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BTN Ballantyne Strong

Filed: 12 Nov 20, 4:41pm

 

 

 

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

 

For the quarterly period ended September 30, 2020

 

OR

 

[  ]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)
   

4201 Congress Street, Suite 175

Charlotte, North Carolina

 28209
(Address of Principal Executive Offices) (Zip Code)

 

(704) 994-8279

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Shares, $.01 par value BTN NYSE American

 

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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

 

Large accelerated filer[  ]Accelerated filer[  ]
Non-accelerated filer[X]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 November 9, 2020
Common Stock, $.01 par value 14,790,374 shares

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page No.
   
 PART I. FINANCIAL INFORMATION 
   
Item 1.Financial Statements3
   
 Condensed Consolidated Balance Sheets, September 30, 2020 (Unaudited) and December 31, 20193
   
 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)4
   
 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)5
   
 Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)6
   
 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited)7
   
 Notes to the Condensed Consolidated Financial Statements (Unaudited)9
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations32
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk46
   
Item 4.Controls and Procedures46
   
 PART II. OTHER INFORMATION 
   
Item 1.Legal Proceedings46
   
Item 1A.Risk Factors46
   

 Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 48

   
Item 6.Exhibits49
   
 Signatures50

 

2

 

 

PART I. Financial Information

 

Item 1. Financial Statements

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par values)

 

  September 30, 2020  December 31, 2019 
  (unaudited)    
Assets        
Current assets:        
Cash and cash equivalents $7,026  $4,951 
Restricted cash  352   351 
Accounts receivable (net of allowance for doubtful accounts of $783 and $1,291, respectively)  6,115   12,898 
Inventories, net  2,816   2,879 
Current assets of discontinued operations  -   320 
Other current assets  1,735   1,624 
Total current assets  18,044   23,023 
Property, plant and equipment (net of accumulated depreciation of $11,363 and $10,030, respectively)  9,028   10,069 
Operating lease right-of-use assets  4,705   5,581 
Finance lease right-of-use assets  2,465   2,563 
Investments  22,006   13,311 
Intangible assets, net  1,214   1,534 
Goodwill  895   919 
Long-term assets of discontinued operations  -   585 
Other assets  31   48 
Total assets $58,388  $57,633 
         
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable $3,448  $2,969 
Accrued expenses  3,464   4,416 
Short-term debt  2,972   3,080 
Current portion of long-term debt  1,055   998 
Current portion of operating lease obligations  743   846 
Current portion of finance lease obligations  1,820   1,586 
Deferred revenue and customer deposits  4,198   2,706 
Current liabilities of discontinued operations  -   704 
Total current liabilities  17,700   17,305 
Long-term debt, net of current portion and debt issuance costs  2,617   3,019 
Operating lease obligations, net of current portion  4,107   4,662 
Finance lease obligations, net of current portion  3,111   3,988 
Deferred income taxes  3,053   2,649 
Long-term liabilities of discontinued operations  -   147 
Other long-term liabilities  120   154 
Total liabilities  30,708   31,924 
Commitments, contingencies and concentrations (Note 14)        
         
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 17,584 and 17,410 shares at September 30, 2020 and December 31, 2019, respectively; outstanding 14,790 and 14,616 shares at September 30, 2020 and December 31, 2019, respectively  176   174 
Additional paid-in capital  43,311   42,589 
Retained earnings  7,472   6,001 
Less 2,794 of common shares in treasury, at cost  (18,586)  (18,586)
Accumulated other comprehensive loss  (4,693)  (4,469)
Total stockholders’ equity  27,680   25,709 
Total liabilities and stockholders’ equity $58,388  $57,633 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2020 and 2019

(In thousands, except per share data)

(Unaudited)

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2020  2019  2020  2019 
Net product sales $                  4,460  $                    9,192  $                13,095  $                20,840 
Net service revenues  5,447   6,358   15,393   21,057 
Total net revenues  9,907   15,550   28,488   41,897 
Cost of products sold  3,564   5,603   10,119   17,526 
Cost of services  3,096   4,746   9,520   11,435 
Total cost of revenues  6,660   10,349   19,639   28,961 
Gross profit  3,247   5,201   8,849   12,936 
Selling and administrative expenses:                
Selling  678   956   2,234   2,986 
Administrative  2,914   4,055   10,119   11,709 
Total selling and administrative expenses  3,592   5,011   12,353   14,695 
Loss on disposal of assets  (18)  (3)  (18)  (67)
(Loss) income from operations  (363)  187   (3,522)  (1,826)
Other income (expense):                
Interest income  -   1   -   3 
Interest expense  (254)  (263)  (794)  (568)
Fair value adjustment to notes receivable  -   (845)  -   (2,153)
Foreign currency transaction (loss) gain  (173)  66   12   (154)
Other income, net  2,749   416   2,873   650 
Total other income (expense)  2,322   (625)  2,091   (2,222)
Income (loss) from continuing operations before income taxes and equity method investment loss  1,959   (438)  (1,431)  (4,048)
Income tax expense  (526)  (731)  (1,022)  (1,295)
Equity method investment loss  (460)  (496)  (580)  (1,223)
Net income (loss) from continuing operations  973   (1,665)  (3,033)  (6,566)
Net income (loss) from discontinued operations (Note 3)  4,673   (123)  4,504   (2,790)
Net income (loss) $5,646  $(1,788) $1,471  $(9,356)
                 
Basic net income (loss) per share                
Continuing operations $0.07  $(0.11) $(0.21) $(0.46)
Discontinued operations  0.31   (0.01)  0.31   (0.19)
Basic net income (loss) per share $0.38  $(0.12) $0.10  $(0.65)
                 
Diluted net income (loss) per share                
Continuing operations $0.07  $(0.11) $(0.21) $(0.46)
Discontinued operations  0.31   (0.01)  0.31   (0.19)
Diluted net income (loss) per share $0.38  $(0.12) $0.10  $(0.65)
                 
Weighted-average shares used in computing net income (loss) per share:                
Basic  14,789   14,494   14,699   14,476 
Diluted  14,906   14,494   14,699   14,476 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2020  2019  2020  2019 
Net income (loss) $                  5,646  $                 (1,788) $                 1,471  $                 (9,356)
Adjustment to postretirement benefit obligation  (8)  -   (13)  2 
Unrealized gain (loss) on available-for-sale securities of equity method investments, net of tax  -   166   (75)  407 
Currency translation adjustment:                
Unrealized net change arising during period  379   (26)  (136)  324 
Total other comprehensive income (loss)  371   140   (224)  733 
Comprehensive income (loss) $6,017  $(1,648) $1,247  $(8,623)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

 

The following summarizes the changes in stockholders’ equity for the three and nine months ended September 30, 2020:

 

  Common Stock (Shares)  Common Stock ($)  Additional Paid-In Capital  Retained Earnings  Treasury Stock  Accumulated Other Comprehensive Loss  Total
Stockholders’ Equity
 
Balance at December 31, 2019  17,410  $174  $42,589  $6,001  $(18,586) $(4,469) $25,709 
Net loss  -   -   -   (447)  -   -   (447)
Net other comprehensive loss  -   -   -   -   -   (1,285)  (1,285)
Vesting of restricted stock  35   -   -   -   -   -   - 
Stock-based compensation expense  -   -   273   -   -   -   273 
Balance at March 31, 2020  17,445   174   42,862   5,554   (18,586)  (5,754)  24,250 
Net loss  -   -   -   (3,728)  -   -   (3,728)
Net other comprehensive income  -   -   -   -   -   690   690 
Vesting of restricted stock  107   2   (2)  -   -   -   - 
Stock-based compensation expense  -   -   212   -   -   -   212 
Balance at June 30, 2020  17,552   176   43,072   1,826   (18,586)  (5,064)  21,424 
Net income  -   -   -   5,646   -   -   5,646 
Net other comprehensive income  -   -   -   -   -   371   371 
Vesting of restricted stock  32   -   -   -   -   -   - 
Stock-based compensation expense  -   -   239   -   -   -   239 
Balance at September 30, 2020  17,584  $176  $43,311  $7,472  $(18,586) $(4,693) $27,680 

 

The following summarizes the changes in stockholders’ equity for the three and nine months ended September 30, 2019:

 

  Common Stock (Shares)  Common Stock ($)  Additional Paid-In Capital  Retained Earnings  Treasury Stock  Accumulated Other Comprehensive Loss  Total
Stockholders’ Equity
 
Balance at December 31, 2018  17,237  $172  $41,471  $13,319  $(18,586) $(5,378) $30,998 
Net loss  -   -   -   (4,150)  -   -   (4,150)
Net other comprehensive income  -   -   -   -   -   168   168 
Cumulative effect of adoption of ASC 842  -   -   -   2,785   -   -   2,785 
Vesting of restricted stock  76   1   (1)  -   -   -   - 
Stock-based compensation expense  -   -   243   -   -   -   243 
Balance at March 31, 2019  17,313   173   41,713   11,954   (18,586)  (5,210)  30,044 
Net loss  -   -   -   (3,418)  -   -   (3,418)
Net other comprehensive income  -   -   -   -   -   425   425 
Stock-based compensation expense  -   -   221   -   -   -   221 
Balance at June 30, 2019  17,313   173   41,934   8,536   (18,586)  (4,785)  27,272 
Net loss  -   -   -   (1,788)  -   -   (1,788)
Net other comprehensive income  -   -   -   -   -   140   140 
Stock-based compensation expense  -   -   334   -   -   -   334 
Balance at September 30, 2019  17,313  $173  $42,268  $6,748  $(18,586) $(4,645) $25,958 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

 

  Nine Months Ended September 30, 
  2020  2019 
Cash flows from operating activities:        
Net loss from continuing operations $(3,033) $(6,566)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:        
Provision for (recovery of) doubtful accounts  397   (509)
Provision for obsolete inventory  41   245 
Provision for warranty  14   24 
Depreciation and amortization  2,634   2,214 
Amortization and accretion of operating leases  814   788 
Fair value adjustment to notes receivable  -   2,153 
Equity method investment loss  580   1,223 
Loss on disposal of assets  -   67 
Gain on business interruption claim settlement  (789)  - 
Deferred income taxes  72   (129)
Stock-based compensation expense  724   798 
Changes in operating assets and liabilities:        
Accounts receivable  4,793   776 
Inventories  (28)  (96)
Current income taxes  269   229 
Other assets  35   (130)
Accounts payable and accrued expenses  1,024   (2,000)
Deferred revenue and customer deposits  1,469   797 
Operating lease obligations  (857)  (875)
Net cash provided by (used in) operating activities from continuing operations  8,159   (991)
Net cash provided by operating activities from discontinued operations  598   1,407 
Net cash provided by operating activities  8,757   416 

 

(Continued on following page)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows - Continued

Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

 

  Nine Months Ended September 30, 
  2020  2019 
Cash flows from investing activities:        
Proceeds from sale of property, plant and equipment $-  $121 
Investment in Firefly Systems, Inc. (Note 7)  (4,000)  - 
Capital expenditures  (729)  (1,717)
Net cash used in investing activities from continuing operations  (4,729)  (1,596)
         
Cash flows from financing activities:        
Proceeds from issuance of long-term debt  -   237 
Principal payments on short-term debt  (450)  (323)
Principal payments on long-term debt  (427)  (725)
Proceeds from borrowing under credit facility  5,040   - 
Repayments of borrowings under credit facility  (5,040)  - 
Proceeds from Paycheck Protection Program Loan  3,174   - 
Repayment of Paycheck Protection Program Loan  (3,174)  - 
Payments on capital lease obligations  (1,195)  (420)
Net cash used in financing activities from continuing operations  (2,072)  (1,231)
Effect of exchange rate changes on cash and cash equivalents  120   46 
Net increase (decrease) in cash and cash equivalents and restricted cash from continuing operations  1,478   (3,772)
Net increase in cash and cash equivalents and restricted cash from discontinued operations  598   1,407 
Net increase (decrease) in cash and cash equivalents and restricted cash  2,076   (2,365)
Cash and cash equivalents and restricted cash at beginning of period  5,302   7,048 
Cash and cash equivalents and restricted cash at end of period $7,378  $4,683 
         
Components of cash and cash equivalents and restricted cash:        
Cash and cash equivalents $7,026  $4,333 
Restricted cash  352   350 
Total cash and cash equivalents and restricted cash $7,378  $4,683 
         
Supplemental disclosure of non-cash investing and financing activities:        
Term loan borrowings to finance equipment purchases $82  $364 
Finance lease obligations for property and equipment $553  $710 
Short-term borrowings to finance insurance $142  $114 
Investment in Firefly Systems, Inc. (Note 3) $5,284  $3,614 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8

 

 

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 entertainment and retail 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 (“SDM”) design, integrate and install technology solutions for a broad range of applications; develop and deliver out-of-home messaging and communications; manufacture projection screens; and provide managed services including monitoring of networked equipment to our customers.

