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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 June 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

 

4201 Congress Street, Suite 175

Charlotte, North Carolina 28209

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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 August 2, 2022
Common Stock, $0.01 par value   19,436,622 shares

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
     
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets, June 30, 2022 and December 31, 2021 (Unaudited) 3
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited) 7
     
  Notes to the Condensed Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
     
Item 4. Controls and Procedures 39
     
  PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 40
     
Item 1A. Risk Factors 40
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

     
Item 6. Exhibits 42
     
  Signatures 43

 

2

 

 

PART I. Financial Information

 

Item 1. Financial Statements

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par values)

(Unaudited)

 

   June 30, 2022   December 31, 2021 
        
Assets          
Current assets:          
Cash and cash equivalents  $4,411   $8,731 
Restricted cash   150    150 
Accounts receivable (net of allowance for doubtful accounts of $572 and $607, respectively)   5,701    4,631 
Inventories, net   3,834    3,271 
Other current assets   4,926    4,992 
Total current assets   19,022    21,775 
Property, plant and equipment, net   13,927    6,226 
Operating lease right-of-use assets   262    3,975 
Finance lease right-of-use asset   66    - 
Note receivable, net of current portion   -    1,667 
Equity holdings   38,498    41,133 
Film and television programming rights, net   1,379    - 
Intangible assets, net   11    69 
Goodwill   927    942 
Other assets   5    22 
Total assets  $74,097   $75,809 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $4,512   $4,245 
Accrued expenses   3,454    2,994 
Short-term debt   3,057    2,998 
Current portion of long-term debt   211    23 
Current portion of operating lease obligations   62    577 
Current portion of finance lease obligations   12    - 
Deferred revenue and customer deposits   2,842    3,292 
Total current liabilities   14,150    14,129 
Operating lease obligations, net of current portion   267    3,586 
Finance lease obligations, net of current portion   54    - 
Long-term debt, net of current portion and deferred debt issuance costs, net   5,107    105 
Deferred income taxes   5,262    5,594 
Other long-term liabilities   1,132    118 
Total liabilities   25,972    23,532 
           
Commitments, contingencies and concentrations (Note 15)          
           
Stockholders’ equity:          
Preferred stock, par value $.01 per share; authorized 1,000 shares, none outstanding   -    - 
Common stock, par value $.01 per share; authorized 50,000 and 25,000 shares at June 30, 2022 and December 31, 2021, respectively; issued 22,120 and 21,286 shares at June 30, 2022 and December 31, 2021, respectively; outstanding 19,325 and 18,492 shares at June 30, 2022 and December 31, 2021, respectively   221    213 
Additional paid-in capital   53,611    50,807 
Retained earnings   17,191    23,591 
Treasury stock, 2,794 shares at cost   (18,586)   (18,586)
Accumulated other comprehensive loss   (4,312)   (3,748)
Total stockholders’ equity   48,125    52,277 
Total liabilities and stockholders’ equity  $74,097   $75,809 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2022 and 2021

(In thousands, except per share data)

(Unaudited)

 

   2022   2021   2022   2021 
  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
   2022   2021   2022   2021 
Net product sales  $6,683   $4,198   $14,386   $7,726 
Net service revenues   2,460    1,896    4,783    3,140 
Total net revenues   9,143    6,094    19,169    10,866 
Cost of products sold   4,833    2,765    10,690    5,207 
Cost of services   1,890    865    3,547    2,034 
Total cost of revenues   6,723    3,630    14,237    7,241 
Gross profit   2,420    2,464    4,932    3,625 
Selling and administrative expenses:                    
Selling   684    270    1,225    747 
Administrative   2,621    2,178    5,354    4,619 

Total selling and administrative expenses

 

   3,305    2,448    6,579    5,366 
(Loss) income from operations   (885)   16    (1,647)   (1,741)
Other income (expense):                    
Interest income   1    20    7    33 
Interest expense   (88)   (167)   (147)   (257)
Foreign currency transaction gain (loss)   206    (234)   (136)   (218)
Unrealized loss on equity holdings   (4,178)   -    (2,451)   - 
Other income (expense), net   3    12    (198)   154 
Total other expense   (4,056)   (369)   (2,925)   (288)
Loss from continuing operations before income taxes and equity method holding loss   (4,941)   (353)   (4,572)   (2,029)
Income tax benefit (expense)   303    (23)   (47)   (92)
Equity method holding loss   (960)   (376)   (1,780)   (1,145)
Net loss from continuing operations   (5,598)   (752)   (6,399)   (3,266)
Net income from discontinued operations (Note 3)   -    324    -    14,649 
Net (loss) income  $(5,598)  $(428)  $(6,399)  $11,383 
                     
Basic and diluted net (loss) income per share                    
Continuing operations  $(0.29)  $(0.04)  $(0.33)  $(0.18)
Discontinued operations   -    0.02    -    0.83 
Basic and diluted net (loss) income per share  $(0.29)  $(0.02)  $(0.33)  $0.65 
                     
Weighted-average shares used in computing net (loss) income per share:                    
Basic   19,273    18,322    19,133    17,583 
Diluted   19,273    18,322    19,133    17,583 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

Three and Six Months Ended June 30, 2022 and 2021

(In thousands)

