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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the quarterly period ended
September 30,
2022
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) |
|
|
|
5960 Fairview Road,
Suite 275
Charlotte,
North Carolina
|
|
28210 |
(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 Stock, $0.01 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 12 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 ☒ 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 ☒ 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 |
☒ |
Smaller
reporting company |
☒ |
|
|
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 ☒
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 4, 2022 |
Common
Stock, $0.01 par value |
|
19,469,649 shares |
TABLE
OF CONTENTS
PART I. Financial Information
Item 1. Financial
Statements
Ballantyne
Strong, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In
thousands, except par values)
(Unaudited)
See
accompanying notes to unaudited condensed consolidated financial
statements.
Ballantyne
Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of
Operations
Three
and Nine Months Ended September 30, 2022 and 2021
(In
thousands, except per share data)
(Unaudited)
See
accompanying notes to unaudited condensed consolidated financial
statements.
Ballantyne
Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss)
Income
Three
and Nine Months Ended September 30, 2022 and 2021
(In
thousands)
(Unaudited)
See
accompanying notes to unaudited condensed consolidated financial
statements.
Ballantyne
Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’
Equity
Three
and Nine Months Ended September 30, 2022 and 2021
(In
thousands)
(Unaudited)
|
|
|
Common
Stock (Shares) |
|
|
|
Common
Stock ($) |
|
|
|
Additional
Paid-In Capital |
|
|
|
Retained
Earnings |
|
|
|
Treasury
Stock |
|
|
|
Accumulated
Other Comprehensive Loss |
|
|
|
Total
Stockholders’ Equity |
|
Balance at December 31,
2020 |
|
|
17,596 |
|
|
$ |
176 |
|
|
$ |
43,713 |
|
|
$ |
5,654 |
|
|
$ |
(18,586 |
) |
|
$ |
(3,891 |
) |
|
$ |
27,066 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,811 |
|
|
|
- |
|
|
|
- |
|
|
|
11,811 |
|
Net other comprehensive loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(402 |
) |
|
|
(402 |
) |
Vesting of restricted stock |
|
|
209 |
|
|
|
2 |
|
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
Issuance of common stock, net of
issuance costs |
|
|
3,290 |
|
|
|
33 |
|
|
|
6,277 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,310 |
|
Stock-based
compensation expense |
|
|
- |
|
|
|
- |
|
|
|
314 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
314 |
|
Balance at March 31, 2021 |
|
|
21,095 |
|
|
|
211 |
|
|
|
50,295 |
|
|
|
17,465 |
|
|
|
(18,586 |
) |
|
|
(4,293 |
) |
|
|
45,092 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(428 |
) |
|
|
- |
|
|
|
- |
|
|
|
(428 |
) |
Net other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
102 |
|
|
|
102 |
|
Vesting of restricted stock |
|
|
65 |
|
|
|
1 |
|
|
|
(73 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(72 |
) |
Stock option exercise |
|
|
4 |
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
Stock-based
compensation expense |
|
|
- |
|
|
|
- |
|
|
|
159 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
159 |
|
Balance at June 30, 2021 |
|
|
21,164 |
|
|
|
212 |
|
|
|
50,390 |
|
|
|
17,037 |
|
|
|
(18,586 |
) |
|
|
(4,191 |
) |
|
|
44,862 |
|
Beginning balance, value |
|
|
21,164 |
|
|
|
212 |
|
|
|
50,390 |
|
|
|
17,037 |
|
|
|
(18,586 |
) |
|
|
(4,191 |
) |
|
|
44,862 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,086 |
|
|
|
- |
|
|
|
- |
|
|
|
7,086 |
|
Net income (loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,086 |
|
|
|
- |
|
|
|
- |
|
|
|
7,086 |
|
Net other comprehensive loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(68 |
) |
|
|
(68 |
) |
Vesting of restricted stock |
|
|
67 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock-based
compensation expense |
|
|
- |
|
|
|
- |
|
|
|
213 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
213 |
|
Balance at
September 30, 2021 |
|
|
21,231 |
|
|
$ |
212 |
|
|
$ |
50,603 |
|
|
$ |
24,123 |
|
|
$ |
(18,586 |
) |
|
$ |
(4,259 |
) |
|
$ |
52,093 |
|
Ending
balance, value |
|
|
21,231 |
|
|
$ |
212 |
|
|
$ |
50,603 |
|
|
$ |
24,123 |
|
|
$ |
(18,586 |
) |
|
$ |
(4,259 |
) |
|
$ |
52,093 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Ballantyne
Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash
Flows
Nine
Months Ended September 30, 2022 and 2021
(In
thousands)
(Unaudited)
|
|
|
2022 |
|
|
|
2021 |
|
|
|
Nine Months Ended September 30, |
|
|
|
|
2022 |
|
|
|
2021 |
|
Cash flows from operating
activities: |
|
|
|
|
|
|
|
|
Net (loss) income from
continuing operations |
|
$ |
(8,598 |
) |
|
$ |
3,820 |
|
Adjustments to
reconcile net (loss) income from continuing operations to net cash
(used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for
(recovery of) doubtful accounts |
|
|
11 |
|
|
|
(249 |
) |
Provision for
obsolete inventory |
|
|
- |
|
|
|
69 |
|
Provision for
warranty |
|
|
9 |
|
|
|
46 |
|
Depreciation
and amortization |
|
|
1,038 |
|
|
|
985 |
|
Amortization
and accretion of operating leases |
|
|
166 |
|
|
|
620 |
|
Equity method
holding loss |
|
|
2,578 |
|
|
|
1,468 |
|
Adjustment to
SageNet promissory note in connection with prepayment (Note 3) |
|
|
202 |
|
|
|
- |
|
Unrealized loss
on equity holdings |
|
|
3,752 |
|
|
|
(8,376 |
) |
Deferred income
taxes |
|
|
(435 |
) |
|
|
2,124 |
|
Stock-based
compensation expense |
|
|
511 |
|
|
|
686 |
|
Changes in
operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(394 |
) |
|
|
1,287 |
|
Inventories |
|
|
(556 |
) |
|
|
(793 |
) |
Current income
taxes |
|
|
117 |
|
|
|
(6 |
) |
Other
assets |
|
|
1,455 |
|
|
|
(2,028 |
) |
Accounts
payable and accrued expenses |
|
|
(1,490 |
) |
|
|
(1,373 |
) |
Deferred
revenue and customer deposits |
|
|
(975 |
) |
|
|
2,002 |
|
Operating lease obligations |
|
|
(161 |
) |
|
|
(617 |
) |
Net cash used
in operating activities from continuing operations |
|
|
(2,770 |
) |
|
|
(335 |
) |
Net cash provided by operating activities from discontinued
operations |
|
|
- |
|
|
|
510 |
|
Net cash (used in) provided by operating activities |
|
|
(2,770 |
) |
|
|
175 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
(858 |
) |
|
|
(650 |
) |
Acquisition of
programming rights |
|
|
(407 |
) |
|
|
- |
|
Purchase of
common shares of FG Financial Group, Inc. (Note 7) |
|
|
(2,000 |
) |
|
|
- |
|
Purchase of
common shares of GreenFirst Forest Products, Inc. (Note 7) |
|
|
- |
|
|
|
(9,977 |
) |
Receipt of SageNet promissory note (Note 3) |
|
|
2,300 |
|
|
|
- |
|
Net cash used
in investing activities from continuing operations |
|
|
(965 |
) |
|
|
(10,627 |
) |
Net cash provided by investing activities from discontinued
operations |
|
|
- |
|
|
|
12,761 |
|
Net cash (used in) provided by investing activities |
|
|
(965 |
) |
|
|
2,134 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities: |
|
|
|
|
|
|
|
|
Principal
payments on short-term debt |
|
|
(487 |
) |
|
|
(509 |
) |
Principal
payments on long-term debt |
|
|
(114 |
) |
|
|
- |
|
Proceeds from
stock issuance, net of costs |
|
|
- |
|
|
|
6,310 |
|
Payments of
withholding taxes related to net share settlement of equity
awards |
|
|
(15 |
) |
|
|
(80 |
) |
Proceeds from
exercise of stock options |
|
|
- |
|
|
|
9 |
|
Payments on capital lease obligations |
|
|
(5 |
) |
|
|
(2,106 |
) |
Net cash (used
in) provided by financing activities from continuing
operations |
|
|
(621 |
) |
|
|
3,624 |
|
Net cash used in financing activities from discontinued
operations |
|
|
- |
|
|
|
(155 |
) |
Net cash (used in) provided by financing activities |
|
|
(621 |
) |
|
|
3,469 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(184 |
) |
|
|
(43 |
) |
Net decrease in
cash and cash equivalents and restricted cash from continuing
operations |
|
|
(4,540 |
) |
|
|
(7,381 |
) |
Net increase in cash and cash equivalents and restricted cash from
discontinued operations |
|
|
- |
|
|
|
13,116 |
|
Net (decrease)
increase in cash and cash equivalents and restricted cash |
|
|
(4,540 |
) |
|
|
5,735 |
|
Cash and
cash equivalents and restricted cash at beginning of period |
|
|
8,882 |
|
|
|
4,787 |
|
Cash and
cash equivalents and restricted cash at end of period |
|
$ |
4,342 |
|
|
$ |
10,522 |
|
|
|
|
|
|
|
|
|
|
Components of cash and cash
equivalents and restricted cash: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,191 |
|
|
$ |
10,372 |
|
Restricted
cash |
|
|
151 |
|
|
|
150 |
|
Total cash and cash equivalents and restricted cash |
|
$ |
4,342 |
|
|
$ |
10,522 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
investing and financing activities: |
|
|
|
|
|
|
|
|
Short-term
borrowings to finance insurance |
|
$ |
392 |
|
|
$ |
140 |
|
Issuance of
debt, common shares, and warrants in connection with purchase of
Digital Ignition building |
|
$ |
7,609 |
|
|
$ |
- |
|
Amount payable
to Landmark Studio Group in connection with aquistion of projects
(Note 9) |
|
$ |
1,345
|
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Ballantyne
Strong, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
1. Nature of
Operations
Ballantyne
Strong, Inc. (“Ballantyne Strong,” or the “Company”), a Delaware
corporation, is a holding company with business operations in the
entertainment industry and holdings in public and privately held
companies. The Company historically has conducted a large portion
of its operations primarily through its Strong Entertainment
operating segment, which manufactures and distributes premium large
format projection screens and provides technical support services
and other related products and services to the cinema exhibition
industry, theme parks, schools, museums and other
entertainment-related markets. Strong Entertainment also
distributes and supports third party products, including digital
projectors, servers, library management systems, menu boards and
sound systems.
The
Company owns and operates its Digital Ignition technology incubator
and co-working facility in Alpharetta, Georgia. In addition, the
Company holds minority positions in one privately held company and
two publicly traded companies.
The
Company recently launched Strong Studios, Inc., (“Strong Studios”)
with the goal of expanding Strong Entertainment to include content
creation and production of feature films and series. The launch of
Strong Studios is intended to further diversify our revenue streams
and increase our addressable markets, while leveraging and
expanding our existing relationships in the industry.
The
Company announced plans to establish the Strong Entertainment
business as a separate publicly listed company. Following the
planned separation, the operations of the Strong Entertainment
operating segment are expected to become part of a newly
established British Columbia corporation, Strong Global
Entertainment, Inc. (“Strong Global Entertainment”). Strong Global
Entertainment has filed a registration statement with the U.S.
Securities and Exchange Commission (“SEC”) and intends to commence
an initial public offering of its common shares during late 2022 or
early 2023 to raise additional capital to support its growth plans.
If successful, the Company expects to apply to have the Strong
Global Entertainment common shares trade on the NYSE American under
the ticker symbol “SGE” following the initial public offering, and
the Company would expect to continue to be the majority shareholder
of Strong Global Entertainment.
Effective
July 20, 2022, the Company’s Board of Directors approved the
relocation of Ballantyne Strong’s headquarters from 4201 Congress
Street, Suite 175, Charlotte, North Carolina, 28209 to 5960
Fairview Road, Suite 275, Charlotte North Carolina,
28210.
In
February 2021, the Company completed the sale of its Convergent
business segment. As a result of the divestiture, the Company has
presented Convergent’s operating results as discontinued operations
for all periods presented. See Note 3 for additional
details.
2.
Summary of Significant
Accounting Policies
Basis of Presentation
and Principles of Consolidation
The
condensed consolidated financial statements include the accounts of
the Company and all majority-owned and controlled domestic and
foreign subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The
condensed consolidated financial statements included in this report
are presented in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosures normally
required by accounting principles generally accepted in the United
States of America (also referred to as “GAAP”) for annual reporting
purposes or those made in the Company’s Annual Report on Form 10-K.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2021.
The
condensed consolidated balance sheet as of December 31, 2021, 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.
Uncertainty
remains surrounding the COVID-19 global pandemic and ongoing
geopolitical tensions, and the extent and duration of the impacts
that these and other events may have on the Company, as well as its
customers, suppliers, and employees. While cinema and theme park
operators in the United States and other parts of the world are in
various stages of returning to “normal”, there continue to be
spikes in COVID-19 cases and new variants in various parts of the
world that could impact the pace of recovery in our markets.
Accordingly, there continues to be a heightened potential for
future reserves against trade receivables, inventory write downs,
and impairments of long-lived assets, goodwill, intangible assets
and equity holdings. 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 and ongoing geopolitical tensions on the Company’s
customers and business develops, there is heightened potential for
changes in these views over the remainder of 2022, and potentially
beyond.
Cash and Cash
Equivalents
All
short-term, highly liquid financial instruments are classified as
cash equivalents in the condensed consolidated balance sheets and
statements of cash flows. Generally, these instruments have
maturities of three months or less from date of purchase. As of
September 30, 2022, $1.6 million of the
$4.2 million in cash and
cash equivalents was held by our foreign subsidiary.
Restricted
Cash
Restricted
cash represents amounts held in a collateral account for the
Company’s corporate travel and purchasing credit card
program.
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. Past due
accounts are written off when our efforts have been unsuccessful in
collecting amounts due.
Equity
Holdings
The
Company accounts for its equity holdings using the equity method,
at cost, or at fair value depending on the facts and circumstances
related to each individual holding. The Company applies the equity
method of accounting to its holdings when it has significant
influence, but not controlling interest, in the entity. Judgment
regarding the level of influence over each equity method holding
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 loss resulting from these
equity holdings is reported under the line item captioned “equity
method holding loss” in our condensed consolidated statements of
operations. The Company’s equity method holdings are reported at
cost and adjusted each period for the Company’s share of the
entity’s income or loss and dividends paid, if any. The Company’s
share of the entity’s income or loss is recorded on a one quarter
lag for all equity method holdings. The Company classifies
distributions received from equity method holdings using the
cumulative earnings approach on the condensed consolidated
statements of cash flows.
Changes
in fair value of holdings in marketable equity securities of
unconsolidated entities in which the Company is not able to
exercise significant influence (“Fair Value Holdings”) are
recognized on the consolidated statement of operations.
Nonmarketable equity holdings in unconsolidated entities in which
the Company is not able to exercise significant influence (“Cost
Method Holdings”) 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 holding or security of the same issuer. Dividends on
Fair Value Holdings and Cost Method Holdings received are recorded
as income.
