UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31,September 30, 2018

 

OR

 

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to

 

 

Commission File Number: 1-13906

 

BALLANTYNE STRONG, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 47-0587703
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)

11422 Miracle Hills Drive, Suite 300, Omaha, Nebraska 68154
(Address of Principal Executive Offices) (Zip Code)

 

(402) 453-4444

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer[  ]Accelerated filer[X]
Non-accelerated filer[  ]   (Do not check if a smaller reporting company)
Smaller reporting company[  ]X]
Emerging growth company[  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

 

Class Outstanding as of April 30,October 31, 2018
Common Stock, $.01, par value 14,422,09014,442,924 shares

 

 

 

 

 

TABLE OF CONTENTS

 

  Page No.
   
 PART I. FINANCIAL INFORMATION
 
Item 1.Financial Statements3
   
Item 1.Condensed Consolidated Balance Sheets, March 31, 2018 and December 31, 2017Financial Statements3
   
 Condensed Consolidated Balance Sheets, September 30, 2018 and December 31, 20173
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31,September 30, 2018 and 20174
   
 Condensed Consolidated Statements of Comprehensive (Loss) IncomeLoss for the Three and Nine Months Ended March 31,September 30, 2018 and 20175
   
 Condensed Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2018 and 20176
   
 Notes to the Condensed Consolidated Financial Statements8
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2629
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk3237
   
Item 4.Controls and Procedures3338
   
 PART II. OTHER INFORMATION 
   
Item 1.Legal Proceedings3338
   
Item 1A.Risk Factors3338
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3338

Item 5.Other Information38
   
Item 6.Exhibits3439
   
 Signatures3540

2

PART I. Financial Information

Item 1. Financial Statements

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par values)

 

  March 31, 2018  December 31, 2017 
  (Unaudited)    
Assets        
Current assets:        
Cash and cash equivalents $3,348  $4,870 
Accounts receivable (net of allowance for doubtful accounts of $1,976 and $1,877, respectively)  10,749   10,766 
Inventories:        
Raw materials and components, net  1,248   1,376 
Work in process  496   362 
Finished goods, net  2,449   3,083 
Total inventories, net  4,193   4,821 
Recoverable income taxes  492   495 
Other current assets  1,572   1,290 
Total current assets  20,354   22,242 
Property, plant and equipment (net of accumulated depreciation of $9,037 and $8,780 respectively)  10,542   10,826 
Equity method investments  17,833   18,053 
Intangible assets, net  3,947   3,972 
Goodwill  926   952 
Notes receivable  2,773   2,815 
Other assets  656   154 
Total assets $57,031  $59,014 
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable $4,221  $3,425 
Accrued expenses  3,562   3,071 
Short-term debt  500   500 
Current portion of long-term debt  65   65 
Deferred revenue and customer deposits  2,314   1,619 
Income tax payable  40   - 
Total current liabilities  10,702   8,680 
Long-term debt, net of current portion and debt issuance costs  1,855   1,870 
Deferred revenue and customer deposits, net of current portion  1,207   1,207 
Deferred income taxes  2,852   2,816 
Other accrued expenses, net of current portion  257   319 
Total liabilities  16,873   14,892 
Stockholders’ equity:        
Preferred stock, par value $.01 per share; authorized 1,000 shares; none outstanding  -   - 
Common stock, par value $.01 per share; authorized 25,000 shares; issued 17,216 shares; outstanding 14,422 shares  169   169 
Additional paid-in capital  40,820   40,565 
Accumulated other comprehensive income (loss):        
Foreign currency translation  (4,515)  (4,048)
Postretirement benefit obligations  108   99 
Unrealized gain on available-for-sale securities of equity method investments  301   353 
Retained earnings  21,861   25,570 
   58,744   62,708 
Less 2,794 of common shares in treasury, at cost  (18,586)  (18,586)
Total stockholders’ equity  40,158   44,122 
Total liabilities and stockholders’ equity $57,031  $59,014 

  September 30, 2018  December 31, 2017 
  (Unaudited)    
Assets        
Current assets:        
Cash and cash equivalents $5,659  $4,870 
Restricted cash  350   - 
Accounts receivable (net of allowance for doubtful accounts of $2,215 and $1,877, respectively)  14,523   10,766 
Inventories:        
Raw materials and components, net  1,330   1,376 
Work in process  419   362 
Finished goods, net  2,194   3,083 
Total inventories, net  3,943   4,821 
Income tax receivable  330   495 
Other current assets  1,852   1,290 
Total current assets  26,657   22,242 
Property, plant and equipment (net of accumulated depreciation of $9,379 and $8,780 respectively)  14,244   10,826 
Equity method investments  12,017   18,053 
Intangible assets, net  1,818   3,972 
Goodwill  922   952 
Notes receivable  3,768   2,815 
Other assets  405   154 
Total assets $59,831  $59,014 
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable $3,558  $3,425 
Accrued expenses  3,562   3,071 
Short-term debt  2,607   500 
Current portion of long-term debt  983   65 
Deferred revenue and customer deposits  2,993   1,619 
Income tax payable  22   - 
Total current liabilities  13,725   8,680 
Long-term debt, net of current portion and debt issuance costs  9,721   1,870 
Deferred revenue and customer deposits, net of current portion  1,182   1,207 
Deferred income taxes  2,636   2,816 
Other accrued expenses, net of current portion  184   319 
Total liabilities  27,448   14,892 
Stockholders’ equity:        
Preferred stock, par value $.01 per share; authorized 1,000 shares; none outstanding  -   - 
Common stock, par value $.01 per share; authorized 25,000 shares; issued 17,237 and 17,216 shares at September 30, 2018 and December 31, 2017, respectively; outstanding 14,443 and 14,422 shares at September 30, 2018 and December 31, 2017, respectively  169   169 
Additional paid-in capital  41,285   40,565 
Accumulated other comprehensive loss:        
Foreign currency translation  (4,633)  (4,048)
Postretirement benefit obligations  114   99 
Unrealized gain on available-for-sale securities of equity method investments  150   353 
Retained earnings  13,884   25,570 
   50,969   62,708 
Less 2,794 of common shares in treasury, at cost  (18,586)  (18,586)
Total stockholders’ equity  32,383   44,122 
Total liabilities and stockholders’ equity $59,831  $59,014 

 

See accompanying notes to condensed consolidated financial statements.

3

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Three and Nine Months Ended March 31,September 30, 2018 and 2017

(In thousands, except per share data)

(Unaudited)

 

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2018  2017  2018  2017  2018  2017 
Net product sales $8,639  $12,456  $8,401  $12,808  $24,490  $38,302 
Net service revenues  7,189   5,470   8,052   6,751   21,968   18,583 
Total net revenues  15,828   17,926   16,453   19,559   46,458   56,885 
Cost of products sold  5,812   10,308   5,076   10,112   16,308   30,929 
Cost of services  7,166   3,179   7,847   4,128   22,480   10,923 
Total cost of revenues  12,978   13,487   12,923   14,240   38,788   41,852 
Gross profit  2,850   4,439   3,530   5,319   7,670   15,033 
Selling and administrative expenses:                        
Selling  1,225   1,490   1,139   1,298   3,638   4,207 
Administrative  4,709   3,547   3,384   3,473   12,301   11,706 
Total selling and administrative expenses  5,934   5,037   4,523   4,771   15,939   15,913 
Loss from operations  (3,084)  (598)
Loss on disposal of assets  (799)  -   (2,130)  - 
(Loss) income from operations  (1,792)  548   (10,399)  (880)
Other income (expense):                        
Interest income  -   22   -   -   -   18 
Interest expense  (45)  (10)  (180)  (51)  (267)  (84)
Foreign currency transaction gain  104   3 
Foreign currency transaction (loss) gain  (67)  (306)  41   (410)
Fair value adjustment to notes receivable  (42)  -   802   -   953   - 
Other (expense) income, net  (10)  5 
Total other income  7   20 
Loss before income taxes and equity method investment (loss) income  (3,077)  (578)
Other income (expense), net  6   (35)  (9)  (24)
Total other income (expense)  561   (392)  718   (500)
(Loss) income before income taxes and equity method investment income (loss)  (1,231)  156   (9,681)  (1,380)
Income tax expense  698   1,493   497   440   1,837   2,709 
Equity method investment (loss) income  (10)  2,481 
Net (loss) earnings from continuing operations  (3,785)  410 
Equity method investment income (loss)  507   (753)  (244)  1,516 
Net loss from continuing operations  (1,221)  (1,037)  (11,762)  (2,573)
Net loss from discontinued operations, net of tax  -   (23)  -   -   -   (49)
Net (loss) earnings $(3,785) $387 
Net (loss) earnings per share - basic        
Net (loss) earnings from continuing operations $(0.26) $0.03 
Net loss $(1,221) $(1,037) $(11,762) $(2,622)
Net loss per share - basic                
Net loss from continuing operations $(0.08) $(0.07) $(0.82) $(0.18)
Net loss from discontinued operations  -   (0.00)  -   -   -   (0.00)
Net (loss) earnings  (0.26)  0.03 
Net (loss) earnings per share - diluted        
Net (loss) earnings from continuing operations $(0.26) $0.03 
Net loss  (0.08)  (0.07)  (0.82)  (0.18)
Net loss per share - diluted                
Net loss from continuing operations $(0.08) $(0.07) $(0.82) $(0.18)
Net loss from discontinued operations  -   (0.00)  -   -   -   (0.00)
Net (loss) earnings  (0.26)  0.03 
Net loss  (0.08)  (0.07)  (0.82)  (0.18)

See accompanying notes to condensed consolidated financial statements.

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

Three and Nine Months Ended September 30, 2018 and 2017

(In thousands)

(Unaudited)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2018  2017  2018  2017 
Net loss $(1,221) $(1,037) $(11,762) $(2,622)
Adjustment to postretirement benefits  6   -   15   - 
Currency translation adjustment:                
Unrealized net change arising during period  245   689   (585)  1,507 
Unrealized (loss) gain on available-for-sale securities of equity method investments, net of tax  (33)  34   (203)  215 
Total other comprehensive income (loss)  218   723   (773)  1,722 
Comprehensive loss $(1,003) $(314) $(12,535) $(900)

 

See accompanying notes to condensed consolidated financial statements.

 

5 4
 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) IncomeCash Flows

ThreeNine Months Ended March 31,September 30, 2018 and 2017

(In thousands)

(Unaudited)

 

  Three Months Ended March 31, 
  2018  2017 
Net (loss) earnings $(3,785) $387 
Adjustment to postretirement benefits  9   - 
Currency translation adjustment:        
Unrealized net change arising during period  (467)  109 
Unrealized loss on available-for-sale securities of equity method investments, net of tax  (52)  - 
Total other comprehensive (loss) income  (510)  109 
Comprehensive (loss) income $(4,295) $496 

See accompanying notes to condensed consolidated financial statements.

5

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2018 and 2017

(In thousands)

(Unaudited)

  Three Months Ended March 31, 
  2018  2017 
Cash flows from operating activities:        
Net (loss) earnings $(3,785) $387 
Net loss from discontinued operations, net of tax  -   (23)
Net (loss) earnings from continuing operations  (3,785)  410 
Adjustments to reconcile net (loss) earnings from continuing operations to net cash (used in) provided by operating activities:        
Provision for doubtful accounts  103   3 
Provision for obsolete inventory  44   68 
Provision for warranty  79   18 
Depreciation and amortization  524   482 
Equity method investment loss (income)  10   (2,481)
Fair value adjustment to notes receivable  42   - 
Deferred income taxes  87   867 
Amortization of contract acquisition costs  57   - 
Stock-based compensation expense  255   136 
Changes in operating assets and liabilities:        
Accounts receivable  (178)  (282)
Inventories  537   (514)
Other current assets  5   (102)
Accounts payable  256   2,321 
Accrued expenses  429   154 
Customer deposits/deferred revenue  704   (86)
Current income taxes  36   (156)
Other assets  (796)  (271)
Net cash flows (used in) provided by operating activities - continuing operations  (1,591)  567 
Net cash flows used in operating activities - discontinued operations  -   (24)
Net cash (used in) provided by operating activities  (1,591)  543 

  Nine Months Ended September 30, 
  2018  2017 
Cash flows from operating activities:        
Net loss $(11,762) $(2,622)
Net loss from discontinued operations, net of tax  -   (49)
Net loss from continuing operations  (11,762)  (2,573)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:        
Provision for doubtful accounts  381   712 
Provision for obsolete inventory  412   (160)
Provision for warranty  83   319 
Depreciation and amortization  1,953   1,563 
Equity method investment loss (income)  244   (1,516)
Fair value adjustment to notes receivable  (953)  - 
Deferred income taxes  (146)  715 
Amortization of contract acquisition costs  29   - 
Impairment of contract acquisition costs  59   - 
Stock-based compensation expense  648   498 
Impairment of operating lease  209   - 
Loss on disposal of assets  2,130   - 
Dividends received from investee  817   - 
Changes in operating assets and liabilities:        
Accounts receivable  (4,244)  385 
Inventories  413   (134)
Other current assets  (629)  (41)
Other assets  (392)  (85)
Accounts payable  171   1,197 
Accrued expenses  244   (763)
Deferred revenue and customer deposits  1,359   (1,204)
Current income taxes  178   174 
Net cash flows used in operating activities - continuing operations  (8,796)  (913)
Net cash flows used in operating activities - discontinued operations  -   (147)
Net cash used in operating activities  (8,796)  (1,060)

 

(Continued on following page)

 

See accompanying notes to condensed consolidated financial statements.