(Unaudited)

 

   2022   2021   2022   2021 
  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
   2022   2021   2022   2021 
Net (loss) income  $(5,598)  $(428)  $(6,399)  $11,383 
Adjustment to postretirement benefit obligation   (4)   -    (11)   (46)
Currency translation adjustment:                    
Unrealized net change arising during period   (730)   102    (553)   (254)
Total other comprehensive (loss) income   (734)   102    (564)   (300)
Comprehensive (loss) income  $(6,332)  $(326)  $(6,963)  $11,083 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

Three and Six Months Ended June 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, 2021   21,286   $213   $50,807   $23,591   $(18,586)  $(3,748)  $  52,277 
Net loss   -    -    -    (802)   -    -    (802)
Net other comprehensive income   -    -    -    -    -    170    170 
Issuance of common stock   761    8    2,342    -    -    -    2,350 
Issuance of warrants   -    -    109    -    -    -    109 
Stock-based compensation expense   -    -    194    -    -    -    194 
Balance at March 31, 2022   22,047    221    53,452    22,789    (18,586)   (3,578)   54,298 
Net loss   -    -    -    (5,598)   -    -    (5,598)
Net other comprehensive loss   -    -    -    -    -    (734)   (734)
Vesting of restricted stock   73    -    (16)   -    -    -    (16)
Stock-based compensation expense   -    -    175    -    -    -    175 
Balance at June 30, 2022   22,120   $221   $53,611   $17,191   $(18,586)  $(4,312)  $48,125 

 

  

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 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2022 and 2021

(In thousands)

(Unaudited)

 

   2022   2021 
  

Six Months Ended June 30,

 
   2022   2021 
Cash flows from operating activities:          
Net loss from continuing operations  $(6,399)  $(3,266)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:          
Provision for (recovery of) doubtful accounts   3    (134)
Provision for obsolete inventory   6    50 
Provision for warranty   15    37 
Depreciation and amortization   702    640 
Amortization and accretion of operating leases   137    413 
Equity method holding loss   1,780    1,145 
Adjustment to SageNet promissory note in connection with prepayment (Note 3)   202    - 
Unrealized loss on equity holdings   2,451    - 
Deferred income taxes   (292)   (273)
Stock-based compensation expense   369    473 
Changes in operating assets and liabilities:          
Accounts receivable   (1,085)   1,213 
Inventories   (602)   (568)
Current income taxes   (135)   (160)
Other assets   1,055    (1,564)
Accounts payable and accrued expenses   (674)   (1,540)
Deferred revenue and customer deposits   (446)   433 
Operating lease obligations   (132)   (414)
Net cash used in operating activities from continuing operations   (3,045)   (3,515)
Net cash provided by operating activities from discontinued operations   -    510 
Net cash used in operating activities   (3,045)   (3,005)
           
Cash flows from investing activities:          
Capital expenditures   (840)   (278)
Acquisition of programming rights   (337)   - 
Purchase of common shares of FG Financial Group, Inc. (Note 7)   (2,000)   - 
Receipt of SageNet promissory note (Note 3)   2,300    - 
Net cash used in investing activities from continuing operations   (877)   (278)
Net cash provided by investing activities from discontinued operations   -    12,761 
Net cash (used in) provided by investing activities   (877)   12,483 
           
Cash flows from financing activities:          
Principal payments on short-term debt   (285)   (295)
Principal payments on long-term debt   (66)   - 
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   (2)   (2,105)
Net cash (used in) provided by financing activities from continuing operations   (368)   3,839 
Net cash used in financing activities from discontinued operations   -    (155)
Net cash (used in) provided by financing activities   (368)   3,684 
           
Effect of exchange rate changes on cash and cash equivalents   (30)   58 
Net (decrease) increase in cash and cash equivalents and restricted cash from continuing operations   (4,320)   104 
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   (4,320)   13,220 
Cash and cash equivalents and restricted cash at beginning of period   8,881    4,787 
Cash and cash equivalents and restricted cash at end of period  $4,561   $18,007 
           
Components of cash and cash equivalents and restricted cash:          
Cash and cash equivalents  $4,411   $17,857 
Restricted cash   150    150 
Total cash and cash equivalents and restricted cash  $4,561   $18,007 
           
Supplemental disclosure of non-cash investing and financing activities:          
Short-term borrowings to finance insurance  $392   $413 
Issuance of debt, common shares, and warrants in connection with purchase of Digital Ignition building  $7,609   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7

 

 

Ballantyne Strong, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Operations

 

Ballantyne Strong, Inc. (“Ballantyne 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 2022 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.

 

8

 

 

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 the extent and duration of the impacts that it may have on the Company, as well as its customers, suppliers, and employees. While cinema and theme park operators in the United States and other parts of the world are in 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 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 June 30, 2022, $1.7 million of the $4.4 million in cash and cash equivalents was held by our foreign subsidiary.

 

Restricted Cash

 

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

 

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.

 

9

 

 

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 June 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 six months ended June 30, 2022. The carrying value of our equity method, Fair Value Holdings and Cost Method Holdings is reported as “equity holdings” on the consolidated balance sheets. Notes 3 and 7 contain additional information on our equity method, Fair Value Holdings and Cost Method Holdings.