The
Company assesses its equity holdings for impairment whenever events
or changes in circumstances indicate that the carrying value of an
equity holding may not be recoverable. Management reviewed the
underlying net assets of the Company’s equity method holding as of
September 30, 2022 and determined that the Company’s proportionate
economic interest in the entity indicates that the equity holding
was not impaired. There were no observable price changes in orderly
transactions for identical or a similar holding or security of the
Company’s Cost Method Holding during the nine months ended
September 30, 2022. The carrying value of our equity method, Fair
Value Holdings and Cost Method Holdings is reported as “equity
holdings” on the condensed consolidated balance sheets. Notes 3 and
7 contain additional information on our equity method, Fair Value
Holdings and Cost Method Holdings.
Film and
Television Programming Rights
Commencing
in March 2022, the Company began producing original productions and
acquiring rights to films and television programming. Film and
television programming rights include the unamortized costs of
in-process or in-development content produced or acquired by the
Company. The Company’s capitalized costs include all direct
production and financing costs, capitalized interest when
applicable, and production overhead. Film and television program
rights are stated at the lower of amortized cost or estimated fair
value.
The
costs of producing content are amortized using the
individual-film-forecast method. These costs are amortized based on
the ratio of the current period’s revenues to management’s
estimated remaining total gross revenues to be earned (“Ultimate
Revenue”) as of each reporting date to reflect the most current
available information. Management’s judgment is required in
estimating Ultimate Revenue and the costs to be incurred throughout
the life of each film or television program. Amortization is
adjusted when necessary to reflect increases or decreases in
forecasted Ultimate Revenues.
For
an episodic television series, the period over which Ultimate
Revenues are estimated cannot exceed ten years following the date
of delivery of the first episode, or, if still in production, five
years from the date of delivery of the most recent episode, if
later. For films, Ultimate Revenue includes estimates over a period
not to exceed ten years following the date of initial
release.
Content
assets are expected to be predominantly monetized individually and
therefore are reviewed at the individual level when an event or
change in circumstance indicates a change in the expected
usefulness of the content or the fair value may be less than the
unamortized cost.
Due
to the inherent uncertainties involved in making such estimates of
Ultimate Revenues and expenses, these estimates may differ from
actual results. In addition, in the normal course of our business,
some films and titles will be more successful or less successful
than anticipated. Management regularly reviews and revises, when
necessary, its Ultimate Revenue and cost estimates, which may
result in a change in the rate of amortization of film costs and
participations and residuals and/or a write-down of all or a
portion of the unamortized costs of the film or television program
to its estimated fair value. An increase in the estimate of
Ultimate Revenue will generally result in a lower amortization rate
and, therefore, less film and television program amortization
expense, while a decrease in the estimate of Ultimate Revenue will
generally result in a higher amortization rate and, therefore,
higher film and television program amortization expense, and also
periodically result in an impairment requiring a write-down of the
film cost to the title’s fair value. The Company has not yet
incurred any of these write-downs.
An
impairment charge would be recorded in the amount by which the
unamortized costs exceed the estimated fair value. Estimates of
future revenue involve measurement uncertainties and it is
therefore possible that reductions in the carrying value of film
library costs may be required because of changes in management’s
future revenue estimates.
Fair Value of
Financial Instruments
Assets
and liabilities measured at fair value are categorized into a fair
value hierarchy based upon the observability of inputs to the
valuation of an asset or liability as of the measurement date.
Inputs refer broadly to the assumptions that market participants
would use in pricing the asset or liability, including assumptions
about risk. The categorization within the valuation hierarchy is
based upon the lowest level of input that is significant to the
fair value measurement. Financial assets and liabilities carried at
fair value are classified and disclosed in one of the following
three categories:
|
● |
Level
1 – inputs to the valuation techniques are quoted prices in active
markets for identical assets or liabilities |
|
● |
Level
2 – inputs to the valuation techniques are other than quoted prices
but are observable for the assets or liabilities, either directly
or indirectly |
|
● |
Level
3 – inputs to the valuation techniques are unobservable for the
assets or liabilities |
The
following tables present the Company’s financial assets measured at
fair value based upon the level within the fair value hierarchy in
which the fair value measurements are classified, as of September
30, 2022 and December 31, 2021.
Fair
values measured on a recurring basis at September 30, 2022 (in
thousands):
Schedule of Fair Value Measured Financial Assets
and Liabilities
|
|
|
Level
1 |
|
|
|
Level
2 |
|
|
|
Level
3 |
|
|
|
Total |
|
Cash and cash
equivalents |
|
$ |
4,191 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,191 |
|
Restricted cash |
|
|
151 |
|
|
|
- |
|
|
|
- |
|
|
|
151 |
|
Fair value
method equity holding |
|
|
17,876 |
|
|
|
- |
|
|
|
- |
|
|
|
17,876 |
|
Total |
|
$ |
22,218 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
22,218 |
|
Fair
values measured on a recurring basis at December 31, 2021 (in
thousands):
|
|
|
Level
1 |
|
|
|
Level
2 |
|
|
|
Level
3 |
|
|
|
Total |
|
Cash and cash
equivalents |
|
$ |
8,731 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8,731 |
|
Restricted cash |
|
|
150 |
|
|
|
- |
|
|
|
- |
|
|
|
150 |
|
Fair value
method equity holding |
|
|
22,467 |
|
|
|
- |
|
|
|
- |
|
|
|
22,467 |
|
Total |
|
$ |
31,348 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
31,348 |
|
The
carrying values of all other financial assets and liabilities,
including accounts receivable, accounts payable, accrued expenses
and short-term debt reported in the consolidated balance sheets
equal or approximate their fair values due to the short-term nature
of these instruments. Based on a combination of the cash on hand as
well as quoted market prices of the securities held by FGF Holdings
(as defined below), the liquidation value of the Company’s equity
method holding was $4.8 million
at September 30, 2022 (see Note 7).
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.
3.
Discontinued
Operations
Convergent
As
part of a transaction that closed in February 2021, the Company
divested its Convergent business segment. The Company’s Convergent
business segment delivered digital signage solutions and related
services to large multi-location organizations in the United States
and Canada.
On
February 1, 2021, the Company entered into an Equity Purchase
Agreement (together with the other related documents defined
therein, the “Purchase Agreement”), and closed the transactions
contemplated by the Purchase Agreement, with SageNet LLC
(“SageNet”). Pursuant to the Purchase Agreement, a subsidiary of
Ballantyne Strong sold 100% of the
issued and outstanding limited liability company membership
interests (the “Equity Interests”) in Convergent, LLC
(“Convergent”) to SageNet. The purchase price for the Equity
Interests (the “Purchase Price”) pursuant to the Purchase Agreement
was (i) $15.0 million in cash and (ii) $2.5 million in the form of a
subordinated promissory note delivered by SageNet in favor of the
Company (the “SageNet Promissory Note”). Per the terms of the
SageNet Promissory Note, the Company would receive twelve
consecutive equal quarterly payments of principal, plus accrued
interest thereon, commencing on March 31, 2022. The Company has
elected to record the SageNet Promissory Note using its historical
cost basis. Additionally, a portion of the Purchase Price was
placed in escrow by SageNet, the release of which is contingent
upon certain events and conditions specified in the Purchase
Agreement. The Purchase Price is also subject to adjustment based
on closing working capital of Convergent. As further consideration,
SageNet also assumed approximately $5.7 million of
third-party debt of Convergent, bringing the total enterprise value
for Convergent’s equity interests to approximately $23.2 million. The Company
recorded a gain of $14.9 million during the
first quarter of 2021 related to the sale of Convergent. In January
2022, the Company entered into an amendment to the SageNet
Promissory Note. Pursuant to the terms of the amendment, the
Company received a prepayment of $2.3 million plus
accrued interest. As a result of the prepayment, all terms of the
SageNet Promissory Note have been satisfied.
Strong Outdoor
As
part of transactions in May 2019 and August 2020, the Company
divested its Strong Outdoor business segment. The Company’s Strong
Outdoor business segment provided outdoor advertising and
experiential marketing to advertising agencies and corporate
accounts, primarily in New York City.
On
May 21, 2019, Strong Digital Media, LLC (“SDM”), an indirect
subsidiary of Ballantyne Strong, entered into certain agreements
with Firefly Systems, Inc. (“Firefly”). As consideration for
entering into these agreements, Ballantyne Strong received a total
of $5.7 million
worth of Firefly’s Series A-2 preferred shares, which includes
$0.9 million pursuant to an
earn-out provision. The Series A-2 preferred shares were
subsequently renamed Firefly Series B-1 Shares (the “Firefly Series
B-1 Shares”).
On
August 3, 2020, SDM entered into an Asset Purchase Agreement (the
“Asset Purchase Agreement”) with Firefly, pursuant to which SDM
agreed to sell certain assets primarily related to its Strong
Outdoor operating business to Firefly. As consideration for
entering into the Asset Purchase Agreement, SDM received
approximately $3.2 million worth of
Firefly Series A-3 preferred shares (the “Firefly Series A-3
Shares”). The Series A-3 preferred shares were subsequently renamed
Firefly Series B-2 Shares (the “Firefly Series B-2
Shares”).
As of
September 30, 2022, the Company held approximately $5.7 million worth of
Firefly Series B-1 Shares and $7.2 million worth of
Firefly Series B-2 Shares.
In
August 2020, Ballantyne Strong entered into a Master Services
Agreement (the “Master Services Agreement”) with Firefly, pursuant
to which Ballantyne Strong agreed to provide certain support
services to Firefly, including remote equipment monitoring and
diagnostics of screens, until no later than December 31, 2022, and
to provide transition advertising instruction and integration
services, content management services, ad-hoc reporting and
analysis, wireless service, advertising content management
services, and mapping data until no later than six months from
closing. As consideration for entering into the Master Services
Agreement, Ballantyne Strong received $2.0 million in cash
consideration which the Company is recognizing as revenue ratably
through the end of 2022.
The
major line items constituting the net income from discontinued
operations are as follows (in thousands):
Schedule of Financial Results of Discontinued
Operations
|
|
|
Convergent |
|
|
|
Strong
Outdoor |
|
|
|
Total |
|
|
|
Nine Months Ended September 30, 2021 |
|
|
|
|
Convergent |
|
|
|
Strong
Outdoor |
|
|
|
Total |
|
Net revenues |
|
$ |
1,472 |
|
|
$ |
- |
|
|
$ |
1,472 |
|
Cost of revenues |
|
|
746 |
|
|
|
- |
|
|
|
746 |
|
Gross profit |
|
|
726 |
|
|
|
- |
|
|
|
726 |
|
Selling and
administrative expenses |
|
|
1,241 |
|
|
|
- |
|
|
|
1,241 |
|
Loss from
operations |
|
|
(515 |
) |
|
|
- |
|
|
|
(515 |
) |
Gain on Convergent transaction |
|
|
14,937 |
|
|
|
- |
|
|
|
14,937 |
|
Other
income |
|
|
194 |
|
|
|
- |
|
|
|
194 |
|
Income from
discontinued operations |
|
|
14,616 |
|
|
|
- |
|
|
|
14,616 |
|
Income tax
benefit |
|
|
33 |
|
|
|
- |
|
|
|
33 |
|
Total
net income from discontinued operations |
|
$ |
14,649 |
|
|
$ |
- |
|
|
$ |
14,649 |
|
4.
Revenue
The
Company accounts for revenue using the following steps:
|
● |
Identify
the contract, or contracts, with a customer; |
|
● |
Identify
the performance obligations in the contract; |
|
● |
Determine
the transaction price; |
|
● |
Allocate
the transaction price to the identified performance obligations;
and |
|
● |
Recognize
revenue when, or as, the Company satisfies the performance
obligations. |
The
Company combines contracts with the same customer into a single
contract for accounting purposes when the contracts are entered
into at or near the same time and the contracts are negotiated as a
single commercial package, consideration in one contract depends on
the other contract, or the services are considered a single
performance obligation. If an arrangement involves multiple
performance obligations, the items are analyzed to determine
whether they are distinct, whether the items have value on a
standalone basis, and whether there is objective and reliable
evidence of their standalone selling price. The total contract
transaction price is allocated to the identified performance
obligations based upon the relative standalone selling prices of
the performance obligations. The standalone selling price is based
on an observable price for services sold to other comparable
customers, when available, or an estimated selling price using a
cost-plus margin approach. The Company estimates the amount of
total contract consideration it expects to receive for variable
arrangements by determining the most likely amount it expects to
earn from the arrangement based on the expected quantities of
services it expects to provide and the contractual pricing based on
those quantities. The Company only includes a portion of variable
consideration in the transaction price when it is probable that a
significant reversal in the amount of cumulative revenue recognized
will not occur or when the uncertainty associated with the variable
consideration is subsequently resolved. The Company considers the
sensitivity of the estimate, its relationship and experience with
the client and variable services being performed, the range of
possible revenue amounts and the magnitude of the variable
consideration to the overall arrangement.
As
discussed in more detail below, revenue is recognized when a
customer obtains control of promised goods or services under the
terms of a contract and is measured as the amount of consideration
the Company expects to receive in exchange for transferring goods
or providing services. The Company typically does not have any
material extended payment terms, as payment is due at or shortly
after the time of the sale. Sales, value-added and other taxes
collected concurrently with revenue producing activities are
excluded from revenue.
The
Company recognizes contract assets or unbilled receivables related
to revenue recognized for services completed but not yet invoiced
to the clients. Unbilled receivables are recorded as accounts
receivable when the Company has an unconditional right to contract
consideration. A contract liability is recognized as deferred
revenue when the Company invoices clients, or receives cash, in
advance of performing the related services under the terms of a
contract. Deferred revenue is recognized as revenue when the
Company has satisfied the related performance
obligation.
The
Company defers costs to acquire contracts, including commissions,
incentives and payroll taxes, if they are incremental and
recoverable costs of obtaining a customer contract with a term
exceeding one year. Deferred contract costs are reported within
other assets and amortized to selling expense over the contract
term, which generally ranges from one to five years. The Company
has elected to recognize the incremental costs of obtaining a
contract with a term of less than one year as a selling expense
when incurred. The Company did not have any deferred contract costs
as of September 30, 2022 or December 31, 2021.