6

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows - Continued

ThreeNine Months Ended March 31,September 30, 2018 and 2017

(In thousands)

(Unaudited)

  Three Months Ended March 31, 
  2018  2017 
Cash flows from investing activities:        
Purchase of equity securities $-  $(2,525)
Dividends received from investee in excess of cumulative earnings  23   103 
Capital expenditures  (356)  (1,120)
Net cash used in investing activities - continuing operations  (333)  (3,542)
         
Cash flows from financing activities:        
Principal payments on long-term debt  (16)  - 
Purchase of treasury stock  -   (65)
Payments on capital lease obligations  (53)  (67)
Net cash used in financing activities - continuing operations  (69)  (132)
Effect of exchange rate changes on cash and cash equivalents - continuing operations  471   39 
Net decrease in cash and cash equivalents  (1,522)  (3,092)
Discontinued operations activity included above:        
Add: Cash balance included in assets held for sale at beginning of period  -   175 
Less: Cash balance included in assets held for sale at end of period  -   (150)
Cash and cash equivalents at beginning of period  4,870   7,596 
Cash and cash equivalents at end of period $3,348  $4,529 

  Nine Months Ended September 30, 
  2018  2017 
Cash flows from investing activities:        
Proceeds from sale of equity securities $4,531  $- 
Purchase of equity securities  -   (2,525)
Dividends received from investee in excess of cumulative earnings  69   230 
Capital expenditures  (1,220)  (2,949)
Proceeds from sale of business  -   60 
Net cash provided by (used in) investing activities  3,380   (5,184)
         
Cash flows from financing activities:        
Proceeds from sale-leaseback financing  7,000   - 
Proceeds from issuance of short-term debt  3,205   500 
Proceeds from issuance of long-term debt  -   2,000 
Principal payments on long-term debt  (2,278)  (17)
Principal payments on short-term debt  (1,097)  - 
Payment of debt issuance costs  (22)  (46)
Payments on capital lease obligations  (147)  (188)
Purchase of treasury stock  -   (102)
Proceeds from exercise of stock options  -   71 
Other  (8)  - 
Net cash provided by financing activities  6,653   2,218 
Effect of exchange rate changes on cash and cash equivalents  (98)  304 
Net increase (decrease) in cash and cash equivalents and restricted cash  1,139   (3,722)
Discontinued operations activity included above:        
Add: Cash balance included in assets held for sale at beginning of period  -   175 
Less: Cash balance included in assets held for sale at end of period  -   - 
Cash and cash equivalents and restricted cash at beginning of period  4,870   7,596 
Cash and cash equivalents and restricted cash at end of period $6,009  $4,049 
Components of cash and cash equivalents and restricted cash:        
Cash and cash equivalents $5,659  $4,049 
Restricted cash  350   - 
Total cash and cash equivalents and restricted cash $6,009  $4,049 
Supplemental disclosure of non-cash investing and financing activities:        
Term loan borrowings to finance equipment purchases $4,121  $- 

 

See accompanying notes to condensed consolidated financial statements.

 

7

Ballantyne Strong, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Operations

 

Ballantyne Strong, Inc. (“Ballantyne” or the “Company”), a Delaware corporation, is a holding company with diverse business activities focused on serving the cinema, retail, financial, advertising and government markets. The Company, and its wholly owned subsidiaries Strong Technical Services, Inc., Strong/MDI Screen Systems, Inc. (“Strong/MDI”), Convergent Media Systems Corporation (“Convergent”) and Strong Digital Media, LLC design, integrate and install technology solutions for a broad range of applications; develop and deliver out-of-home messaging, advertising and communications; manufacture projection screens; and provide managed services including monitoring of networked equipment to our customers.

 

2. Discontinued Operations

 

In May 2017, the Company sold the operational assets of Strong Westrex, Inc. for total proceeds of $60 thousand.

The summary financial results of discontinued operations for the three and nine months ended March 31,September 30, 2017 were as follows (in thousands):

 

 

Three Months Ended
September 30, 2017

 

Nine Months Ended
September 30, 2017

 
Total net revenues $12  $    -  $24 
Total cost of revenues  26   -   48 
Total selling and administrative expenses  9   -   53 
Loss from operations of discontinued operations  (23)  -   (77)
Loss before income taxes  (23)  -  ��(49)
Income tax expense  -   -   - 
Net loss from discontinued operations, net of tax $(23) $-  $(49)

 

There was no depreciation and amortization related to discontinued operations recorded for the three and nine month periodperiods ended March 31,September 30, 2017. There were no capital expenditures related to discontinued operations during the three and nine month periodperiods ended March 31,September 30, 2017.

 

3. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and all majority owned and controlled domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America (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, 2017.

 

The condensed consolidated balance sheet as of December 31, 2017 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results of operations and cash flows for the respective interim periods. The results for interim periods are not necessarily indicative of trends or results expected for a full year.

8

 

Use of Management Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.

 

Restricted Cash

Restricted cash represents amounts held in a collateral account for the Company’s corporate travel and purchasing credit card program.

Accounts and Notes Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for doubtful accounts based on several factors, including overall customer credit quality, historical write-off experience and a specific analysis that projects the ultimate collectability of the account. As such, these factors may change over time causing the allowance level and bad debt expense to be adjusted accordingly.

Equity Method Investments

 

We apply the equity method of accounting to investments when we have significant influence, but not controlling interest, in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under the line item captioned “equity method investment income (loss) income”” in our condensed consolidated statements of operations. The carrying value of our equity method investments is reported in equity“equity method investmentsinvestments” in the condensed consolidated balance sheets. The Company’s equity method investments are reported at cost and adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company’s share of the investee’s income or loss is recorded on a one quarter lag for all equity method investments. The Company classifies distributions received from equity method investments using the cumulative earnings approach on the condensed consolidated statements of cash flows. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. The Company recorded an other-than-temporary impairment charge related to its equity method investments of $0.7 million in equity method investment loss on its condensed consolidated statements of operations during the nine month period ended September 30, 2018. The Company did not record any impairments related to its equity method investments during the three monthsmonth period ended March 31,September 30, 2018 or three and nine month periods ended September 30, 2017. Note 6 contains additional information on our equity method investments, which are held by our Cinema segment.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

9

 

The following tables present the Company’s financial assets measured at fair value based upon the level within the fair value hierarchy in which the fair value measurements fall,are classified, as of March 31,September 30, 2018 and December 31, 2017.

 

Fair values measured on a recurring basis at March 31,September 30, 2018 (in thousands):

 

  Level 1  Level 2  Level 3  Total 
Cash and cash equivalents $3,348  $-  $-  $3,348 
Notes receivable  -   -   2,773  $2,773 
Total $3,348  $-  $2,773  $6,121 

  Level 1  Level 2  Level 3  Total 
Cash and cash equivalents $5,659  $-  $-  $5,659 
Restricted cash  350   -   -   350 
Notes receivable  -   -   3,768   3,768 
Total $6,009  $-  $3,768  $9,777 

 

Fair values measured on a recurring basis at December 31, 2017 (in thousands):

 

  Level 1  Level 2  Level 3  Total 
Cash and cash equivalents $4,870  $-  $-  $4,870 
Notes receivable  -   -   2,815  $2,815 
Total $4,870  $-  $2,815  $7,685 

  Level 1  Level 2  Level 3  Total 
Cash and cash equivalents $4,870  $-  $-  $4,870 
Notes receivable  -   -   2,815   2,815 
Total $4,870  $-  $2,815  $7,685 
                 

 

Quantitative information about the Company’s level 3 fair value measurements at March 31,September 30, 2018 is set forth below:

 

  

Fair value at 3/31/18

(in thousands)

  Valuation technique  Unobservable input  Range 
Notes receivable $2,773   Discounted cash flow   Default percentage   49%
        Discount rate   18%
  

Fair value at

9/30/18
(in thousands)

  Valuation technique Unobservable input Range 
Notes receivable $3,768  Discounted cash flow Default percentage  15%
        Discount rate  18%

 

During 2011, the Company entered into certain unsecured notes receivable arrangements with CDF2 Holdings, LLC pertaining to the sale and installation of digital projection equipment. The notes receivable accrue interest at a rate of 15% per annum. Interest not paid in any particular year is added to the principal and also accrues interest at 15%. The notes receivable are recorded at estimated fair value. In order to estimate the fair value, the Company reviews the financial position and estimated cash flows of the debtor of the notes receivable.receivable on a quarterly basis. During the first quarter of 2018, the Company updated its estimated future cash flow assumptions. This resulted in a decreasean increase to the fair value of the notes receivable of $42 thousandapproximately $1.0 million recorded in earningsother income in the Company’s condensed consolidated statement of operations during the quarternine months ended March 31,September 30, 2018. There was no adjustment to the estimated fair value of the notes receivable during the quarternine months ended March 31,September 30, 2017.

 

The significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are discount rate and percentage of default. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.

 

The Company’s short-term and long-term debt is recorded at historical cost. As of March 31,September 30, 2018, the Company’s long-term debt, including current maturities, had a carrying value of $1.95$10.7 million. Based on discounted cash flows using current quoted interest rates (Level 2 of the fair value hierarchy), the estimated fair value at March 31,September 30, 2018 was $1.90$10.7 million.

The carrying values of all other financial assets and liabilities, including accounts receivable, accounts payable, accrued expenses and short-term debt, reported in the condensed consolidated balance sheets equal or approximate their fair values due to the short-term nature of these instruments. Note 6 includes fair value information related to our equity method investments. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which include non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). During the three and nine months ended March 31,September 30, 2018, the Company recorded impairment charges of $0.8 million and 2017,$2.1 million, respectively, related to the abandonment of internally developed software intangible assets as a loss on disposal of assets in the condensed consolidated statement of operations. Other than the intangible asset impairment, the Company did not have any significant non-recurring measurements of non-financial assets or liabilities.liabilities during the three and nine months ended September 30, 2018 and 2017.

 

10

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” “(ASC 606)”. The ASU replaced most existing revenue recognition guidance in U.S. GAAP. The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method. The Company recorded a transition adjustment of approximately $76 thousand increasing the opening balance of retained earnings, primarily related to the deferral and amortization of direct and incremental costs of obtaining contracts. See Note 4 for further information about the nature and pattern of revenue recognition for the different types of contracts with customers.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments that do not result in consolidation and are not accounted under the equity method to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets; and modifies certain fair value disclosure requirements. The Company adopted ASU 2016-01 prospectively on January 1, 2018. The adoption of this ASU did not significantly impact the Company’s results of operations and financial position.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The new guidance describes the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not significantly impact the Company’s results of operations and financial position.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).,” which was further clarified by ASU 2018-11, “Leases – Targeted Improvements,” issued in July 2018. ASU 2016-02 requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve months, on its balance sheet. This ASU is effective in fiscal years beginning after December 15, 2018, with early adoption permitted, and requiresinitially required a modified retrospective transition method.method under which entities would initially apply Topic 842 at the beginning of the earliest period presented in the financial statements. ASU 2018-11 added an additional optional transition method allowing entities to apply Topic 842 as of the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt ASU 2016-02 using the optional transition method from ASU 2018-11 on January 1, 2019. The Company is evaluating the requirements of ASU 2016-02Topic 842 and its potential impact on the Company’sits financial statements. The Company has leases primarily for property and equipment and is in the process of identifying and evaluating these leases for purposes of adopting ASU 2016-02. For each of these leases, the term will be evaluated, including extension and renewal options as well as the lease payments. While the Company has not yet quantified the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements, the Company expects to record assets and liabilities on its balance sheet upon adoption of this standard, which may be material. In addition, the Company expects that the sale-leaseback of Convergent’s Alpharetta, Georgia office facility described in Note 10, which did not qualify for sale-leaseback accounting under the current lease accounting standard, will qualify for sale-leaseback accounting under Topic 842, as Topic 842 eliminates the concept of continuing involvement by the seller-lessee precluding sale-leaseback accounting. The Company will continue to provide enhanced disclosures as it continues its assessment.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company believes its adoption will not significantly impact the Company’s results of operations and financial position.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles—“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates Step 2 of the goodwill impairment testing which requires the fair value of individual assets and liabilities of a reporting unit to be determined when measuring goodwill impairment. The new guidance may result in different amounts of impairment that could be recognized compared to existing guidance. In addition, failing step 1 of the impairment test may not result in impairment under existing guidance. However, under the revised guidance, failing step 1 will always result in a goodwill impairment. ASU 2017-04 is to be applied prospectively for goodwill impairment testing performed in years beginning after December 15, 2019. The Company does not believe its adoption will significantly impact the Company’s results of operations or financial position.