 

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 June 30, 2022 and December 31, 2021.

 

Fair values measured on a recurring basis at June 30, 2022 (in thousands):

 

 

   Level 1   Level 2   Level 3   Total 
Cash and cash equivalents  $4,411   $-   $-   $4,411 
Restricted cash   150    -    -    150 
Fair value method equity holding   19,831    -    -    19,831 
Total  $24,392   $-   $-   $24,392 

 

10

 

 

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 quoted market prices, the combined fair value of the Company’s equity method and fair value method holdings was $23.6 million at June 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.

 

11

 

 

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 June 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):

 

   Convergent  

Strong

Outdoor

   Total 
   Three Months Ended June 30, 2021 
   Convergent  

Strong

Outdoor

   Total 
Net revenues  $-   $    -   $- 
Cost of revenues   -    -    - 
Gross profit   -    -    - 
Selling and administrative expenses   -    -    - 
Loss from operations   -    -    - 
Gain on Convergent transaction   -         - 
Other income   233    -    233 
Income from discontinued operations   233    -    233 
Income tax benefit   91    -    91 
Total net income from discontinued operations  $324   $-   $324 

 

12

 

 

   Convergent  

Strong

Outdoor

   Total 
   Six Months Ended June 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.

 

13

 

 

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 June 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 six months ended June 30, 2022 and 2021 (in thousands):

 

  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
  

Three Months Ended

June 30, 2022

  

Three Months Ended

June 30, 2021

 
  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
Screen system sales  $      2,939   $-   $2,939   $     2,440   $-   $2,440 
Digital equipment sales   2,673    -    2,673    1,308    -    1,308 
Extended warranty sales   84    -    84    30    -    30 
Other product sales   987    -    987    420    -    420 
Total product sales   6,683    -    6,683    4,198    -    4,198 
Field maintenance and monitoring services   1,649    -    1,649    1,288    -    1,288 
Installation services   469    -    469    316    -    316 
Other service revenues   21    321    342    26    266    292 
Total service revenues   2,139    321    2,460    1,630    266    1,896 
Total  $8,822   $321   $9,143   $5,828   $266   $6,094 

 

  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
  

Six Months Ended

June 30, 2022

  

Six Months Ended

June 30, 2021

 
  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
Screen system sales  $      6,245   $-   $6,245   $     4,487   $-   $4,487 
Digital equipment sales   6,216    -    6,216    2,483    -    2,483 
Extended warranty sales   184    -    184    61    -    61 
Other product sales   1,741    -    1,741    695    -    695 
Total product sales   14,386    -    14,386    7,726    -    7,726 
Field maintenance and monitoring services   3,267    -    3,267    2,109    -    2,109 
Installation services   841    -    841    430    -    430 
Other service revenues   49    626    675    36    565    601 
Total service revenues   4,157    626    4,783    2,575    565    3,140 
Total  $18,543   $626   $19,169   $10,301   $565   $10,866 

 

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.

 

14

 

 

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 six months ended June 30, 2022 and 2021 (in thousands):

  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
  

Three Months Ended

June 30, 2022

  

Three Months Ended

June 30, 2021

 
  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
Point in time  $     7,532   $14   $7,546   $5,098   $6   $5,104 
Over time   1,290    307    1,597    730    260    990 
Total  $8,822   $321   $9,143   $5,828   $266   $6,094 

 

  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
  

Six Months Ended

June 30, 2022

  

Six Months Ended

June 30, 2021

 
  

Strong

Entertainment

   Other   Total  

Strong

Entertainment

   Other   Total 
Point in time  $     15,974   $17   $15,991   $8,854   $10   $8,864 
Over time   2,569    609    3,178    1,447    555    2,002 
Total  $18,543   $626   $19,169   $10,301   $565   $10,866 

 

At June 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 $1.0 million. The Company expects to recognize $0.9 million of the unearned revenue amounts during the remainder of 2022 and immaterial amounts from 2023 through 2026.

 

15

 

 

5. Net Loss Per Common Share

 

Basic net loss 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 per share (in thousands):

 

   2022   2021   2022   2021 
  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2022   2021   2022   2021 
Weighted average shares outstanding:                    
Basic weighted average shares outstanding   19,273    18,322    19,133    17,583 
Dilutive effect of stock options and certain non-vested restricted stock units   -    -    -    - 
Diluted weighted average shares outstanding   19,273    18,322    19,133    17,583 

 

A total of 197,152 and 178,535 common stock equivalents related to stock options and restricted stock units were excluded for the three and six months ended June 30, 2022, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses from continuing operations per share. A total of 368,269 and 276,788 common stock equivalents related to stock options and restricted stock units were excluded for the three and six months ended June 30, 2021, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses from continuing operations per share. Options to purchase 349,500 and 257,500 shares of common stock were outstanding as of June 30, 2022 and June 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):

   June 30, 2022   December 31, 2021 
Raw materials and components  $1,612   $1,680 
Work in process   409    399 
Finished goods   1,813    1,192 
Inventories, net  $3,834   $3,271 

 

The inventory balances were net of reserves of approximately $0.5 million as of both June 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 six months ended June 30, 2022 is as follows (in thousands):

 