 

In August 2020, the Company completed the sale of its Strong Outdoor business segment. As a result of the divestiture, the Company has presented Strong Outdoor’s operating results as a discontinued operation for all periods presented. See Note 3 for additional details.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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

 

The condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America (also referred to as “GAAP”) for annual reporting purposes or those made in the Company’s Annual Report on Form 10-K. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

The condensed consolidated balance sheet as of December 31, 2019 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results of operations and cash flows for the respective interim periods. Certain prior period balances have been reclassified to conform to current period presentation. The results for interim periods are not necessarily indicative of trends or results expected for a full year.

 

Unless otherwise indicated, all references to “dollars” and “$” in this Quarterly Report on Form 10-Q are to, and amounts are presented in, U.S. dollars.

 

Use of Management Estimates

 

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

 

There is significant ongoing uncertainty surrounding the COVID-19 global pandemic and the extent and duration of the impacts that it may have on the Company, as well as its customers, suppliers, and employees. There is heightened potential for future reserves against trade receivables, inventory write downs and impairments of long-lived assets, goodwill, intangible assets and investments. In the current environment, assumptions about future financial and operational performance, supply chain pricing and availability and customer creditworthiness have greater variability than normal, which could in the future significantly affect the valuation of the Company’s assets, both financial and non-financial. As an understanding of the longer-term impacts of COVID-19 on the Company’s customers and business develops, there is heightened potential for changes in these views over the remainder of 2020, and potentially beyond.

 

9

 

 

Restricted Cash

 

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

 

Accounts Receivable

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for doubtful accounts based on several factors, including overall customer credit quality, historical write-off experience and a specific analysis that projects the ultimate collectability of the account. As such, these factors may change over time causing the allowance level and bad debt expense to be adjusted accordingly. Since many of Strong Entertainment’s customers have been negatively impacted by COVID-19, the Company recorded $0.5 million of bad debt expense during the first nine months of 2020 as a result of the increased uncertainty related to collection of trade accounts receivable from these customers.

 

Investments

 

The Company applies the equity method of accounting to investments when it has significant influence, but not controlling interest, in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under the line item captioned “equity method investment income (loss)” in our condensed consolidated statements of operations. The Company’s equity method investments are reported at cost and adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company’s share of the investee’s income or loss is recorded on a one quarter lag for all equity method investments. The Company classifies distributions received from equity method investments using the cumulative earnings approach on the condensed consolidated statements of cash flows. Investments in nonmarketable unconsolidated entities in which the Company is not able to exercise significant influence (“Cost Method Investments”) are accounted for at the Company’s initial cost, minus any impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Dividends on cost method investments received are recorded as income.

 

The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. Management reviewed the underlying net assets of the investees as of September 30, 2020 and determined that the Company’s proportionate economic interest in the investees indicate that the investments were not other than temporarily impaired. The carrying value of our equity method and cost method investments is reported as “investments” on the condensed consolidated balance sheets. Notes 3 and 7 contain additional information on our equity method and cost method investments.

 

Fair Value of Financial Instruments

 

Assets and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

 Level 1 – inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities
 Level 2 – inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
 Level 3 – inputs to the valuation techniques are unobservable for the assets or liabilities

 

10

 

 

The following tables present the Company’s financial assets measured at fair value based upon the level within the fair value hierarchy in which the fair value measurements are classified, as of September 30, 2020 and December 31, 2019.

 

Fair values measured on a recurring basis at September 30, 2020 (in thousands):

 

  Level 1  Level 2  Level 3  Total 
Cash and cash equivalents $7,026  $-  $-  $7,026 
Restricted cash  352   -   -   352 
Notes receivable  -      -        -   - 
Total $7,378  $-  $-  $7,378 

 

Fair values measured on a recurring basis at December 31, 2019 (in thousands):

 

  Level 1  Level 2  Level 3  Total 
Cash and cash equivalents $4,951  $-  $-  $4,951 
Restricted cash  351   -   -   351 
Notes receivable  -       -       -   - 
Total $5,302  $-  $-  $5,302 

 

The following table reconciles the beginning and ending balance of the Company’s notes receivable at fair value (in thousands):

 

  Nine Months Ended September 30, 
  2020  2019 
Notes receivable balance, beginning of period $    -  $3,965 
Fair value adjustment  -   (2,153)
Notes receivable balance, end of period $-  $1,812 

 

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%. In connection with this transaction, the Company also entered into an agreement with one of its customers, pursuant to which the Company is obligated to provide up to $1.1 million of credits against any amounts due to the Company from the customer based on cash collected on the notes receivable. In the event the Company does not have any outstanding balances due from the customer, the Company would be obligated to remit up to the first $1.1 million collected on the notes receivable directly to the customer.

 

The notes receivable are recorded at estimated fair value. The significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are the discount rate and percentage of default. Significant increases (decreases) in any of these inputs in isolation would result in significantly lower (higher) fair value measurements. Adjustments to the fair value of the notes receivable are included in other (expense) income on the Company’s condensed consolidated statements of operations.

 

In order to estimate the fair value, the Company reviews the financial position and estimated cash flows of the debtor of the notes receivable. During the year ended December 31, 2019, the Company adjusted the carrying value of the notes receivable to $0 based on management’s review of the debtor’s financial statements and changes in the underlying trend of historical and projected cash flows available to service the notes. The related $1.1 million contingent liability was also adjusted during the year ended December 31, 2019, based on the Company’s expectation that cash flow from the notes receivable will not be available. As of September 30, 2020, management estimated the fair value of the notes receivable to be $0.

 

11

 

 

The Company’s short-term and long-term debt is recorded at historical cost. As of September 30, 2020, the Company’s long-term debt, including current maturities, had a carrying value of $3.7 million. Based on discounted cash flows using current quoted interest rates (Level 2 of the fair value hierarchy), the estimated fair value at September 30, 2020 was $3.4 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 7 includes fair value information related to our equity and cost method investments. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which include non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). The Company did not have any significant non-recurring measurements of non-financial assets or liabilities during the three and nine months ended September 30, 2020 or 2019.

 

Recently Adopted Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles- Goodwill and Other- Internal Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This ASU requires customers in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize or expense. The standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of the new standard on January 1, 2020 did not have an impact on the Company’s consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU improves the effectiveness of fair value measurement disclosures by eliminating, adding and modifying certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of the new standard on January 1, 2020 did not have an impact on the Company’s consolidated financial statements and related disclosures.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance was initially effective for the Company for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which, among other things, defers the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company believes the adoption of this ASU will not significantly impact its results of operations and financial position.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. The effective date of the standard will be for annual periods beginning after December 15, 2020, with early adoption permitted. The various amendments in the standard are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

 

12

 

 

In January 2020, the FASB issued ASU 2020-01, “Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815.” This ASU clarifies the interaction between accounting standards related to equity securities, equity method investments and certain derivatives. The effective date of the standard will be for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the new standard on its condensed consolidated financial statements and related disclosures.

 

In April 2020, the FASB issued a question-and-answer document to address stakeholder questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. The guidance will allow concessions related to the timing of payments, where the total consideration has not changed, to not be accounted for as lease modifications. Instead, any such concessions can be accounted for as if no change was made to the contract or as variable lease payments. As a result of the COVID-19 pandemic, the Company received certain lease concessions in the form of rent deferrals during 2020. The Company chose to implement the policy election provided by the FASB to record rent concessions as if no modifications to leases contracts were made, and thus no changes to the lease obligations were recorded in respect to these concessions. As of September 30, 2020, the Company had outstanding deferred rent of $0.1 million, the majority of which will be paid over the remaining term of the leases.

 

3. Discontinued Operations

 

As part of transactions in May 2019 and August 2020, the Company divested its Strong Outdoor business segment. The Company’s Strong Outdoor business segment provided outdoor advertising and experiential marketing to advertising agencies and corporate accounts, primarily in New York City.

 

On May 21, 2019, SDM entered into a Taxicab Advertising Collaboration Agreement (the “Commercial Agreement”) and a Unit Purchase Agreement (the “Unit Purchase Agreement”) with Firefly Systems, Inc. (“Firefly”), pursuant to which SDM agreed to make available to Firefly 300 digital taxi tops and the parties agreed to coordinate the fulfilling of SDM’s agreements with the Metropolitan Taxicab Board of Trade, Inc. (“MTBOT”) and Creative Mobile Media, LLC (“CMM”), each dated February 8, 2018. Firefly agreed to fulfill the digital taxi top advertising obligations under the MTBOT agreement and CMM agreement, and SDM agreed to fulfill the non-digital taxi top advertising obligations under the MTBOT agreement and CMM agreement. The Company is a party to the Unit Purchase Agreement and agreed to guarantee the payment obligations of SDM under the Commercial Agreement. As consideration for entering into these agreements, the Company received $4.8 million of Firefly’s Series A-2 preferred shares (“Firefly Shares”). The Firefly Shares, including those subsequently issued pursuant to an earn-out provision, were subject to a repurchase option for a period of three years to cover SDM’s indemnity obligations and other post-closing covenants under the Commercial Agreement and the Unit Purchase Agreement. As part of the Asset Purchase Agreement (as defined and described below), Firefly no longer has an option to repurchase any of the Series A-2 preferred shares issued to SDM.

 

The 300 digital tops the Company has made available to Firefly are subject to a master equipment lease agreement the Company entered into during 2017. Pursuant to the master lease agreement and the Unit Purchase Agreement, the Company will remain the primary obligor until such time as the lease expires. In addition, of the $4.8 million of Firefly Shares received, $1.2 million were eligible for repurchase by Firefly if the Company did not exercise the purchase option contained within the master lease agreement. Accordingly, the Company had deferred recognizing an investment related to these Firefly Shares eligible for repurchase until such time it was reasonably certain the Company would exercise the purchase option. The transaction, in effect, transferred control of the underlying asset to Firefly. As additional consideration for the right to use the digital taxi tops, Firefly agreed to pay for certain of Company’s operating expenses associated with the non-digital taxi tops. The Company concluded the payments that Firefly made on its behalf were considered variable payments and were not included in the calculation of the selling profit. Therefore, the Company recorded the benefit and the related operating expenses in the period when the changes in facts and circumstances on which the variable lease payments were based occured. As part of the Asset Purchase Agreement (as defined and described below) the Taxicab Advertising Collaboration Agreement dated May 21, 2019 was terminated, which relieved the Company of its obligation to exercise the purchase option contained within the master lease agreement. As a result, the Company recognized an additional $1.2 million investment at September 30, 2020 related to the Firefly Shares that were previously eligible for repurchase by Firefly.

 

13

 

 

The Unit Purchase Agreement contained an earnout provision pursuant to which SDM obtained additional Firefly Shares. The earnout period was from May 22, 2019 through June 30, 2020. SDM was eligible to earn additional Firefly Shares equivalent to the cash collections under certain digital top contracts that were in place at the closing of the transaction. The Company received the shares earned pursuant to the earnout provision on August 3, 2020. In connection with the additional Firefly Shares that were received, the Company recorded an additional $0.1 million and $0.7 million gain on the Firefly transaction during the three and nine months ended September 30, 2020, respectively.

 

On August 3, 2020, SDM entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Firefly, pursuant to which SDM agreed to sell substantially all of the assets primarily related to its Strong Outdoor operating business to Firefly and continue to make available 300 digital taxi tops to Firefly. SDM retained certain accounts receivable as well as liabilities other than executory obligations under transferred contracts to the extent such liabilities are required to be performed following closing or constitute certain deferred revenue. The transaction closed on the same day.

 

As consideration for entering into the Asset Purchase Agreement, SDM received approximately $0.6 million in cash consideration and approximately $3.2 million of Firefly’s Series A-3 preferred shares. In connection with the closing of the transactions contemplated by the Asset Purchase Agreement, (i) SDM received approximately $1.1 million of Firefly’s Series A-2 preferred shares, which constituted the remaining shares to be issued pursuant to the Unit Purchase Agreement, (ii) Firefly no longer has an option to repurchase any of the Series A-2 preferred shares issued to SDM, (iii) accounts payable to Firefly were cancelled and forgiven, and (iv) the Taxicab Advertising Collaboration Agreement dated May 21, 2019 was terminated, which relieved the Company of its obligation to exercise the purchase option contained within the master lease agreement. The Company recorded a gain of approximately $5.3 million during the third quarter of 2020 as a result of the transaction. As of September 30, 2020, SDM held approximately $5.7 million of Firefly Series A-2 preferred shares, which included the shares issued to SDM as part of the May 2019 transaction.

 

As contemplated by the Asset Purchase Agreement, the newly issued Series A-2 preferred shares of Firefly will be held by SDM, and the previously issued Series A-2 preferred shares of Firefly held by Fundamental Global Venture Partners, LP (“FGVP”), an investment fund managed by Fundamental Global Investors, LLC in which SDM is the sole limited partner, were transferred to SDM. The Asset Purchase Agreement includes customary representations and warranties. SDM is indemnifying Firefly for excluded liabilities related to the transferred business.