 

11

In August 2018, the Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule is effective for all filings made on and after November 5, 2018. Given the effective date and proximity to most filers’ quarterly reports, the SEC is not objecting to filers deferring the presentation of changes in stockholders’ equity in their quarterly reports on Forms 10-Q until the quarter that begins after November 5, 2018. The Company anticipates its first presentation of changes in stockholders’ equity will be included in its quarterly report on Form 10-Q for the quarter ended March 31, 2019.

 

4. Revenue

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

 

Under ASC 606, the Company accounts for revenue using the following steps:

 

 ●Identify the contract, or contracts, with a customer
 ●Identify the performance obligations in the contract
 ●Determine the transaction price
 ●Allocate the transaction price to the identified performance obligations
 ●Recognize revenue when, or as, the Company satisfies the performance obligations

 

The Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement.

 

As discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale. Observable prices are used to determine the standalone selling price of separate performance obligations, or a cost plus margin approach is used when one isobservable prices are not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.

 

The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.

12

 

Deferred contract acquisition costs are included in other assets. Beginning January 1, 2018, with the adoption of ASC 606, 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. Prior to 2018, all contract acquisition costs were expensed as incurred. The Company recorded a transition adjustment of approximately $76 thousand increasing the opening balance of retained earnings, primarily related to the deferral and amortization of direct and incremental costs of obtaining contracts. The following table summarizes the changes in the Company’s contract asset balance during the threenine months ended March 31,September 30, 2018 (in thousands):

 

Deferred contract acquisition costs as of January 1, 2018 $76  $76 
Costs capitalized  10   12 
Amortization  (14)  (29)
Impairment  -   (59)
Deferred contract acquisition costs as of March 31, 2018 $72 
Deferred contract acquisition costs as of September 30, 2018 $- 

 

During the three months ended September 30, 2018, the Company recorded an impairment charge of $59 thousand for the remaining deferred contract acquisition costs, as they are no longer considered recoverable based on the customer’s recent credit history.

The following tables summarize the impact the adoption of ASC 606 had on the Company’s consolidated financial statements (in thousands, except per share data):

 

Condensed Consolidated Balance Sheet:

 

 As reported
March 31, 2018		  Adjustments  Balances
without
adoption of ASC 606		  As reported
September 30, 2018		  Adjustments  Balances without adoption of ASC 606 
Total current assets $20,354  $146  $20,500  $26,657  $68  $26,725 
Total noncurrent assets  36,677   (14)  36,663   33,174   -   33,174 
Total assets $57,031  $132  $57,163  $59,831  $68  $59,899 
                        
Total current liabilities $10,702  $258  $10,960  $13,725  $83  $13,808 
Total noncurrent liabilities  6,171   -   6,171   13,723   -   13,723 
Total liabilities  16,873   258   17,131   27,448   83   27,531 
                        
Retained earnings  21,861   (126)  21,735   13,884   (15)  13,869 
Other stockholders’ equity  18,297   -   18,297   18,499   -   18,499 
Total stockholders’ equity  40,158   (126)  40,032   32,383   (15)  32,368 
Total liabilities and stockholders’ equity $57,031  $132  $57,163  $59,831  $68  $59,899 

 

13

Condensed Consolidated StatementStatements of Operations:

 

  As reported for
the three
months ended
March 31, 2018		  Adjustments  Balances
without
adoption of ASC 606		 
Total net revenues $15,828  $(57) $15,771 
Total cost of revenues  12,978   (2)  12,976 
Gross profit  2,850   (55)  2,795 
Total selling and administrative expenses  5,934   (5)  5,929 
Loss from operations  (3,084)  (50)  (3,134)
Other income  7   -   7 
Loss before income taxes and equity method investment loss  (3,077)  (50)  (3,127)
Income tax expense  698   -   698 
Equity method investment loss  (10)  -   (10)
Net loss $(3,785) $(50) $(3,835)
Net loss per share of common stock:            
Basic $(0.26)  (0.00) $(0.26)
Diluted $(0.26)  (0.00) $(0.26)

  As reported for the three months ended
September 30, 2018		  Adjustments  Balances without adoption of ASC 606 
Total net revenues $16,453  $102  $16,555 
Total cost of revenues  12,923   81   13,004 
Gross profit  3,530   21   3,551 
Total selling and administrative expenses  4,523   (60)  4,463 
Loss on disposal of assets  (799)  -   (799)
Loss from operations  (1,792)  81   (1,711)
Other income  561   -   561 
Loss before income taxes and equity method investment income  (1,231)  81   (1,150)
Income tax expense  497   -   497 
Equity method investment income  507   -   507 
Net loss $(1,221) $81  $(1,140)
Net loss per share of common stock:            
Basic $(0.08)     $(0.08)
Diluted $(0.08)     $(0.08)

 

  As reported for the
nine months ended
September 30, 2018		  Adjustments  Balances without adoption of ASC 606 
Total net revenues $46,458  $187  $46,645 
Total cost of revenues  38,788   204   38,992 
Gross profit  7,670   (17)  7,653 
Total selling and administrative expenses  15,939   (78)  15,861 
Loss on disposal of assets  (2,130)  -   (2,130)
Loss from operations  (10,399)  61   (10,338)
Other income  718   - �� 718 
Loss before income taxes and equity method investment loss  (9,681)  61   (9,620)
Income tax expense  1,837   -   1,837 
Equity method investment loss  (244)  -   (244)
Net loss $(11,762) $61  $(11,701)
Net loss per share of common stock:            
Basic $(0.82)     $(0.81)
Diluted $(0.82)     $(0.81)

The adoption of ASC 606 did not have any net impact on other comprehensive loss or cash flows.

 

The following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2018:September 30, 2018 (in thousands):

 

 Cinema  Digital Media  Other  Eliminations  Total  Cinema  Digital Media  Other  Eliminations  Total 
Screen system sales $4,005  $-  $-  $-  $4,005  $5,005  $-  $-  $-  $5,005 
Digital equipment sales  3,158   766   -   (216)  3,708   2,134   630   -   (44)  2,720 
Field maintenance and monitoring services  2,944   2,114   -   (138)  4,920   2,966   1,372   -   (129)  4,209 
Installation services  328   1,360   -   -   1,688   712   1,069   -   -   1,781 
Extended warranty sales  342   -  -   -   342   213   -   -   -   213 
Advertising  -   1,480   -   -   1,480 
Other  672   477   16   -   1,165   530   499   16   -   1,045 
Total $11,449  $4,717  $16  $(354) $15,828  $11,560  $5,050  $16  $(173) $16,453 

The following table disaggregates the Company’s revenue by major source for the nine months ended September 30, 2018 (in thousands):

  Cinema  Digital Media  Other  Eliminations  Total 
Screen system sales $13,240  $-  $-  $-  $13,240 
Digital equipment sales  7,228   2,020   -   (278)  8,970 
Field maintenance and monitoring services  9,011   5,193   -   (344)  13,860 
Installation services  1,420   3,057   -   -   4,477 
Extended warranty sales  804   -   -   -   804 
Advertising  -   1,948   -   -   1,948 
Other  1,735   1,375   49   -   3,159 
Total $33,438  $13,593  $49  $(622) $46,458 

 

Screen system sales

 

The Company recognizes revenue on the sale of its screen systems when control of the screen is transferred to the customer, usually at time of shipment. However, revenue is recognized upon delivery for certain international shipments with longer shipping transit time because control does not transfer to the customer until delivery.

 

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 Cinema and Digital Media customers. In the Cinema segment, these contracts are generally 12 months in length, while the term for service contracts in the Digital Media segment can be for multiple years. Revenue is recognized over the term of the agreement in proportion to the costs incurred in fulfilling performance obligations under the contract.

 

14

The Company also performs time and materials-based maintenance and repair work for customers in the Cinema and Digital Media segments. Revenue is recognized at a point in time when the performance obligation has been fully satisfied.

 

Installation services

 

The Company performs installation services for both its Cinema and Digital Media customers and recognizes revenue upon completion of the installations.

 

Extended warranty sales

 

The Company sells extended warranties to its Cinema customers. When the Company is the primary obligor, revenue is recognized on a gross basis over the term of the extended warranty in proportion to the costs incurred in fulfilling performance obligations under the extended warranty. In third party extended warranty sales, the Company is not the primary obligor, and revenue is recognized on a net basis at the time of the sale.

 

At January 1, 2018, $0.8 million of unearned revenue associated with maintenance and monitoring services and extended warranty sales in which the Company is the primary obligor was reported in deferred revenue and customer deposits. During the threenine months ended March 31,September 30, 2018, $0.4 millionsubstantially all of this balance was earned and recognized as revenue. At March 31,September 30, 2018, the unearned revenue amount was $0.8$0.6 million. The Company expects to recognize $0.7$0.3 million of unearned revenue amounts throughout the rest of 2018, $0.3 million in 2019 and immaterial amounts each year from 20192020 through 2023.

 

The following table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the three months ended March 31,September 30, 2018 (in thousands):

 

  Cinema  Digital Media  Other  Eliminations  Total 
Point in time $9,598  $2,529  $16  $(354) $11,789 
Over time  1,851   2,188   -   -   4,039 
Total $11,449  $4,717  $16  $(354) $15,828 

  Cinema  Digital Media  Other  Eliminations  Total 
Point in time $9,872  $3,399  $-  $(173) $13,098 
Over time  1,688   1,651   16   -   3,355 
Total $11,560  $5,050  $16  $(173) $16,453 

The following table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the nine months ended September 30, 2018 (in thousands):

  Cinema  Digital Media  Other  Eliminations  Total 
Point in time $28,159  $7,935  $-  $(622) $35,472 
Over time  5,279   5,658   49   -   10,986 
Total $33,438  $13,593  $49  $(622) $46,458 

 

5. (Loss) EarningsLoss Per Common Share

 

Basic (loss) earningsloss per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted (loss) earningsloss per share has been computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options and certain non-vested shares of restricted stock and restricted stock units. The following table providessummarizes the reconciliation between average shares used to compute basic and diluted (loss) earningsloss per share:

 

  Three Months Ended March 31, 
  2018  2017 
Weighted average shares outstanding (in thousands):        
Basic weighted average shares outstanding  14,341   14,264 
Dilutive effect of stock options and certain non-vested shares of restricted stock  -   156 
Diluted weighted average shares outstanding  14,341   14,420 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2018  2017  2018  2017 
Weighted average shares outstanding (in thousands):            
Basic weighted average shares outstanding  14,392   14,310   14,366   14,279 
Dilutive effect of stock options and certain non-vested shares of restricted stock  -   -   -   - 
Diluted weighted average shares outstanding  14,392   14,310   14,366   14,279 

 

For the three and nine month periodperiods ended March 31,September 30, 2018, options to purchase 490,000330,000 shares of common stock were outstanding but were not included in the computation of diluted loss per share as the option’s exercise price was greater than the average market price of the common shares for each period. An additional 129,52563,398 and 166,391 common stock equivalents related to options and restricted stock awards were excluded for the three and nine months ended March 31,September 30, 2018, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share. For the three and nine month periodperiods ended March 31,September 30, 2017, options to purchase 385,000470,000 shares of common stock were outstanding but were not included in the computation of diluted earnings per share as the option’s exercise price was greater than the average market price of the common shares for the respective periods.