The
following tables disaggregate the Company’s revenue by major source
and by operating segment for the three and nine months ended
September 30, 2022 and 2021 (in thousands):
Schedule of Disaggregation of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
|
|
Three Months Ended September 30, 2021 |
|
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
Screen system sales |
|
$ |
3,096 |
|
|
$ |
- |
|
|
$ |
3,096 |
|
|
$ |
2,193 |
|
|
$ |
- |
|
|
$ |
2,193 |
|
Digital equipment sales |
|
|
3,592 |
|
|
|
- |
|
|
|
3,592 |
|
|
|
1,408 |
|
|
|
- |
|
|
|
1,408 |
|
Extended warranty sales |
|
|
106 |
|
|
|
- |
|
|
|
106 |
|
|
|
44 |
|
|
|
- |
|
|
|
44 |
|
Other product
sales |
|
|
896 |
|
|
|
- |
|
|
|
896 |
|
|
|
441 |
|
|
|
- |
|
|
|
441 |
|
Total product
sales |
|
|
7,690 |
|
|
|
- |
|
|
|
7,690 |
|
|
|
4,086 |
|
|
|
- |
|
|
|
4,086 |
|
Field maintenance and monitoring
services |
|
|
1,708 |
|
|
|
- |
|
|
|
1,708 |
|
|
|
1,436 |
|
|
|
- |
|
|
|
1,436 |
|
Installation services |
|
|
453 |
|
|
|
- |
|
|
|
453 |
|
|
|
244 |
|
|
|
- |
|
|
|
244 |
|
Other service
revenues |
|
|
53 |
|
|
|
370 |
|
|
|
423 |
|
|
|
56 |
|
|
|
294 |
|
|
|
350 |
|
Total service
revenues |
|
|
2,214 |
|
|
|
370 |
|
|
|
2,584 |
|
|
|
1,736 |
|
|
|
294 |
|
|
|
2,030 |
|
Total |
|
$ |
9,904 |
|
|
$ |
370 |
|
|
$ |
10,274 |
|
|
$ |
5,822 |
|
|
$ |
294 |
|
|
$ |
6,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2022 |
|
|
Nine Months Ended September 30, 2021 |
|
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
Screen system sales |
|
$ |
9,341 |
|
|
$ |
- |
|
|
$ |
9,341 |
|
|
$ |
6,680 |
|
|
$ |
- |
|
|
$ |
6,680 |
|
Digital equipment sales |
|
|
9,808 |
|
|
|
- |
|
|
|
9,808 |
|
|
|
3,890 |
|
|
|
- |
|
|
|
3,890 |
|
Extended warranty sales |
|
|
290 |
|
|
|
- |
|
|
|
290 |
|
|
|
105 |
|
|
|
- |
|
|
|
105 |
|
Other product
sales |
|
|
2,637 |
|
|
|
- |
|
|
|
2,637 |
|
|
|
1,136 |
|
|
|
- |
|
|
|
1,136 |
|
Total product
sales |
|
|
22,076 |
|
|
|
- |
|
|
|
22,076 |
|
|
|
11,811 |
|
|
|
- |
|
|
|
11,811 |
|
Field maintenance and monitoring
services |
|
|
4,975 |
|
|
|
- |
|
|
|
4,975 |
|
|
|
3,545 |
|
|
|
- |
|
|
|
3,545 |
|
Installation services |
|
|
1,294 |
|
|
|
- |
|
|
|
1,294 |
|
|
|
674 |
|
|
|
- |
|
|
|
674 |
|
Other service
revenues |
|
|
101 |
|
|
|
996 |
|
|
|
1,097 |
|
|
|
91 |
|
|
|
860 |
|
|
|
951 |
|
Total service
revenues |
|
|
6,370 |
|
|
|
996 |
|
|
|
7,366 |
|
|
|
4,310 |
|
|
|
860 |
|
|
|
5,170 |
|
Total |
|
$ |
28,446 |
|
|
$ |
996 |
|
|
$ |
29,442 |
|
|
$ |
16,121 |
|
|
$ |
860 |
|
|
$ |
16,981 |
|
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 times because control transfers upon customer delivery. The
cost of freight and shipping to the customer is recognized in cost
of sales at the time of transfer of control to the customer. 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.
Digital
equipment sales
The
Company recognizes revenue on sales of digital equipment when the
control of the equipment is transferred, which typically occurs at
the time of shipment from the Company’s warehouse or drop-shipment
from a third party. The cost of freight and shipping to the
customer is recognized in cost of sales at the time of transfer of
control to the customer.
Field
maintenance and monitoring services
The
Company sells service contracts that provide maintenance and
monitoring services to its Strong Entertainment customers. These
contracts are generally 12 months in length. Revenue related to
service contracts is recognized ratably over the term of the
agreement.
In
addition to selling service contracts, the Company also performs
discrete time and materials-based maintenance and repair work for
customers in the Strong Entertainment segment. Revenue related to
time and materials-based maintenance and repair work is recognized
at the point in time when the performance obligation has been fully
satisfied.
Installation
services
The
Company performs installation services for its Strong Entertainment
customers and recognizes revenue upon completion of the
installations.
Extended
warranty sales
The
Company performs installation services for its Strong Entertainment
customers and recognizes revenue upon completion of the
installations.
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, 2022 and 2021 (in
thousands):
Schedule of Disaggregation of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
|
|
Three Months Ended September 30, 2021 |
|
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
Point in time |
|
$ |
8,588 |
|
|
$ |
63 |
|
|
$ |
8,651 |
|
|
$ |
4,795 |
|
|
$ |
22 |
|
|
$ |
4,817 |
|
Over time |
|
|
1,316 |
|
|
|
307 |
|
|
|
1,623 |
|
|
|
1,027 |
|
|
|
272 |
|
|
|
1,299 |
|
Total |
|
$ |
9,904 |
|
|
$ |
370 |
|
|
$ |
10,274 |
|
|
$ |
5,822 |
|
|
$ |
294 |
|
|
$ |
6,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2022 |
|
|
Nine Months Ended September 30, 2021 |
|
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
|
|
Strong
Entertainment |
|
|
|
Other |
|
|
|
Total |
|
Point in time |
|
$ |
24,561 |
|
|
$ |
80 |
|
|
$ |
24,641 |
|
|
$ |
13,648 |
|
|
$ |
32 |
|
|
$ |
13,680 |
|
Over time |
|
|
3,885 |
|
|
|
916 |
|
|
|
4,801 |
|
|
|
2,473 |
|
|
|
828 |
|
|
|
3,301 |
|
Total |
|
$ |
28,446 |
|
|
$ |
996 |
|
|
$ |
29,442 |
|
|
$ |
16,121 |
|
|
$ |
860 |
|
|
$ |
16,981 |
|
At
September 30, 2022, the unearned revenue amount associated with
long-term projects that the Company uses the
percentage-of-completion method to recognize revenue, maintenance
and monitoring services and extended warranty sales in which the
Company is the primary obligor was $0.9 million. The Company expects to
recognize $0.8 million of the unearned revenue
amounts during the remainder of 2022, $0.1 million during 2023 and
immaterial amounts from 2024 through 2026.
5.
Net (Loss) Income Per
Common Share
Basic
net (loss) income per share has been computed on the basis of the
weighted average number of shares of common stock outstanding. In
periods when the Company reported a net loss from continuing
operations, there were no differences between average shares used
to compute basic and diluted loss per share as inclusion of stock
options and restricted stock units would have been anti-dilutive in
those periods. The following table summarizes the weighted average
shares used to compute basic and diluted net (loss) income per
share (in thousands):
Schedule of Reconciliation Weighted Average Between
Basic and Diluted Earnings Per Share
|
|
|
2022 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
2022 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
Weighted average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average
shares outstanding |
|
|
19,437 |
|
|
|
18,437 |
|
|
|
19,235 |
|
|
|
17,870 |
|
Dilutive
effect of stock options and certain non-vested restricted stock
units |
|
|
- |
|
|
|
263 |
|
|
|
- |
|
|
|
172 |
|
Diluted
weighted average shares outstanding |
|
|
19,437 |
|
|
|
18,700 |
|
|
|
19,235 |
|
|
|
18,042 |
|
A
total of
159,994 and
114,408 common stock equivalents related to stock options
and restricted stock units were excluded for the three and nine
months ended September 30, 2022, respectively, as their inclusion
would be anti-dilutive, thereby decreasing the net losses from
continuing operations per share. Options to purchase
489,500 and
329,500 shares of common stock were outstanding as of
September 30, 2022 and September 30, 2021, 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.
6.
Inventories
Inventories
consisted of the following (in thousands):
Schedule of Inventories
|
|
|
September
30, 2022 |
|
|
|
December
31, 2021 |
|
Raw materials and
components |
|
$ |
1,591 |
|
|
$ |
1,680 |
|
Work in process |
|
|
364 |
|
|
|
399 |
|
Finished
goods |
|
|
1,711 |
|
|
|
1,192 |
|
Inventories, net |
|
$ |
3,666 |
|
|
$ |
3,271 |
|
The
inventory balances were net of reserves of approximately $0.5 million as
of both September 30, 2022 and December 31, 2021. The inventory
reserves primarily related to the Company’s finished goods
inventory. A rollforward of the inventory reserve for the nine
months ended September 30, 2022 is as follows (in
thousands):
Schedule of Inventory Reserve
|
|
|
|
|
Inventory reserve balance
at December 31, 2021 |
|
$ |
467 |
|
Inventory reserve, beginning
balance |
|
$ |
467 |
|
Inventory write-offs and other
adjustments during 2022 |
|
|
5 |
|
Provision for
inventory reserve during 2022 |
|
|
- |
|
Inventory
reserve balance at September 30, 2022 |
|
$ |
472 |
|
Inventory
reserve, ending balance |
|
$ |
472 |
|
7.
Equity
Holdings
The
following summarizes our equity holdings (dollars in
thousands):
Summary of Investments
|
|
September 30, 2022 |
|
|
December 31 2021 |
|
|
|
Carrying Amount |
|
|
Economic Interest |
|
|
Carrying Amount |
|
|
Economic Interest |
|
Equity Method Holdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FG Financial Holdings,
LLC |
|
$ |
4,850 |
|
|
|
47.3 |
% |
|
$ |
- |
|
|
|
- |
|
FG Financial Group, Inc. |
|
|
- |
|
|
|
- |
|
|
|
5,549 |
|
|
|
25.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Method Holding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GreenFirst Forest Products Inc. |
|
|
17,876 |
|
|
|
8.6 |
% |
|
|
22,467 |
|
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Method Holding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firefly
Systems, Inc. |
|
|
12,898 |
|
|
|
|
|
|
|
13,117 |
|
|
|
|
|
Total
Investments |
|
$ |
35,624 |
|
|
|
|
|
|
$ |
41,133 |
|
|
|
|
|
The
following summarizes the loss of equity method holdings reflected
in the condensed consolidated statements of operations (in
thousands):
Summary of Income (Loss) of Equity Method
Investees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FG Financial Group,
Inc. |
|
$ |
(798 |
) |
|
$ |
91 |
|
|
$ |
(2,578 |
) |
|
$ |
(318 |
) |
GreenFirst
Forest Products Inc. |
|
|
- |
|
|
|
(414 |
) |
|
|
- |
|
|
|
(1,150 |
) |
Total |
|
$ |
(798 |
) |
|
$ |
(323 |
) |
|
$ |
(2,578 |
) |
|
$ |
(1,468 |
) |
Equity
Method Holdings
FG
Financial Group, Inc. (“FGF”) is a reinsurance and investment
management holding company focused on opportunistic collateralized
and loss capped reinsurance, while allocating capital to special
purpose acquisition companies (each, a “SPAC”) and SPAC
sponsor-related businesses.
In
June 2022, FGF announced the closing of a public offering of common
stock of 2,750,000 shares at a
price of $1.58. The Company
participated in the public offering and purchased 1,265,822 shares of FGF
common stock. Following the purchase, the Company’s FGF holdings
total approximately 2.9 million shares of
FGF common stock.
The
Company’s Chairman, D. Kyle Cerminara, is the chairman of the board
of directors of FGF. Mr. Cerminara is affiliated with entities
that, when combined with the Company’s ownership in FGF, own
greater than 50% of FGF.
Since FGF does not depend on the Company for continuing financial
support to maintain operations, the Company has determined that FGF
is not a variable interest entity, and therefore, the Company is
not required to determine the primary beneficiary of FGF for
potential consolidation. The Company did not receive dividends from
FGF during the three and nine months ended September 30, 2022 or
2021.
FG
Financial Holdings, LLC (“FGF Holdings”) is a limited liability
company formed under the Delaware Limited Liability Company Act.
The Company is a member of FGF Holdings and contributed its
2.9 million shares of
FGF common stock to FGF Holdings on September 12, 2022. In
consideration of its contribution to FGF Holdings, the Company was
issued Series B Common Interests of FGF Holdings and 50% of the
voting power over FGF Holdings. The members of FGF Holdings agreed
that the powers of FGF Holdings shall be exercised by, or under the
authority of, its managers. FGF Holdings has two managers, one of
which was appointed by the Company. The Company designated it
Chairman, D. Kyle Cerminara, to serve as a manager of FGF Holdings.
The managers of FGF Holdings, acting unanimously, have the right,
power and authority on behalf of FGF Holdings and in its name to
execute documents or other instruments and exercise all of the
rights, power and authority of FGF Holdings. Allocations of profits
and losses and distributions of cash are made in accordance with
the terms of the FGF Holdings operating agreement.
The
Company has the ability to significantly influence FGF Holdings
through its 50% voting
power but does not maintain a controlling interest. Accordingly,
the Company applied the equity method of accounting to its interest
in FGF Holdings. The Company accounted for the transfer of the
2.9 million shares of
FGF common stock to FGF Holdings as a change in interest and
recognized a gain of $0.9 million during the
third quarter of 2022, which was included part of the Equity method
holding loss on the condensed consolidated statement of
operations.
Consistent
with the Company’s policy to recognize the results of its equity
method holdings in its statement of operations on a one-quarter
lag, the Company will begin to recognize its share of the results
of FGF Holdings beginning in the fourth quarter of 2022 (reported
in the first quarter of 2023).
Based
on quoted market prices of the assets held by FGF Holdings, as well
as the cash balance on hand, the liquidation value of the Company’s
LLC interest in FGF Holdings was approximately $4.8 million as of
September 30, 2022.
As of
September 30, 2022, the Company’s retained earnings included an
accumulated deficit from its equity method holdings of
approximately $9.0 million.
Fair
Value Method Holding
GreenFirst
Forest Products Inc. (“GreenFirst”) is a publicly-traded Canadian
company focused on environmentally sustainable forest management
and lumber production. In April 2021, GreenFirst announced that it
had entered into an asset purchase agreement pursuant to which it
would acquire a portfolio of forest and paper product assets (the
“GreenFirst Acquisition”). The
Company’s Chairman, Mr. Cerminara, served as a member of the board
of directors of GreenFirst from June 2016 to October 2021, and was
also appointed Chairman of GreenFirst from June 2018 to June 2021.
Prior to the closing of the GreenFirst Acquisition, the Company
held a 20.7% ownership position in GreenFirst. The Company’s 20.7%
ownership of GreenFirst, combined with Mr. Cerminara’s board seat,
provided the Company with significant influence over GreenFirst,
but not a controlling interest. Accordingly, the Company applied
the equity method of accounting to its equity holding in
GreenFirst. Following the GreenFirst Acquisition and GreenFirst’s
issuance of additional common shares, the Company’s ownership
percentage decreased to 8.6%. As a result, the Company is no
longer able to exercise significant influence over GreenFirst and
the equity holding in GreenFirst no longer qualifies for equity
method accounting. As a result of applying the fair value method of
accounting, the Company recorded an unrealized loss on equity
holdings of approximately $1.3 million and
$3.8 million
during the three and nine months ended September 30, 2022,
respectively, and recorded an unrealized gain on equity holdings of
$8.4
million during the three and nine months ended September 30, 2021.
The Company did not receive dividends from GreenFirst during the
three and nine months ended September 30, 2022 or 2021. Based on
quoted market prices, the fair value of the Company’s ownership in
GreenFirst was $17.9 million as
of September 30, 2022.
Cost
Method Holding
The
Company holds approximately 1.1
million and 0.6
million Firefly Series B-1 and Firefly Series B-2 preferred shares,
respectively, which were acquired in connection with the
transactions with Firefly in May 2019 and August 2020. See Note 3
for additional details. In addition, the Company holds an
additional 0.7
million Firefly Series B-2 preferred shares, which were acquired in
August 2020 pursuant to a stock purchase agreement with Firefly.
The Company and its affiliated entities have designated Kyle
Cerminara, Chairman of the Company’s board of directors and a
principal of the Company’s largest shareholder, to Firefly’s board
of directors.
8.