 

Convergent entered into a Master Services Agreement (the “Master Services Agreement”) with Firefly, pursuant to which Convergent agreed to provide certain support services to Firefly, including remote equipment monitoring and diagnostics of screens until no later than December 31, 2022 and transition advertising instruction and integration services, content management services, ad-hoc reporting and analysis, wireless service, advertising content management services, and mapping data until no later than six months from closing. As consideration for entering into the Master Services Agreement, Convergent received $2.0 million in cash consideration.

 

14

 

 

The components of the gain on the sale of the Strong Outdoor business to Firefly during the three months ended September 30, 2020 are as follows (in thousands):

 

Firefly Series A-3 preferred shares received $3,200 
Cash received  571 
Removal of Firefly's share repurchase option related to digital top lease  1,171 
Forgiven accounts payable to Firefly  739 
Book value of liabilities transferred to Firefly  191 
Book value of assets transferred to Firefly  (608)
Net gain from sale of discontinued operations $5,264 

 

The major line items constituting the net income (loss) from discontinued operations are as follows (in thousands):

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2020  2019  2020  2019 
Net revenues $148  $1,296  $1,587  $3,524 
Cost of revenues  160   684   1,487   4,769 
Gross profit  (12)  612   100   (1,245)
Selling and administrative expenses  515   733   1,498   1,725 
Loss on disposal of assets  (64)  -   (64)  (38)
(Loss) income from operations  (591)  (121)  (1,462)  (3,008)
Other income (expense)  -   -   -   - 
(Loss) income from discontinued operations  (591)  (121)  (1,462)  (3,008)
Gain on Firefly transaction  5,264   (2)  5,966   218 
Income tax expense  -   -   -   - 
Total net income (loss) from discontinued operations $4,673  $(123) $4,504  $(2,790)

 

15

 

 

Strong Outdoor’s assets and liabilities are reflected as assets and liabilities of discontinued operations for all periods presented. The major classes of assets and liabilities included as part of discontinued operations are as follows (in thousands):

 

  September 30,  December 31, 
  2020  2019 
Accounts receivable $-  $- 
Other current assets  -   320 
Total current assets of discontinued operations  -   320 
Property, plant and equipment  -   491 
Other long-term assets  -   94 
Total long-term assets of discontinued operations  -   585 
Total assets of discontinued operations $-  $905 
         
Accounts payable $-  $304 
Current portion of operating lease obligation  -   125 
Deferred revenue and customer deposits  -   275 
Total current liabilities of discontinued operations  -   704 
Operating lease obligation, net of current portion  -   147 
Total long-term liabilities of discontinued operations  -   147 
Total liabilities of discontinued operations $-  $851 

 

4. Revenue

 

The Company accounts for revenue using the following steps:

 

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

 

The Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine 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 or when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement.

 

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

 

16

 

 

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.

 

The Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. The Company did not have any deferred contract costs as of September 30, 2020 or December 31, 2019.

 

The following tables disaggregate the Company’s revenue by major source and by operating segment for the three and nine months ended September 30, 2020 (in thousands):

 

  Three Months Ended September 30, 2020 
  Strong Entertainment  Convergent  Other  Total 
Screen system sales $1,631  $-  $-  $1,631 
Digital equipment sales  2,192   322   -   2,514 
Extended warranty sales  110   -   -   110 
Other product sales  205   -   -   205 
Total product sales  4,138   322   -   4,460 
Field maintenance and monitoring services  875   3,808   -   4,683 
Installation services  186   216   -   402 
Other service revenues  61   -   301   362 
Total service revenues  1,122   4,024   301   5,447 
Total $5,260  $4,346  $301  $9,907 

 

  Nine Months Ended September 30, 2020 
  Strong Entertainment  Convergent  Other  Total 
Screen system sales $5,566  $-  $-  $5,566 
Digital equipment sales  4,529   1,725   -   6,254 
Extended warranty sales  418   -   -   418 
Other product sales  857   -   -   857 
Total product sales  11,370   1,725   -   13,095 
Field maintenance and monitoring services  3,030   10,517   -   13,547 
Installation services  518   694   -   1,212 
Other service revenues  123   18   493   634 
Total service revenues  3,671   11,229   493   15,393 
Total $15,041  $12,954  $493  $28,488 

 

17

 

 

The following tables disaggregate the Company’s revenue by major source and by operating segment for the three and nine months ended September 30, 2019 (in thousands):

 

  Three Months Ended September 30, 2019 
  Strong Entertainment  Convergent  Other  Total 
Screen system sales $4,441  $-  $-  $4,441 
Digital equipment sales  3,282   757   -   4,039 
Extended warranty sales  197   -   -   197 
Other product sales  515   -   -   515 
Total product sales  8,435   757   -   9,192 
Field maintenance and monitoring services  1,972   3,145   -   5,117 
Installation services  473   611   -   1,084 
Other service revenues  48   19   90   157 
Total service revenues  2,493   3,775   90   6,358 
Total $10,928  $4,532  $90  $15,550 

 

  Nine Months Ended September 30, 2019 
  Strong Entertainment  Convergent  Other  Total 
Screen system sales $10,370  $-  $-  $10,370 
Digital equipment sales  6,396   2,248   -   8,644 
Extended warranty sales  582   -   -   582 
Other product sales  1,238   6   -   1,244 
Total product sales  18,586   2,254   -   20,840 
Field maintenance and monitoring services  6,060   8,704   -   14,764 
Installation services  1,540   4,194   -   5,734 
Other service revenues  219   52   288   559 
Total service revenues  7,819   12,950   288   21,057 
Total $26,405  $15,204  $288  $41,897 

 

Screen system sales

 

The Company typically recognizes revenue on the sale of its screen systems when control of the screen is transferred to the customer, usually at time of shipment. However, revenue is recognized upon delivery for certain international shipments with longer shipping transit time because control does not transfer to the customer until delivery. For contracts that are long-term in nature, the Company believes that the use of the percentage-of-completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues, and contract costs. Under the percentage-of-completion method, revenue is recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer.

 

18

 

 

Digital equipment sales

 

The Company recognizes revenue on sales of digital equipment when the control of the equipment is transferred, which occurs at the time of shipment from the Company’s warehouse or drop-shipment from a third party. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer.

 

Field maintenance and monitoring services

 

The Company sells service contracts that provide maintenance and monitoring services to Strong Entertainment and Convergent customers. In the Strong Entertainment segment, these contracts are generally 12 months in length, while the term for service contracts in the Convergent segment can be for multiple years. Revenue related to service contracts is recognized ratably over the term of the agreement.

 

The Company also performs discrete time and materials-based maintenance and repair work for customers in the Strong Entertainment and Convergent segments. Revenue related to time and materials-based maintenance and repair work is recognized at the point in time when the performance obligation has been fully satisfied.

 

Installation services

 

The Company performs installation services for both its Strong Entertainment and Convergent customers and recognizes revenue upon completion of the installations.

 

Extended warranty sales

 

The Company sells extended warranties to its Strong Entertainment customers. When the Company is the primary obligor, revenue is recognized on a gross basis ratably over the term of the extended warranty. In third party extended warranty sales, the Company is not the primary obligor, and revenue is recognized on a net basis at the time of the sale.

 

Timing of Revenue Recognition

 

The following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three and nine months ended September 30, 2020 (in thousands):

 

  Three Months Ended September 30, 2020 
  Strong Entertainment  Convergent  Other  Total 
Point in time $4,532  $767  $-  $5,299 
Over time  728   3,579   301   4,608 
Total $5,260  $4,346  $301  $9,907 

 

  Nine Months Ended September 30, 2020 
  Strong Entertainment  Convergent  Other  Total 
Point in time $12,326  $2,987  $6  $15,319 
Over time  2,715   9,967   487   13,169 
Total $15,041  $12,954  $493  $28,488 

 

19

 

 

The following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three and nine months ended September 30, 2019 (in thousands):

 

  Three Months Ended September 30, 2019 
  Strong Entertainment  Convergent  Other  Total 
Point in time $9,364  $1,518  $-  $10,882 
Over time  1,564   3,014   90   4,668 
Total $10,928  $4,532  $90  $15,550 

 

  Nine Months Ended September 30, 2019 
  Strong Entertainment  Convergent  Other  Total 
Point in time $21,746  $6,918  $-  $28,664 
Over time  4,659   8,286   288   13,233 
Total $26,405  $15,204  $288  $41,897 

 

At September 30, 2020, the unearned revenue amount associated with maintenance and monitoring services, extended warranty sales and advertising services in which the Company is the primary obligor, was $2.9 million. The Company expects to recognize $1.4 million of unearned revenue amounts throughout the rest of 2020, $0.8 million during 2021 and $0.7 million during 2022.

 

5. Income (Loss) Per Common Share

 

Basic income (loss) per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted net income per share has been calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method. Diluted loss per share would be computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options and certain non-vested shares of restricted stock and restricted stock units. However, because the Company reported losses from continuing operations for the nine months ended September 30, 2020 and the three and nine months ended September 30, 2019, there were no differences between average shares used to compute basic and diluted loss per share. The following table summarizes the weighted average shares used to compute basic and diluted income (loss) per share (in thousands): 

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2020  2019  2020  2019 
Weighted average shares outstanding:                
Basic weighted average shares outstanding  14,789   14,494   14,699   14,476 
Dilutive effect of stock options and certain non-vested restricted stock units  117   -   -   - 
Diluted weighted average shares outstanding  14,906   14,494   14,699   14,476 

 

Options to purchase 884,500 and 772,000 shares of common stock were outstanding as of September 30, 2020 and September 30, 2019, respectively, but were not included in the computation of diluted loss per share as the options’ exercise prices were greater than the average market price of the common shares for each period. An additional 165,206 and 146,461 common stock equivalents related to options and restricted stock awards were excluded for the three and nine months ended September 30, 2019, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.

 

20

 

 

6. Inventories

 

Inventories consist of the following (in thousands):

 

  September 30, 2020  December 31, 2019 
Raw materials and components $1,632  $1,584 
Work in process  269   211 
Finished goods  915   1,084 
  $2,816  $2,879 

 

The inventory balances are net of reserves of approximately $0.7 million and $0.9 million as of September 30, 2020 and December 31, 2019, respectively.

 

7. Investments

 

The following summarizes our investments (dollars in thousands):

 

  September 30, 2020  December 31, 2019 
  Carrying Amount  Economic Interest  Carrying Amount  Economic Interest 
Equity Method Investments                
1347 Property Insurance Holdings, Inc. $6,379   21.0% $6,897   17.2%
Itasca Capital Ltd.  2,729   32.3%  2,800   32.3%
Total Equity Method Investments  9,108       9,697     
                 
Cost Method Investment                
Firefly Systems, Inc.  12,898       3,614     
Total Investments $22,006      $13,311     

 

Equity Method Investments

 

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

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2020  2019  2020  2019 
Entity                
1347 Property Insurance Holdings, Inc. $(440) $(783) $(443) $(622)
Itasca Capital Ltd.  (20)  287   (137)  (601)
Total $(460) $(496) $(580) $(1,223)

 

1347 Property Insurance Holdings, Inc. (“PIH”) is a publicly traded company that is implementing business plans to operate as a diversified holding company of insurance, reinsurance and investment management businesses. On September 15, 2020, PIH entered into an agreement pursuant to which PIH purchased 1.1 million shares of its outstanding common stock from an existing shareholder. The purchase of the 1.1 million shares decreased the number of outstanding shares of PIH and increased the Company’s ownership interest to approximately 21%. The Company’s Chairman and former Chief Executive Officer is the chairman of the board of directors of PIH, and the Company’s Co-Chairman is co-chairman of the board of directors of PIH. As of September 30, 2020, they controlled entities that, when combined with the Company’s ownership in PIH, own greater than 50% of PIH. Since PIH does not depend on the Company for continuing financial support to maintain operations, the Company has determined that PIH is not a variable interest entity, and therefore, the Company is not required to consolidate PIH. The equity method loss from PIH during the three and nine months ended September 30, 2020 was primarily the result of PIH’s non-cash losses associated with the change in fair value of its investment in the common stock of FedNat Holding Company (Nasdaq: FNHC). The Company did not receive dividends from PIH during the three and nine months ended September 30, 2020 or 2019. Based on quoted market prices, the market value of the Company’s ownership in PIH was $4.0 million at September 30, 2020.

 

21

 

 

Itasca Capital Ltd. (“Itasca”) is a publicly traded Canadian company that is an investment vehicle seeking transformative strategic investments. The Company’s Chairman and former Chief Executive Officer is chairman of the board of directors of Itasca, and the Company’s Co-Chairman is also a member of the board of directors of Itasca. These board seats, combined with the Company’s 32.3% ownership of Itasca, provide the Company with significant influence over Itasca, but not controlling interest. The Company did not receive dividends from Itasca during the three and nine months ended September 30, 2020 or 2019. Based on quoted market prices, the market value of the Company’s ownership in Itasca was $3.4 million at September 30, 2020.

 

As of September 30, 2020, the Company’s retained earnings included an accumulated deficit from its equity method investees of approximately $1.9 million.