15

An additional 115,754 and 154,161 common stock equivalents related to options and restricted stock awards were excluded for the three and nine months ended September 30, 2017, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.

 

6. Equity Method Investments

 

The following summarizes our equity method investments (dollars in thousands):

 

  March 31, 2018  December 31, 2017 
Entity Carrying Amount  Economic Interest  Carrying Amount  Economic Interest 
RELM Wireless Corporation $4,102   8.3% $4,473   8.3%
Itasca Capital, Ltd.  5,814   32.3%  5,870   32.3%
1347 Property Insurance Holdings, Inc.  7,917   17.4%  7,710   17.4%
Total $17,833      $18,053     

  September 30, 2018  December 31, 2017 
Entity Carrying Amount  Economic Interest  Carrying Amount  Economic Interest 
BK Technologies, Inc. $-   0.0% $4,473   8.3%
Itasca Capital, Ltd.  3,890   32.3%  5,870   32.3%
1347 Property Insurance Holdings, Inc.  8,127   17.4%  7,710   17.4%
Total $12,017      $18,053     

The following summarizes the income (loss) income of equity method investees reflected in the Statementcondensed consolidated statements of Operationsoperations (in thousands):

 

  Three months ended March 31, 
Entity  2018   2017 
RELM Wireless Corporation $(354) $8 
Itasca Capital, Ltd.  103   2,461 
1347 Property Insurance Holdings, Inc.  241   12 
Total $(10) $2,481 

  Three months ended September 30,  Nine months ended September 30, 
Entity 2018  2017  2018  2017 
BK Technologies, Inc. $512  $109  $120  $12 
Itasca Capital, Ltd.  (28)  (1,023)  (967)  1,289 
1347 Property Insurance Holdings, Inc.  23   161   603   215 
Total $507  $(753) $(244) $1,516 

 

BK Technologies, Inc. (formerly known as RELM Wireless CorporationCorporation) (“RELM”BKTI”) is a publicly traded company that designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components and subsystems. The Company’s Chief Executive Officer is chairman of the board of directors of RELM, and controls entities that, when combined withDue to the Company’s ownership in RELM, own greater than 20% of RELM, providing the Company with significant influence, over RELM, but not controlling interest.interest, in BKTI, the Company’s investment in BKTI was accounted for using the equity method. On September 9, 2018, the Company entered into an agreement with Fundamental Global Investors, LLC (“FGI”), a related party, where the Company sold 1,147,087 shares of common stock of BKTI to FGI for a price of $3.95 per share and total proceeds of approximately $4.5 million. The per share transaction price of $3.95 represented the immediately preceding closing price on the NYSE American stock exchange, and the transaction was approved by the Company’s Audit Committee, comprised of only independent directors. The Company recorded a gain on the sale of the equity method investment of $0.4 million within equity method investment income on the condensed consolidated statement of operations for the three and nine month periods ended September 30, 2018. Prior to the sale of the BKTI common stock, the Company received dividends of $23 thousand and $0.1 million forduring the three month periods ended March 31,September 30, 2018 and 2017, respectively. Based on quoted market prices,respectively, and received dividends of $0.1 million and $0.2 million during the market value of the Company’s ownership in RELM was $4.5 million at March 31, 2018.nine month periods ended September 30, 2018 and 2017, respectively.

 

Itasca Capital, Ltd. (“Itasca”) is a publicly traded Canadian company that is an investment vehicle seeking transformative strategic investments. The Company’s Chief Executive Officer is a memberchairman of the board of directors of Itasca. This board seat, combined with the Company’s 32.3% ownership of Itasca, provide the Company with significant influence over Itasca, but not controlling interest. The Company received a dividend of $0.8 million from Itasca during the three and nine month periods ended September 30, 2018. The Company did not receive any dividends from Itasca during the three and nine month periods ended March 31, 2018 orSeptember 30, 2017. Based on quoted market prices, the market value of the Company’s ownership in Itasca was $3.5$2.4 million at March 31,September 30, 2018. A $0.7 million other-than-temporary impairment charge for Itasca is included in equity method investment loss on the condensed consolidated statements of operations for the nine month period ended September 30, 2018.

 

1347 Property Insurance Holdings, Inc. (“PIH”) is a publicly traded company that provides property and casualty insurance in the States of Louisiana, Texas and Florida. The Company’s Chief Executive Officer is a memberchairman of the board of directors of PIH, and controls entities that, when combined with the Company’s ownership in PIH, own greater than 20% of PIH, providing the Company with significant influence over PIH, but not controlling interest. The Company did not receive dividends from PIH during the three or nine month periods ended March 31,September 30, 2018 and 2017. Based on quoted market prices, the market value of the Company’s ownership in PIH was $7.4$7.0 million at March 31,September 30, 2018.

16

 

As of March 31,September 30, 2018, the Company’s retained earnings included undistributed earnings from ourits equity method investees of $1.5$1.3 million.

 

The summarized financial information presented below reflects the financial information of the Company’s equity method investees as of September 30, 2018 for the threenine months ended December 31,June 30, 2018 and 2017, consistent with the Company’s recognition of the results of its equity method investments on a one-quarter lag.

 

For the three months ended December 31, 2017  2016 
   (in thousands) 
Revenue $20,576  $15,358 
Operating loss from continuing operations $(2,034) $2,590 
Net income $(2,557) $9,351 

For the nine months ended June 30, 2018  2017 
  (in thousands) 
Revenue $38,977  $25,227 
Operating income from continuing operations $5,489  $4,074 
Net income $2,500  $7,012 

7. Intangible Assets

 

Intangible assets consisted of the following at March 31,September 30, 2018 (dollars in thousands):

  Useful life  Gross  Accumulated Amortization  Net 
  (Years)          
Intangible assets not yet subject to amortization:                
Software in development     $877  $-  $877 
Intangible assets subject to amortization:                
Software in service  5   3,718   (768)  2,950 
Product formulation  10   473   (353)  120 
Total     $5,068  $(1,121) $3,947 

 

  

Useful

life

  Gross  Accumulated Amortization  Net 
   (Years)             
Intangible assets not yet subject to amortization:                
Software in development     $79  $-  $79 
Intangible assets subject to amortization:                
Software in service  5   2,123   (482)  1,641 
Product formulation  10   472   (374)  98 
Total     $2,674  $(856) $1,818 

Intangible assets consisted of the following at December 31, 2017 (dollars in thousands):

 

 Useful life  Gross  Accumulated Amortization  Net  

Useful

life

  Gross  Accumulated Amortization  Net 
 (Years)        (Years) 
Intangible assets not yet subject to amortization:                                
Software in development     $1,243  $-  $1,243      $1,243  $-  $1,243 
Intangible assets subject to amortization:                                
Software in service  5   3,191   (597)  2,594   5   3,191   (597)  2,594 
Product formulation  10   486   (351)  135   10   486   (351)  135 
Total     $4,920  $(948) $3,972      $4,920  $(948) $3,972 

 

Amortization expense relating to intangible assets was $0.2$0.5 million and $0.1$0.4 million for the threenine months ended March 31,September 30, 2018 and 2017, respectively. During the three and nine months ended September 30, 2018, the Company also recorded impairment charges of $0.8 million and $2.1 million, respectively, related to abandoned software in service as a loss on disposal of assets in the condensed consolidated statement of operations.

 

17

 

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):

 

 Amount 
Remainder 2018 $639  $120 
2019  840   468 
2020  831   459 
2021  670   420 
2022  86   215 
Thereafter  4   57 
Total $3,070  $1,739 

8. Goodwill

 

The following represents a summary of changes in the Company’s carrying amount of goodwill for the threenine months ended March 31,September 30, 2018 (in thousands):

Balance as of December 31, 2017 $952 
Foreign currency translation  (26)
Balance as of March 31, 2018 $926 

 

Balance as of December 31, 2017 $952 
Foreign currency translation  (30)
Balance as of September 30, 2018 $922 
     

9. Warranty Reserves

 

In most instances, the Company’s digital projection products are covered by the manufacturing firm’s original warranty; however, for certain customers the Company may grant warranties in excess of the manufacturer’s warranty. In addition, the Company provides warranty coverage on screens it manufactures. The Company accrues for these costs at the time of sale. The following table summarizes warranty activity for the three and nine months ended March 31,September 30, 2018 and 2017 (in thousands):

 

  Three Months Ended March 31, 
  2018  2017 
Warranty accrual at beginning of period $521  $645 
Charged to expense  84   47 
Claims paid, net of recoveries  (30)  (231)
Foreign currency adjustment  (11)  1 
Warranty accrual at end of period $564  $462 

18

  Three Months Ended September 30,  

Nine Months Ended

September 30,

 
  2018  2017  2018  2017 
Warranty accrual at beginning of period $449  $457  $521  $645 
Charged to expense  18   144   83   319 
Claims paid, net of recoveries  (26)  (20)  (142)  (392)
Foreign currency adjustment  8   3   (13)  12 
Warranty accrual at end of period $449  $584  $449  $584 

 

10. Debt

 

The Company’s debt consists of the following (in thousands):

 

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
Short-term debt:                
Strong/MDI installment loan $2,607  $- 
Revolving line of credit $500  $500   -   500 
Current portion of long-term debt  65   65   983   65 
Total short-term debt  565   565   3,590   565 
Long-term debt:                
Sale-leaseback financing  6,827   - 
Equipment term loans  3,897   - 
$2 million term loan  1,951   1,968   -   1,968 
Total principal balance of long-term debt  10,724   1,968 
Less: current portion  (65)  (65)  (983)  (65)
Less: unamortized debt issuance costs  (31)  (33)  (20)  (33)
Total long-term debt  1,855   1,870   9,721   1,870 
Total short-term and long-term debt $2,420  $2,435  $13,311  $2,435 

 

On April 27, 2017,May 22, 2018, the CompanyCompany’s subsidiary, Convergent, entered into a debtan installment payment agreement with an equipment financing company in order to purchase media players and related equipment in an aggregate amount of up to approximately $4.4 million. Installment payments under each contract for purchase of the equipment are due monthly for a bank consistingperiod of 1) a $2.0 million five-year term loan60 months. The financing provided in the agreement is secured by a first lien deed of trustthe equipment. The borrowings under the agreement are recorded as long-term debt on the Company’s Alpharetta, GA facility, bearingcondensed consolidated balance sheet and bear interest at a fixed rate based on the three-year U.S. Treasury Note yield plus a spread at the time of 4.5%funding. The obligations under the agreement are guaranteed by the Company. At September 30, 2018, the Company had $3.9 million of outstanding borrowings under the agreement, which bear interest at a weighted-average fixed rate of 5.8%.

On June 29, 2018, the Company and payableConvergent completed a sale-leaseback of Convergent’s Alpharetta, Georgia office facility. Convergent sold the Alpharetta facility for $7.0 million in equal monthly installmentscash and the Company simultaneously entered into a 10-year leaseback of principalthe facility for rent in the amount of $600,000 per year, escalating at the rate of 2% per year. Due to the Company’s continuing involvement in the building, the transaction was accounted for as a financing rather than a normal leaseback. The net proceeds from the transaction were recorded as a financing liability in long-term debt on the Company’s condensed consolidated balance sheet. Upon closing, the Company’s term loan and interestrevolving line of credit that previously were secured by the Alpharetta facility were repaid, and the related debt agreement was terminated. In addition, the Company issued warrants to the buyer to purchase up to 100,000 shares of Company stock, consisting of warrants to purchase 25,000 shares at each of $10, $12, $14, and $16 purchase prices per share. The warrants have a 10-year maturity. The Company recorded the aggregate $81 thousand fair value of the warrants as additional paid-in capital. The warrants are recorded at grant date fair value, which was calculated based on a 20-year amortization schedule with a final balloon payment of approximately $1.7 million due on May 10, 2022 and 2) a line of credit of up to $1.0 million secured by a second lien deed of trustBlack-Scholes valuation model using the following assumptions:

Expected dividend yield at date of grant0.00%
Risk-free interest rate2.81%
Expected stock price volatility37.01%
Expected life of warrants (in years)7.0

The risk-free interest rate assumption was based on the Company’s Alpharetta, GA facility, bearing interestU.S. Treasury yield curve in effect at the Prime Rate published in the Wall Street Journal plus 0.25% (5.00% at March 31, 2018) and with a term ending May 10, 2018. On April 23, 2018, the Company entered into a one-year extensionwarrant issuance date. The expected volatility was based on historical daily price changes of the maturity dateCompany’s stock for the seven years prior to the warrant issuance date. The expected life of the line of credit through May 10, 2019. The debt agreement requireswarrants is the Company to maintain a ratio of total liabilities to tangible net worth not in excess of 3:1 and maintain minimum liquidity of $2.0 million. The Company was in compliance with its debt covenants as of March 31, 2018. The Company’s Chairman and Chief Executive Officer is also a memberestimate of the bank’s boardnumber of directors.years the warrants will be outstanding.