Property, Plant and
Equipment, Net
Property,
plant and equipment, net consisted of the following as of September
30, 2022 and December 31, 2021 (in thousands):
Schedule of Property, Plant and
Equipment
|
|
|
September
30, 2022 |
|
|
|
December
31, 2021 |
|
Land |
|
$ |
2,340 |
|
|
$ |
51 |
|
Buildings and improvements |
|
|
12,669 |
|
|
|
6,886 |
|
Machinery and other equipment |
|
|
5,837 |
|
|
|
5,992 |
|
Office furniture and fixtures |
|
|
846 |
|
|
|
837 |
|
Construction in
progress |
|
|
11 |
|
|
|
393 |
|
Total properties, cost |
|
|
21,703 |
|
|
|
14,159 |
|
Less:
accumulated depreciation |
|
|
(8,358 |
) |
|
|
(7,933 |
) |
Property, plant
and equipment, net |
|
$ |
13,345 |
|
|
$ |
6,226 |
|
In
January 2022, the Company, through its wholly owned subsidiary,
Digital Ignition, LLC, and Metrolina Alpharetta, LLC (“Metrolina”)
entered into an agreement pursuant to which the Company purchased a
parcel of land with buildings and improvements in Alpharetta,
Georgia. The Company previously leased the building and uses it for
its Digital Ignition technology incubator and co-working facility.
The purchase price consisted of (i) $5.8 million in cash, (ii)
the grant of approximately 0.8 million shares
of the Company’s common stock (the “Stock Grant”), and (iii) the
issuance of a warrant to purchase an additional 0.1 million shares
of the Company’s common stock (the “Stock Warrant”).
The
Stock Grant was made to Metrolina Capital Investors, LLC
(“Metrolina Capital”) and consisted of approximately 0.8 million shares
of the Company’s common stock with a value equal to approximately
$2.3 million.
The number of shares of the Company’s stock was determined based
upon a price per share equal to the average of the closing price of
our on the NYSE American exchange for the 60 most recent trading
days prior to February 1, 2022, rounded up to the nearest whole
number of shares. Additionally, the Company issued the Stock
Warrant to Metrolina Capital, consisting of a ten-year warrant to
purchase up to 0.1 million shares
of the Company’s common stock at an exercise price per share of
$3.00. In connection with the
issuance of Stock Warrant, the Company and Metrolina agreed that
other warrants previously granted by the Company to Metrolina were
cancelled and terminated.
9.
Film and Television
Programming Rights, Net
Schedule of Development Assets
Acquired
|
|
|
September
30, 2022 |
|
|
|
December
31, 2021 |
|
Television series in
development |
|
$ |
1,257 |
|
|
$ |
- |
|
Films in
development |
|
|
192 |
|
|
|
- |
|
Total |
|
$ |
1,449 |
|
|
$ |
- |
|
The
Company has not yet commenced amortization of the projects as they
were still in development at September 30, 2022.
A
rollforward of film and television programming rights, net for the
nine months ended September 30, 2022 is as follows (in
thousands):
Schedule of Film And Television Programming
Rights
Balance at December 31, 2021 |
|
$ |
- |
|
In-process projects
acquired from Landmark |
|
|
1,670 |
|
Warrant to be issued to Landmark |
|
|
364 |
|
Expenditures on in-process
projects |
|
|
407 |
|
Reclass from other assets |
|
|
124 |
|
Reclass of
reimbursable costs associated with Safehaven |
|
|
(1,116 |
) |
Balance at September 30,
2022 |
|
$ |
1,449 |
|
On
March 3, 2022, the Company, Strong Studios and Landmark Studio
Group LLC (“Landmark”) entered into an Assignment and Attachment
Agreement (“AA Agreement”) and a Purchase Agreement, pursuant to
which Strong Studios acquired from Landmark the rights to original
feature films and television series, and has been assigned third
party rights to content for global multiplatform distribution. The
transaction entailed the acquisition of certain projects which are
in varying stages of development, none of which have, as yet,
produced revenue. In connection with such assignment and purchase,
Strong Studios agreed to pay to Landmark approximately $1.7 million in
four separate payments, $0.3
million of which was paid upon the closing of the transaction. The
$1.7 million
acquisition price was allocated to three projects in development,
as follows: $1.0 million to
Safehaven, $0.3 million to
Flagrant and $0.4 million to
Shadows in the Vineyard. The Company also agreed to issue to
Landmark no later than 10 days after the completion of the initial
public offering of Strong Global Entertainment, a warrant to
purchase up to 150,000 common
shares of Strong Global Entertainment, exercisable for three years
beginning six months after the consummation of the initial public
offering, at an exercise price equal to the per-share offering
price of Strong Global Entertainment’s common shares in the initial
public offering (the “Landmark Warrant”). The Landmark Warrant
allows for cashless exercise in certain limited circumstances and
provides for certain registration rights for such warrant shares.
In the event that an initial public offering of Strong Global
Entertainment does not occur within a specified time, Landmark
would have the right to surrender the warrant in exchange for
2.5% ownership in
Strong Studios.
As a
condition precedent to entry into the AA Agreement, Strong Studios
agreed to enter into distribution agreements for Safehaven
and Flagrant (the “AA Distribution Agreements”) with Screen
Media Ventures, LLC (“SMV”). Pursuant to the AA Distribution
Agreements, SMV agreed to purchase the global distribution rights
to Safehaven for $6.5
million and Flagrant for $2.5
million upon delivery of each project.
In
accordance with Accounting Standards Codification (“ASC”) 926
Entertainment - Films, costs of acquiring and producing films and
television programs are capitalized when incurred. In connection
with the transaction, and using the guidance in “Acquisition of
Assets Rather than a Business” subsections contained within ASC 805
Business Combinations, the Company allocated the $1.7 million
acquisition price to the various projects under development based
upon the historical costs incurred by Landmark, which the Company
believes approximates fair value. The Company also recorded a
liability for the $1.4 million of
remaining installment payments it will make to Landmark. Finally,
the Company also determined the fair value of the Landmark Warrant
and allocated an additional $0.4
million to the various projects under development. The Company will
recognize the remaining payment contingencies that may be due to
Landmark, which include distribution fees and profit participations
that will be incurred following the completion and exploitation of
each project, when the contingencies are resolved, and the amounts
become payable.
The
fair value of the Landmark Warrant was estimated on the date of
grant using a Black-Scholes valuation model with the following
assumptions:
Summary of Warrants Granted Valuation Using
Black Scholes Pricing Method
Expected dividend yield at
date of grant |
|
|
0.00 |
% |
Risk-free interest rate |
|
|
1.7 |
% |
Expected stock price volatility |
|
|
72.9 |
% |
Expected life of warrants (in
years) |
|
|
3.0 |
|
During
the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven 2022”)
was established to manage the production and financing of
Safehaven, one of the projects acquired from Landmark.
Strong Studios owns 49% of Safehaven 2022 and the
remaining 51% is owned by Unbounded
Services, LLC (“Unbounded”). No consideration was paid by Strong
Studios in exchange for its 49% equity interest in
Safehaven 2022. Unbounded also did not contribute any assets or
liabilities to Safehaven 2022 and agreed to provide day-to-day
management services in exchange for their 51% ownership. Unbounded will
also serve as a co-producer on the project. Strong Studios assigned
the Landmark distribution agreement to Safehaven 2022, and the
Landmark distribution agreement serves as collateral for the
production financing at Safehaven 2022. Strong Studios and
Unbounded will share profits and losses, if any, from Safehaven
2022 on a pro-rata basis based on their relative ownership
percentages.
Strong
Studios allocated $1.0
million of the $1.7
million acquisition price to Safehaven and incurred an
additional $0.1 million of development costs
during the nine months ended September 30, 2022. Strong Studios
transferred the $1.1
million in intellectual property representing the rights and assets
related to Safehaven and Safehaven 2022 agreed to reimburse
Strong Studios $1.1 million for those costs
following payment of any senior secured debt and prior to any
profit participations or equity distributions. The $1.1 million payable to Strong
Studios represents an obligation of Safehaven 2022 to Strong
Studios and is not contingent on any specific event. Accordingly,
the Company has classified the amount due from Safehaven 2022 as a
receivable within other current assets on its condensed
consolidated balance sheet as of September 30, 2022. Strong Studios
expects Safehaven 2022 to reimburse the acquisition cost allocated
to the project based on its ultimate expected revenues and profits
from the exploitation of the project. Safehaven 2022 will begin to
generate revenue and expenses upon delivery of the completed
Safehaven series to SMV, which is expected to occur in early
2023. The $6.5 million minimum
guarantee is due and payable to Safehaven 2022 in installments of
25% upon delivery and acceptance, 25% three months thereafter, and
the remaining 50% six months thereafter. Upon delivery and
acceptance, Safehaven 2022 expects to recognize $6.5 million
in initial revenue from the distribution rights and will record
cost of sales using the individual-film-forecast method based on
the ratio of the current period’s revenues to management’s
estimated remaining total gross revenues to be earned. Safehaven
2022 is an equity method holding and the Company will reflect its
proportionate share of the net periodic profit and loss of
Safehaven 2022 as equity method income (loss) during each reporting
period.
Safehaven
2022 subsequently entered into an $8.9 million Loan and
Security Agreement with Bank of Hope to provide interim production
financing for the Safehaven production, secured by the Landmark
distribution agreement. Safehaven 2022 is the sole borrower and
guarantor under the loan agreement. As of September 30, 2022,
Safehaven 2022 had borrowed $8.6 million under the
facility for production costs incurred to that date. Safehaven 2022
has also received working capital advances of $0.4 million from
Strong Studios. Strong Studios expects Safehaven 2022 to reimburse
the working capital advances when tax credits are received in the
second half of 2023.
Strong
Studios reviewed its ownership in Safehaven 2022 and concluded that
it has significant influence, but not a controlling interest, in
Safehaven 2022 based on its ownership being less than 50% along
with having one of three representatives on the board of managers
of Safehaven 2022. Strong Studios also reviewed whether it
otherwise had the power to make decisions that significantly impact
the economic performance of Safehaven 2022 and concluded that it
did not control the entity and is not the primary beneficiary.
Accordingly, the Company will apply the equity method of accounting
to its equity holding in Safehaven 2022 and will record its
proportionate share of the net income/loss resulting from the
equity holding as a single line item captioned “equity method
holding income (loss)” on its statement of operations.
Safehaven
2022 did not record any income or expense during the nine months
ended September 30, 2022, because all costs incurred by Safehaven
2022 related to the in-process production through September 30,
2022, have been capitalized. Upon delivery and acceptance of the
project, Safehaven 2022 expects to recognize revenue from the
distribution rights and will record cost of sales using the
individual-film-forecast method based on the ratio of the current
period’s revenues to management’s estimated remaining total gross
revenues to be earned. A summary of the balance sheet of Safehaven
2022 as of September 30, 2022, is as follows (in
thousands):
Schedule of Balance Sheets
|
|
|
|
|
Cash |
|
$ |
194 |
|
Television programming rights |
|
|
10,439 |
|
Other
assets |
|
|
337 |
|
Total
assets |
|
$ |
10,970 |
|
|
|
|
|
|
Accounts payable and accrued
expenses |
|
$ |
946 |
|
Due to Strong Studios |
|
|
1,375 |
|
Debt |
|
|
8,649 |
|
Equity |
|
|
- |
|
Total
liabilities and equity |
|
$ |
10,970 |
|
10.
Goodwill
The
following represents a summary of changes in the Company’s carrying
amount of goodwill for the nine months ended September 30, 2022 (in
thousands):
Summary of Changes in Carrying Amount of
Goodwill
Balance as of December 31, 2021 |
|
$ |
942 |
|
Foreign
currency translation adjustment |
|
|
(71 |
) |
Balance as of September 30,
2022 |
|
$ |
871 |
|
11.
Debt
The
Company’s short-term debt and long-term debt consisted of the
following as of September 30, 2022 and December 31, 2021 (in
thousands):
Schedule of Short term and Long term
Debt
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
Short-term debt: |
|
|
|
|
|
|
|
|
Strong/MDI
20-year installment loan |
|
$ |
2,316 |
|
|
$ |
2,682 |
|
Strong/MDI
5-year equipment loan |
|
|
237 |
|
|
|
316 |
|
Insurance note payable |
|
|
133 |
|
|
|
- |
|
Total
short-term debt |
|
$ |
2,686 |
|
|
$ |
2,998 |
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
Tenant improvement
loan |
|
$ |
170 |
|
|
$ |
128 |
|
Digital Ignition building loan |
|
|
5,149 |
|
|
|
- |
|
Total long-term
debt |
|
$ |
5,319 |
|
|
$ |
128 |
|
Less: current
portion |
|
|
(213 |
) |
|
|
(23 |
) |
Less:
deferred debt issuance costs, net |
|
|
(50 |
) |
|
|
- |
|
Long-term debt, net of current portion and deferred debt issuance
costs, net |
|
$ |
5,056 |
|
|
$ |
105 |
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
Deferred debt issuance
costs |
|
$ |
56 |
|
|
$ |
- |
|
Less:
accumulated amortization |
|
$ |
(6 |
) |
|
|
- |
|
Deferred debt issuance costs, net |
|
$ |
50 |
|
|
$ |
- |
|
Estimated
future amortization expense of deferred debt issuance costs is as
follows (in thousands):
Schedule of Amortization Expense of Deferred
Issuance Costs
|
|
|
|
|
Remainder of 2022 |
|
$ |
4 |
|
2023 |
|
|
11 |
|
2024 |
|
|
11 |
|
2025 |
|
|
11 |
|
2026 |
|
|
11 |
|
Thereafter |
|
|
2 |
|
Total |
|
$ |
50 |
|
Strong/MDI
Installment Loans and Revolving Credit Facility
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI,
entered into a demand credit agreement, as amended and restated May
15, 2018, with a bank consisting of a revolving line of credit for
up to CAD$3.5
million, subject to a borrowing base requirement, a 20-year installment loan for
up to CAD$6.0
million and a 5-year installment loan for up
to CAD$0.5
million. On June 7, 2021, Strong/MDI entered into a demand credit
agreement (the “2021 Credit Agreement”), which amended and restated
the demand credit agreement dated as of September 5, 2017. The 2021
credit agreement consists of a revolving line of credit for up to
CAD$2.0
million subject to a borrowing base requirement, a 20-year installment loan for
up to CAD$5.1
million and a 5-year installment loan for up
to CAD$0.5
million. Amounts outstanding under the line of credit are payable
on demand and bear interest at the prime rate established by the
lender. Amounts outstanding under the installment loans bear
interest at the lender’s prime rate plus 0.5%
and are payable in monthly installments, including interest, over
their respective borrowing periods. The lender may also demand
repayment of the installment loans at any time. The Strong/MDI
credit facilities are secured by a lien on Strong/MDI’s Quebec,
Canada facility and substantially all of Strong/MDI’s assets.
The 2021 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 holdings) not
exceeding 2.5 to 1, a current ratio (excluding amounts due from
related parties) of at least 1.3 to 1 and minimum “effective
equity” of CAD$4.0 million. As of
September 30, 2022, there was CAD$3.2 million, or approximately
$2.3 million, of principal
outstanding on the 20-year installment loan,
which bears variable interest at 5.20%.
As of September 30, 2022, there was CAD$0.3 million, or approximately
$0.2 million, of principal
outstanding on the 5-year installment loan, which
also bears variable interest at 5.20%.
Strong/MDI was in compliance with its debt covenants as of
September 30, 2022.