 

The summarized financial information presented below reflects the financial information of the Company’s equity method investees for the nine months ended June 30, 2020 and 2019, consistent with the Company’s recognition of the results of its equity method investments on a one-quarter lag (in thousands):

 

For the nine months ended June 30, 2020  2019 
       
Revenue (1) $(4,883) $1,086 
Operating (loss) income $(7,845) $898 
Net loss $(3,020) $(5,489)

 

(1) PIH records realized and unrealized gains and losses on investments in net investment income (loss), which is included in the revenue line above.  

 

Cost Method Investment

 

The Company received preferred shares of Firefly in connection with the transactions with Firefly in May 2019 and August 2020. See Note 3 for additional details. In addition, on August 3, 2020, Strong/MDI entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Firefly, pursuant to which MDI agreed to purchase $4.0 million of Firefly’s Series A-3 preferred shares at the initial closing, which took place on the same day, and the Company or its affiliated entities may purchase an additional $2.0 million of Firefly’s Series A-3 preferred shares at a second closing subject to certain conditions. As contemplated by the Stock Purchase Agreement and ancillary investment agreements, the Company and its affiliated entities will have the right to designate a director to be elected to the board of directors of Firefly, subject to holding, together with its affiliates, approximately $7.2 million of Firefly’s Series A-3 preferred shares and other conditions. The Company and its affiliated entities currently hold $7.2 million of Series A-3 preferred shares and have designated Kyle Cerminara, Chairman of the Company’s board of directors and a principal of the Company’s largest shareholder, to Firefly’s board of directors.

 

22

 

 

8. Intangible Assets

 

Intangible assets consisted of the following as of September 30, 2020 (dollars in thousands):

 

  Useful life  Gross  Accumulated Amortization  Net 
  (Years)          
Intangible assets not yet subject to amortization:               
Software in development    $250  $-  $250 
Intangible assets subject to amortization:               
Software in service 5   2,404   (1,478)  926 
Product formulation 10   458   (420)  38 
Total    $3,112  $(1,898) $1,214 

 

Intangible assets consisted of the following as of December 31, 2019 (dollars in thousands):

 

  Useful life  Gross  Accumulated Amortization  Net 
  (Years)          
Intangible assets not yet subject to amortization:               
Software in development    $203  $-  $203 
Intangible assets subject to amortization:               
Software in service 5   2,362   (1,087)  1,275 
Product formulation 10   471   (415)  56 
Total    $3,036  $(1,502) $1,534 

 

Amortization expense relating to intangible assets was $0.2 million during each of the three months ended September 30, 2020 and 2019 and $0.6 million during each of the nine months ended September 30, 2020 and 2019.

 

The following table shows the Company’s estimated future amortization expense related to intangible assets currently subject to amortization for the next five years (in thousands):

 

Remainder of 2020 $140 
2021  523 
2022  244 
2023  57 
2024  - 
Thereafter  - 
Total $964 

 

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9. Goodwill

 

The following represents a summary of changes in the Company’s carrying amount of goodwill for the nine months ended September 30, 2020 (in thousands):

 

Balance as of December 31, 2019 $919 
Foreign currency translation adjustment  (24)
Balance as of September 30, 2020 $895 

 

10. Debt

 

The Company’s debt consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):

 

  September 30, 2020  December 31, 2019 
Short-term debt:        
Strong/MDI installment loan $2,830  $3,080 
Insurance note payable  142   - 
Current portion of long-term debt  1,055   998 
Total short-term debt  4,027   4,078 
Long-term debt:        
Equipment term loans  3,683   4,031 
Total principal balance of long-term debt  3,683   4,031 
Less: current portion  (1,055)  (998)
Less: unamortized debt issuance costs  (11)  (14)
Total long-term debt  2,617   3,019 
Total short-term and long-term debt $6,644  $7,097 

 

Equipment Term Loans

 

On May 22, 2018, Convergent entered into an installment payment agreement with an equipment financing company in order to purchase media players and related equipment in an aggregate amount of up to approximately $4.4 million. In each of December 2018 and June 2019, Convergent entered into additional installment payment agreements with other financing companies in order to purchase additional media players and related equipment, with each round of financing totaling approximately $0.6 million and $0.2 million, respectively. Installment payments under each contract are due monthly for a period of 60 months. The financing under each of the agreements is secured by the respective equipment. The borrowings under the agreements are recorded as long-term debt on the Company’s consolidated balance sheet. Collectively, the Company had $3.7 million of outstanding borrowings under equipment term loan agreements at September 30, 2020, which bore interest at a weighted-average fixed rate of 7.7%.

 

Strong/MDI Installment Loan and Revolving Credit Facility

 

On September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and restated May 15, 2018, with a bank consisting of a revolving line of credit for up to CDN$3.5 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$500,000. Amounts outstanding under the line of credit are payable on demand and bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans bear interest at the lender’s prime rate plus 0.5% and are payable in monthly installments, including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The credit agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity method investments) not exceeding 2 to 1, a current ratio (excluding amounts due from related parties) of at least 1.5 to 1 and minimum “effective equity” of CDN$8.0 million. On April 24, 2018, the Company borrowed CDN$3.5 million on the 20-year installment loan. There was CDN$3.8 million, or approximately $2.8 million, of principal outstanding on the 20-year installment loan as of September 30, 2020, which bears variable interest at 2.95%. There was no balance outstanding on Strong/MDI’s revolving credit facility as of September 30, 2020. Strong/MDI was in compliance with its debt covenants as of September 30, 2020.

 

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Scheduled repayments are as follows for the Company’s long-term debt outstanding as of September 30, 2020 (in thousands):

 

Remainder of 2020 $257 
2021  1,080 
2022  1,151 
2023  1,165 
2024  30 
Thereafter  - 
Total $3,683 

 

Paycheck Protection Program

 

On April 14, 2020, the Company entered into a promissory note evidencing a loan of $3.2 million (the “Loan”) under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) of the CARES Act. The Company intended to use the Loan for qualifying payroll, rent and utility expenses in accordance with the terms of the CARES Act. At the time the Company applied for the Loan, the Company believed it qualified to receive the funds pursuant to the PPP.

 

On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created additional uncertainty regarding the qualification requirements for a PPP loan for public companies. The Company has less than 300 employees and continues to be severely impacted by the disruption to the cinema, theme park and advertising industries as a result of COVID-19. However, out of an abundance of caution and in light of the new guidance, the Company repaid the full amount of the Loan plus accrued interest to the lender on May 5, 2020.

 

11. Leases

 

The Company and its subsidiaries lease plant and office facilities and equipment under operating and finance leases expiring through 2028. The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.

 

Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain of the leases contain extension options; however, the Company has not included such options as part of its right-of-use assets and lease liabilities because it does not expect to extend the leases. The Company measures and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company’s estimated incremental borrowing rate for loans with similar collateral and duration.

 

The Company elected to not apply the recognition requirements of Topic 842 to leases of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases are recognized in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

 

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The Company elected, as a lessee, for all classes of underlying assets, to not separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component.

 

The following tables present the Company’s lease costs and other lease information (dollars in thousands):

 

Lease cost            
  

Three Months Ended

September 30, 2020

  

Three Months Ended

September 30, 2019

  

Nine Months Ended

September 30, 2020

  

Nine Months Ended

September 30, 2019

 
Finance lease cost:                 
Amortization of right-of-use assets $420  $282  $1,195  $420 
Interest on lease liabilities  154   142   473   184 
Operating lease cost  372   421   1,163   1,751 
Short-term lease cost  12   12   42   21 
Sublease income  (92)  (120)  (297)  (313)
Net lease cost $866  $737  $2,576  $2,063 

 

Other information            
  

Three Months Ended

September 30, 2020

  

Three Months Ended

September 30, 2019

  

Nine Months Ended

September 30, 2020

  

Nine Months Ended

September 30, 2019

 
Cash paid for amounts included in the measurement of lease liabilities:               
Operating cash flows from finance leases $154  $142  $473  $184 
Operating cash flows from operating leases $289  $333  $857  $875 
Financing cash flows from finance leases $420  $282  $1,195  $420 
Right-of-use assets obtained in exchange for new finance lease liabilities $231  $902  $553  $1,613 
Right-of-use assets obtained in exchange for new operating lease liabilities $-  $-  $109  $644 
Derecognition of right-of-use asset in connection with Firefly transaction $-  $-  $-  $3,394 

 

  

As of

September 30, 2020

 
Weighted-average remaining lease term - finance leases (years)  2.7 
Weighted-average remaining lease term - operating leases (years)  7.1 
Weighted-average discount rate - finance leases  12.1%
Weighted-average discount rate - operating leases  4.9%

 

The following table presents a maturity analysis of the Company’s finance and operating lease liabilities as of September 30, 2020 (in thousands):

 

  Operating Leases  Finance Leases 
Remainder of 2020 $253  $580 
2021  944   2,320 
2022  812   2,114 
2023  660   499 
2024  669   235 
Thereafter  2,447   75 
Total lease payments  5,785   5,823 
Less: Amount representing interest  (935)  (892)
Present value of lease payments  4,850   4,931 
Less: Current maturities  (743)  (1,820)
Lease obligations, net of current portion $4,107  $3,111 

 

26

 

 

The Company leases certain equipment to customers as a component of its Digital Signage as a Service (“DSaaS”) offering. Under DSaaS, the Company provides support, maintenance and content management services in addition to the use of a media player to the customer. The Company elected, as a lessor, for all classes of underlying assets, to not separate nonlease components from lease components and, instead, to account for each separate lease component and the nonlease components associated with that lease component as a single component if the nonlease components otherwise would be accounted for under Accounting Standards Codification Topic 606 on revenue from contracts with customers, and both of the following conditions are met: 1) the timing and pattern of transfer for the lease component and nonlease components associated with that lease component are the same and 2) the lease component, if accounted for separately, would be classified as an operating lease in accordance with Topic 842. The combined component is accounted for as a single performance obligation under Topic 606 if the nonlease component or components are the predominant component(s) of the combined component. Otherwise, if the lease component is the predominant component, the combined component is accounted for as an operating lease under ASC 842. In the case of the Company’s DSaaS contracts, the nonlease components are predominant; therefore, revenue from DSaaS contracts is accounted for under Topic 606 and is included in net service revenues in the condensed consolidated statements of operations.

 

12. Income Taxes

 

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction in recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence, including recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance should be recorded against all of the Company’s U.S. tax jurisdiction deferred tax assets as of September 30, 2020 and December 31, 2019.

 

The Tax Cuts and Jobs Act of 2017 provides for a territorial tax system, which began in 2018. It includes the global intangible low-taxed income (“GILTI”) provision. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. As a result of the GILTI provisions, the Company’s inclusion of taxable income was incorporated into the overall net operating loss and valuation allowance for the three and nine months ended September 30, 2020 and September 30, 2019, as well as December31, 2019.

 

Changes in tax laws may affect recorded deferred tax assets and liabilities and the Company’s effective tax rate in the future. On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act made significant changes to Federal tax laws, including certain changes that are retroactive to the prior year. The effects of these changes relate to deferred tax assets and net operating losses; all of which are offset by valuation allowance.

 

The Company is subject to possible examinations not yet initiated for Federal purposes for fiscal years 2016 through 2019. In most cases, the Company is subject to possible examinations by state or local jurisdictions based on the particular jurisdiction’s statute of limitations.

 

13. Stock Compensation

 

The Company recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated grant date fair values. Stock-based compensation expense included in selling and administrative expenses was $0.2 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively, and $0.7 million and $0.8 million for the nine months ended September 30, 2020 and 2019, 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. On December 17, 2019, the Company’s stockholders approved the amendment and restatement of the 2017 Plan to (i) increase the number of shares of the Company’s common stock authorized for issuance under the 2017 Plan by 1,975,000 shares and (ii) extend the expiration date of the 2017 Plan by approximately two years, until October 27, 2029. As of September 30, 2020, 2,589,278 shares were available for issuance under the amended and restated 2017 Plan.

 

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Stock Options

 

The following table summarizes stock option activity for the nine months ended September 30, 2020:

 

  Number of Options  

Weighted Average Exercise Price

Per Share

  

Weighted Average Remaining Contractual

Term (Years)

  

Aggregate Intrinsic Value

(in thousands)

 
Outstanding at December 31, 2019  1,107,000  $4.47   7.9  $148 
Granted  -             
Exercised  -             
Forfeited  (100,500)  4.76         
Expired  (122,000)  5.27                
Outstanding at Spetember 30, 2020  884,500  $4.33   7.2  $        - 
Exercisable at September 30, 2020  386,000  $4.77   6.6  $- 

 

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 September 30, 2020, 498,500 stock option awards were non-vested. Unrecognized compensation cost related to non-vested stock options was approximately $0.6 million, which is expected to be recognized over a weighted average period of 2.7 years.

 

Restricted Stock Shares and Restricted Stock Units

 

The Company granted a total of 200,634 and 417,378 restricted stock units during the nine months ended September 30, 2020 and 2019, respectively. The Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant.