 

On September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement with a bank consisting of a revolving line of credit for up to CDN$3.5 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$500,000. Amounts outstanding under the line of credit are payable on demand and will bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans will bear interest at the lender’s prime rate plus 0.5% and are payable in monthly installments, including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The credit agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity method investments) not exceeding 2 to 1, a current ratio (excluding amounts due from related parties) of at least 1.5 to 1 and minimum “effective equity” of CDN$8.0 million. There were no borrowings outstanding at March 31, 2018 on any of the Strong/MDI credit facilities, as Strong/MDI had not yet drawn on the facilities. On April 24, 2018, the Company borrowed CDN$3.5 million on the 20-year installment loan. There was CDN$3.38 million of principal outstanding on the 20-year installment loan as of September 30, 2018, which bears variable interest at 4.28%. Strong/MDI was in compliance with its debt covenants as of March 31,September 30, 2018.

19

 

Scheduled repayments are as follows for the Company’s long-term debt outstanding as of March 31,September 30, 2018 (in thousands):

 

Remainder of 2018 $48 
2019  68 
2020  70 
2021  74 
2022  1,691 
Thereafter  - 
Total $1,951 

Remainder of 2018 $172 
2019  996 
2020  1,066 
2021  1,141 
2022  1,221 
Thereafter  6,128 
Total $10,724 

 

11. 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,September 30, 2018 and December 31, 2017.

 

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction and the transition of the United States from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the 2017 Tax Act requires taxpayers to calculate a one-time transition tax based on the deemed repatriation of undistributed earnings of foreign subsidiaries. The Company is currently analyzing the 2017 Tax Act, and in certain areas, has made provisional estimates of the effects on our consolidated financial statements and tax disclosures, including the amount of the repatriation tax and changes to existing deferred tax balances.

 

The Company is subject to possible examinations not yet initiated for Federal purposes for fiscal years 20142015 through 2017. In most cases, the Company is subject to possible examinations by state or local jurisdictions based on the particular jurisdiction’s statute of limitations.

 

12. Stock Compensation

 

The Company recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated grant date fair values. Stock-based compensation expense included in selling and administrative expenses approximated $0.3$0.2 million for each of the three month periods ended September 30, 2018 and 2017, and $0.6 million and $0.1$0.5 million for the three monthsnine month periods ended March 31,September 30, 2018 and 2017, respectively.

 

The Company’s 2017 Omnibus Equity Compensation Plan (“2017 Plan”) was approved by the Company’s stockholders and provides the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units and other stock-based awards and cash-based awards. Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company. The total number of shares authorized for issuance under the 2017 Plan is 1,371,189 shares, with 758,3541,121,654 shares remaining available for grant at March 31,September 30, 2018.

20

 

Options

 

The Company granted a total of 387,500 and 285,000435,000 options during the threenine month periods ended March 31,September 30, 2018 and 2017, respectively. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant.

 

The weighted average grant date fair value of stock options granted during the threenine month periods ended March 31,September 30, 2018 and 2017 was $1.82 and $2.41,$2.42, respectively. The fair value of each stock option granted was estimated on the date of grant using a Black-Scholes valuation model with the following weighted average assumptions:

 

 2018  2017  2018  2017 
Expected dividend yield at date of grant  0.00%  0.00%  0.00%  0.00%
Risk-free interest rate  2.49%  2.04%  2.49%  1.99%
Expected stock price volatility  35.65%  34.71%  35.65%  34.85%
Expected life of options (in years)  6.0   6.0   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. Expected volatility is based on historical daily price changes of the Company’s stock for six years prior to the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding.

The following table summarizes stock option activity for the threenine months ended March 31,September 30, 2018:

 

 Number of Options  Weighted Average Exercise Price Per Share  Weighted Average Remaining Contractual Term  Aggregate Intrinsic Value (in thousands)  Number of Options  Weighted Average Exercise Price Per Share  Weighted Average Remaining Contractual Term  Aggregate Intrinsic Value (in thousands) 
Outstanding at December 31, 2017  930,300  $5.63   8.7  $150   930,300  $5.63   8.7  $150 
Granted  387,500   4.70           387,500   4.70         
Exercised  -   -           -   -         
Forfeited  (32,000)  5.59           (249,000)  5.72         
Expired  (8,000)  5.41           (144,300)  4.84         
Outstanding at March 31, 2018  1,277,800  $5.29   8.8  $64 
Exercisable at March 31, 2018  269,300  $4.88   7.9  $31 
Outstanding at September 30, 2018  924,500  $5.26   8.5  $- 
Exercisable at September 30, 2018  163,000  $5.23   7.7  $- 

 

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,September 30, 2018, 1,008,500761,500 stock option awards were non-vested. Unrecognized compensation cost related to stock option awards was approximately $1.9$1.3 million, which is expected to be recognized over a weighted average period of 4.03.7 years.

 

Restricted Stock

 

The Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant. As of March 31,September 30, 2018, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $1.1$0.8 million, which is expected to be recognized over a weighted average period of 2.42.1 years.

21

 

The following table summarizes restricted stock share activity for the threenine months ended March 31,September 30, 2018:

 

 Number of Restricted Stock Shares  Weighted Average Grant Price Fair Value  Number of Restricted Stock Shares  Weighted Average Grant Date Fair Value 
Non-vested at December 31, 2017  85,000  $6.50   85,000  $6.50 
Granted  -   -   -   - 
Shares vested  (28,333)  6.50   (28,333)  6.50 
Shares forfeited  -   -   (10,000)  6.50 
Non-vested at March 31, 2018  56,667  $6.50 
Non-vested at September 30, 2018 ��46,667  $6.50 

 

The following table summarizes restricted stock unit activity for the threenine months ended March 31,September 30, 2018:

 

  Number of Restricted Stock Units  Weighted Average Grant Price Fair Value 
Non-vested at December 31, 2017  35,835  $6.45 
Granted  147,500   4.70 
Shares vested  -   - 
Shares forfeited  -   - 
Non-vested at March 31, 2018  183,335  $5.04 

  Number of Restricted Stock Units  Weighted Average Grant Date Fair Value 
Non-vested at December 31, 2017  35,835  $6.45 
Granted  147,500   4.70 
Shares vested  (35,835)  6.45 
Shares forfeited  -   - 
Non-vested at September 30, 2018  147,500  $4.70 

 

13. Commitments, Contingencies and Concentrations

 

Litigation

 

The Company is involved, from time to time, in certain legal disputes in the ordinary course of business operations. No such disputes, individually or in the aggregate, are expected to have a material effect on the Company’s business or financial condition.

 

Concentrations

 

The Company’s top ten customers accounted for approximately 56%53% and 45% of total consolidated net revenues for the three and nine months ended March 31, 2018.September 30, 2018, respectively. Trade accounts receivable from these customers represented approximately 37%45% of net consolidated receivables at March 31,September 30, 2018. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which the Company sells its products.

 

Financial instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. The Company sells product to a large number of customers in many different geographic regions. To minimize credit risk, the Company performs ongoing credit evaluations of its customers’ financial condition.

 

Leases

 

The Company and its subsidiaries lease plant and office facilities, furniture, autos and equipment under operating leases expiring through 2022. These leases generally contain renewal options and the Company expects to renew or replace certain of these leases in the ordinary course of business.

22

 

The Company’s future minimum lease payments for leases at March 31,September 30, 2018 are as follows:

 

 Capital Leases  Operating Leases  Capital Leases  Operating Leases 
 (in thousands)  (in thousands) 
Remainder 2018 $185  $1,342  $62  $450 
2019  116   1,768   116   1,770 
2020  -   1,543   -   1,545 
2021  -   1,415   -   1,416 
2022  -   1,081   -   1,081 
Thereafter  -   -   -   - 
Total minimum lease payments $301  $7,149  $178  $6,262 
Less: Amount representing interest  (10)      (4)    
Present value of minimum lease payments  291       174     
Less: Current maturities  (226)      (174)    
Capital lease obligations, net of current portion $65      $-     

 

14. Business Segment Information

 

As of March 31,September 30, 2018, the Company’s operations were conducted principally through two business segments: Cinema and Digital Media. The Cinema segment provides a full range of product and service solutions primarily for the theater exhibition industry, including a wide spectrum of premier audio-visual products and accessories such as digital projectors, state of the art projection screens, servers, library management systems, menu boards, flat panel displays, and sound systems, as well as network monitoring and on-site service for cinema equipment. The Digital Media segment develops and delivers solutions for out-of-home messaging, advertising and communication and provides managed services including monitoring of networked equipment. While there is digital signage equipment sold within this segment, the primary focus of this segment is providing solutions and services to our customers.

 

23

Summary by Business Segments

 

  Three Months Ended March 31, 
(In thousands) 2018  2017 
Net revenues        
Cinema $11,449  $12,689 
Digital Media  4,717   5,345 
Other  16   - 
Total segment net revenues  16,182   18,034 
Eliminations  (354)  (108)
Total net revenues  15,828   17,926 
         
Gross profit (loss)        
Cinema  3,385   3,616 
Digital Media  (551)  823 
Other  16   - 
Total gross profit  2,850   4,439 
         
Operating income (loss)        
Cinema  2,325   2,679 
Digital Media  (2,496)  (1,113)
Other  (113)  (117)
Total segment operating (loss) income  (284)  1,449 
Unallocated general and administrative expenses  (2,800)  (2,047)
Loss from operations  (3,084)  (598)
Other income  7   20 
Loss before income taxes and equity method investment (loss) income $(3,077) $(578)

(In thousands) March 31, 2018  December 31, 2017 
Identifiable assets        
Cinema $24,845  $27,358 
Digital Media  14,353   13,603 
Corporate  17,833   18,053 
Total $57,031  $59,014 

24

  Three Months Ended September 30,  Nine Months Ended September 30, 
(In thousands) 2018  2017  2018  2017 
Net revenues                
Cinema $11,560  $12,290  $33,438  $38,153 
Digital Media  5,050   7,595   13,593   19,277 
Other  16   13   49   22 
Total segment net revenues  16,626   19,898   47,080   57,452 
Eliminations  (173)  (339)  (622)  (567)
Total net revenues  16,453   19,559   46,458   56,885 
                 
Gross profit (loss)                
Cinema  4,415   3,934   11,015   11,565 
Digital Media  (901)  1,372   (3,394)  3,445 
Other  16   13   49   23 
Total gross profit  3,530   5,319   7,670   15,033 
                 
Operating (loss) income                
Cinema  3,383   3,028   7,681   8,593 
Digital Media  (2,563)  (84)  (10,042)  (2,094)
Other  (82)  (98)  (281)  (289)
Total segment operating (loss) income  738   2,846   (2,642)  6,210 
Unallocated general and administrative expenses  (1,712)  (2,298)  (6,939)  (7,090)
Unallocated loss on disposal of assets  (818)  -   (818)  - 
(Loss) income from operations  (1,792)  548   (10,399)  (880)
Other income (expense)  561   (392)  718   (500)
(Loss) income before income taxes and equity method investment (loss) income $(1,231) $156  $(9,681) $(1,380)

 

(In thousands) September 30, 2018  December 31, 2017 
Identifiable assets        
Cinema $29,515  $27,358 
Digital Media  14,274   13,603 
Corporate  16,042   18,053 
Total $59,831  $59,014 

Summary by Geographical Area

 

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
(In thousands) 2018  2017  2018  2017  2018  2017 
Net revenue                        
United States $12,830  $14,393  $12,495  $15,349  $36,196  $44,648 
Canada  1,400   1,220   1,234   1,365   4,148   4,372 
Mexico  556   356   206   425   1,293   1,164 
China  541   1,466   1,581   1,646   2,867   4,543 
Latin America  270   284   256   461   659   1,263 
Europe  158   116   456   250   809   427 
Asia (excluding China)  73   72   160   -   337   216 
Other  -   19   65   63   149   252 
Total $15,828  $17,926  $16,453  $19,559  $46,458  $56,885 

(In thousands) September 30, 2018  December 31, 2017 
Identifiable assets        
United States $42,094  $37,230 
Canada  17,737   21,784 
Total $59,831  $59,014 

 

(In thousands) March 31, 2018  December 31, 2017 
Identifiable assets        
United States $38,325  $37,230 
Canada  18,706   21,784 
Total $57,031  $59,014 

Net revenues by business segment are to unaffiliated customers. Net sales by geographical area are based on destination of sales. Identifiable assets by geographical area are based on location of facilities. Net sales by geographical area are based on destination of sales.