Tenant
Improvement Loan
During
the fourth quarter of 2021, the Company entered into a lease for a
combined office and warehouse in Omaha, Nebraska. The Company
incurred total costs of approximately $0.4 million to complete the build-out of
the new combined office and warehouse facility. The landlord has
agreed to fund approximately 50% of the build-out costs,
and the Company is required to repay the portion funded by the
landlord in equal monthly installments through the end of the
initial lease term in February 2027. Through the end of 2021, the
Company incurred approximately $0.2 million of total costs to build out
the facility, of which approximately $0.1 million was funded by the
landlord. The Company completed the build-out during the first
quarter of 2022 and incurred an additional $0.2 million of total costs to complete
the build-out, of which approximately $0.1 million was funded by the
landlord.
Digital
Ignition Building Loam
As
discussed in Note 8, in January 2022 the Company purchased a parcel
of land with buildings and improvements in Alpharetta, Georgia. In
connection with the purchase of the land and building, the Company
entered into a Commercial Loan Agreement (the “Loan Agreement”)
with Community First Bank (the “Lender”), dated February 1, 2022.
Pursuant to the Loan Agreement, the Lender agreed to lend the
Company approximately $5.3 million (the “Loan Amount”), and
the Borrower agreed to repay the Loan Amount pursuant to the terms
of a promissory note (the “Note”).
The
term of the Loan Agreement runs from February 1, 2022, until the
Loan Amount is repaid in full by the Company or the Loan Agreement
is terminated pursuant to its terms or by agreement between the
Company and the Lender. The terms of the Note include
(i) a fixed interest rate of 4%, (ii) maturity date of
February 1, 2027, (iii) monthly payments of approximately
$32 thousand beginning on
March 1, 2022, and continuing on the first of each month until the
maturity date or until the Note has been paid in full, (iv) a
default interest of 8% in the event of a default pursuant to the
terms of the Note, and (v) prepayment penalties of (a) 3% of all
excess payments during the first two years of the term of the Note,
(b) 2% of all excess payments during the third and fourth years of
the term of the Note, and (c) 1% of all excess payments made during
the fifth year of the term of the Note.
The
Note includes standard events of default and references defaults
under the Loan Agreement and the Deed to Secure Debt as events of
default under the Note. The Company has a right to cure any curable
events of default.
Contractual
Principal Payments
Contractual
required principal payments on the Company’s long-term debt at
September 30, 2022 are as follows (in thousands):
Schedule of Contractual Principal Payments of
Long-term Debt
|
|
Tenant Improvement Loan |
|
|
Digital Ignitiion Building Loan |
|
|
Total |
|
Remainder of 2022 |
|
$ |
8 |
|
|
$ |
44 |
|
|
$ |
52 |
|
2023 |
|
|
36 |
|
|
|
180 |
|
|
|
216 |
|
2024 |
|
|
38 |
|
|
|
187 |
|
|
|
225 |
|
2025 |
|
|
39 |
|
|
|
195 |
|
|
|
234 |
|
2026 |
|
|
42 |
|
|
|
203 |
|
|
|
245 |
|
Thereafter |
|
|
7 |
|
|
|
4,340 |
|
|
|
4,347 |
|
Total |
|
$ |
170 |
|
|
$ |
5,149 |
|
|
$ |
5,319 |
|
12.
Leases
The
Company and its subsidiaries lease plant and office facilities and
equipment under operating and finance leases expiring through
2027. The Company determines if a contract is or contains a
lease at inception or modification of a contract. A contract is or
contains a lease if the contract conveys the right to control the
use of an identified asset for a period in exchange for
consideration. Control over the use of the identified asset means
the lessee has both (a) the right to obtain substantially all of
the economic benefits from the use of the asset and (b) the right
to direct the use of the asset.
Right-of-use
assets and liabilities are recognized based on the present value of
future minimum lease payments over the expected lease term at
commencement date. Certain of the leases contain extension options;
however, the Company has not included such options as part of its
right-of-use assets and lease liabilities because it does not
expect to extend the leases. The Company measures and records a
right-of-use asset and lease liability based on the discount rate
implicit in the lease, if known. In cases where the discount rate
implicit in the lease is not known, the Company measures the
right-of-use assets and lease liabilities using a discount rate
equal to the Company’s estimated incremental borrowing rate for
loans with similar collateral and duration.
The
Company elected to not apply the recognition requirements of
Accounting Standards Codification Topic 842, “Leases,” to leases of
all classes of underlying assets that, at the commencement date,
have a lease term of 12 months or less and do not include an option
to purchase the underlying asset that the lessee is reasonably
certain to exercise. Instead, lease payments for such short-term
leases are recognized in operations on a straight-line basis over
the lease term and variable lease payments in the period in which
the obligation for those payments is incurred.
The
Company elected, as a lessee, for all classes of underlying assets,
to not separate nonlease components from lease components and
instead to account for each separate lease component and the
nonlease components associated with that lease component as a
single lease component.
The
following tables present the Company’s lease costs and other lease
information (dollars in thousands):
Schedule of Lease Costs and Other Lease
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease cost |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
6 |
|
|
$ |
3 |
|
Interest on lease
liabilities |
|
|
1 |
|
|
|
- |
|
|
|
2 |
|
|
|
292 |
|
Operating lease cost |
|
|
36 |
|
|
|
218 |
|
|
|
160 |
|
|
|
666 |
|
Short-term lease cost |
|
|
13 |
|
|
|
13 |
|
|
|
41 |
|
|
|
42 |
|
Sublease
income |
|
|
- |
|
|
|
(93 |
) |
|
|
(32 |
) |
|
|
(246 |
) |
Net
lease cost |
|
$ |
53 |
|
|
$ |
139 |
|
|
$ |
177 |
|
|
$ |
757 |
|
Other information |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
Cash paid for amounts included in the
measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from finance leases |
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
292 |
|
Operating cash
flows from operating leases |
|
$ |
29 |
|
|
$ |
203 |
|
|
$ |
170 |
|
|
$ |
617 |
|
Financing cash
flows from finance leases |
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
2,106 |
|
Right-of-use assets obtained in
exchange for new finance lease liabilities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
68 |
|
|
$ |
- |
|
Right-of-use assets obtained in
exchange for new operating lease liabilities |
|
$ |
97 |
|
|
$ |
- |
|
|
$ |
97 |
|
|
$ |
- |
|
|
|
As of September 30, 2022 |
|
Weighted-average remaining
lease term - finance leases (years) |
|
|
4.5 |
|
Weighted-average remaining lease term
- operating leases (years) |
|
|
4.9 |
|
Weighted-average discount rate -
finance leases |
|
|
6.4 |
% |
Weighted-average discount rate -
operating leases |
|
|
6.0 |
% |
The
following table presents a maturity analysis of the Company’s
operating and finance lease liabilities as of September 30, 2022
(in thousands):
Schedule of Future Minimum Lease
Payments
|
|
Operating Leases |
|
|
Finance Leases |
|
Remainder of 2022 |
|
$ |
32 |
|
|
$ |
4 |
|
2023 |
|
|
131 |
|
|
|
16 |
|
2024 |
|
|
101 |
|
|
|
16 |
|
2025 |
|
|
79 |
|
|
|
16 |
|
2026 |
|
|
81 |
|
|
|
16 |
|
Thereafter |
|
|
14 |
|
|
|
5 |
|
Total lease payments |
|
|
438 |
|
|
|
73 |
|
Less: Amount
representing interest |
|
|
(37 |
) |
|
|
(10 |
) |
Present value of lease payments |
|
|
401 |
|
|
|
63 |
|
Less: Current
maturities |
|
|
(114 |
) |
|
|
(12 |
) |
Lease
obligations, net of current portion |
|
$ |
287 |
|
|
$ |
51 |
|
13.
Income and Other
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, 2022 and
December 31, 2021.
During
the first quarter of 2021, the Company sold its Convergent business
segment. As a result, this business segment is categorized as
discontinued operations for the periods presented. The Company has
sufficient net operating losses to offset Federal taxable income
from these discontinued operations as well as the tax effects
related to the gain on sale of discontinued operations. State
income tax expense related to the operations and sale of this
entity has been allocated to discontinued operations.
The
Tax Cuts and Jobs Act 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, 2022 and comparative September 30, 2021,
as well as December 31, 2021.
Changes
in tax laws may affect recorded deferred tax assets and liabilities
and the Company’s effective tax rate in the future. In March 2020,
the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) was enacted. The CARES Act made significant changes to
Federal tax laws, including certain changes that are retroactive to
the 2019 tax year. The effects of these changes relate to deferred
tax assets and net operating losses; all of which are offset by
valuation allowance. There were no material income tax consequences
of this enacted legislation on the reporting period of these
condensed consolidated financial statements.
The
Company is subject to possible examinations not yet initiated for
Federal purposes for fiscal years 2018 through 2020. In most cases,
the Company is subject to possible examinations by state or local
jurisdictions based on the particular jurisdiction’s statute of
limitations.
The
Consolidated Appropriations Act extended and expanded the
availability of the CARES Act employee retention credit through
June 30, 2021. Subsequently, the American Rescue Plan Act of 2021
(“ARP Act”), enacted on March 11, 2021, extended and expanded the
availability of the employee retention credit through December 31,
2021, however, certain provisions apply only after December 31,
2020. This new legislation expanded the group of qualifying
business to include businesses with fewer than 500 employees and
those who previously qualified for the Paycheck Protection Program
(the “PPP Loan”). The employee retention credit is calculated to be
equal to 70% of
qualified wages paid to employees after December 31, 2020, and
before January 1, 2022. During calendar year 2021, a maximum of
$10,000 in qualified wages for
each employee per qualifying calendar quarter may be counted in
determining the 70% credit.
Therefore, the maximum tax credit that can be claimed by an
eligible employer is $7,000
per employee per qualifying calendar quarter of 2021. The Company
has determined that the qualifications for the credit were met in
the first and second quarters of 2021. In July 2021, the Company
applied for a refund of $1.5 million of payroll taxes
previously paid and recognized a corresponding reduction in
compensation expenses during the three months ending June 30, 2021.
Of the $1.5
million, $0.8
million was recorded within cost of services, $0.1
million was recorded withing selling expenses, $0.4
million was recorded withing general and administrative expenses
and $0.2
million was recorded within discontinued operations on the
condensed consolidated statement of operations. In September 2021,
the Company applied for a refund of $0.6 million of payroll taxes
previously paid and recognized a corresponding reduction in
compensation expenses during the three months ended September 30,
2021. Of the $0.6
million, $0.4
million was recorded within cost of services and $0.2
million was recorded within general and administrative
expenses.
14.
Stock
Compensation
The
Company recognizes compensation expense for all stock-based payment
awards based on estimated grant date fair values. Stock-based
compensation expense included in selling and administrative
expenses approximated $0.1 million and
$0.2 million for the
three months ended September 30, 2022 and September 30, 2021,
respectively, and $0.5 million and
$0.7 million for the
nine months ended September 30, 2022 and September 30, 2021,
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, 2022, approximately
2.3 million shares were available for issuance under the
amended and restated 2017 Plan.
Stock Options
The
following table summarizes stock option activity for the nine
months ended September 30, 2022:
Summary of Stock Option
Activities
|
|
Number of Options |
|
|
Weighted Average Exercise Price Per Share |
|
|
Weighted Average Remaining Contractual Term (Years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
Outstanding at December 31, 2021 |
|
|
659,500 |
|
|
$ |
3.68 |
|
|
|
6.6 |
|
|
$ |
187 |
|
Granted |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(12,000 |
) |
|
|
1.60 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(8,000 |
) |
|
|
3.54 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2022 |
|
|
639,500 |
|
|
$ |
3.72 |
|
|
|
5.8 |
|
|
$ |
52 |
|
Exercisable at September 30,
2022 |
|
|
434,000 |
|
|
$ |
4.25 |
|
|
|
5.3 |
|
|
$ |
10 |
|
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, 2022,
205,500 stock option awards were non-vested. Unrecognized
compensation cost related to non-vested stock options was
approximately $0.2
million, which is expected to be recognized over a weighted average
period of
1.9 years.
Restricted Stock Units
The
Company estimates the fair value of restricted stock awards based
upon the market price of the underlying common stock on the date of
grant. On July 1, 2022, the Company granted a total of 120,829 restricted stock
units to the members of its Board of Directors. The restricted
stock units will vest on the first anniversary of the grant date,
subject to continuous service to the Company.
The
following table summarizes restricted stock unit activity for the
nine months ended September 30, 2022:
Summary of Restricted Stock
Activity
|
|
Number of Restricted Stock Units |
|
|
Weighted Average Grant Date Fair Value |
|
Non-vested at December 31, 2021 |
|
|
314,079 |
|
|
$ |
2.45 |
|
Granted |
|
|
120,829 |
|
|
|
2.40 |
|
Shares vested |
|
|
(189,641 |
) |
|
|
3.02 |
|
Shares
forfeited |
|
|
- |
|
|
|
|
|
Non-vested at September 30,
2022 |
|
|
245,267 |
|
|
$ |
1.99 |
|
As of
September 30, 2022, the total unrecognized compensation cost
related to non-vested restricted stock unit awards was
approximately $0.2
million, which is expected to be recognized over a weighted average
period of
1.1 years.
15.
Commitments,
Contingencies and Concentrations
Litigation
The
Company is involved, from time to time, in certain legal disputes
in the ordinary course of business. No such disputes, individually
or in the aggregate, are expected to have a material effect on the
Company’s business or financial condition.
The
Company and certain of its subsidiaries are named as defendants in
personal injury lawsuits based on alleged exposure to
asbestos-containing materials. A majority of the cases involve
product liability claims based principally on allegations of past
distribution of commercial lighting products containing wiring that
may have contained asbestos. Each case names dozens of corporate
defendants in addition to the Company. In the Company’s experience,
a large percentage of these types of claims have never been
substantiated and have been dismissed by the courts. The Company
has not suffered any adverse verdict in a trial court proceeding
related to asbestos claims and intends to continue to defend these
lawsuits. During 2021, the Company recorded a loss contingency
reserve of approximately $0.3 million, which
represents the Company’s estimate of its potential losses related
to the resolution of open cases. There have been no changes to this
loss contingency reserve during 2022. When appropriate, the Company
may settle certain claims. The Company does not expect the
resolution of these cases to have a material adverse effect on the
Company’s consolidated financial condition, results of operations
or cash flows.
Concentrations
The
Company’s top ten customers accounted for approximately 66% and 52% of consolidated
net revenues during the three and nine months ended September 30,
2022. Trade accounts receivable from these customers represented
approximately 45% of net
consolidated receivables at September 30, 2022. None of the
Company’s customers accounted for more than 10% of both its
consolidated net revenues during the nine months ended September
30, 2022 and its net consolidated receivables as of September 30,
2022. While the Company believes its relationships with such
customers are stable, most arrangements are made by purchase order
and are terminable at will by either party. A significant decrease
or interruption in business from the Company’s significant
customers could have a material adverse effect on the Company’s
business, financial condition and results of operations. The
Company could also be adversely affected by such factors as changes
in foreign currency rates and weak economic and political
conditions in each of the countries in which the Company sells its
products.
Some
operators in the cinema industry carry high levels of balance sheet
leverage arising from pre-COVID acquisitions. Cineworld Group Plc,
the parent company of Regal Cinemas and one of the largest cinema
operators, filed for Chapter 11 bankruptcy on September 7, 2022 to
restructure their balance sheet and alleviate their debt burden. As
of September 30, 2022, the Company had $0.2 million in accounts
receivable related to products and services sold to Regal Cinemas.