 

The following table summarizes restricted stock share activity for the nine months ended September 30, 2020:

 

  

Number of Restricted

Stock Shares

  

Weighted Average Grant

Date Fair Value

 
Non-vested at December 31, 2019  23,334  $6.50 
Granted  -     
Shares vested  (23,334)  6.50 
Shares forfeited  -     
Non-vested at September 30, 2020  -     

 

The following table summarizes restricted stock unit activity for the nine months ended September 30, 2020:

 

  Number of Restricted Stock Units  

Weighted Average Grant

Date Fair Value

 
Non-vested at December 31, 2019  522,379  $3.14 
Granted  200,634   1.57 
Shares vested  (174,954)  2.73 
Shares forfeited  (3,334)  2.89 
Non-vested at September 30, 2020  544,725  $2.51 

 

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As of September 30, 2020, the total unrecognized compensation cost related to non-vested restricted stock unit awards was approximately $1.1 million, which is expected to be recognized over a weighted average period of 1.9 years.

 

14. Commitments, Contingencies and Concentrations

 

Litigation

 

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

 

Concentrations

 

The Company’s top ten customers accounted for approximately 62% and 57% of consolidated net revenues during the three and nine months ended September 30, 2020, respectively. Trade accounts receivable from these customers represented approximately 37% of net consolidated receivables at September 30, 2020. In addition, the Company had one customer account for more than 10% of both its consolidated net revenues during the three and nine months ended September 30, 2020. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could also be adversely affected by such factors as the impact of COVID-19 on its customers, changes in foreign currency rates and weak economic and political conditions in each of the countries in which the Company sells its products.

 

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

 

Insurance Recoveries

 

During February 2019, one portion of Strong/MDI’s Quebec, Canada facility sustained damage as a result of inclement weather. The Company has property and casualty and business interruption insurance and has been working with its insurance carrier with regard to the insurance claims for reimbursement of incurred costs of the affected portion of the facility and compensation for the Company’s business interruption losses. During the third quarter of 2020, the Company reached a settlement with its insurance company which resolved all contingencies related to its business interruption claim.

 

Through September 30, 2020, the Company has received insurance proceeds of $5.0 million, which included $2.0 million related to the property and casualty claim and $3.0 million related to our business interruption claim. Any additional future claims payments associated with the Company’s property and casualty losses are at the discretion of the insurance carrier based on its continuing claims analysis.

 

The Company received an additional $1.9 million during the third quarter of 2020 associated with the final settlement of the business interruption claim, which combined with the $0.8 million of proceeds previously received and deferred, resulted in an insurance recovery gain of approximately $2.7 million during the third quarter of 2020.

 

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Consulting Agreement

 

On May 19, 2020, the Company entered into a Financial and Consulting Services Agreement (the “Itasca Financial Agreement”) with Itasca Financial LLC (“Itasca Financial”), pursuant to which Itasca Financial agreed to advise the Company on aspects of its strategic direction. In exchange for Itasca Financial’s services, the Company agreed to pay Itasca Financial a retainer fee of $50,000, payable in two installments of $25,000, and a monthly fee of $20,000. The Itasca Financial Agreement may not be terminated for a period of three months from May 19, 2020, after which time it may be terminated by either party at any time with prior written notice of at least 30 calendar days. During the nine months ended September 30, 2020, the Company paid $130,000 to Itasca Financial, and the parties have agreed to suspend the Itasca Financial Agreement indefinitely. Upon termination of the Itasca Financial Agreement by either party, the Company has agreed to pay Itasca Financial a termination fee of $100,000, which can be payable in a combination of cash and stock at the Company’s discretion, and if any such fee is paid in stock, then the Company has agreed to grant Itasca Financial unlimited piggyback registration rights for such stock. The Itasca Financial Agreement also includes expense reimbursement provisions and indemnification provisions in favor of Itasca Financial and its affiliates. This description of the Itasca Financial Agreement is a summary only and is qualified by reference to full text of the Itasca Financial Agreement, which is filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with the Commission on August 12, 2020.

 

Fundamental Global Investors, LLC, with its affiliates (collectively, “Fundamental Global”), is the controlling stockholder of the Company. D. Kyle Cerminara, the Chief Executive Officer, Co-Founder and Partner of Fundamental Global Investors, LLC, is the Chairman of the Company’s board of directors and former Chief Executive Officer of the Company, and Lewis M. Johnson, the President, Co-Founder and Partner of Fundamental Global Investors, LLC, is Co-Chairman of the Company’s board of directors. Fundamental Global is the controlling stockholder of PIH, and Larry G. Swets, Jr. serves as Interim Chief Executive Officer and principal executive officer of PIH and as a member of PIH’s Board of Directors. In addition, Mr. Swets founded and serves as the managing member of Itasca Financial, which provides services to the Company, as described above, as well as to other companies affiliated with Fundamental Global.

 

15. Business Segment Information

 

Subsequent to the disposal of its Strong Outdoor business segment, the Company conducts its operations through two primary business segments: Strong Entertainment (formerly known as Strong Cinema) and Convergent. The Strong Entertainment segment name change is to the name only and had no impact on the Company’s historical financial position, results of operations, cash flow or segment level results previously reported. Strong Entertainment is one of the largest manufacturers of premium projection screens and also manufactures customized screen support systems, distributes other products and provides technical support services to the cinema, amusement park and other markets. Convergent delivers digital signage solutions and related services to large multi-location organizations in the United States and Canada. The Company’s operating segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance.

 

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Summary by Business Segments

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2020  2019  2020  2019 
  (in thousands)  (in thousands) 
Net revenues                
Strong Entertainment $5,260  $10,928  $15,041  $26,405 
Convergent  4,346   4,532   12,954   15,204 
Other  301   90   493   288 
Total net revenues  9,907   15,550   28,488   41,897 
                 
Gross profit (loss)                
Strong Entertainment  889   3,669   2,769   8,621 
Convergent  2,083   1,469   5,668   4,622 
Other  275   63   412   (307)
Total gross profit  3,247   5,201   8,849   12,936 
                 
Operating (loss) income                
Strong Entertainment  (79)  2,230   (894)  4,646 
Convergent  1,059   394   2,508   1,467 
Other  52   (233)  (225)  (1,197)
Total segment operating income  1,032   2,391   1,389   4,916 
Unallocated administrative expenses  (1,377)  (2,204)  (4,893)  (6,742)
Unallocated loss on disposal of assets  (18)  -   (18)  - 
(Loss) income from operations  (363)  187   (3,522)  (1,826)
Other income (expense), net  2,322   (625)  2,091   (2,222)
Income (loss) before income taxes and equity method investment loss $1,959  $(438) $(1,431) $(4,048)

 

(In thousands) September 30, 2020  December 31, 2019 
Identifiable assets        
Strong Entertainment $18,616  $18,135 
Convergent  10,304   15,797 
Corporate assets  29,468   22,796 
Discontinued operations  -   905 
Total $58,388  $57,633 

 

Summary by Geographical Area

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
(In thousands) 2020  2019  2020  2019 
Net revenues                
United States $8,566  $12,395  $24,699  $34,995 
Canada  645   1,111   1,708   2,664 
China  507   633   775   1,763 
Mexico  -   65   78   70 
Latin America  -   275   328   574 
Europe  38   521   262   1,058 
Asia (excluding China)  24   348   337   515 
Other  127   202   301   258 
Total $9,907  $15,550  $28,488  $41,897 

 

(In thousands) September 30, 2020  December 31, 2019 
Identifiable assets        
United States $37,052  $37,508 
Canada  21,336   20,125 
Total $58,388  $57,633 

 

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

 

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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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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, 2019 and Item 1A of this Quarterly Report on Form 10-Q and the following risks and uncertainties: the Company’s ability to maintain and 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 access to capital, the Company’s ability to successfully execute its capital allocation strategy, the Company’s ability to maintain its brand and reputation and retain or replace its significant customers, the impact of a challenging global economic environment or a downturn in the markets (such as the current economic disruption and recession and market volatility generated by the ongoing COVID-19 pandemic), economic and political risks of selling products in foreign countries (including tariffs), risks of non-compliance with U.S. and foreign laws and regulations, potential sales tax collections and claims for uncollected amounts, 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 impact of the COVID-19 pandemic on the companies in which the Company holds investments, the Company’s ability to utilize or assert its intellectual property rights, the impact of natural disasters and other catastrophic events (such as the ongoing COVID-19 pandemic), 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. Many of the risks listed above have been, and may be further be, exacerbated by the COVID-19 pandemic, its impact on the cinema and entertainment industry, and the worsening economic environment. 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 entertainment and retail 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.

 

Subsequent to the sale of our Strong Outdoor business segment, we conduct our operations through two operating segments: Strong Entertainment (formerly known as Strong Cinema) and Convergent. The Strong Entertainment segment name change is to the name only and had no impact on our historical financial position, results of operations, cash flow or segment level results previously reported. Our Strong Entertainment business is one of the largest manufacturers of premium projection screens. We also manufacture customized screen support systems, distribute other products and provide technical support services to the cinema, amusement park and other markets. Convergent delivers digital signage solutions and related services to large multi-location organizations in the United States and Canada.

 

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Our segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance. Approximately 53% of our revenues for the nine months ended September 30, 2020 were from Strong Entertainment, approximately 45% were from Convergent and approximately 2% were from other revenue sources. Additional information related to our reporting segments can be found in Note 15 in the notes to the condensed consolidated financial statements.

 

Firefly Transaction in August 2020

 

On August 3, 2020, SDM entered into an Asset Purchase Agreement with Firefly, pursuant to which SDM agreed to sell substantially all of the assets primarily related to its Strong Outdoor operating business to Firefly and continue to make available 300 digital taxi tops to Firefly. SDM retained certain accounts receivable as well as liabilities other than executory obligations under transferred contracts to the extent such liabilities are required to be performed following closing or constitute certain deferred revenue. The transaction closed on the same day. As a result of the divestiture, we have presented Strong Outdoor’s operating results as a discontinued operation for all periods presented. Note 3 contains additional information regarding this transaction.

 

Impact of COVID-19 Pandemic

 

In December 2019, a novel coronavirus disease (“COVID-19”) was initially reported, and in March 2020, the World Health Organization characterized COVID-19 as a pandemic. COVID-19 has had a widespread and detrimental effect on the global economy as a result of the continued increase in the number of cases, particularly in the United States, and actions by public health and governmental authorities, businesses, other organizations and individuals to address the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations and shutdowns. The ultimate impact of the COVID-19 pandemic on our business and results of operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the COVID-19 pandemic, including repeat or cyclical outbreaks, and any additional preventative and protective actions that governments, or we or our customers, may direct, which may result in an extended period of continued business disruption and reduced operations. For instance, some areas of the United States are experiencing new surges in COVID-19 cases, which has, in some cases, led to the closure of recently re-opened businesses and further postponed opening other businesses, including movie theaters. Any resulting financial impact cannot be reasonably estimated at this time, but we expect it will continue to have a material impact on our business, financial condition and results of operations.

 

The repercussions of the COVID-19 global pandemic resulted in a significant impact to our customers, specifically those in the entertainment and advertising industries, and their ability and willingness to spend on our products and services, which continues to negatively impact us. A significant number of our customers temporarily ceased operations during the pandemic, some of which continue to be suspended; as such, we have experienced, and anticipate that we will continue to experience at least until our customers have resumed normal operations, a significant decline in our results of operations. For instance, during this time, many movie theaters and other entertainment centers were forced to close or curtail their hours and, correspondingly, have terminated or deferred their non-essential capital expenditures; many advertisers began to reduce, postpone, or cancel their advertising campaigns as social distancing measures, including closures of schools and non-essential businesses, and restrictions around the free movement of people were implemented; and a number of events during which our experiential marketing services may have been provided, such as Coachella, have been postponed, cancelled or shifted to virtual venues. While some movie theaters and chains have begun to re-open, or announced plans to re-open in the near future, theater operators may continue to experience reduced revenues for an extended period due to, among other things, consumer concerns over safety and social distancing, depressed consumer sentiment due to adverse economic conditions, including job losses, capacity restrictions, and postponed release dates, shortened “release windows” between the release of motion pictures in theaters and an alternative delivery method, or the release of motion pictures directly to alternative delivery methods, bypassing the theater entirely, for certain movies, and continued COVID-19 outbreaks could cause these theaters to suspend operations again. The COVID-19 pandemic has also adversely affected film production and may adversely affect the pipeline of feature films available in the short- or long-term. In addition to decreased business spending by our customers and prospective customers and reduced demand for our products, lower renewal rates by our customers, increased customer losses/churn, increased challenges in or cost of acquiring new customers and increased risk in collectability of accounts receivable may have a material adverse effect on our business and results of operations. We have also experienced other negative impacts; among other actions, we were required to temporarily close our screen manufacturing facility in Canada due to the governmental response to COVID-19, which we were able to re-open on May 11, 2020, and have experienced lower revenues from field services and a reduction in non-recurring time and materials-based services. The completion of our outsourced screen finishing facility in China was also delayed by the COVID-19 pandemic, and we are currently evaluating the timing of when we will be able to commence operations at the facility in light of current travel restrictions. We may also experience one or more of the following conditions that could have a material adverse impact on our business operations and financial condition: adverse effects on our strategic partners’ businesses or on the businesses of companies in which we hold investments; impairment charges; extreme currency exchange-rate fluctuations; inability to recover costs from insurance carriers; and business continuity concerns for us, our customers and our third-party vendors.