15. Subsequent Event

On April 27, 2018, the Company executed a definitive agreement for a sale-leaseback of its Alpharetta, Georgia office facility. The Company agreed to sell the Alpharetta facility for $7.0 million in cash and enter into a 10-year leaseback of the facility for rent in the amount of $600,000 per year, escalating at the rate of 2% per year. In addition, the Company agreed to issue 100,000 warrants to the buyer or its designee to purchase Company stock, consisting of 25,000 warrants at each of $10, $12, $14 and $16 purchase prices per share. The warrants will have a 10-year maturity. The closing of the transaction is expected to occur within 30 days after the completion of a 60-day due diligence period and satisfaction of customary contingencies. Upon closing of the sale-leaseback transaction, the Company’s term loan and revolving line of credit that are currently secured by the Alpharetta facility will be repaid and the related debt agreement would be terminated. The Company expects to receive net proceeds of approximately $4.0 million on the sale-leaseback after repayment of the loans.

 

28 25
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. Management’s discussion and analysis contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements that are not historical are forward-looking and reflect expectations for future Company performance. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

Forward-looking statements involve a number of risks and uncertainties, including but not limited to those discussed in the “Risk Factors” section contained in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and the following risks and uncertainties: the Company’s ability to expand its revenue streams, potential interruptions of supplier relationships or higher prices charged by suppliers, the Company’s ability to successfully compete and introduce enhancements and new features that achieve market acceptance and that keep pace with technological developments, the Company’s ability to successfully execute its capital allocation strategy, the Company’s ability to retain or replace its significant customers, the impact of a challenging global economic environment or a downturn in the markets, economic and political risks of selling products in foreign countries, risks of non-compliance with U.S. and foreign laws and regulations, cybersecurity risks and risks of damage and interruptions of information technology systems, the Company’s ability to retain key members of management and successfully integrate new executives, the Company’s ability to complete acquisitions, strategic investments, entry into new lines of business, divestitures, mergers or other transactions on acceptable terms or at all, the Company’s ability to assert its intellectual property rights, the impact of natural disasters and other catastrophic events, the adequacy of insurance and the impact of having a controlling stockholder. Given the risks and uncertainties, readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described herein, as well as others not now anticipated. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except where required by law, the Company assumes no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

 

Overview

 

Ballantyne Strong, Inc. (“BTN”, “Ballantyne”, “the Company”, “we”, “our” and “us”) is a holding company with diverse business activities focused on serving the cinema, retail, financial, advertising and government markets. The Company and its subsidiaries design, integrate and install technology solutions for a broad range of applications; develop and deliver out-of-home messaging, advertising and communications; manufacture projection screens; and provide managed services including monitoring of networked equipment to our customers. We add value through our design, engineering, manufacturing excellence and customer service.

 

We conduct our operations through two primary business segments: Cinema and Digital Media. The Cinema segment provides a full range of product and service solutions primarily for the theater exhibition industry, including a wide spectrum of premier audio-visual products and accessories such as digital projectors, state of the art projection screens, servers, library management systems, menu boards, flat panel displays and sound systems. The Digital Media segment delivers solutions and services across two primary markets: digital out-of-home and enterprise video.

 

Our segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance. Approximately 71% of our revenues for the threenine months ended March 31,September 30, 2018 were from Cinema and approximately 29% were from Digital Media. Additional information related to our reporting segments can be found in the notes to the condensed consolidated financial statements.

 

26

Results of Operations:

 

Three Months Ended March 31,September 30, 2018 Compared to the Three Months Ended March 31,September 30, 2017

 

Revenues

 

Net revenues during the quarter ended March 31,September 30, 2018 decreased 11.7%15.9% to $15.8$16.5 million from $17.9$19.6 million during the quarter ended March 31,September 30, 2017.

 

 Three Months Ended March 31,       Three Months Ended September 30,  ��   
 2018 2017 $ Change % Change  2018  2017  $ Change  % Change 
 (dollars in thousands)  (dollars in thousands) 
Cinema $11,449  $12,689  $(1,240)  (9.8)% $11,560  $12,290  $(730)  (5.9)%
Digital Media  4,717   5,345   (628)  (11.7)%  5,050   7,595   (2,545)  (33.5)%
Other  16   -   16   N/A  16   13   3   23.1%
Total segment revenues  16,182   18,034   (1,852)  (10.3)%  16,626   19,898   (3,272)  (16.4)%
Eliminations  (354)  (108)  (246)  227.8%  (173)  (339)  166   (49.0)%
Total net revenues $15,828  $17,926  $(2,098)  (11.7)% $16,453  $19,559  $(3,106)  (15.9)%

 

Cinema

 

Sales of Cinema products and services decreased 9.8%5.9% to $11.4$11.6 million in the firstthird quarter of 2018 from $12.7$12.3 million in the firstthird quarter of 2017. The decrease was driven primarily by a decrease in lamp sales, as we terminated our distributorship for certain cinema lamp products in July 2017 due to the very low margins earned on these products. Smaller decreases inlower sales of screens, digital cinema equipment and non-recurring maintenance services, partially offset by higher sales of screen support systems and projectors were offset by increases in sales of audio equipment, displays and installation services.

 

Digital Media

 

Sales of Digital Media products and services decreased 11.7%33.5% to $4.7$5.1 million in the firstthird quarter of 2018 from $5.3$7.6 million in the firstthird quarter of 2017. DecreasedThe decrease was driven primarily by lower revenue from installation services and smaller decreases in contract maintenance revenue, sales of digital signage equipment wasand revenue from non-recurring maintenance. These decreases were partially offset by increases$1.5 million of revenue in sales of installation services and digital signage as a service (“DSaaS”).the current year from our taxicab advertising business that did not exist in the prior year.

 

Export Revenues

 

Sales outside the United States (primarily from the Cinema segment) decreased to $3.0$4.0 million in the firstthird quarter of 2018 from $3.5$4.2 million afor the same quarter of last year ago due primarily to decreased sales in China,Canada, Mexico and other parts of Latin America, partially offset by increased sales in Canada and Mexico.Europe. Export sales are sensitive to worldwide economic and political conditions that lead to volatility. Certain areas of the world are more cost conscious than the U.S. market and there are instances where our products are priced higher than local manufacturers, making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market our products overseas at reasonable selling prices.

 

27

Gross Profit

 

Gross profit during the quarter ended March 31,September 30, 2018 decreased 35.8%33.6% to $2.9$3.5 million from $4.4$5.3 million during the quarter ended March 31,September 30, 2017.

 

 Three Months Ended March 31,       Three Months Ended September 30,      
 2018 2017 $ Change % Change  2018  2017  $ Change  % Change 
 (dollars in thousands)  (dollars in thousands) 
Cinema $3,385  $3,616  $(231)  (6.4)% $4,415  $3,934  $481   12.2%
Digital Media  (551)  823   (1,374)  (167.0)%  (901)  1,372   (2,273)  (165.7)%
Other  16   -   16   N/A   16   13   3   23.1%
Total gross profit $2,850  $4,439  $(1,589)  (35.8)% $3,530  $5,319  $(1,789)  (33.6)%

 

Cinema

 

Gross profit in the Cinema segment was $3.4$4.4 million or 29.6%38.2% of revenues in the firstthird quarter of 2018 compared to $3.6$3.9 million or 28.5%32.0% of revenues in the firstthird quarter of 2017. The decreaseincrease in gross profit dollars and gross margin dollarspercentage was driven primarily by lower revenues as described above, partially offset by slightly higher margins as a percentage of revenues. Favorable product mix in sales of cinema equipment due to the termination of the low margin cinema lamp distributorship last year was partially offset by unfavorable product mixdecreases in screen sales,warranty expense, inventory reserves and warehousing costs. We expect the lower warehousing costs to continue into future periods, as saleswe downsized our Cinema warehouse operations in the second quarter of lower margin screens made up a larger percentage of total revenues.2018.

 

Digital Media

 

Gross loss in the Digital Media segment was $0.6$0.9 million in the firstthird quarter of 2018 compared to gross profit of $0.8$1.4 million in the firstthird quarter of 2017. The decrease in gross margin dollars was driven primarily by the fixed costs associated with our new advertising operations that we did not incur in the prior year. During the first quarter of 2018, we signed an agreement to provide advertising services on over 3,500 New York City taxicabs. The advertising will beis on a combination of vinyl printed signs and digital signs. We have leased 300 digital signs, which we began installing in February and we expect to complete installations for bywere installed throughout the end of the second quarterfirst half of 2018. In addition to lease expense for the digital signs, we incur fixed fees payable to our taxicab counterparties for advertising access and maintenance. While weWe expect gross losses in the taxicab advertising business will continue into 2019 until enough advertising revenue can be generated to incurcover these fixed costs, we expect advertising revenues to gradually increase throughout 2018, absorbing a larger portion of the fixed costs until the business generates a positive gross profit in late 2018 or early 2019.costs. Excluding the new costs associated with the advertising business, the gross profit in the Digital Media gross margin dollars and gross margin as a percentage of revenues did not change significantly fromsegment was approximately breakeven during the samethird quarter of 2018, or a decrease of approximately $1.4 million compared to the prior year.third quarter of 2017. This decrease was driven primarily by lower revenues as described above.

 

Operating (Loss) Income

 

We generated an operating loss of $3.1$1.8 million in the firstthird quarter of 2018 compared to an operating lossincome of $0.6$0.5 million in the firstthird quarter of 2017.

 

 Three Months Ended March 31,       Three Months Ended September 30,      
 2018 2017 $ Change % Change  2018  2017  $ Change  % Change 
 (dollars in thousands)  (dollars in thousands) 
Cinema $2,325  $2,679  $(354)  (13.2)% $3,383  $3,028  $355   11.7%
Digital Media  (2,496)  (1,113)  (1,383)  124.3%  (2,563)  (84)  (2,479)  2,951.2%
Other  (113)  (117)  4   (3.4)%  (82)  (98)  16   (16.3)%
Total segment operating (loss) income  (284)  1,449   (1,733)  (119.6)%
Total segment operating income  738   2,846   (2,108)  (74.1)%
Unallocated general and administrative expenses  (2,800)  (2,047)  (753)  36.8%  (1,712)  (2,298)  586   (25.5)%
Total operating loss $(3,084) $(598) $(2,486)  415.7%
Unallocated loss on disposal of assets  (818)  -   (818)  N/A 
Total operating (loss) income $(1,792) $548  $(2,340)  (427.0)%

28

 

We generated operating income in the Cinema segment of $2.3$3.4 million in the firstthird quarter of 2018 compared to $2.7$3.0 million in the firstthird quarter of 2017. The decreaseincrease in operating income was driven primarily by lowerhigher gross profit as described above.

 

The Digital Media segment generated an operating loss of $2.5$2.6 million in the firstthird quarter of 2018 compared to $1.1$0.1 million in the firstthird quarter of 2017. The decreaseincrease in the operating loss was driven primarily by lower gross profit as described above.

 

Unallocated general and administrative expenses increaseddecreased to $2.8$1.7 million in the firstthird quarter of 2018 compared to $2.0$2.3 million in the firstthird quarter of 2017. The increasedecrease was driven primarily by increasedlower consulting and employee compensation and benefits stock-based compensation, audit, tax and legal expenses. Unallocated loss on disposal of assets consisted primarily of a $0.8 million loss on abandonment of an internally-developed software intangible asset in the third quarter of 2018.

 

Other Financial Items

For the third quarter of 2018, total other income of $0.6 million primarily consisted of a $0.8 million fair value adjustment to our notes receivable, partially offset by $0.2 million of interest expense. For the third quarter of 2017, total other expense of $0.4 million primarily consisted of $0.3 million of foreign currency transaction losses and interest expense of $0.1 million. The increase in interest expense was due to higher average debt outstanding in 2018 compared to 2017.

 

The effective tax rate differs from the statutory rates primarily as a result of the valuation allowance recorded against the Company’s U.S. tax jurisdiction deferred tax assets and differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction. Our income tax expense consists primarily of income tax on foreign earnings.