      
Inventory reserve balance at December 31, 2021  $467 
Inventory write-offs and other adjustments during 2022   17 
Provision for inventory reserve during 2022   6 
Inventory reserve balance at June 30, 2022  $490 

 

16

 

 

7. Equity Holdings

 

The following summarizes our equity holdings (dollars in thousands):

 

   June 30, 2022   December 31 2021 
   Carrying Amount   Economic Interest   Carrying Amount   Economic Interest 
Equity Method Holding                    
FG Financial Group, Inc.  $5,769    31.3%  $5,549    25.2%
                     
Fair Value Method Holding                    
GreenFirst Forest Products Inc.   19,831    8.6%   22,467    8.6%
                     
Cost Method Holding                    
Firefly Systems, Inc.   12,898         13,117      
Total Investments  $38,498        $41,133      

 

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

 

   2022   2021   2022   2021 
  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2022   2021   2022   2021 
Entity                    
FG Financial Group, Inc.  $(960)  $7   $(1,780)  $(409)
GreenFirst Forest Products Inc.   -    (383)   -    (736)
Total  $(960)  $(376)  $(1,780)  $(1,145)

 

Equity Method Holding

 

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 six months ended June 30, 2022 or 2021. Based on quoted market prices, the fair value of the Company’s ownership in FGF was approximately $4.2 million as of June 30, 2022.

 

17

 

 

The summarized financial information presented below reflects the financial information of the Company’s equity method holdings for the six months ended March 31, 2022 and 2021, consistent with the Company’s recognition of the results of its equity method holdings on a one-quarter lag (in thousands):

 

For the six months ended March 31,  2022   2021 
         
Revenue (1)  $2,588   $1,847 
Operating loss  $(7,090)  $(4,444)
Net loss  $(7,090)  $(4,384)

 

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

 

The summarized financial information presented above combines the results of (i) FGF for both periods presented and (ii) GreenFirst (defined below) during the period in which the Company accounted for its holdings in GreenFirst using the equity method of accounting. As noted below, the Company no longer applies the equity method of accounting to its holdings in GreenFirst.

 

As of June 30, 2022, the Company’s retained earnings included an accumulated deficit from its equity method holdings of approximately $8.2 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 $4.2 million and $2.5 million during the three and six months ended June 30, 2022, respectively. The Company did not receive dividends from GreenFirst during the three and six months ended June 30, 2022 or 2021. Based on quoted market prices, the fair value of the Company’s ownership in GreenFirst was $19.8 million as of June 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.

 

18

 

 

8. Property, Plant and Equipment, Net

 

Property, plant and equipment, net consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):

 

   June 30, 2022   December 31, 2021 
Land  $2,343   $51 
Buildings and improvements   13,068    6,886 
Machinery and other equipment   6,090    5,992 
Office furniture and fixtures   878    837 
Construction in progress   5    393 
Total properties, cost   22,384    14,159 
Less: accumulated depreciation   (8,457)   (7,933)
Property, plant and equipment, net  $13,927   $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

 

On March 3, 2022, Strong Studios acquired, from Landmark Studio Group LLC (“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 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.

 

Costs of acquiring and producing films and television programs are capitalized when incurred. In connection with the transaction, 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 obligations due to Landmark when the contingencies are resolved and the amounts become payable.

 

19

 

 

During the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven 2022”) was established to manage the production and financing of the Safehaven television series, 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”). Unbounded will serve as a co-producer on the project and will manage the day-to-day activities of the project.

 

As part of the Landmark transaction, Strong Studios entered into a distribution agreement with Screen Media Ventures, Inc. (“SMV”), pursuant to which SMV agreed to purchase the global distribution rights to Safehaven for $6.5 million upon delivery. This distribution agreement, along with the project’s intellectual property, was assigned to Safehaven 2022 and serves as collateral for the production financing at Safehaven 2022. The Company originally allocated $1.0 million of the $1.7 million acquisition price to the Safehaven project. As a result of the assignment of the distribution agreement to SMV, the Company has reclassified the $1.0 million allocated to the Safehaven project to Other current assets since the Company expects Safehaven 2022 to reimburse the acquisition cost allocated to the project.

 

The Company 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. The Company 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 our statement of operations.

 

10. Goodwill

 

The following represents a summary of changes in the Company’s carrying amount of goodwill for the three months ended June 30, 2022 (in thousands):

 

Balance as of December 31, 2021  $942 
Foreign currency translation adjustment   (15)
Balance as of June 30, 2022  $927 

 

 

11. Debt

 

The Company’s short-term debt and long-term debt consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):

  

   June 30, 2022   December 31, 2021 
Short-term debt:          
Strong/MDI 20-year installment loan  $2,522   $2,682 
Strong/MDI 5-year equipment loan   272    316 
Insurance note payable   263    - 
Total short-term debt  $3,057   $2,998 
           
Long-term debt:          
Tenant improvement loan  $179   $128 
Digital Ignition building loan   5,192    - 
Total long-term debt  $5,371   $128 
Less: current portion   (211)   (23)
Less: deferred debt issuance costs, net   (53)   - 
Long-term debt, net of current portion and deferred debt issuance costs, net  $5,107   $105 

 

20

 

 

   June 30, 2022   December 31, 2021 
Deferred debt issuance costs  $56   $       - 
Less: accumulated amortization  $(3)   - 
Deferred debt issuance costs, net  $53   $- 

 

Estimated future amortization expense of deferred debt issuance costs is as follows (in thousands):

  

      
Remainder of 2022  $7 
2023   11 
2024   11 
2025   11 
2026   11 
Thereafter   2 
Total  $53 

 

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 installlment 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 June 30, 2022, there was CAD$3.3 million, or approximately $2.5 million, of principal outstanding on the 20-year installment loan, which bears variable interest at 4.20%. As of June 30, 2022, there was CAD$0.4 million, or approximately $0.3 million, of principal outstanding on the 5-year installment loan, which also bears variable interest at 4.20%. Strong/MDI was in compliance with its debt covenants as of June 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.