 

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In response to uncertainties associated with the COVID-19 pandemic, we have taken, and are continuing to take, significant steps to preserve cash and remain in a strong competitive position when the current crisis subsides by eliminating non-essential costs, reducing employee hours and deferring all non-essential capital expenditures to minimum levels. Among other mitigating actions, we implemented targeted furloughs, temporarily curtailed our service and distribution activities in the United States and temporarily reduced compensation of our executive officers and certain other employees, and our board of directors waived its cash compensation for 2020. We have also implemented remote work policies for many employees, and the resources available to such employees may not enable them to maintain the same level of productivity and efficiency. In addition, these and other employees may face additional demands on their time, such as increased responsibilities resulting from school and childcare closures or illness of family members. Our increased reliance on remote access to our information systems also increases our exposures to potential cybersecurity breaches. We cannot provide any assurance that these actions, or any other mitigating actions we may take, will help mitigate the impact of the COVID-19 pandemic on us.

 

In addition, we have undertaken new initiatives as a result of the COVID-19 pandemic, including our BrightNight program, which converts movie theater and other parking lots into temporary drive-in theaters, and a Theatre Readiness Program, which includes an auditorium quality assurance service visit in advance of customers returning to movie theaters. While we believe these programs will provide an additional source of revenue during the COVID-19 pandemic, we cannot provide any assurance that these programs will provide the anticipated benefits to our business.

 

We cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to the unprecedented nature of the disruption to our operations and the unpredictability of the COVID-19 global pandemic. As a consequence, our estimates of the duration of the pandemic and the severity of the impact on our future earnings and cash flows could change and have a material impact on our results of operations and financial condition. In the second quarter of 2020, management decided to draw down CDN$2.9 million, or approximately $2.1 million, under Strong/MDI’s credit facility, all of which was repaid prior to September 30, 2020. Furthermore, we have applied for and received wage subsidies, and are in the process of reviewing tax credits and other financial support under the newly enacted COVID-19 relief legislation in the U.S. and Canada. However, the legislation and guidance from the authorities continues to evolve; as such, the amount and timing of support, if any, that we could receive is not determinable at this time, and there can be no guarantees that we will receive financial support through these programs. In addition, certain government benefits that we seek to access have not previously been administered on the present scale or at all. Government or third-party program administrators may be unable to cope with the volume of applications in the near term, and any benefits we receive may not be as extensive as we currently estimate, may impose additional conditions and restrictions on our operations or may otherwise provide less relief than we contemplate. In the event of a sustained market deterioration, and continued declines in net sales, including the impact of such events on the borrowing base under the Strong/MDI credit facility, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. We cannot provide any assurance that we will be able to obtain additional sources of financing or liquidity on acceptable terms, or at all.

 

The ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, the duration of the pandemic, including repeat or cyclical outbreaks, additional “waves” and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time due to the daily evolution of the COVID-19 pandemic and the global responses to curb its spread. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable. However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include a global recession, and that, as result of such effects, we may continue to be adversely affected even after the COVID-19 pandemic has subsided.

 

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Results of Operations

 

The following table sets forth our operating results for the periods indicated:

 

  Three Months Ended September 30,       
  2020  2019  $ Change  % Change 
        (dollars in thousands)    
Net revenues $9,907  $15,550  $(5,643)  (36.3)%
Cost of revenues  6,660   10,349   (3,689)  (35.6)%
Gross profit  3,247   5,201   (1,954)  (37.6)%
Gross profit percentage  32.8%  33.4%        
Selling and administrative expenses  3,592   5,011   (1,419)  (28.3)%
Loss on disposal of assets  (18)  (3)  (15)  500.0%
(Loss) income from operations  (363)  187   (550)  (294.1)%
Other income (expense)  2,322   (625)  2,947   (471.5)%
Income (loss) before income taxes and equity method investment loss  1,959   (438)  2,397   (547.3)%
Income tax expense  (526)  (731)  205   (28.0)%
Equity method investment loss  (460)  (496)  36   (7.3)%
Net income (loss) from continuing operations $973  $(1,665) $2,638   (158.4)%

 

  Nine Months Ended September 30,       
  2020  2019  $ Change  % Change 
      (dollars in thousands)    
Net revenues $28,488  $41,897  $(13,409)  (32.0)%
Cost of revenues  19,639   28,961   (9,322)  (32.2)%
Gross profit  8,849   12,936   (4,087)  (31.6)%
Gross profit percentage  31.1%  30.9%        
Selling and administrative expenses  12,353   14,695   (2,342)  (15.9)%
Loss on disposal of assets  (18)  (67)  49   (73.1)%
Loss from operations  (3,522)  (1,826)  (1,696)  92.9%
Other income (expense)  2,091   (2,222)  4,313   (194.1)%
Loss before income taxes and equity method investment loss  (1,431)  (4,048)  2,617   (64.6)%
Income tax expense  (1,022)  (1,295)  273   (21.1)%
Equity method investment loss  (580)  (1,223)  643   (52.6)%
Net loss from continuing operations $(3,033) $(6,566) $3,533   (53.8)%

 

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Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

 

Revenues

 

Net revenues during the quarter ended September 30, 2020 decreased 36.3% to $9.9 million from $15.6 million during the quarter ended September 30, 2019. The decrease in consolidated net revenue was primarily due to the impact of COVID-19 on our Strong Entertainment business. At Convergent, growth in services revenue was offset by the effect of large non-recurring installation projects in the prior year period.

 

  Three Months Ended September 30,       
  2020  2019  $ Change  % Change 
        (dollars in thousands)    
Strong Entertainment $5,260  $10,928  $(5,668)  (51.9)%
Convergent  4,346   4,532   (186)  (4.1)%
Other  301   90   211   234.4%
Total net revenues $9,907  $15,550  $(5,643)  (36.3)%

 

Strong Entertainment

 

Revenue from Strong Entertainment decreased 51.9% to $5.3 million in the third quarter of 2020 from $10.9 million in the third quarter of 2019. The decrease was primarily due to the impact of the COVID-19 pandemic and lower revenues from equipment sales and field service projects.

 

In March 2020, the Quebec government ordered the closure of all non-essential businesses, including our Quebec facility. We reopened our facility on May 11, 2020. In addition, while we originally expected to have our outsourced screen finishing facility in China up and running in the first half of 2020, the outbreak of COVID-19 in China delayed those plans, and we are currently evaluating the timing of when we will be able to commence operations at the facility in light of current travel restrictions.

 

Some cinemas, theme parks and other entertainment venues re-opened their doors in recent months. We have seen an uptick in customer demand for both screen systems for international markets and services domestically to support those reopening initiatives. We continue to closely monitor the regulatory environment and the status of our customers’ operations in managing the pace at which we ramp back up our operations.

 

Convergent

 

Revenue from Convergent decreased 4.1% to $4.3 million in the third quarter of 2020 from $4.5 million in the third quarter of 2019. Convergent’s service revenues increased approximately $0.4 million on growth in DSaaS customer installations, while revenue from installations and equipment sales decreased approximately $0.8 million due to completion of a large non-recurring installation project during 2019. Convergent experienced a moderate negative revenue impact from COVID-19 during the third quarter of 2020 and continues to support its retail customers, many of whom provide essential services and remain in operation.

 

Gross Profit

 

Consolidated gross profit decreased 37.6% to $3.2 million during the quarter ended September 30, 2020 from $5.2 million during the quarter ended September 30, 2019. As a percentage of revenue, gross profit was 32.8% and 33.4% for the quarters ended September 30, 2020 and September 30, 2019, respectively. Consolidated gross profit as a percentage of revenue decreased as the positive impact of the margin expansion at Convergent and cost reductions actions were more than offset by reduced revenue and contribution from Strong Entertainment due to COVID-19.

 

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  Three Months Ended September 30,       
  2020  2019  $ Change  % Change 
        (dollars in thousands)    
Strong Entertainment $889  $3,669  $(2,780)  (75.8)%
Convergent  2,083   1,469   614   41.8%
Other  275   63   212   336.5%
Total gross profit $3,247  $5,201  $(1,954)  (37.6)%

 

Strong Entertainment

 

Gross profit in the Strong Entertainment segment was $0.9 million or 16.9% of revenues in the third quarter of 2020 compared to $3.7 million or 33.6% of revenues in the third quarter of 2019. The decrease in gross profit dollars is primarily due to the decline in screen, equipment and field service revenues related to COVID-19. The impact of significantly lower revenues was somewhat mitigated by actions taken to control costs, including the furlough of production employees and technicians, management salary reductions, payroll subsidies received from the Canadian government and other similar actions taken to manage costs during the quarter.

 

Convergent

 

Gross profit in the Convergent segment was $2.1 million or 47.9% of revenues in the third quarter of 2020 compared to $1.5 million or 32.4% of revenues in the third quarter of 2019. The increase in gross profit margins was driven primarily by the increase in higher margin DSaaS revenue.

 

Operating (Loss) Income

 

Consolidated operating loss was $0.4 million in the third quarter of 2020 compared to operating income of $0.2 million in the third quarter of 2019.

 

  Three Months Ended September 30,       
  2020  2019  $ Change  % Change 
        (dollars in thousands)    
Strong Entertainment $(79) $2,230  $(2,309)  (103.5)%
Convergent  1,059   394   665   168.8%
Other  52   (233)  285   (122.3)%
Total segment operating income  1,032   2,391   (1,359)  (56.8)%
Unallocated administrative expenses  (1,377)  (2,204)  827   (37.5)%
Unallocated loss on disposal of assets  (18)  -   (18)  N/A 
Total operating (loss) income $(363) $187  $(550)  (294.1)%

 

Strong Entertainment generated an operating loss of $0.1 million in the third quarter of 2020 compared to operating income of $2.2 million in the third quarter of 2019. The decrease in operating income was primarily due to the decline in revenues as discussed above, partially offset by actions taken to reduce operating expenses, including furloughs, headcount reductions, temporary salary cuts and wage subsidies, and lower travel and entertainment expenses.

 

Convergent generated operating income of $1.1 million in the third quarter of 2020 compared to $0.4 million in the third quarter of 2019. Operating income during the third quarter of 2020 increased as a result of our investment to grow the higher margin recurring revenue business lines, as well as lower selling expenses, including costs related to compensation, commissions, travel and entertainment and trade shows.

 

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Unallocated administrative expenses decreased to $1.4 million in the third quarter of 2020 compared to $2.2 million in the third quarter of 2019. The decrease was driven primarily by cost-saving measures implemented in response to COVID-19, as well as reductions in information technology expenses, costs associated with contractors and consultants and audit and tax expenses, all of which were due to our initiatives to reduce overall administrative expenses.

 

Other Financial Items

 

Total other income during the third quarter of 2020 primarily consisted of a $2.7 million gain on our business interruption claim for the weather-related incident at our production facility in Quebec, partially offset by foreign currency transaction adjustments of $0.2 million and $0.3 million of interest expense. For the third quarter of 2019, total other expense of $0.6 million primarily consisted of a $0.8 million fair value adjustment to notes receivable and $0.3 million of interest expense, partially offset by a $0.4 million gain on our property and insurance claim for the weather-related incident at our production facility in Quebec and $0.1 million of foreign currency transaction adjustments.

 

Income tax expense was approximately $0.5 million during the third quarter of 2020 compared to $0.7 million during the third quarter of 2019. Our income tax expense consisted primarily of income tax on foreign earnings.

 

We recorded an equity method investment loss of $0.5 million in the third quarter of 2020, consisting of $0.4 million from PIH and $20 thousand from Itasca. The equity method loss from PIH was primarily the result of PIH’s unrealized holding losses associated with the change in fair value of its investment in the common stock of FedNat Holding Company (Nasdaq: FNHC). The third quarter of 2019 included an equity method investment loss of $0.5 million, which included a $0.8 million loss from PIH, partially offset by 0.3 million of income from Itasca.

 

As a result of the items outlined above, we generated a net income from continuing operations of $1.0 million, or $0.07 per basic and diluted share, in the third quarter of 2020, compared to a net loss from continuing operations of $1.7 million, or $0.11 per basic and diluted share, in the third quarter of 2019.

 

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

 

Revenues

 

Net revenues during the nine months ended September 30, 2020 decreased 32.0% to $28.5 million from $42.9 million during the nine months ended September 30, 2019. The decrease in consolidated net revenue was primarily due to the impact of COVID-19 on our Strong Entertainment business. At Convergent, growth in services revenue was offset by the effect of large non-recurring installation projects in the prior year period.