The bankruptcy filing is expected to negatively impact the
collectability of our accounts receivable and could also negatively
impact our revenue in future periods.
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.
16.
Business Segment
Information
The
Company conducts its operations primarily through its Strong
Entertainment business segment which manufactures and distributes
premium large format projection screens and provides technical
support services and other related products and services to the
cinema exhibition industry, theme parks, schools, museums and other
entertainment-related markets. Strong Entertainment also
distributes and supports third party products, including digital
projectors, servers, library management systems, menu boards and
sound systems. Strong Studios, which is part of the Strong
Entertainment operating segment, develops and produces original
feature films and television series. The Company’s operating
segments were determined based on the manner in which management
organizes segments for making operating decisions and assessing
performance.
Summary
by Business Segments
Schedule of Segment Reporting Information by
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong
Entertainment |
|
$ |
9,904 |
|
|
$ |
5,822 |
|
|
$ |
28,446 |
|
|
$ |
16,121 |
|
Other |
|
|
370 |
|
|
|
294 |
|
|
|
996 |
|
|
|
860 |
|
Total net
revenues |
|
|
10,274 |
|
|
|
6,116 |
|
|
|
29,442 |
|
|
|
16,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong
Entertainment |
|
|
2,371 |
|
|
|
2,154 |
|
|
|
6,674 |
|
|
|
5,428 |
|
Other |
|
|
369 |
|
|
|
294 |
|
|
|
996 |
|
|
|
644 |
|
Total gross
profit |
|
|
2,740 |
|
|
|
2,448 |
|
|
|
7,670 |
|
|
|
6,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong
Entertainment |
|
|
732 |
|
|
|
1,028 |
|
|
|
1,522 |
|
|
|
2,150 |
|
Other |
|
|
(34 |
) |
|
|
(142 |
) |
|
|
(204 |
) |
|
|
(577 |
) |
Total segment
operating income |
|
|
698 |
|
|
|
886 |
|
|
|
1,318 |
|
|
|
1,573 |
|
Unallocated
administrative expenses |
|
|
(990 |
) |
|
|
(1,004 |
) |
|
|
(3,258 |
) |
|
|
(3,434 |
) |
Loss from operations |
|
|
(292 |
) |
|
|
(118 |
) |
|
|
(1,940 |
) |
|
|
(1,861 |
) |
Other (expense)
income, net |
|
|
(864 |
) |
|
|
10,223 |
|
|
|
(3,788 |
) |
|
|
9,937 |
|
(Loss) income
from continuing operations before income taxes and equity method
holding loss |
|
$ |
(1,156 |
) |
|
$ |
10,105 |
|
|
$ |
(5,728 |
) |
|
$ |
8,076 |
|
Schedule of Reconciliation of Assets from Segment
to Consolidated
|
|
|
|
|
|
|
|
|
(In
thousands) |
|
September 30, 2022 |
|
|
December 31, 2021 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
Strong
Entertainment |
|
$ |
33,344 |
|
|
$ |
38,518 |
|
Corporate assets |
|
|
36,020 |
|
|
|
37,291 |
|
Total |
|
$ |
69,364 |
|
|
$ |
75,809 |
|
Summary
by Geographical Area
Schedule of Segment Reporting Information by
Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(In
thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States |
|
$ |
8,780 |
|
|
$ |
4,735 |
|
|
$ |
25,403 |
|
|
$ |
13,831 |
|
Canada |
|
|
391 |
|
|
|
524 |
|
|
|
1,264 |
|
|
|
1,101 |
|
China |
|
|
48 |
|
|
|
197 |
|
|
|
327 |
|
|
|
355 |
|
Mexico |
|
|
12 |
|
|
|
1 |
|
|
|
19 |
|
|
|
15 |
|
Latin America |
|
|
97 |
|
|
|
45 |
|
|
|
317 |
|
|
|
146 |
|
Europe |
|
|
525 |
|
|
|
244 |
|
|
|
790 |
|
|
|
442 |
|
Asia (excluding
China) |
|
|
142 |
|
|
|
290 |
|
|
|
573 |
|
|
|
636 |
|
Other |
|
|
279 |
|
|
|
80 |
|
|
|
749 |
|
|
|
455 |
|
Total |
|
$ |
10,274 |
|
|
$ |
6,116 |
|
|
$ |
29,442 |
|
|
$ |
16,981 |
|
Schedule of Identifiable Assets by
Geographical Area
|
|
|
|
|
|
|
|
|
(In
thousands) |
|
September 30, 2022 |
|
|
December 31, 2021 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
United
States |
|
$ |
48,632 |
|
|
$ |
46,585 |
|
Canada |
|
|
20,732 |
|
|
|
29,224 |
|
Total |
|
$ |
69,364 |
|
|
$ |
75,809 |
|
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.
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, 2021, and the following risks and
uncertainties: the negative impact that the COVID-19 pandemic has
already had, and may continue to have, on the Company’s business
and financial condition; the general economic impact of the current
geopolitical environment, including the ongoing military conflict
in Ukraine and the impact of related sanctions being imposed by the
U.S. Government and the governments of other countries; the
Company’s ability to maintain and expand its revenue streams to
compensate for the lower demand for the Company’s digital cinema
products and installation services; potential interruptions of
supplier relationships or higher prices charged by suppliers; the
Company’s ability to successfully compete and introduce
enhancements and new features that achieve market acceptance and
that keep pace with technological developments; the Company’s
ability to successfully execute its capital allocation strategy or
achieve the returns it expects from these holdings; the Company’s
ability to maintain its brand and reputation and retain or replace
its significant customers; challenges associated with the Company’s
long sales cycles; the impact of a challenging global economic
environment or a downturn in the markets (such as the current
economic disruption and market volatility generated by the ongoing
COVID-19 pandemic and geopolitical environment); 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 and the
current geopolitical tension and related sanctions on the companies
in which the Company holds equity stakes; 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 or the ongoing military conflict in
Ukraine); the adequacy of insurance; the impact of having a
controlling stockholder and vulnerability to fluctuation in the
Company’s stock price. 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 further be, exacerbated by the
COVID-19 pandemic, its impact on the cinema and entertainment
industry, and general economic conditions, including the ongoing
military conflict in Ukraine and related sanctions, such as
inflationary pressures and disruptions in the global supply chain
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
Continuing Operations
Ballantyne
Strong, Inc. (“Ballantyne Strong,” “the Company,” “we,” “our,” and
“us”) is a holding company with business operations in the
entertainment industry and holdings in public and privately held
companies. Our Strong Entertainment segment includes one of the
largest manufacturers of premium projection screens and customized
screen support systems, and we also distribute other products and
provide technical support services to the cinema, amusement park
and other markets.
We
recently launched Strong Studios with the goal of expanding Strong
Entertainment to include content creation and production of feature
films and series. The launch of Strong Studios is intended to
further diversify our revenue streams and increase our addressable
markets, while leveraging and expanding our existing relationships
in the industry.
In
connection with the sale of our Strong Outdoor operating business
to Firefly in August 2020, we entered into a Master Services
Agreement and agreed to provide certain support services to
Firefly. In addition, we use our facility in Alpharetta, Georgia
for our Digital Ignition technology incubator and co-working
facility. Results of those operations are included within “Other”
in our results of operations.
We
also continue to evaluate capital allocation opportunities to
invest in other public or private companies or acquire other
businesses, which may be within or outside of the Company’s
existing markets. During 2021, we completed the divestiture of our
Convergent digital signage business. In addition, during 2021 we
allocated additional capital to increase our position in
GreenFirst, and in both 2021 and 2022 we allocated additional
capital to increase our position in FGF. In February 2022, we also
completed the acquisition of the land and building housing our
Digital Ignition incubator and co-working business.
Discontinued
Operations
Convergent
Transaction in February 2021
As
part of a transaction that closed on February 1, 2021, we divested
our Convergent business segment. The purchase price was (i) $15.0
million in cash and (ii) $2.5 million in the form of a subordinated
promissory note. Additionally, a portion of the Purchase Price was
placed in escrow and a portion of the purchase price was subject to
a working capital adjustment. As further consideration, the buyer
also assumed approximately $5.7 million of debt, bringing the total
enterprise value for Convergent sale to approximately $23.2
million. We recorded a gain of approximately $14.8 million during
2021 related to the sale of Convergent.
Firefly
Transaction in August 2020
On
August 3, 2020, we sold certain assets of the Strong Outdoor
operating business to Firefly, and we continue to make available
300 digital taxi tops to Firefly. Strong Digital Media, LLC
(“SDM”), an indirect subsidiary of Ballantyne Strong, 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 these divestitures, we have presented Convergent’s and
Strong Outdoor’s operating results as discontinued operations for
all periods presented. Note 3 contains additional information
regarding these transactions.
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 and
variants thereof have 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. 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 in certain geographic regions. 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.
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. Although most
movie theaters and chains have re-opened, 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 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 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 by a third party was also
delayed by the COVID-19 pandemic. 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 equity stakes; 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.
The
future and ultimate impact of the COVID-19 pandemic on our business
and results of operations beyond the third quarter of fiscal year
2022 is 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 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.
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 the possibility of a global
recession.
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.
The Consolidated Appropriations Act extended and expanded the
availability of the CARES Act employee retention credit through
June 30, 2021. Subsequently, the American Rescue Plan Act of 2021
(“ARP Act”), enacted on March 11, 2021, extended and expanded the
availability of the employee retention credit through December 31,
2021, however, certain provisions apply only after December 31,
2020. This new legislation expanded the group of qualifying
business to include businesses with fewer than 500 employees and
those who previously qualified for the Paycheck Protection Program
(the “PPP Loan”). The employee retention credit is calculated to be
equal to 70% of qualified wages paid to employees after December
31, 2020, and before January 1, 2022. During calendar year 2021, a
maximum of $10,000 in qualified wages for each employee per
qualifying calendar quarter may be counted in determining the 70%
credit. Therefore, the maximum tax credit that can be claimed by an
eligible employer is $7,000 per employee per qualifying calendar
quarter of 2021. We have determined that the qualifications for the
credit were met in the first and second quarters of 2021. In July
2021, we applied for a refund of $1.5 million of payroll taxes
previously paid and recognized a corresponding reduction in
compensation expenses during the three months ending June 30, 2021.
In September 2021, we applied for a refund of $0.6 million of
payroll taxes previously paid and recognized a corresponding
reduction in compensation expenses during the three months ended
September 30, 2021. Of the $0.6 million, $0.4 million was recorded
within cost of services and $0.2 million was recorded within
general and administrative expenses.
Results
of Operations
The
following table sets forth our operating results for the periods
indicated:
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Net revenues |
|
$ |
10,274 |
|
|
$ |
6,116 |
|
|
$ |
4,158 |
|
|
|
68.0 |
% |
Cost of revenues |
|
|
7,534 |
|
|
|
3,668 |
|
|
|
3,866 |
|
|
|
105.4 |
% |
Gross profit |
|
|
2,740 |
|
|
|
2,448 |
|
|
|
292 |
|
|
|
11.9 |
% |
Gross profit
percentage |
|
|
26.7 |
% |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
Selling and
administrative expenses |
|
|
3,032 |
|
|
|
2,566 |
|
|
|
466 |
|
|
|
18.2 |
% |
Loss from
operations |
|
|
(292 |
) |
|
|
(118 |
) |
|
|
(174 |
) |
|
|
147.5 |
% |
Other
(expense) income |
|
|
(864 |
) |
|
|
10,223 |
|
|
|
(11,087 |
) |
|
|
(108.5 |
)% |
(Loss)
income before income taxes and equity method holding
loss |
|
|
(1,156 |
) |
|
|
10,105 |
|
|
|
(11,261 |
) |
|
|
(111.4 |
)% |
Income tax expense |
|
|
(245 |
) |
|
|
(2,696 |
) |
|
|
2,451 |
|
|
|
(90.9 |
)% |
Equity method
holding loss |
|
|
(798 |
) |
|
|
(323 |
) |
|
|
(475 |
) |
|
|
147.1 |
% |
Net
(loss) income from continuing operations |
|
$ |
(2,199 |
) |
|
$ |
7,086 |
|
|
$ |
(9,285 |
) |
|
|
(131.0 |
)% |
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Net revenues |
|
$ |
29,442 |
|
|
$ |
16,981 |
|
|
$ |
12,461 |
|
|
|
73.4 |
% |
Cost of revenues |
|
|
21,772 |
|
|
|
10,909 |
|
|
|
10,863 |
|
|
|
99.6 |
% |
Gross profit |
|
|
7,670 |
|
|
|
6,072 |
|
|
|
1,598 |
|
|
|
26.3 |
% |
Gross profit
percentage |
|
|
26.1 |
% |
|
|
35.8 |
% |
|
|
|
|
|
|
|
|
Selling and
administrative expenses |
|
|
9,610 |
|
|
|
7,933 |
|
|
|
1,677 |
|
|
|
21.1 |
% |
Loss from
operations |
|
|
(1,940 |
) |
|
|
(1,861 |
) |
|
|
(79 |
) |
|
|
4.2 |
% |
Other (expense)
income |
|
|
(3,788 |
) |
|
|
9,937 |
|
|
|
(13,725 |
) |
|
|
(138.1 |
)% |
(Loss)
income before income taxes and equity method holding
loss |
|
|
(5,728 |
) |
|
|
8,076 |
|
|
|
(13,804 |
) |
|
|
(170.9 |
)% |
Income tax expense |
|
|
(292 |
) |
|
|
(2,788 |
) |
|
|
2,496 |
|
|
|
(89.5 |
)% |
Equity method
holding loss |
|
|
(2,578 |
) |
|
|
(1,468 |
) |
|
|
(1,110 |
) |
|
|
75.6 |
% |
Net
(loss) income from continuing operations |
|
$ |
(8,598 |
) |
|
$ |
3,820 |
|
|
$ |
(12,418 |
) |
|
|
(325.1 |
)% |
Three
Months Ended September 30, 2022 Compared to the Three Months Ended
September 30, 2021
Revenues
Net
revenues during the quarter ended September 30, 2022 increased
68.0% to $10.3 million from $6.1 million during the quarter ended
September 30, 2021. The increase in consolidated net revenue was
primarily due to the continuing recovery of the Strong
Entertainment business from the impact of COVID-19 as demand
increased for services and screens.
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Strong Entertainment |
|
$ |
9,904 |
|
|
$ |
5,822 |
|
|
$ |
4,082 |
|
|
|
70.1 |
% |
Other |
|
|
370 |
|
|
|
294 |
|
|
|
76 |
|
|
|
25.9 |
% |
Total
net revenues |
|
$ |
10,274 |
|
|
$ |
6,116 |
|
|
$ |
4,158 |
|
|
|
68.0 |
% |
Strong Entertainment
Revenue
from Strong Entertainment increased 70.1% to $9.9 million in the
third quarter of 2022 from $5.8 million in the third quarter of
2021. The increase from the prior year was due to a $3.6 million
increase in product revenue and a $0.5 million increase in service
revenue.
Demand
and revenue from products and services benefited from the
continuing recovery in the cinema industry. As the industry
recovery has progressed, exhibitors are beginning to re-examine
capital improvements, including upgrading their auditoriums from
xenon projection to laser projection, with helps drive demand for
our products and services. We have also increased the scope of our
services to better support our customers and to increase market
share in cinema services. We expect the upgrades from xenon to
laser to accelerate in 2023 and continue for at least the next
several years.