 

21

 

 

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 June 30, 2022 are as follows (in thousands):

  

   Tenant Improvement Loan   Digital Ignitiion Building Loan   Total 
Remainder of 2022  $16   $87   $103 
2023   36    180    216 
2024   38    187    225 
2025   40    195    235 
2026   42    203    245 
Thereafter   7    4,340    4,347 
Total  $179   $5,192   $5,371 

 

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.

 

22

 

 

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):

 

  

   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
Lease cost  Three Months Ended   Six Months Ended 
   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
Finance lease cost:                    
Amortization of right-of-use assets  $2   $1   $2   $243 
Interest on lease liabilities   1    226    1    292 
Operating lease cost   46    215    150    449 
Short-term lease cost   14    14    28    29 
Sublease income   -    (81)   (32)   (153)
Net lease cost  $63   $375   $149   $860 

 

Other information  Three Months Ended   Six Months Ended 
   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
Cash paid for amounts included in the measurement of lease liabilities:                    
Operating cash flows from finance leases  $1   $226   $1   $292 
Operating cash flows from operating leases  $49   $203   $141   $414 
Financing cash flows from finance leases  $2   $1,863   $2   $2,105 
Right-of-use assets obtained in exchange for new finance lease liabilities  $68   $-   $68   $- 
Right-of-use assets obtained in exchange for new operating lease liabilities  $-   $-   $-   $- 

 

   As of June 30, 2022 
Weighted-average remaining lease term - finance leases (years)   4.8 
Weighted-average remaining lease term - operating leases (years)   4.7 
Weighted-average discount rate - finance leases   6.4%
Weighted-average discount rate - operating leases   4.5%

 

The following table presents a maturity analysis of the Company’s operating and finance lease liabilities as of June 30, 2022 (in thousands):

 

  

   Operating Leases   Finance Leases 
Remainder of 2022  $38   $8 
2023   76    16 
2024   78    16 
2025   79    16 
2026   81    16 
Thereafter   14    5 
Total lease payments   366    77 
Less: Amount representing interest   (37)   (11)
Present value of lease payments   329    66 
Less: Current maturities   (62)   (12)
Lease obligations, net of current portion  $267   $54 

 

23

 

 

13. Income Taxes

 

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction in recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence, including recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance should be recorded against all of the Company’s U.S. tax jurisdiction deferred tax assets as of June 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 six months ended June 30, 2022 and comparative June 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.

 

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 $0.2 million for each of the three months ended June 30, 2022 and June 30, 2021, and $0.4 million and $0.5 million for the six months ended June 30, 2022 and June 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 June 30, 2022, approximately 2.6 million shares were available for issuance under the amended and restated 2017 Plan.

 

24

 

 

Stock Options

 

The following table summarizes stock option activity for the six months ended June 30, 2022:

  

   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 June 30, 2022   639,500   $3.72    6.1   $96 
Exercisable at June 30, 2022   432,000   $4.25    5.5   $22 

 

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 June 30, 2022, 207,500 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 2.1 years.

 

Restricted Stock Units

 

The Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant.

 

The following table summarizes restricted stock unit activity for the six months ended June 30, 2022:

  

  

Number of

Restricted Stock

Units

  

Weighted Average

Grant Date Fair

Value

 
Non-vested at December 31, 2021   314,079   $2.45 
Granted   -      
Shares vested   (78,335)   2.91 
Shares forfeited   -      
Non-vested at June 30, 2022   235,744   $2.30 

 

As of June 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.

 

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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. 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 46% of consolidated net revenues during each of the three and six months ended June 30, 2022. Trade accounts receivable from these customers represented approximately 53% of net consolidated receivables at June 30, 2022. One of the Company’s customers accounted for more than 10% of both its consolidated net revenues during the three months ended June 30, 2022 and its net consolidated receivables as of June 30, 2022. None of the Company’s customers accounted for more than 10% of both its consolidated net revenues during the six months ended June 30, 2022 and its net consolidated receivables as of June 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.

 

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.