 

  Nine Months Ended September 30,       
  2020  2019  $ Change  % Change 
      (dollars in thousands)    
Strong Entertainment $15,041  $26,405  $(11,364)  (43.0)%
Convergent  12,954   15,204   (2,250)  (14.8)%
Other  493   288   205   71.2%
Total net revenues $28,488  $41,897  $(13,409)  (32.0)%

 

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Strong Entertainment

 

Revenue from Strong Entertainment decreased 43.0% to $15.0 million in the first nine months of 2020 from $26.4 million in the first nine months of 2019. The decrease was primarily due to the impact of the COVID-19 pandemic, including the government-mandated temporary closure of our screen manufacturing facility in Quebec and lower revenues from equipment sales and field service projects. Revenue during the nine months ended September 30, 2019 was impacted by roof damage that caused the screen facility to temporarily halt operations for a portion of the first nine months of 2019.

 

In March 2020, the Quebec government ordered the closure of all non-essential businesses, including our Quebec facility. We reopened our facility on May 11, 2020. In addition, while we originally expected to have our outsourced screen finishing facility in China up and running in the first half of 2020, the outbreak of COVID-19 in China delayed those plans, and we are currently evaluating the timing of operations there in light of current travel restrictions.

 

Some cinemas, theme parks and other entertainment venues re-opened their doors in recent months. We have seen an uptick in customer demand for both screen systems for international markets and services domestically to support those reopening initiatives. We continue to closely monitor the regulatory environment and the status of our customers’ operations in managing the pace at which we ramp back up our operations.

 

Convergent

 

Revenue from Convergent decreased 14.8% to $13.0 million during the nine months ended September 30, 2020 from $15.2 million during the nine months ended September 30, 2019. Convergent’s service revenues increased approximately $1.4 million on growth in DSaaS customer installations, while revenue from installations and equipment sales decreased approximately $4.6 million due to the completion of a large non-recurring installation project during 2019. Convergent experienced a moderate negative revenue impact from COVID-19 during the first nine months of 2020 and continues to support its retail customers, many of whom provide essential services and remain in operation.

 

Gross Profit

 

Consolidated gross profit decreased 31.6% to $8.8 million during the nine months ended September 30, 2020 from $12.9 million during the nine months ended September 30, 2019. As a percentage of revenue, gross profit improved to 31.1% for the nine months ended September 30, 2020 compared to 30.9% for the nine months ended September 30, 2019. Consolidated gross profit as a percentage of revenue improved, despite the significant decline in revenue, due to a combination of the margin expansion at Convergent related to the growth in the DSaaS service business and the cost reduction actions taken to mitigate the impact of COVID-19 during the first nine months of 2020.

 

  Nine Months Ended September 30,       
  2020  2019  $ Change  % Change 
  (dollars in thousands)    
Strong Entertainment $2,769  $8,621  $(5,852)  (67.9)%
Convergent  5,668   4,622   1,046   22.6%
Other  412   (307)  719   (234.2)%
Total gross profit $8,849  $12,936  $(4,087)  (31.6)%

 

Strong Entertainment

 

Gross profit in the Strong Entertainment segment was $2.8 million or 18.4% of revenues in the first nine months 2020 compared to $8.6 million or 32.6% of revenues in the first nine months of 2019. The decrease in gross profit dollars is primarily due to the decline in screen, equipment and field service revenues related to COVID-19 and changes in product mix. The impact of significantly lower revenues was somewhat mitigated by actions taken to control costs, including the furlough of production employees and technicians, management salary reductions, payroll subsidies received from the Canadian government and other similar actions taken to manage costs.

 

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Convergent

 

Gross profit in the Convergent segment was $5.7 million or 43.8% of revenues in the first nine months of 2020 compared to $4.6 million or 30.4% of revenues in the first nine months of 2019. The increase in gross profit was driven primarily by the increase in higher margin DSaaS revenue.

 

Operating Income (Loss)

 

Consolidated operating loss was $3.5 million in the first nine months of 2020 compared to $1.8 million in the first nine months of 2019.

 

  Nine Months Ended September 30,       
  2020  2019  $ Change  % Change 
  (dollars in thousands)    
Strong Entertainment $(894) $4,646  $(5,540)  (119.2)%
Convergent  2,508   1,467   1,041   71.0%
Other  (225)  (1,197)  972   (81.2)%
Total segment operating (loss) income  1,389   4,916   (3,527)  (71.7)%
Unallocated administrative expenses  (4,893)  (6,742)  1,849   (27.4)%
Unallocated loss on disposal of assets  (18)  -   (18)  N/A 
Total operating loss $(3,522) $(1,826) $(1,696)  92.9%

 

Strong Entertainment generated an operating loss of $0.9 million during the nine months ended September 30, 2020 compared to operating income of $4.6 million during the nine months ended September 30, 2019. The decrease in operating income was primarily due to the decline in revenues as discussed above, partially offset by actions taken to reduce compensation related expenses, including furloughs, headcount reductions, temporary salary cuts and wage subsidies, as well as lower travel and entertainment expenses. In addition, since many of Strong Entertainment’s customers have been negatively impacted by COVID-19, we recorded $0.4 million of bad debt expense during the nine months ended September 30, 2020 as a result of the increased uncertainty related to collection of trade accounts receivable.

 

Convergent generated operating income of $2.5 million in the first nine months of 2020 compared to $1.5 million in the first nine months of 2019. Operating income during the first nine months of 2020 increased as a result of our investment to grow the higher margin recurring revenue business lines, as well as lower selling expenses, including costs related to compensation, commissions, travel and entertainment and trade shows. The increased gross margin and higher operating income from recurring revenue in 2020 was partially offset by a $0.4 million favorable bad debt recovery during the first nine months of 2019.

 

Unallocated administrative expenses decreased to $4.9 million during the nine months ended September 30, 2020 compared to $6.7 million during the nine months ended September 30, 2019. The decrease was driven primarily by actions taken to reduce compensation expense, board fees, travel, information technology expenses, costs associated with contractors and consultants and audit and tax expenses, all of which were due to our initiatives to reduce overall administrative expenses.

 

Other Financial Items

 

Total other income of $2.1 million during the nine months ended September 30, 2020 primarily consisted of a $2.9 million gain on our property and casualty and business interruption claims for the weather-related incident at our production facility in Quebec, partially offset by $0.8 million of interest expense. For the nine months ended September 30, 2019, total other expense of $2.2 million primarily consisted of a $2.2 million fair value adjustment to notes receivable, $0.2 million of foreign currency transaction adjustments and $0.6 million of interest expense, partially offset by a $0.6 million gain on our property and insurance claim for the weather-related incident at our production facility in Quebec.

 

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Income tax expense was approximately $1.0 million during the first nine months of 2020 compared to $1.3 million during the first nine months of 2019. Our income tax expense consisted primarily of income tax on foreign earnings.

 

We recorded equity method investment loss of $0.6 million during the nine months ended September 30, 2020, consisting of $0.4 million from PIH and $0.1 million from Itasca. The nine months ended September 30, 2019 included equity method investment loss of $1.2 million, which consisted of losses from PIH and Itasca of $0.6 million each.

 

As a result of the items outlined above, we generated a net loss from continuing operations of $3.0 million, or $0.21 per basic and diluted share, during the nine months ended September 30, 2020, compared to a net loss of $6.6 million, or $0.46 per basic and diluted share, during the nine months ended September 30, 2019.

 

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. Our primary cash requirements involve operating expenses, working capital fluctuations, capital expenditures, and other general corporate activities. We incurred operating losses and negative operating cash flow in our Convergent business for the first three quarters of 2018, as we executed our plans to restructure that business to reduce operating costs and invest in higher margin recurring revenue. Convergent’s financial performance has improved significantly as a result of those actions and is now generating positive operating income and cash from operations. The startup of Strong Outdoor negatively impacted our cash flow as we invested in building that business. We expect the sale of our Strong Outdoor business during August 2020 to have a positive impact on future cash flows since Strong Outdoor has generated operating losses since the startup of the business. Cash flow from Strong Entertainment and Convergent during 2019 was used to fund our corporate operating expenses and Strong Outdoor. Our capital expenditures during 2019 and the first nine months of 2020 included costs incurred in the construction of the Strong Entertainment production facility in Quebec that sustained damage as a result of inclement weather. The purchase of equipment in connection with the expansion of our Convergent business operations has recently been funded via term loan borrowings and capital leases, and we may continue to do so.

 

We ended the third quarter of 2020 with total cash and cash equivalents and restricted cash of $7.4 million compared to $5.3 million as of December 31, 2019. Of the $7.4 million as of September 30, 2020, $3.4 million was held by our Canadian subsidiary, Strong/MDI, and $0.4 million was restricted. Strong/MDI also makes intercompany loans to the U.S. parent company which do not trigger Canadian withholding taxes if they meet certain requirements. As of September 30, 2020, the parent company had outstanding intercompany loans from Strong/MDI of approximately $34.6 million. In the event those loans are not repaid, or are recharacterized as dividends to the U.S. parent company, we would be required to pay Canadian withholding taxes, which have been fully accrued as of September 30, 2020.

 

In response to the COVID-19 pandemic and related closures of cinemas, theme parks and entertainment venues, we have taken steps to conserve cash, reduce operating expenditures, delay capital expenditures, and to manage working capital. We have also implemented targeted furloughs, headcount reductions and temporary salary cuts for our executive officers and certain other employees, and our board of directors waived its cash compensation for 2020 in order to reduce expenses. In the second quarter of 2020, management decided to draw down CDN$2.9 million, or approximately $2.1 million, under Strong/MDI’s revolving credit facility, to provide additional liquidity, all of which was repaid prior to September 30, 2020.

 

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We believe that our existing sources of liquidity, including cash and cash equivalents, operating cash flow, credit facilities, equity investments, receivables and other assets will be sufficient to meet our projected capital needs for the at least the next twelve months. However, our ability to continue to meet our cash requirements will depend on, among other things, the duration of COVID-19 related restrictions on cinemas, theme parks and other entertainment venues, our ability to achieve anticipated levels of revenues and cash flow from operations, our ability to manage costs and working capital successfully and the continued availability of financing, if needed. We cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to the unprecedented nature of the disruption to our operations and the unpredictability of the COVID-19 global pandemic. As a consequence, our estimates of the duration of the pandemic and the severity of the impact on our future earnings and cash flows could change and have a material impact on our results of operations and financial condition. In the event of a sustained market deterioration, and continued declines in net sales, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. We may, depending on a variety of factors, including market conditions for capital raises, the trading price of our common stock and opportunities for uses of any proceeds, engage in public or private offerings of equity or debt securities to increase our capital resources. However, financial and economic conditions, including those resulting from the COVID-19 pandemic, could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all, and we cannot provide any assurance that we will be able to obtain any additional sources of financing or liquidity on acceptable terms, or at all. See Note 10 to the condensed consolidated financial statements for a description of our debt as of September 30, 2020.

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities from continuing operations was $8.2 million during the nine months ended September 30, 2020. Cash flows generated by Convergent and changes in working capital were partially offset by the operating loss generated by Strong Entertainment as well as cash outflows for selling and administrative expenses. Net cash used in operating activities from continuing operations was $1.0 million in the first nine months of 2019. Cash flows generated by Strong Cinema and Convergent and improvements in working capital were offset by the cash outflows for selling and administrative expenses.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $4.7 million during the nine months ended September 30, 2020, which consisted of a $4.0 million investment in Firefly and capital expenditures of $0.7 million. Net cash used in investing activities was $1.6 million in the first nine months of 2019, consisting of $1.7 million of capital expenditures, partially offset by $0.2 million of proceeds received from the disposal of assets.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities was $2.1 million during the nine months ended September 30, 2020, consisting of principal payments on debt and capital lease obligations. Net cash used in financing activities was $1.2 million during the nine months ended September 30, 2019, primarily consisting of $1.5 million of principal payments on debt and capital lease obligations, partially offset by $0.2 million of proceeds from the issuance of debt.

 

Use of Non-GAAP Measures

 

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”). In addition to disclosing financial results prepared in accordance with GAAP, the Company discloses information regarding Adjusted EBITDA, which differs from the term EBITDA as it is commonly used. In addition to adjusting net income (loss) to exclude income taxes, interest, and depreciation and amortization, Adjusted EBITDA also excludes discontinued operations, share-based compensation, impairment charges, equity method income (loss), fair value adjustments, severance, foreign currency transaction gains (losses), transactional gains and expenses, gains on insurance recoveries and other cash and non-cash charges and gains.

 

EBITDA and Adjusted EBITDA are not measures of performance defined in accordance with GAAP. However, Adjusted EBITDA is used internally in planning and evaluating the Company’s operating performance. Accordingly, management believes that disclosure of these metrics offers investors, bankers and other stakeholders an additional view of the Company’s operations that, when coupled with the GAAP results, provides a more complete understanding of the Company’s financial results.

 

EBITDA and Adjusted EBITDA should not be considered as an alternative to net loss or to net cash used in operating activities as measures of operating results or liquidity. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies, and the measures exclude financial information that some may consider important in evaluating the Company’s performance.

 

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EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

 

We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.