We
expect the pace of recovery of our revenue will continue to be
dependent upon the overall measures in place to control COVID-19,
and any variants thereof, and the pace at which studios release new
feature films to the market.
Gross
Profit
Consolidated
gross profit increased $0.3 million to $2.7 million during the
quarter ended September 30, 2022 from $2.4 million during the
quarter ended September 30, 2021. As a percentage of revenue, gross
profit was 26.7% and 40.0% for the quarters ended September 30,
2022 and September 30, 2021, respectively.
Excluding
the impact of employee retention credits, which favorably impacted
the prior year period, gross profit during the quarter ended
September 30, 2021 would have been 33.1% as compared to 26.7% in
the current period.
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Strong Entertainment |
|
$ |
2,371 |
|
|
$ |
2,154 |
|
|
$ |
217 |
|
|
|
10.1 |
% |
Other |
|
|
369 |
|
|
|
294 |
|
|
|
75 |
|
|
|
25.5 |
% |
Total
gross profit |
|
$ |
2,740 |
|
|
$ |
2,448 |
|
|
$ |
292 |
|
|
|
11.9 |
% |
Strong Entertainment
Gross
profit in the Strong Entertainment segment was $2.4 million or
23.9% of revenues in the third quarter of 2022. Gross profit in the
Strong Entertainment segment was $2.2 million or 37.0% of revenues
in the third quarter of 2021, which included a positive impact of
$0.4 million from employee retention credits. Excluding the impact
of the employee retention credits, gross profit would have been
29.7% of revenue as compared to 23.9% in the current
period.
Gross
profit from product sales was $2.1 million or 27.9% of revenues for
the third quarter of 2022 compared to $1.5 million or 35.8% of
revenues for the third quarter of 2021. The decrease in gross
profit percentage resulted primarily from product mix as revenue
from projection and audio equipment grew at a faster rate than our
higher margin screen products and services. Costs of labor,
materials, packaging and shipping also increased, partially
offsetting the favorable impact of higher revenue
levels.
Gross
profit from service revenue was $0.2 million or 10.1% of revenues
for the third quarter of 2022 compared to $0.7 million or 39.9% of
revenues for the third quarter of 2021. Excluding the impact of the
employee retention credits, gross profit from service revenue for
the third quarter of 2021 would have been $0.3 million or 12.2% of
revenue.
Loss
From Operations
Consolidated
loss from operations was $0.3 million in the third quarter of 2022
compared to $0.1 million in the third quarter of 2021. Excluding
the impact of employee retention credits, which favorably impacted
the prior year period, loss from operations during the quarter
ended September 30, 2021 would have been $0.7 million.
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Strong Entertainment |
|
$ |
732 |
|
|
$ |
1,028 |
|
|
$ |
(296 |
) |
|
|
(28.8 |
)% |
Other |
|
|
(34 |
) |
|
|
(142 |
) |
|
|
108 |
|
|
|
(76.1 |
)% |
Total segment
operating income |
|
|
698 |
|
|
|
886 |
|
|
|
(188 |
) |
|
|
(21.2 |
)% |
Unallocated
administrative expenses |
|
|
(990 |
) |
|
|
(1,004 |
) |
|
|
14 |
|
|
|
(1.4 |
)% |
Total
loss from operations |
|
$ |
(292 |
) |
|
$ |
(118 |
) |
|
$ |
(174 |
) |
|
|
147.5 |
% |
The
Strong Entertainment segment generated operating income of $0.7
million in the third quarter of 2022 compared to $1.0 million in
the third quarter of 2021. The decrease in income from operations
was primarily due to the favorable impact on the prior year period
of $0.4 million of employee
retention credits and $0.1 million bad debt recovery, which did not
recur in the current period. In addition, there were also
increases to selling and administrative expenses, marketing and
travel and entertainment expenses related to the increased revenue
and business activity, including Strong Studios, in the current
period as compared to the prior year.
Unallocated
administrative expenses was $1.0 million in both the third quarter
of 2022 and 2021. The recognition of employee retention credits of
$0.1 million in the prior year was partially offset by lower
stock-based compensation in the current period.
Other
Financial Items
Total
other expense of $0.9 million during the third quarter of 2022
primarily consisted of a $1.3 million unrealized loss on equity
holdings and $0.1 million of interest expense, partially offset by
$0.5 million of foreign currency transaction adjustments. Total
other income of $10.2 million during the third quarter of 2021
primarily consisted of a $8.4 million unrealized gain on equity
holdings, $1.7 million realized gain on equity holdings, and $0.2
million of foreign currency transaction adjustments.
Income
tax expense was $0.2 million during the third quarter of 2022
compared to $2.7 million during the third quarter of 2021. Our
income tax expense during the third quarter of 2022 and 2021
consisted primarily of current and deferred income tax on foreign
earnings, which includes the unrealized (loss) gain on equity
holdings.
We
recorded a loss on our equity method holding of $0.8 million during
the third quarter of 2022, which included a $1.7 million loss from
FGF, partially offset by a $0.9 million gain recorded in connection
with the change in interest resulting from transfer of our 2.9
million shares of FGF common stock to a new equity method holding.
We recorded equity method investment loss of $0.3 million during
the third quarter of 2021, which primarily consisted of $0.4
million from GreenFirst, partially offset by $0.1 million of income
from FGF.
As a
result of the items outlined above, we generated a net loss from
continuing operations of $2.2 million, or $0.11 per basic and
diluted share, in the third quarter of 2022, compared to a net
income from continuing operations of $7.1 million, or $0.38 per
basic and diluted share, in the third quarter of 2021.
Nine
Months Ended September 30, 2022 Compared to the Nine Months Ended
September 30, 2021
Revenues
Net
revenues during the nine months ended September 30, 2022 increased
73.4% to $29.4 million from $17.0 million during the nine months
ended September 30, 2021. The increase in consolidated net revenue
was primarily due to the continuing recovery of the Strong
Entertainment business from the impact of COVID-19 as demand
increased for services and screens.
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Strong Entertainment |
|
$ |
28,446 |
|
|
$ |
16,121 |
|
|
$ |
12,325 |
|
|
|
76.5 |
% |
Other |
|
|
996 |
|
|
|
860 |
|
|
|
136 |
|
|
|
15.8 |
% |
Total
net revenues |
|
$ |
29,442 |
|
|
$ |
16,981 |
|
|
$ |
12,461 |
|
|
|
73.4 |
% |
Strong Entertainment
Revenue
from Strong Entertainment increased 76.5% to $28.4 million in the
first nine months of 2022 from $16.1 million in the first nine
months of 2021. The increase from the prior year was due to a $10.3
million increase in product revenue and a $2.0 million increase in
service revenue.
Demand
and revenue from products and services benefited from the
continuing recovery in the cinema industry. As the industry
recovery has progressed, exhibitors are beginning to re-examine
capital improvements, including upgrading their auditoriums from
xenon projection to laser projection, with helps drive demand for
our products and services. We have also increased the scope of our
services to better support our customers and to increase market
share in cinema services. We expect the upgrades from xenon to
laser to accelerate in 2023 and continue for at least the next
several years.
Gross
Profit
Consolidated
gross profit increased to $7.7 million during the nine months ended
September 30, 2022 from $6.1 million during the nine months ended
September 30, 2021. As a percentage of revenue, gross profit was
26.1% and 35.8% for the nine months ended September 30, 2022 and
September 30, 2021, respectively. Excluding the impact of the
employee retention credit, gross profit during the nine months
ended September 30, 2021 would have been 28.3%.
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Strong Entertainment |
|
$ |
6,674 |
|
|
$ |
5,428 |
|
|
$ |
1,246 |
|
|
|
23.0 |
% |
Other |
|
|
996 |
|
|
|
644 |
|
|
|
352 |
|
|
|
54.7 |
% |
Total
gross profit |
|
$ |
7,670 |
|
|
$ |
6,072 |
|
|
$ |
1,598 |
|
|
|
26.3 |
% |
Strong Entertainment
Gross
profit in the Strong Entertainment segment was $6.7 million or
23.5% of revenues in the first nine months of 2022. Gross profit in
the Strong Entertainment segment was $5.4 million or 33.7% of
revenues in the first nine months of 2021, which included a
positive impact of $1.3 million from employee retention credits.
Excluding the impact of the employee retention credit in the prior
period, gross profit would have been 25.8% of revenue as compared
to 23.5% in the current period.
Gross
profit from product sales was $5.8 million or 26.5% of revenues for
the first nine months of 2022 compared to $4.0 million or 33.7% of
revenues for the first nine months of 2021. The decrease in gross
profit percentage resulted primarily from product mix as revenue
from projection and audio equipment grew at a faster rate than our
higher margin screen products and services. Costs of labor,
materials, packaging and shipping also increased, partially
offsetting the favorable impact of higher revenue
levels.
Gross
profit from service revenue was $0.8 million or 13.1% of revenues
for the first nine months of 2022 compared to $1.5 million or 34.9%
of revenues for the first nine months of 2021. Excluding the impact
of the employee retention credits, gross profit from service
revenue for the first nine months of 2021 would have been $0.3
million or 4.2% of revenue.
Loss
From Operations
Consolidated
loss from operations was $1.9 million in each of the first nine
months of 2022 and 2021. Excluding the impact of employee retention
credits, which favorably impacted the prior year period, loss from
operations during the nine months ended September 30, 2021 would
have been $3.7 million.
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in
thousands) |
|
|
|
|
Strong Entertainment |
|
$ |
1,522 |
|
|
$ |
2,150 |
|
|
$ |
(628 |
) |
|
|
(29.2 |
)% |
Other |
|
|
(204 |
) |
|
|
(577 |
) |
|
|
373 |
|
|
|
(64.6 |
)% |
Total segment
operating income |
|
|
1,318 |
|
|
|
1,573 |
|
|
|
(255 |
) |
|
|
(16.2 |
)% |
Unallocated
administrative expenses |
|
|
(3,258 |
) |
|
|
(3,434 |
) |
|
|
176 |
|
|
|
(5.1 |
)% |
Total
loss from operations |
|
$ |
(1,940 |
) |
|
$ |
(1,861 |
) |
|
$ |
(79 |
) |
|
|
4.2 |
% |
The
Strong Entertainment segment generated income from operations of
$1.5 million in the first nine months of 2022 compared to operating
income of $2.2 million in the first nine months of 2021. The
decrease in income from operations was primarily due to the
favorable impact on the prior year period of $1.3 million of employee retention
credits and $0.3 million bad debt recovery, which did not recur in
the current period. In addition, there were also increases
to selling and administrative expenses due to higher compensation
and benefits, marketing and travel and entertainment expenses
related to the increased revenue and business activity, including
the startup of Strong Studios, in the current period as compared to
the prior year.
Unallocated
administrative expenses decreased to $3.3 million in the first nine
months of 2022 compared to $3.4 million in the first nine months of
2021. Compensation and benefits expenses, including stock-based
compensation expense, decreased in the current period as compared
to prior year but were partially offset by the recognition of
employee retention credits of $0.3 million recognized in the prior
year.
Other
Financial Items
Total
other expense of $3.9 million during the first nine months of 2022
primarily consisted of a $3.8 million unrealized loss on equity
holdings, a $0.2 million adjustment to the carrying value of the
SageNet Promissory Note in connection with a prepayment, and $0.2
million of interest expense, partially offset by and $0.4 million
of foreign currency transaction adjustments. Total other income of
$9.9 million during the first nine months of 2021 primarily
consisted of a $8.4 million unrealized gain on equity holdings,
$1.7 million realized gain on equity holdings, a $0.1 million gain
on our property and insurance claim for the weather-related
incident at our production facility in Quebec, Canada, partially
offset by $0.1 million of foreign currency transaction adjustments
and $0.2 million of interest expense.
Income
tax expense was approximately $0.3 million during the first nine
months of 2022 compared to $2.8 million during the first nine
months of 2021. Our income tax expense consisted primarily of
current and deferred income tax on foreign earnings, which includes
unrealized (loss) gain on equity holdings.
We
recorded a loss on our equity method holding of $2.6 million during
the first nine months of 2022 which included a $3.5 million loss
from FGF, partially offset by a $0.9 million gain recorded in
connection with the change in interest resulting from the transfer
of our 2.9 million shares of FGF common stock to a new equity
method holding. We recorded an equity method investment loss of
$1.5 million during the first nine months of 2021, consisting of
$1.1 million from GreenFirst and $0.3 million from FGF.
As a
result of the items outlined above, we generated a net loss from
continuing operations of $8.6 million, or $0.45 per basic and
diluted share, in the first nine months of 2022, compared to a net
income from continuing operations of $3.8 million, or $0.21 per
basic and diluted share, in the first nine months of
2021.
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, sales of
our common stock and credit facilities. Our primary cash
requirements involve operating expenses, working capital, capital
expenditures, equity holdings, and other general corporate
activities.
We
ended the third quarter of 2022 with total cash and cash
equivalents and restricted cash of $4.3 million compared to $8.9
million as of December 31, 2021. Of the $4.3 million as of
September 30, 2022, $1.6 million was held by our Canadian
subsidiary, Strong/MDI, and $0.2 million was restricted. Strong/MDI
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, 2022, the parent company had
outstanding intercompany loans from Strong/MDI of approximately
$38.6 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 5% Canadian withholding taxes, which have been
fully accrued as of September 30, 2022.
In
response to the COVID-19 pandemic and related closures of cinemas,
theme parks and entertainment venues, we took decisive actions to
conserve cash, reduce operating expenditures, delay capital
expenditures, and manage working capital.
On
June 7, 2021, Strong/MDI entered into a demand credit agreement
(the “2021 Credit Agreement”), which amended and restated the
demand credit agreement dated as of September 5, 2017. The 2021
Credit Agreement consists of a revolving line of credit for up to
CDN$2.0 million subject to a borrowing base requirement, a 20-year
installment loan for up to CDN$5.1 million and a 5-year installment
loan for up to CDN$0.5 million. These borrowings are due on demand
by the lender and total $2.6 million as of September 30,
2022.
We
believe that our existing sources of liquidity, including cash and
cash equivalents, operating cash flow, credit facilities, equity
holdings, receivables and other assets will be sufficient to meet
our projected capital needs for 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, performance of our equity holdings, 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
additional 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 11 to the condensed consolidated financial statements for
a description of our debt as of September 30, 2022.
Cash
Flows from Operating Activities
Net
cash used in operating activities from continuing operations was
$2.8 million during the nine months ended September 30, 2022 and
$0.3 million during the nine months ended September 30, 2021. Cash
used in operating activities from continuing operations increased
primarily due to increases in working capital accompanying revenue
growth in the Strong Entertainment business during the current
period.
Cash
Flows from Investing Activities
Net
cash used in investing activities from continuing operations was
$1.0 million during the nine months ended September 30, 2022, which
consisted of a $2.0 million purchase of common stock of FGF, $0.9
million of capital expenditures and $0.4 million outflow related to
the acquisition of film and television programming rights,
partially offset by the $2.3 million receipt of the SageNet
Promissory Note. Net cash used in investing activities from
continuing operations was $10.6 million during the nine months
ended September 30, 2021, which consisted of a $10.0 million
increase to our investment in GreenFirst and $0.7 million of
capital expenditures.