 

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Summary by Business Segments

  

   2022   2021   2022   2021 
  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2022   2021   2022   2021 
   (in thousands)   (in thousands) 
Net revenues                    
Strong Entertainment  $8,822   $5,828   $18,543   $10,301 
Other   321    266    626    565 
Total net revenues   9,143    6,094    19,169    10,866 
                     
Gross profit                    
Strong Entertainment   2,098    2,386    4,304    3,276 
Other   322    78    628    349 
Total gross profit   2,420    2,464    4,932    3,625 
                     
Operating (loss) income                    
Strong Entertainment   180    1,369    790    1,122 
Other   (36)   (401)   (170)   (433)
Total segment operating income   144    968    620    689 
Unallocated administrative expenses   (1,029)   (952)   (2,267)   (2,430)
(Loss) income from operations   (885)   16    (1,647)   (1,741)
Other expense, net   (4,056)   (369)   (2,925)   (288)
Loss from continuing operations before income taxes and equity method holding loss  $(4,941)  $(353)  $(4,572)  $(2,029)

 

(In thousands)  June 30, 2022   December 31, 2021 
Identifiable assets          
Strong Entertainment  $35,237   $38,518 
Corporate assets   38,860    37,291 
Total  $74,097   $75,809 

 

Summary by Geographical Area

  

   2022   2021   2022   2021 
  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
(In thousands)  2022   2021   2022   2021 
Net revenues                    
United States  $7,840   $4,947   $16,623   $9,096 
Canada   466    380    873    577 
China   44    156    279    158 
Mexico   7    -    7    14 
Latin America   74    58    220    100 
Europe   169    148    265    198 
Asia (excluding China)   279    214    432    346 
Other   264    191    470    377 
Total  $9,143   $6,094   $19,169   $10,866 

 

(In thousands)  June 30, 2022   December 31, 2021 
Identifiable assets          
United States  $51,525   $46,585 
Canada   22,572    29,224 
Total  $74,097   $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.

 

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

 

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

 

Forward-looking statements involve a number of risks and uncertainties, including but not limited to those discussed in the “Risk Factors” section contained in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 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 ongoing military conflict in Ukraine, including the impact of related sanctions being imposed by the U.S. Government and the governments of other countries, and the impact of potential reprisals as a consequence of the military conflict in Ukraine and any related sanctions; 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 the ongoing military conflict in Ukraine and related sanctions); 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 ongoing military conflict in Ukraine 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, the ongoing military conflict in Ukraine and related sanctions, 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.

 

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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 and allocated additional capital to increase our positions in GreenFirst and 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. For instance, some areas of the United States are experiencing new surges in COVID-19 cases, which has, in some cases, led to the closure of recently re-opened businesses and further postponed opening other businesses, including movie theaters. Any resulting financial impact cannot be reasonably estimated at this time, but we expect it will continue to have a material impact on our business, financial condition and results of operations.

 

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The repercussions of the COVID-19 global pandemic resulted in a significant impact to our customers, specifically those in the entertainment and advertising industries, and their ability and willingness to spend on our products and services, which continues to negatively impact us. A significant number of our customers temporarily ceased operations during the pandemic, some of which continue to be suspended; as such, we have experienced, and anticipate that we will continue to experience at least until our customers have resumed normal operations, a significant decline in our results of operations. For instance, during this time, many movie theaters and other entertainment centers were forced to close or curtail their hours and, correspondingly, have terminated or deferred their non-essential capital expenditures. While some movie theaters and chains have begun to re-open, or announced plans to re-open in the near future, theater operators may continue to experience reduced revenues for an extended period due to, among other things, consumer concerns over safety and social distancing, depressed consumer sentiment due to adverse economic conditions, including job losses, capacity restrictions, and postponed release dates, shortened “release windows” between the release of motion pictures in theaters and an alternative delivery method, or the release of motion pictures directly to alternative delivery methods, bypassing the theater entirely, for certain movies, and continued COVID-19 outbreaks could cause these theaters to suspend operations again. The COVID-19 pandemic has also adversely affected film production and may adversely affect the pipeline of feature films available in the short- or long-term. In addition to decreased business spending by our customers and prospective customers and reduced demand for our products, lower renewal rates by our customers, increased customer losses/churn, increased challenges in or cost of acquiring new customers and increased risk in collectability of accounts receivable may have a material adverse effect on our business and results of operations. We have also experienced other negative impacts; among other actions, we were required to temporarily close our screen manufacturing facility in Canada due to the governmental response to COVID-19, which we were able to re-open on May 11, 2020, and have experienced lower revenues from field services and a reduction in non-recurring time and materials-based services. The completion of our outsourced screen finishing facility in China 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 second 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.

 

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Results of Operations

 

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

 

  

Three Months Ended

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Net revenues  $9,143   $6,094   $3,049    50.0%
Cost of revenues   6,723    3,630    3,093    85.2%
Gross profit   2,420    2,464    (44)   (1.8)%
Gross profit percentage   26.5%   40.4%          
Selling and administrative expenses   3,305    2,448    857    35.0%
(Loss) income from operations   (885)   16    (901)   (5631.3)%
Other expense   (4,056)   (369)   (3,687)   999.2%
Loss before income taxes and equity method holding loss   (4,941)   (353)   (4,588)   1299.7%
Income tax benefit (expense)   303    (23)   326    (1417.4)%
Equity method holding loss   (960)   (376)   (584)   155.3%
Net loss from continuing operations  $(5,598)  $(752)  $(4,846)   644.4%

 

  