 

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction and the transition of the United States from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the 2017 Tax Act requires taxpayers to calculate a one-time transition tax based on the deemed repatriation of undistributed earnings of foreign subsidiaries. We currently are analyzing the 2017 Tax Act and, in certain areas, have made provisional estimates of the effects on our consolidated financial statements and tax disclosures, including the amount of the repatriation tax and changes to our existing deferred tax balances.

 

The firstthird quarter of 2018 includes an overall insignificant equity method net investment loss,income of $0.5 million, primarily consisting of a gain of $0.4 million loss from RELM, partially offset by incomeon the sale of $0.2 million from PIH and $0.1 million from Itasca.BKTI common stock. Equity method investment incomeloss in the firstthird quarter of 2017 amounted to $2.5$0.8 million, almost exclusivelyprimarily consisting of losses from Itasca.Itasca of $1.0 million, partially offset by income from PIH of $0.2 million.

 

As a result of the items outlined above, we generated a net lossesloss from continuing operations of approximately $3.8$1.2 million and basic and diluted lossesloss per share from continuing operations of $0.26$0.08 in the firstthird quarter of 2018, compared to a net earningsloss from continuing operations of $0.4$1.0 million and basic and diluted earningsloss per share from continuing operations of $0.03$0.07 in the firstthird quarter of 2017.

 

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017

Revenues

Net revenues during the nine months ended September 30, 2018 decreased 18.3% to $46.5 million from $56.9 million during the nine months ended September 30, 2017.

  Nine Months Ended September 30,       
  2018  2017  $ Change  % Change 
  (dollars in thousands) 
Cinema $33,438  $38,153  $(4,715)  (12.4)%
Digital Media  13,593   19,277   (5,684)  (29.5)%
Other  49   22   27   122.7%
Total segment revenues  47,080   57,452   (10,372)  (18.1)%
Eliminations  (622)  (567)  (55)  9.7%
Total net revenues $46,458  $56,885  $(10,427)  (18.3)%

Cinema

Sales of Cinema products and services decreased 12.4% to $33.4 million in the first nine months of 2018 from $38.2 million in the first nine months of 2017. The decrease was driven by a decrease in lamp sales, as we terminated our distributorship for certain cinema lamp products in July 2017 due to the very low margins earned on these products, along with decreased sales of screens, and non-recurring maintenance services, partially offset by increased revenues from installation services.

Digital Media

Sales of Digital Media products and services decreased 29.5% to $13.6 million in the first nine months of 2018 from $19.3 million in the first nine months of 2017. The decrease was driven primarily by lower revenue from non-recurring installation and maintenance services, sales of digital signage equipment and contract maintenance services, partially offset by revenue in the current year from our taxicab advertising business that did not exist in the prior year and increased digital signage as a service revenues.

Export Revenues

Sales outside the United States (primarily from the Cinema segment) decreased to $10.3 million in the first nine months of 2018 from $12.2 million for the same period of the prior year due primarily to decreased sales in China and Latin America (excluding Mexico), partially offset by increased sales in Mexico and Europe.

Gross Profit

Gross profit during the first nine months of 2018 decreased 49.0% to $7.7 million from $15.0 million during the first nine months of 2017.

  Nine Months Ended September 30,       
  2018  2017  $ Change  % Change 
  (dollars in thousands) 
Cinema $11,015  $11,565  $(550)  (4.8)%
Digital Media  (3,394)  3,445   (6,839)  (198.5)%
Other  49   23   26   113.0%
Total gross profit $7,670  $15,033  $(7,363)  (49.0)%

Cinema

Gross profit in the Cinema segment was $11.0 million or 32.9% of revenues in the first nine months of 2018 compared to $11.6 million or 30.3% of revenues in the first nine months of 2017. The decrease in gross profit dollars was driven primarily by decreased revenues as described above along with higher personnel costs in our cinema field service business, partially offset by lower warranty expenses and warehousing costs. We expect the lower warehousing costs to continue into future periods, as we downsized our Cinema warehouse operations in the second quarter of 2018.

Digital Media

Gross loss in the Digital Media segment was $3.4 million in the first nine months of 2018 compared to gross profit of $3.4 million in the first nine months of 2017. The decrease in gross profit dollars was driven primarily by the fixed costs associated with our new taxicab advertising operations that we did not incur in the prior year. Excluding the new costs associated with the advertising business, the gross profit in the Digital Media segment amounted to approximately $0.7 million during the first nine months of 2018, or a decrease of approximately $2.7 million compared to the first nine months of 2017. This decrease was driven primarily by lower revenues as described above and higher inventory obsolescence charges.

Operating (Loss) Income

We generated an operating loss of $10.4 million in the first nine months of 2018 compared to $0.9 million in the first nine months of 2017.

  Nine Months Ended September 30,       
  2018  2017  $ Change  % Change 
  (dollars in thousands) 
Cinema $7,681  $8,593  $(912)  (10.6)%
Digital Media  (10,042)  (2,094)  (7,948)  379.6%
Other  (281)  (289)  8   (2.8)%
Total segment operating (loss) income  (2,642)  6,210   (8,852)  (142.5)%
Unallocated general and administrative expenses  (6,939)  (7,090)  151   (2.1)%
Unallocated loss on disposal of assets  (818)  -   (818)  N/A 
Total operating loss $(10,399) $(880) $(9,519)  1,081.7%

We generated operating income in the Cinema segment of $7.7 million in the first nine months of 2018 compared to $8.6 million in the first nine months of 2017. The decrease in operating income was driven primarily by lower revenues and gross profit as described above.

The Digital Media segment generated an operating loss of $10.0 million in the first nine months of 2018 compared to $2.1 million in the first nine months of 2017. The decrease was driven primarily by lower gross profit as described above, along with a $1.3 million loss on abandonment of an internally-developed software intangible asset.

Unallocated general and administrative expenses decreased to $6.9 million in the first nine months of 2018 compared to $7.1 million in the first nine months of 2017. The decrease was driven by lower consulting costs, partially offset by increased employee compensation and benefits and professional services costs. Unallocated loss on disposal of assets consisted primarily of a $0.8 million loss on abandonment of an internally-developed software intangible asset.

Other Financial Items

For the first nine months of 2018, total other income of $0.7 million primarily consisted of a $1.0 million fair value adjustment to our notes receivable, partially offset by $0.3 million of interest expense. For the first nine months of 2017, total other expense of $0.5 million primarily consisted of $0.4 million of foreign currency transaction losses and $0.1 million of interest expense. The increase in interest expense was due to higher average debt outstanding in 2018 compared to 2017.

The effective tax rate differs from the statutory rates primarily as a result of the valuation allowance recorded against the Company’s U.S. tax jurisdiction deferred tax assets and differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction. Our income tax expense consists primarily of income tax on foreign earnings.

The first nine months of 2018 includes an equity method investment loss of $0.2 million, consisting of an other-than-temporary impairment charge of $0.7 million and equity method investment loss of $0.2 million from Itasca and an equity method investment loss of $0.4 million from BKTI, partially offset by equity method investment income of $0.6 million from PIH and a gain on the sale of BKTI common stock of $0.4 million. Equity method investment income in the first nine months of 2017 amounted to $1.5 million, primarily consisting of $1.3 million of income from Itasca and $0.2 million of income from PIH.

As a result of the items outlined above, we generated a net loss from continuing operations of approximately $11.8 million and basic and diluted loss per share from continuing operations of $0.82 in the first nine months of 2018, compared to a net loss from continuing operations of $2.6 million and basic and diluted loss per share from continuing operations of $0.18 in the first nine months of 2017.

Liquidity and Capital Resources

 

During the past several years, we have primarily met our working capital and capital resource needs from our operating cash flows and credit facilities. During the first quarter of 2018, we signed an agreement to provide advertising services on over 3,500 New York City taxicabs. The advertising will beis on a combination of vinyl printed signs and digital signs. We have leased 300 digital signs, which we began installing in Februarywere installed throughout the first and we expect to complete installations for by the end of the second quarterquarters of 2018. In addition to lease expense for the digital signs, we incur fixed fees payable to our taxicab counterparties for advertising access and maintenance. We expect that the new advertising business will continue to negatively impact our cash flow for the first half of 2018into 2019 as we incur costs without collecting significantequivalent revenues during the start-up phase. However, we believe that our existing sources of liquidity, including cash and cash equivalents, credit facilities and operating cash flow and anticipated net proceeds from the sale-leaseback of our Alpharetta, Georgia facility as described below, will be sufficient to meet our projected capital needs for the foreseeable future. We ended the firstthird quarter of 2018 with total cash and cash equivalents of $3.3$5.7 million, compared to $4.9 million at December 31, 2017.

 

As of March 31,September 30, 2018, $0.6$1.2 million of the $3.3$5.7 million in cash and cash equivalents was held by our Canadian subsidiary, Strong/MDI. If these funds are repatriated to our operations in the U.S., we would be required to pay Canadian withholding taxes, which have been fully accrued as of March 31,September 30, 2018. Strong/MDI also may make intercompany loans to the U.S. parent company, which do not trigger Canadian withholding taxes if they meet certain requirements. As of March 31,September 30, 2018, the parent company had outstanding intercompany loans from Strong/MDI of approximately $24.1$28.8 million, compared to approximately $19.4 million at December 31, 2017.

 

29

In 2017, weOn May 22, 2018, our subsidiary, Convergent, entered into a debtan installment payment agreement consisting of a $2.0 million five-year term loanwith an equipment financing company in order to purchase media players and a line of creditrelated equipment in an aggregate amount of up to $1.0 million,approximately $4.4 million. Installment payments under each contract for purchase of the equipment are due monthly for a period of 60 months. The financing provided in the agreement is secured by deedsthe equipment. The borrowings under the agreement bear interest at a fixed rate based on the three-year U.S. Treasury Note yield plus a spread at the time of trust on ourfunding. At September 30, 2018, we had $3.9 million of outstanding borrowings under the agreement, which bear interest at a weighted-average fixed rate of 5.8%.

On June 29, 2018, Convergent completed a sale-leaseback of its Alpharetta, Georgia office facility. The revolving line of credit bears interest at 5.00% as of March 31, 2018. At March 31, 2018, the balance of the term loan, including current maturities, was $1.95 million. We also had outstanding borrowings on our line of credit of $0.5 million as of March 31, 2018 and borrowed an additional $0.5 million in April 2018. At March 31, 2018, we were in compliance with our debt covenants. On April 27, 2018, we executed a definitive agreement for a sale-leaseback of the Alpharetta facility. We agreed to sellConvergent sold the Alpharetta facility for $7.0 million in cash and enterwe entered into a 10-year leaseback of the facility for rent in the amount of $600,000 per year, escalating at the rate of 2% per year. The closing ofDue to our continuing involvement in the building, the transaction is expected to occur within 30 days after the completion ofwas accounted for as a 60-day due diligence period and satisfaction of customary contingencies.financing rather than a normal leaseback. Upon closing, of the sale-leaseback transaction, theConvergent’s term loan and revolving line of credit will bethat previously were secured by the Alpharetta facility were repaid, and the related debt agreement would bewas terminated. We expect to receive net proceeds of approximately $4.0 million on the sale-leaseback after repayment of the loans.

 

In 2017, our Canadian subsidiary, Strong/MDI, also entered into a demand credit agreement consisting of a revolving line of credit for up CDN$3.5 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$500,000. 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. There were no borrowings outstanding at March 31, 2018 on any of the Strong/MDI credit facilities, as we had not yet drawn on the facilities. On April 24, 2018, wethe Company borrowed CDN$3.5 million on the 20-year installment loan. There was CDN$3.38 million of principal outstanding on the 20-year installment loan as of September 30, 2018. The outstanding principal bears variable interest based on the lender’s prime rate plus 0.5%, which equaled 4.28% on September 30, 2018. Strong/MDI was in compliance with its debt covenants as of March 31,September 30, 2018.