 

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The following table sets forth reconciliations of net loss under GAAP to EBITDA and Adjusted EBITDA (in thousands):

 

  Three Months Ended September 30, 
  2020  2019 
                               
  Strong Entertainment  Convergent  Corporate and Other  Discontinued Operations  Consolidated  Strong Entertainment  Convergent  Corporate and Other  Discontinued Operations  Consolidated 
Net income (loss) $1,939  $1,000  $(1,966) $4,673  $5,646  $1,265  $386  $(3,316) $(123) $(1,788)
Net income (loss) from discontinued operations  -   -   -   (4,673)  (4,673) -  -  -  123   123 
Net income (loss) from continuing operations  1,939   1,000   (1,966)  -   973   1,265   386   (3,316)  -   (1,665)
Interest expense, net  24   146   84   -   254   35   120   107   -   262 
Income tax expense (benefit)  488   (88)  126   -   526   827   (96)  -   -   731 
Depreciation and amortization  226   613   46   -   885   226   492   54   -   772 
EBITDA  2,677   1,671   (1,710)  -   2,638   2,353   902   (3,155)  -   100 
Stock-based compensation expense  -   -   239   -   239   -   -   334   -   334 
Fair value adjustment to notes receivable  -   -   -   -   -   845   -   -   -   845 
Equity method investment loss (income)  20   -   440   -   460   (287)  -   783   -   496 
Loss on disposal of assets and impairment charges  -   -   18   -   18   3   -   -   -   3 
Foreign currency transaction loss (gain)  172   1   -   -   173   (50)  (16)  -   -   (66)
Gain on property and casualty insurance recoveries  (2,736)  -   -   -   (2,736)  (420)  -   -   -   (420)
Severance and other  -   -   -   -   -   -   4   8   -   12 
Adjusted EBITDA $133  $1,672  $(1,013) $-  $792  $2,444  $890  $(2,030) $-  $1,304 

 

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  Nine Months Ended September 30, 
  2020  2019 
                               
  Strong Entertainment  Convergent  Corporate and Other  Discontinued Operations  Consolidated  Strong Entertainment  Convergent  Corporate and Other  Discontinued Operations  Consolidated 
Net income (loss) $918  $2,018  $(5,969) $4,504  $1,471  $1,120  $1,085  $(8,771) $(2,790) $(9,356)
Net income (loss) from discontinued operations  -   -   -   (4,504)  (4,504)  -   -   -   2,790   2,790 
Net income (loss) from continuing operations  918   2,018   (5,969)  -   (3,033)  1,120   1,085   (8,771)  -   (6,566)
Interest expense, net  90   429   275   -   794   105   322   138   -   565 
Income tax expense  853   26   143   -   1,022   1,137   72   86   -   1,295 
Depreciation and amortization  688   1,804   142   -   2,634   665   1,387   162   -   2,214 
EBITDA  2,549   4,277   (5,409)  -   1,417   3,027   2,866   (8,385)  -   (2,492)
Stock-based compensation expense  -   -   724   -   724   -   -   798   -   798 
Fair value adjustment to notes receivable  -   -   -   -   -   2,153   -   -   -   2,153 
Equity method investment loss (income)  137   -   443   -   580   601   -   622   -   1,223 
Loss on disposal of assets and impairment charges  -   -   18   -   18   66   1   -   -   67 
Foreign currency transaction (gain) loss  (51)  39   -   -   (12)  166   (12)  -   -   154 
Gain on property and casualty insurance recoveries  (2,850)  -   -   -   (2,850)  (646)  -   -   -   (646)
Severance and other  78   16   7   -   101   -   4   8   -   12 
Adjusted EBITDA $(137) $4,332  $(4,217) $-  $(22) $5,367  $2,859  $(6,957) $-  $1,269 

 

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.

 

Seasonality

 

Generally, our 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 three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for an entire fiscal year.

 

Recently Issued Accounting Pronouncements

 

See Note 2, Summary of Significant Accounting Policies to the condensed consolidated financial statements for a description of recently issued accounting pronouncements.

 

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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, 2019. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes in our critical accounting policies during the three months ended September 30, 2020.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable as we are a “smaller reporting company.”

 

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 were 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 Securities and Exchange Commission’s rules and forms. There have been no 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. The Company determined that no material changes to its internal control over financial reporting occurred or were required in response to the measures it has taken related to the COVID-19 pandemic, including remote working arrangements for many of its employees. The Company is continually monitoring and assessing the impact of COVID-19 on its internal controls in an effort to ensure that its internal controls respond to any changes in its operating environment.

 

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, 2019 includes a detailed discussion of the Company’s risk factors. There have been no material changes to the risk factors as previously disclosed, except as set forth below. However, many of the risk factors disclosed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 have been, and we expect will continue to be further, heightened or exacerbated by the impact of the COVID-19 pandemic.

 

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The COVID-19 pandemic and ensuing governmental responses have negatively impacted, and could further materially adversely affect, our business, financial condition, results of operations and cash flows.

 

In December 2019, COVID-19 was initially reported, and in March 2020, the World Health Organization characterized COVID-19 as a pandemic. COVID-19 has had a widespread and detrimental effect on the global economy as a result of the continued increase in the number of cases, particularly in the United States, and actions by public health and governmental authorities, businesses, other organizations and individuals to address the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations and shutdowns. The ultimate impact of the COVID-19 pandemic on our business and results of operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the COVID-19 pandemic, including repeat or cyclical outbreaks, and any additional preventative and protective actions that governments, or we or our customers, may direct, which may result in an extended period of continued business disruption and reduced operations. For instance, some areas of the United States are experiencing new surges in COVID-19 cases, which has, in some cases, led to the closure of recently re-opened businesses and further postponed opening other businesses, including movie theaters. Any resulting financial impact cannot be reasonably estimated at this time, but we expect it will continue to have a material impact on our business, financial condition and results of operations.

 

The repercussions of the COVID-19 global pandemic resulted in a significant impact to our customers, specifically those in the entertainment and advertising industries, and their ability and willingness to spend on our products and services, which continues to negatively impact us. A significant number of our customers temporarily ceased operations during the pandemic, some of which continue to be suspended; as such, we have experienced, and anticipate that we will continue to experience at least until our customers have resumed normal operations, a significant decline in our results of operations. For instance, during this time, many movie theaters and other entertainment centers were forced to close or curtail their hours and, correspondingly, have terminated or deferred their non-essential capital expenditures; many advertisers began to reduce, postpone, or cancel their advertising campaigns as social distancing measures, including closures of schools and non-essential businesses, and restrictions around the free movement of people were implemented; and a number of events during which our experiential marketing services may have been provided, such as Coachella, have been postponed, cancelled or shifted to virtual venues. While some movie theaters and chains have begun to re-open, or announced plans to re-open in the near future, theater operators may continue to experience reduced revenues for an extended period due to, among other things, consumer concerns over safety and social distancing, depressed consumer sentiment due to adverse economic conditions, including job losses, capacity restrictions, and postponed release dates, shortened “release windows” between the release of motion pictures in theaters and an alternative delivery method, or the release of motion pictures directly to alternative delivery methods, bypassing the theater entirely, for certain movies, and continued COVID-19 outbreaks could cause these theaters to suspend operations again. The COVID-19 pandemic has also adversely affected film production and may adversely affect the pipeline of feature films available in the short- or long-term. In addition to decreased business spending by our customers and prospective customers and reduced demand for our products, lower renewal rates by our customers, increased customer losses/churn, increased challenges in or cost of acquiring new customers and increased risk in collectability of accounts receivable may have a material adverse effect on our business and results of operations. We have also experienced other negative impacts; among other actions, we were required to temporarily close our screen manufacturing facility in Canada due to the governmental response to COVID-19, which we were able to re-open on May 11, 2020, and have experienced lower revenues from field services and a reduction in non-recurring time and materials-based services. The completion of our outsourced screen finishing facility in China was also delayed by the COVID-19 pandemic, and we are currently evaluating the timing of when we will be able to commence operations at the facility in light of current travel restrictions. We may also experience one or more of the following conditions that could have a material adverse impact on our business operations and financial condition: adverse effects on our strategic partners’ businesses or on the businesses of companies in which we hold investments; impairment charges; extreme currency exchange-rate fluctuations; inability to recover costs from insurance carriers; and business continuity concerns for us, our customers and our third-party vendors.

 

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In response to uncertainties associated with the COVID-19 pandemic, we have taken, and are continuing to take, significant steps to preserve cash and remain in a strong competitive position when the current crisis subsides by eliminating non-essential costs, reducing employee hours and deferring all non-essential capital expenditures to minimum levels. Among other mitigating actions, we implemented targeted furloughs, temporarily curtailed our service and distribution activities in the United States and temporarily reduced compensation of our executive officers and certain other employees, and our board of directors waived its cash compensation for 2020. We have also implemented remote work policies for many employees, and the resources available to such employees may not enable them to maintain the same level of productivity and efficiency. In addition, these and other employees may face additional demands on their time, such as increased responsibilities resulting from school and childcare closures or illness of family members. Our increased reliance on remote access to our information systems also increases our exposures to potential cybersecurity breaches. We cannot provide any assurance that these actions, or any other mitigating actions we may take, will help mitigate the impact of the COVID-19 pandemic on us.

 

In addition, we have undertaken new initiatives as a result of the COVID-19 pandemic, including our BrightNight program, which converts movie theater and other parking lots into temporary drive-in theaters, and a Theatre Readiness Program, which includes an auditorium quality assurance service visit in advance of customers returning to movie theaters. While we believe these programs will provide an additional source of revenue during the COVID-19 pandemic, we cannot provide any assurance that these programs will provide the anticipated benefits to our business.

 

We cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to the unprecedented nature of the disruption to our operations and the unpredictability of the COVID-19 global pandemic. As a consequence, our estimates of the duration of the pandemic and the severity of the impact on our future earnings and cash flows could change and have a material impact on our results of operations and financial condition. In the second quarter of 2020, management decided to draw down CDN$2.9 million, or approximately $2.1 million, under Strong/MDI’s credit facility, all of which was repaid prior to September 30, 2020. Furthermore, we have applied for and received wage subsidies, and are in the process of reviewing tax credits and other financial support under the newly enacted COVID-19 relief legislation in the U.S. and Canada. However, the legislation and guidance from the authorities continues to evolve; as such, the amount and timing of support, if any, that we could receive is not determinable at this time, and there can be no guarantees that we will receive financial support through these programs. In addition, certain government benefits that we seek to access have not previously been administered on the present scale or at all. Government or third-party program administrators may be unable to cope with the volume of applications in the near term, and any benefits we receive may not be as extensive as we currently estimate, may impose additional conditions and restrictions on our operations or may otherwise provide less relief than we contemplate. In the event of a sustained market deterioration, and continued declines in net sales, including the impact of such events on the borrowing base under the Strong/MDI credit facility, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. We cannot provide any assurance that we will be able to obtain additional sources of financing or liquidity on acceptable terms, or at all.

 

The ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, the duration of the pandemic, including repeat or cyclical outbreaks, additional “waves” and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time due to the daily evolution of the COVID-19 pandemic and the global responses to curb its spread. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable. However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include a global recession, and that, as result of such effects, we may continue to be adversely affected even after the COVID-19 pandemic has subsided.

 

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 September 30, 2020. As of September 30, 2020, there were 636,931 shares that may yet be purchased under the stock repurchase program.

 

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Item 6. Exhibits

 

    Incorporated by Reference  
Exhibit
Number
 Document Description Form Exhibit Filing
Date
 Filed
Herewith
10.1* 

Letter Agreement, dated as of August 17, 2020, by and between the Company and Mark D. Roberson.

 8-K 10.1 

August 18,

2020

  
           
10.2* 

Letter Agreement, dated as of August 17, 2020, by and between the Company and Ray F. Boegner.

 8-K 10.2 

August 18,

2020

  
           
10.3* 

Letter Agreement, dated as of August 17, 2020, by and between the Company and Todd R. Major.

 8-K 10.3 

August 18,

2020

  
           
10.4 Form of Indemnification Agreement. 8-K 10.1 

September 3,

2020

  
           
10.5* Letter Agreement, dated as of September 15, 2020, by and between the Company and Mark D. Roberson. 8-K 10.1 

September 15,

2020

  
           
10.6* Letter Agreement, dated as of September 15, 2020, by and between the Company and Ray F. Boegner. 8-K 10.2 

September 15,

2020

  
           
10.7* Letter Agreement, dated as of September 15, 2020, by and between the Company and Todd R. Major. 8-K 10.3 

September 15,

2020

  
           
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, 2020, 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 Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to the Condensed Consolidated Financial Statements.       X

 

 

Exhibits and schedules have been omitted pursuant to Item 601 of Regulation S-K and will be supplementally provided to the Securities and Exchange Commission upon request.
*Management contract or compensatory plan.
**Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements 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/ MARK D. ROBERSON By:/s/ TODD R. MAJOR
 

Mark D. Roberson

Chief Executive Officer

(Principal Executive Officer)

 

  

Todd R. Major

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

     
Date:November 12, 2020 Date:November 12, 2020

 

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