Six Months Ended

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Net revenues  $19,169   $10,866   $8,303    76.4%
Cost of revenues   14,237    7,241    6,996    96.6%
Gross profit   4,932    3,625    1,307    36.1%
Gross profit percentage   25.7%   33.4%          
Selling and administrative expenses   6,579    5,366    1,213    22.6%
Loss from operations   (1,647)   (1,741)   94    (5.4)%
Other expense   (2,925)   (288)   (2,637)   915.6%
Loss before income taxes and equity method holding loss   (4,572)   (2,029)   (2,543)   125.3%
Income tax expense   (47)   (92)   45    (48.9)%
Equity method holding loss   (1,780)   (1,145)   (635)   55.5%
Net loss from continuing operations  $(6,399)  $(3,266)  $(3,133)   95.9%

 

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

 

Revenues

 

Net revenues during the quarter ended June 30, 2022 increased 50.0% to $9.1 million from $6.1 million during the quarter ended June 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

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Strong Entertainment  $8,822   $5,828   $2,994    51.4%
Other   321    266    55    20.7%
Total net revenues  $9,143   $6,094   $3,049    50.0%

 

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Strong Entertainment

 

Revenue from Strong Entertainment increased 51.4% to $8.8 million in the second quarter of 2022 from $5.8 million in the second quarter of 2021. The increase from the prior year was due to a $2.5 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 restrictions eased and studios began accelerating the release of new content to the cinemas. Studios recently resumed releasing major movies to the cinemas and continue to have a backlog of content planned for release in 2022 and 2023.

 

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 decreased $0.1 million to $2.4 million during the quarter ended June 30, 2022 from $2.5 million during the quarter ended June 30, 2021. As a percentage of revenue, gross profit was 26.5% and 40.4% for the quarters ended June 30, 2022 and June 30, 2021, respectively.

 

Excluding the impact of employee retention credits, which favorably impacted the prior year period, gross profit during the quarter ended June 30, 2021 would have been 26.6% as compared to 26.5% in the current period.

 

  

Three Months Ended

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Strong Entertainment  $2,098   $2,386   $(288)   (12.1)%
Other   322    78    244    312.8%
Total gross profit  $2,420   $2,464   $(44)   (1.8)%

 

Strong Entertainment

 

Gross profit in the Strong Entertainment segment was $2.1 million or 23.8% of revenues in the second quarter of 2022. Gross profit in the Strong Entertainment segment was $2.4 million or 40.9% of revenues in the second quarter of 2021, which included a positive impact of $0.8 million from employee retention credits. Excluding the impact of the employee retention credit, gross profit would have been 26.5% of revenue as compared to 23.8% in the current period.

 

Gross profit from product sales was $1.8 million or 27.7% of revenues for the second quarter of 2022 compared to $1.4 million or 34.1% of revenues for the second quarter of 2021. During the current period, we experienced increased costs for materials, packaging and shipping, which partially offset the favorable impact of higher revenue levels.

 

Gross profit from service revenue was $0.2 million or 11.6% of revenues for the second quarter of 2022 compared to $1.0 million or 58.4% of revenues for the second quarter of 2021. Excluding the impact of the employee retention credit, gross profit from service revenue for the second quarter of 2021 would have been $0.1 million or 5.0% of revenue.

 

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Loss From Operations

 

Consolidated loss from operations was $0.9 million in the second quarter of 2022 compared to breakeven in the second quarter of 2021. Excluding the impact of employee retention credits, which favorably impacted the prior year period, loss from operations during the quarter ended June 30, 2021 would have been $1.3 million.

 

  

Three Months Ended

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Strong Entertainment  $180   $1,369   $(1,189)   (86.9)%
Other   (36)   (401)   365    (91.0)%
Total segment operating income   144    968    (824)   (85.1)%
Unallocated administrative expenses   (1,029)   (952)   (77)   8.1%
Total (loss) income from operations  $(885)  $16   $(901)   (5631.3)%

 

Strong Entertainment generated income from operations of $0.2 million in the second quarter of 2022 compared to operating income of $1.4 million in the second quarter of 2021. The decrease in income from operations was primarily due to the favorable impact on the prior year period of $1.0 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 due to higher compensation and benefits, marketing and travel and entertainment expenses related to the increased revenue and business activity in the current period as compared to the prior year.

 

Unallocated administrative expenses was $1.0 million in both the second quarter of 2022 and 2021. The recognition of employee retention credits of $0.2 million in the prior year was partially offset by lower compensation and benefits expenses in the current period.

 

Other Financial Items

 

Total other expense of $4.1 million during the second quarter of 2022 primarily consisted of a $4.2 million unrealized loss on equity holdings and $0.1 million of interest expense, partially offset by $0.2 million of foreign currency transaction adjustments. Total other expense of $0.4 million during the second quarter of 2021 primarily consisted of $0.2 million of foreign currency transaction adjustments and $0.2 million of interest expense.

 

Income tax benefit was $0.3 million during the second quarter of 2022 compared to expense of $23 thousand during the second quarter of 2021. Our income tax benefit during the second quarter of 2022 consisted primarily of current and deferred income tax on foreign earnings, which includes the unrealized loss on equity holdings.

 

We recorded a loss on our equity method holding of $1.0 million during the second quarter of 2022. We recorded equity method investment loss of $0.4 million during the second quarter of 2021, which primarily consisted of $0.4 million from GreenFirst.