 

Cash Flows from Operating Activities

 

The following table provides information that we use in analyzing our cash flows from operating activities of continuing operations (in thousands):

 

  Three Months Ended March 31, 
  2018  2017 
Net cash (used in) provided by operating activities - continuing operations $(1,591) $567 
Less:        
Changes in working capital  993   1,064 
Foreign currency transaction gain  104   3 
Current income tax expense  (636)  (630)
Net interest (expense) income  (45)  12 
Other  15   9 
Subtotal - reconciling items  431   458 
Operating (loss) income, excluding noncash operating expenses (non-GAAP) $(2,022) $109 

  Nine Months Ended September 30, 
  2018  2017 
Net cash used in operating activities - continuing operations $(8,796) $(913)
Less:        
Changes in working capital  (2,900)  (471)
Foreign currency transaction gain (loss)  41   (410)
Dividends received from investee  817   - 
Current income tax expense  (1,982)  (2,017)
Net interest expense  (267)  (66)
Other  (10)  (1)
Subtotal - reconciling items  (4,301)  (2,965)
Operating (loss) income, excluding noncash operating expenses (non-GAAP) $(4,495) $2,052 

 

Operating (loss) income, excluding noncash operating expenses, is a non-GAAP financial measure that we use only for the purpose of analyzing net cash provided by (used in) operating activities. It is defined as operating income (loss), adjusted to remove noncash operating expenses consisting of provisions for doubtful accounts, obsolete inventory and warranty, depreciation and amortization, impairment of intangible assets, loss on disposal or transfer of assets, amortization of contract acquisition costs and stock-based compensation expense.

 

Net cash used in operating activities from continuing operations was $1.6$8.8 million in the first quarternine months of 2018, as operating loss, excluding noncash expenses, of $2.0$4.5 million, andchanges in working capital of $2.9 million, current income tax expense of $0.6$2.0 million and net interest expense of $0.3 million were partially offset by favorable net changes in working capital itemsdividends received from an equity method investee of $1.0 million and foreign currency transaction gains of $0.1$0.8 million. The favorableunfavorable net change in working capital was primarily due to a $0.7$4.2 million increase in customer depositsaccounts receivable and deferred revenue, a $0.7$1.0 million increase in accrued expensesother current and accounts payable and a $0.5 million decrease in inventories,noncurrent assets partially offset by a $0.8$1.4 million increase in other assets.deferred revenue and customer deposits, a $0.4 million decrease in inventory and a $0.4 million increase in accounts payable and accrued expenses.

30

 

Net cash provided byused in operating activities from continuing operations was $0.6$0.9 million in the first quarternine months of 2017, as operating income, excluding noncash expenses, of $0.1$2.1 million and favorable netwas offset by unfavorable changes in working capital items of $1.1$0.5 million, were partially offset by current income tax expense of $0.6$2.0 million and foreign currency transaction losses of $0.4 million. The favorableunfavorable net change in working capital was primarily due to a $2.5$1.2 million decrease in deferred revenue and customer deposits, partially offset by a $0.4 million decrease in accounts receivable and a $0.4 million increase in accounts payable and accrued liabilities, partially offset by increases in inventories, accounts receivable and other assets. Accounts payable and accrued liabilities increased $2.5 million primarily due to timing of orders and payments to vendors at the end of the quarter.expenses.

 

Cash Flows from Investing Activities

 

Net cash used inprovided by investing activities was $0.3$3.4 million in the first quarternine months of 2018, consisting primarily of $4.5 million of proceeds from our sale of BKTI common stock, partially offset by $1.2 million of capital expenditures. Net cash used in investing activities was $3.5$5.2 million in the first quarternine months of 2017, primarily due primarily to $2.5 million used in purchases of equity securities and $1.1$2.9 million inof capital expenditures.

 

36 

Cash Flows from Financing Activities

 

Net cash used inprovided by financing activities was $0.1$6.7 million in the first quarternine months of 2018, consisting primarily of $7.0 million of proceeds from the sale-leaseback of our Alpharetta, GA office facility and $3.2 million of proceeds from issuance of short-term debt, partially offset by $3.4 million of principal payments on capital leases.debt, including repayment in conjunction with the sale-leaseback of approximately $3.0 million of short-term and long-term debt previously secured by the Alpharetta, GA facility. Net cash used inprovided by financing activities in the first quarternine months of 2017 was $2.2 million due to $2.5 million of proceeds from issuance of debt, offset slightly by $0.1 million primarily for the purchase of treasury stock purchases and payments on$0.2 million of capital leases.lease payments.

 

The effect of changes in foreign exchange rates decreased cash and cash equivalents by $0.1 million in the first nine months of 2018 and increased cash and cash equivalents by $0.5$0.3 million and $39 thousand in the first quarternine months of 2018 and 2017, respectively.2017.

 

Hedging and Trading Activities

 

Our primary exposure to foreign currency fluctuations pertains to our subsidiary in Canada. In certain instances, we may enter into a foreign exchange contract to manage a portion of this risk. We do not have any trading activities that include non-exchange traded contracts at fair value.

 

Off Balance Sheet Arrangements and Contractual Obligations

The future estimated payments as of March 31, 2018 under contractual obligations are summarized below (in thousands):

Contractual Obligations Total  2018  2019-2020  2021-2022  Thereafter 
Long-term debt, including current maturities $2,296  $115  $306  $1,875  $- 
Short-term debt  503   503   -   -   - 
Postretirement benefits  112   11   30   30   41 
Capital leases  301   185   116   -   - 
Operating leases  7,149   1,342   3,311   2,496   - 
Contractual cash obligations $10,361  $2,156  $3,763  $4,401  $41 

There were no other material contractual obligations other than inventory and property, plant and equipment purchases in the ordinary course of business.

Seasonality

 

Generally, our quarterly revenue and earnings fluctuate moderately from quarter to quarter. As we increase our sales in our current markets, and as we expand into new markets in different geographies, it is possible we may experience different seasonality patterns in our business. As a result, the results of operations for the threenine months ended March 31,September 30, 2018 are not necessarily indicative of the results that may be expected for an entire fiscal year.

31

 

Recently Issued Accounting Pronouncements

 

See Note 3, Summary of Significant Accounting Policies to the condensed consolidated financial statements for a description of recently issued accounting pronouncements.

 

Critical Accounting Policies and Estimates

 

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.

 

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for our year ended December 31, 2017. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. Other than policies related to the adoption of ASC 606 as described in Note 4 to the condensed consolidated financial statements, there were no significant changes in our critical accounting policies during the threenine months ended March 31,September 30, 2018.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The principal market risks affecting us are exposure to interest rates and foreign currency exchange rates. We market our products throughout the United States and the world. As a result, we could be adversely affected by such factors as changes in foreign currency rates and weak economic conditions. As a majority of our sales are currently denominated in U.S. dollars, a strengthening of the dollar can and sometimes has made our products less competitive in foreign markets.

Interest Rates—Interest rate risks from our interest related accounts such as our postretirement obligations are not deemed significant. We currently have long-term notes receivable, recorded at fair value, bearing fixed interest rates of 15% and long-term debt with a fixed interest rate of 4.5%. A change in long-term interest rates for comparable types of instruments would have the effect of us recording changes in fair value of the notes receivable through our statement of operations. As of March 31, 2018, we also have $500,000 borrowed on a revolving line of credit that bears variable interest at the Prime Rate published by the Wall Street Journal plus 0.25%, or 5.00% as of March 31, 2018. Changes in the Prime Rate would increase or decrease our interest expense on outstanding line of credit borrowings.

Foreign Exchange—Exposures to transactions denominated in currencies other than the entity’s functional currency are primarily related to our Canadian subsidiary. Fluctuations in the value of foreign currencies create exposures, which can adversely affect our results of operations. From time to time, as market conditions indicate, we will enter into foreign currency contracts to manage the risks associated with forecasted transactions. A portion of our cash in our Canadian subsidiary is denominated in foreign currencies, where fluctuations in exchange rates will impact our cash balances in U.S. dollar terms. A hypothetical 10% change in the value of the U.S. dollar would not have a material impact on our reported cash balance as of March 31, 2018.

Equity Price Risk—We are exposed to price risk related to our investments in equity securities. At March 31, 2018, our carrying value of investments in equity securities aggregated $17.8 million, all of which were accounted for using the equity method. The fair value of these investments was $15.4 million at March 31, 2018. A change in the equity price of the equity method investments would result in a change in the fair value or economic value of such securities.Not applicable.

 

37 32
 

 

Item 4. Controls and Procedures

 

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective at ensuring that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (as amended) is (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

On January 1, 2018, we adopted ASC 606 (see Note 4 to the Condensed Consolidated Financial Statements). We implemented internal controls to ensure we adequately evaluated our contracts with customers and properly assessed the impact of the standard on our financial statements. We also implemented changes to our business processes related to revenue recognition and the control activities within them. The changes included internal training, ongoing contract review and monitoring and gathering of information for disclosures.

There have been no other changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

 

PART II. Other Information

 

Item 1. Legal Proceedings

 

In the ordinary course of business operations, we are involved, from time to time, in certain legal disputes. No such disputes, individually or in the aggregate, are expected to have a material effect on our business or financial condition.

 

Item 1A. Risk Factors

 

Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 includes a detailed discussion of the Company’s risk factors. There have been no material changes to the risk factors as previously disclosed.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 20, 2015, we announced that our Board of Directors adopted a stock repurchase program authorizing the repurchase of up to 700,000 shares of our outstanding Common Stock pursuant to a plan adopted under Rule 10b5-1 of the Securities Exchange Act of 1934 (as amended). The repurchase program has no expiration date. There were no repurchases during the three months ended March 31,September 30, 2018. As of March 31,September 30, 2018, there were 636,931 shares that may yet be purchased under the stock repurchase program.

 

Item 5. Other Information

As previously disclosed, the Company’s 2018 Annual Meeting of Stockholders is scheduled to be held on November 28, 2018. This date is more than 30 days after the anniversary of the Company’s 2017 Annual Meeting of Stockholders. As a result, stockholder proposals intended to be considered for inclusion in the Company’s proxy materials for the 2018 Annual Meeting of Stockholders had to be submitted to the Company a reasonable time before the Company began printing and sending its proxy materials.

Since the date of the Company’s 2018 Annual Meeting of Stockholders has been delayed by more than 60 days from the anniversary of the Company’s 2017 Annual Meeting of Stockholders, in accordance with the Company’s Bylaws, stockholder nominations of director candidates and stockholder proposals to be presented at the 2018 Annual Meeting of Stockholders, but not submitted for inclusion in the Company’s proxy materials, had to be delivered to the Secretary of the Company no later than October 15, 2018.

The Bylaws specify the information that had to accompany any such stockholder notices. The Company did not receive any such proposals or nominations.

38 
 33

 

Item 6. Exhibits

 

    Incorporated by Reference  
Exhibit Number Document Description Form Exhibit Filing
Date		 Filed
Herewith
10.1 Amendment to the Credit Agreement, dated as of November 14, 2017, between Canadian Imperial Bank of Commerce and Strong/MDI Screen Systems, Inc. 10-K 10.22 3-15-2018  
           
10.2 Note Modification Agreement, dated as of April 18, 2018, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender. 8-K 10.1 4-24-2018  
           
10.3 Contract of Sale, dated as of April 27, 2018, by and among Convergent Media Systems Corporation, as seller, and Metrolina Alpharetta, LLC, as Buyer. 8-K 10.1 5-1-2018  
           
10.4 Form of Lease Agreement, to be entered into by and between Metrolina Alpharetta, LLC, as Landlord, and Ballantyne Strong, Inc., as Tenant 8-K 10.2 5-1-2018  
           
10.5 Form of Warrant, to be issued by Ballantyne Strong, Inc. 8-K 10.3 5-1-2018  
           
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.       X
           
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.       X
           
32.1* 18 U.S.C. Section 1350 Certification of Chief Executive Officer.       X
           
32.2* 18 U.S.C. Section 1350 Certification of Chief Financial Officer.       X
           
101 The following materials from Ballantyne Strong, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements.       X
    Incorporated by Reference  
Exhibit
Number		 Document Description Form Exhibit Filing
Date		 Filed
Herewith
10.1 Letter Agreement, dated as of September 9, 2018, by and between Ballantyne Strong, Inc. and Fundamental Global Investors, LLC. 8-K 10.1 9-12-18  
           
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.       X
           
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.       X
           
32.1* 18 U.S.C. Section 1350 Certification of Chief Executive Officer.       X
           
32.2* 18 U.S.C. Section 1350 Certification of Chief Financial Officer.       X
           
101 The following materials from Ballantyne Strong, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements.       X

 

 

*Furnished herewith.

34

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BALLANTYNE STRONG, INC.   
     
By:

/s/D. Kyle Cerminara

 By:

/s/Lance V. Schulz

 

D. Kyle Cerminara,

Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)

  Lance V. Schulz,
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
     
Date:May 8,November 6, 2018 Date:May 8,November 6, 2018

35