Cash
Flows from Financing Activities
Net
cash used in financing activities from continuing operations was
$0.6 million during the nine months ended September 30, 2022, which
primarily consisted of principal payments on short-term and
long-term debt. Net cash provided by financing activities from
continuing operations was $3.6 million during the nine months ended
September 30, 2021, which primarily consisted of $6.3 million of
net proceeds from the issuance of our common stock, partially
offset by $2.6 million of principal payments on finance leases and
short-term 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, we disclose 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 our operating performance. Accordingly,
management believes that disclosure of these metrics offers
investors, bankers and other stakeholders an additional view of our
operations that, when coupled with the GAAP results, provides a
more complete understanding of our financial results.
EBITDA
and Adjusted EBITDA should not be considered as an alternative to
net income (loss) or to net cash from 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 our performance.
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.
The
following table sets forth reconciliations of net (loss) income
under GAAP to EBITDA and Adjusted EBITDA (in thousands):
|
|
Quarters Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong
Entertainment |
|
|
Corporate
and Other |
|
|
Discontinued
Operations |
|
|
Consolidated |
|
|
Strong
Entertainment |
|
|
Corporate
and Other |
|
|
Discontinued
Operations |
|
|
Consolidated |
|
Net income (loss) |
|
$ |
315 |
|
|
$ |
(2,514 |
) |
|
$ |
- |
|
|
$ |
(2,199 |
) |
|
$ |
7,685 |
|
|
$ |
(599 |
) |
|
$ |
- |
|
|
$ |
7,086 |
|
Net income from
discontinued operations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net income (loss) from continuing
operations |
|
|
315 |
|
|
|
(2,514 |
) |
|
|
- |
|
|
|
(2,199 |
) |
|
|
7,685 |
|
|
|
(599 |
) |
|
|
- |
|
|
|
7,086 |
|
Interest expense, net |
|
|
33 |
|
|
|
58 |
|
|
|
- |
|
|
|
91 |
|
|
|
25 |
|
|
|
(18 |
) |
|
|
- |
|
|
|
7 |
|
Income tax expense |
|
|
202 |
|
|
|
43 |
|
|
|
- |
|
|
|
245 |
|
|
|
2,327 |
|
|
|
369 |
|
|
|
- |
|
|
|
2,696 |
|
Depreciation
and amortization |
|
|
153 |
|
|
|
183 |
|
|
|
- |
|
|
|
336 |
|
|
|
216 |
|
|
|
129 |
|
|
|
- |
|
|
|
345 |
|
EBITDA |
|
|
703 |
|
|
|
(2,230 |
) |
|
|
- |
|
|
|
(1,527 |
) |
|
|
10,253 |
|
|
|
(119 |
) |
|
|
- |
|
|
|
10,134 |
|
Stock-based compensation expense |
|
|
- |
|
|
|
142 |
|
|
|
- |
|
|
|
142 |
|
|
|
- |
|
|
|
213 |
|
|
|
- |
|
|
|
213 |
|
Equity method holding loss
(income) |
|
|
- |
|
|
|
798 |
|
|
|
- |
|
|
|
798 |
|
|
|
414 |
|
|
|
(91 |
) |
|
|
- |
|
|
|
323 |
|
Realized gain on equity holdings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,689 |
) |
|
|
|
|
|
|
- |
|
|
|
(1,689 |
) |
Unrealized loss (gain) on equity
holdings |
|
|
631 |
|
|
|
670 |
|
|
|
- |
|
|
|
1,301 |
|
|
|
(7,648 |
) |
|
|
(728 |
) |
|
|
- |
|
|
|
(8,376 |
) |
Foreign currency transaction
income |
|
|
(517 |
) |
|
|
- |
|
|
|
- |
|
|
|
(517 |
) |
|
|
(162 |
) |
|
|
- |
|
|
|
- |
|
|
|
(162 |
) |
Employee
retention credit |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(527 |
) |
|
|
(90 |
) |
|
|
- |
|
|
|
(617 |
) |
Adjusted EBITDA |
|
$ |
817 |
|
|
$ |
(620 |
) |
|
$ |
- |
|
|
$ |
197 |
|
|
$ |
641 |
|
|
$ |
(815 |
) |
|
$ |
- |
|
|
$ |
(174 |
) |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong
Entertainment |
|
|
Corporate
and Other |
|
|
Discontinued
Operations |
|
|
Consolidated |
|
|
Strong
Entertainment |
|
|
Corporate
and Other |
|
|
Discontinued
Operations |
|
|
Consolidated |
|
Net (loss) income |
|
$ |
(322 |
) |
|
$ |
(8,276 |
) |
|
$ |
- |
|
|
$ |
(8,598 |
) |
|
$ |
7,719 |
|
|
$ |
(3,899 |
) |
|
$ |
14,649 |
|
|
$ |
18,469 |
|
Net income from
discontinued operations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,649 |
) |
|
|
(14,649 |
) |
Net (loss) income from continuing
operations |
|
|
(322 |
) |
|
|
(8,276 |
) |
|
|
- |
|
|
|
(8,598 |
) |
|
|
7,719 |
|
|
|
(3,899 |
) |
|
|
- |
|
|
|
3,820 |
|
Interest expense, net |
|
|
85 |
|
|
|
146 |
|
|
|
- |
|
|
|
231 |
|
|
|
84 |
|
|
|
146 |
|
|
|
- |
|
|
|
230 |
|
Income tax expense |
|
|
242 |
|
|
|
50 |
|
|
|
- |
|
|
|
292 |
|
|
|
2,406 |
|
|
|
382 |
|
|
|
- |
|
|
|
2,788 |
|
Depreciation
and amortization |
|
|
521 |
|
|
|
517 |
|
|
|
- |
|
|
|
1,038 |
|
|
|
687 |
|
|
|
298 |
|
|
|
- |
|
|
|
985 |
|
EBITDA |
|
|
526 |
|
|
|
(7,563 |
) |
|
|
- |
|
|
|
(7,037 |
) |
|
|
10,896 |
|
|
|
(3,073 |
) |
|
|
- |
|
|
|
7,823 |
|
Stock-based compensation expense |
|
|
- |
|
|
|
511 |
|
|
|
- |
|
|
|
511 |
|
|
|
- |
|
|
|
686 |
|
|
|
- |
|
|
|
686 |
|
Equity method holding loss |
|
|
- |
|
|
|
2,578 |
|
|
|
- |
|
|
|
2,578 |
|
|
|
1,150 |
|
|
|
318 |
|
|
|
- |
|
|
|
1,468 |
|
Employee retention credit |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,576 |
) |
|
|
(336 |
) |
|
|
- |
|
|
|
(1,912 |
) |
Realized gain on equity holdings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,689 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,689 |
) |
Unrealized loss (gain) on equity
holdings |
|
|
1,695 |
|
|
|
2,057 |
|
|
|
- |
|
|
|
3,752 |
|
|
|
(7,648 |
) |
|
|
(728 |
) |
|
|
- |
|
|
|
(8,376 |
) |
Foreign currency transaction (income)
loss |
|
|
(383 |
) |
|
|
1 |
|
|
|
- |
|
|
|
(382 |
) |
|
|
56 |
|
|
|
- |
|
|
|
- |
|
|
|
56 |
|
Gain on property and casualty
insurance recoveries |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(148 |
) |
|
|
- |
|
|
|
- |
|
|
|
(148 |
) |
Severance and
other |
|
|
- |
|
|
|
222 |
|
|
|
- |
|
|
|
222 |
|
|
|
15 |
|
|
|
87 |
|
|
|
- |
|
|
|
102 |
|
Adjusted EBITDA |
|
$ |
1,838 |
|
|
$ |
(2,194 |
) |
|
$ |
- |
|
|
$ |
(356 |
) |
|
$ |
1,056 |
|
|
$ |
(3,046 |
) |
|
$ |
- |
|
|
$ |
(1,990 |
) |
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, 2022 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.
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, 2021. We periodically re-evaluate and
adjust our critical accounting policies as circumstances change.
Other than the addition of our policy related to film and
television programming rights, there were no significant changes in
our critical accounting policies during the three months ended
September 30, 2022.
Film and Television Programming Rights
Commencing
in March 2022, we began producing original productions and
acquiring rights to films and television programming. Film and
television programming rights include the unamortized costs of
in-process or in-development content produced or acquired by us.
Our capitalized costs include all direct production and financing
costs, capitalized interest when applicable, and production
overhead. Film and television program rights are stated at the
lower of amortized cost or estimated fair value.
The
costs of producing content are amortized using the
individual-film-forecast method. These costs are amortized based on
the ratio of the current period’s revenues to management’s
estimated remaining total gross revenues to be earned (“Ultimate
Revenue”) as of each reporting date to reflect the most current
available information. Management’s judgment is required in
estimating Ultimate Revenue and the costs to be incurred throughout
the life of each film or television program. Amortization is
adjusted when necessary to reflect increases or decreases in
forecasted Ultimate Revenues.
For
an episodic television series, the period over which Ultimate
Revenues are estimated cannot exceed ten years following the date
of delivery of the first episode, or, if still in production, five
years from the date of delivery of the most recent episode, if
later. For films, Ultimate Revenue includes estimates over a period
not to exceed ten years following the date of initial
release.
Content
assets are expected to be predominantly monetized individually and
therefore are reviewed at the individual level when an event or
change in circumstance indicates a change in the expected
usefulness of the content or the fair value may be less than the
unamortized cost.
Due
to the inherent uncertainties involved in making such estimates of
Ultimate Revenues and expenses, these estimates may differ from
actual results. In addition, in the normal course of our business,
some films and titles will be more successful or less successful
than anticipated. Management regularly reviews and revises, when
necessary, its Ultimate Revenue and cost estimates, which may
result in a change in the rate of amortization of film costs and
participations and residuals and/or a write-down of all or a
portion of the unamortized costs of the film or television program
to its estimated fair value. An increase in the estimate of
Ultimate Revenue will generally result in a lower amortization rate
and, therefore, less film and television program amortization
expense, while a decrease in the estimate of Ultimate Revenue will
generally result in a higher amortization rate and, therefore,
higher film and television program amortization expense, and also
periodically result in an impairment requiring a write-down of the
film cost to the title’s fair value. We have not yet incurred any
of these write-downs.
An
impairment charge would be recorded in the amount by which the
unamortized costs exceed the estimated fair value. Estimates of
future revenue involve measurement uncertainties and it is
therefore possible that reductions in the carrying value of film
library costs may be required because of changes in management’s
future revenue estimates.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Not
applicable as we are a “smaller reporting company” as defined by
Item 229.10(f)(1) of Regulation S-K.
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 (principal executive officer) and
Chief Financial Officer (principal financial officer and principal
accounting officer), of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures
pursuant to Securities Exchange Act Rules 13a-15 and 15d-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 (as defined in § 240.13a-15(e) or 240.15d-15(e) of
Regulation S-K) 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 our business operations, we are involved,
from time to time, in certain legal disputes. We and certain of our
subsidiaries are named as defendants in personal injury lawsuits
based on alleged exposure to asbestos-containing materials. A
majority of the cases involve product liability claims based
principally on allegations of past distribution of commercial
lighting products containing wiring that may have contained
asbestos. Each case names dozens of corporate defendants in
addition to us. In our experience, a large percentage of these
types of claims have never been substantiated and have been
dismissed by the courts. We have not suffered any adverse verdict
in a trial court proceeding related to asbestos claims and intends
to continue to defend these lawsuits. During 2021, we recorded a
loss contingency reserve of approximately $0.3 million, which
represents our estimate of our potential losses related to the
settlement of open cases. There have been no changes to this loss
contingency reserve during 2022. When appropriate, we may settle
certain claims. We do not expect the resolution of these cases to
have a material adverse effect on our consolidated financial
condition, results of operations or cash flows.
Item 1A. Risk
Factors
Item
1A “Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2021 (the “2021 Form 10-K”) includes a detailed
discussion of the Company’s risk factors. As of the date of this
filing, except as set forth herein, there have been no material
changes to the risk factors as previously disclosed. The Risk
Factors set forth in the 2021 Form 10-K should be read carefully in
connection with evaluating our business and in connection with the
forward-looking statements contained in this Quarterly Report on
Form 10-Q. Any of the risks described in the 2021 Form 10-K, could
materially adversely affect our business, financial condition or
future results and the actual outcome of matters as to which
forward-looking statements are made. These are not the only risks
we face. Additional risks and uncertainties not currently known to
us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating
results.
We are entering a new line of business which could require
additional capital.
The
production, acquisition and distribution of feature films and
series content requires substantial capital. We intend to mitigate
risks by pre-selling rights to content and utilizing tax credit
incentives in most cases to offset production costs. However, a
significant amount of time may elapse between our expenditure of
funds and the receipt of revenues after release or distribution of
such content. Although we intend to reduce the risks of production
exposure through pre-sale of rights, tax credit programs,
government and industry programs, co-financiers and other sources,
we cannot assure you that we will successfully implement these
arrangements or that we will not be subject to substantial
financial risks relating to the production, acquisition and
distribution of content. Additionally, the production, completion
and distribution of motion picture and television content can be
subject to a number of uncertainties, including delays and
increased expenditures due to disruptions or events beyond our
control. As a result, if production incurs substantial budget
overruns, we may have to seek additional financing or fund the
overrun ourselves. We cannot make assurances regarding the
availability of such additional financing on terms acceptable to
us, or that we will recoup these costs. For instance, increased
costs or budget overruns incurred with respect to a particular film
may prevent a picture from being completed or released or may
result in a delayed release and the postponement to a potentially
less favorable date, all of which could cause a decline in
performance, and, thus, the overall financial success of such film.
Any of the foregoing could have a material adverse effect on our
business, financial condition, operating results, liquidity and
prospects.
We may incur significant write-offs if our projects do not perform
well enough to recoup costs.
We
will be required to amortize content capitalized production costs
over the expected revenue streams as we recognize revenue from
films or other projects. The amount of production costs that will
be amortized each quarter depends on, among other things, how much
future revenue we expect to receive from each project. Unamortized
production costs will be evaluated for impairment each reporting
period on a project-by-project basis. If estimated remaining
revenue is not sufficient to recover the unamortized production
costs, including because of delayed theatrical distribution of
films as a result of the COVID-19 global pandemic and its effects,
those costs would be written down to fair value. In any given
quarter, if we lower our previous forecast with respect to total
anticipated revenue from any film or other project, we may be
required to accelerate amortization or record impairment charges
with respect to the unamortized costs, even if we previously
recorded impairment charges for such film or other project. Such
impairment charges could adversely impact our business, operating
results and financial condition.
Our revenues and results of operations may fluctuate significantly
from period to period.
Our
revenues and results of operations can vary based on the timing of
shipments of our cinema products particularly with regard to the
timing of cinema screen shipments and timing of customer orders and
shipments of projection equipment. With the launch of Strong
Studios, those fluctuations could increase on a quarter-to-quarter
basis as timing of revenue and amortization of production costs
will depend on timing delivery of content, among other factors. The
degree of commercial success of content that we sell, license or
distribute, which cannot be predicted with certainty may cause our
revenue and earnings results to fluctuate significantly from period
to period, and the results of any one period may not be indicative
of the results for any future periods.
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. The
following table provides information about purchases made by us of
our common stock for each month included in the quarter ended
September 30, 2022:
ISSUER PURCHASES OF EQUITY
SECURITIES |
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs |
|
|
The Maximum Number of Shares That May Still be Purchased Under the
Plans or Programs |
|
|
|
|
|
|
|
|
July 2022 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
636,931 |
|
August 2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
636,931 |
|
September 2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
636,931 |
|
Quarter Ended
September 30, 2022 |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
636,931 |
|
Item 6.
Exhibits