 

As a result of the items outlined above, we generated a net loss from continuing operations of $5.6 million, or $0.29 per basic and diluted share, in the second quarter of 2022, compared to a net loss from continuing operations of $0.7 million, or $0.04 per basic and diluted share, in the second quarter of 2021.

 

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Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

 

Revenues

 

Net revenues during the six months ended June 30, 2022 increased 76.4% to $19.2 million from $10.9 million during the six months ended June 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.

 

  

Six Months Ended

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Strong Entertainment  $18,543   $10,301   $8,242    80.0%
Other   626    565    61    10.8%
Total net revenues  $19,169   $10,866   $8,303    76.4%

 

Strong Entertainment

 

Revenue from Strong Entertainment increased 80.0% to $18.5 million in the first half of 2022 from $10.3 million in the first half of 2021. The increase from the prior year was due to a $6.7 million increase in product revenue and a $1.5 million increase in service revenue. Demand and revenue from products and services benefited from the continuing recovery in the cinema industry as restrictions eased and studios began accelerating the release of new content to the cinemas. Studios recently resumed releasing major movies to the cinemas and continue to have a backlog of content planned for release in 2022 and 2023.

 

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 to $4.9 million during the six months ended June 30, 2022 from $3.6 million during the six months ended June 30, 2021. As a percentage of revenue, gross profit was 25.7% and 33.4% for the six months ended June 30, 2022 and June 30, 2021, respectively. Excluding the impact of the employee retention credit, gross profit during the six months ended June 30, 2021 would have been 22.4%.

 

  

Six Months Ended

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Strong Entertainment  $4,304   $3,276   $1,028    31.4%
Other   628    349    279    79.9%
Total gross profit  $4,932   $3,625   $1,307    36.1%

 

Strong Entertainment

 

Gross profit in the Strong Entertainment segment was $4.3 million or 22.7% of revenues in the first half of 2022. Gross profit in the Strong Entertainment segment was $3.3 million or 31.8% of revenues in the first half of 2021, which included a positive impact of $0.8 million from employee retention credits. Excluding the impact of the employee retention credit, gross profit would have been 23.6% of revenue as compared to 22.7% in the current period.

 

34

 

 

Gross profit from product sales was $3.7 million or 25.7% of revenues for the first half of 2022 compared to $2.5 million or 32.6% of revenues for the first half of 2021. During the current period, we experienced increased costs for materials, packaging and shipping which partially the favorable impact of increasing revenue levels.

 

Gross profit from service revenue was $0.6 million or 14.7% of revenues for the first half of 2022 compared to $0.8 million or 31.7% of revenues for the first half of 2021. Excluding the impact of the employee retention credit, gross profit from service revenue for the first half of 2021 would have been breakeven.

 

Loss From Operations

 

Consolidated loss from operations was $1.6 million in the first half of 2022 compared to $1.7 million in the first half of 2021. Excluding the impact of employee retention credits, which favorably impacted the prior year period, loss from operations during the six months ended June 30, 2021 would have been $3.0 million.

 

  

Six Months Ended

June 30,

         
   2022   2021   $ Change   % Change 
   (dollars in thousands)     
Strong Entertainment  $790   $1,122   $(332)   (29.6)%
Other   (170)   (433)   263    (60.7)%
Total segment operating income   620    689    (69)   (10.0)%
Unallocated administrative expenses   (2,267)   (2,430)   163    (6.7)%
Total loss from operations  $(1,647)  $(1,741)  $94    (5.4)%

 

Strong Entertainment generated income from operations of $0.8 million in the first half of 2022 compared to operating income of $1.1 million in the first half of 2021. The decrease in income from operations was primarily due to the favorable impact on the prior year period of $1.0 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 due to higher compensation and benefits, marketing and travel and entertainment expenses related to the increased revenue and business activity in the current period as compared to the prior year.

 

Unallocated administrative expenses decreased to $2.3 million in the first half of 2022 compared to $2.4 million in the first half of 2021. Compensation and benefits expenses decreased in the current period as compared to prior year but were partially offset by the recognition of employee retention credits of $0.2 million recognized in the prior year.

 

Other Financial Items

 

Total other expense of $2.9 million during the first half of 2022 primarily consisted of a $2.5 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 $0.1 million of interest expense, and $0.1 million of foreign currency transaction adjustments. Total other expense of $0.3 million during the first half of 2021 primarily consisted of $0.2 million of foreign currency transaction adjustments and $0.3 million of interest expense, partially offset by a $0.1 million gain on our property and insurance claim for the weather-related incident at our production facility in Quebec, Canada.

 

Income tax expense was approximately $47 thousand during the first half of 2022 compared to $0.1 million during the first half of 2021. Our income tax expense consisted primarily of current and deferred income tax on foreign earnings, which includes unrealized loss on equity holdings.

 

We recorded a loss on our equity method holding of $1.8 million during the first half of 2022. We recorded an equity method investment loss of $1.1 million during the first half of 2021, consisting of $0.7 million from GreenFirst and $0.4 million from FGF.

 

35

 

 

As a result of the items outlined above, we generated a net loss from continuing operations of $6.4 million, or $0.33 per basic and diluted share, in the first half of 2022, compared to a net loss from continuing operations of $3.2 million, or $0.18 per basic and diluted share, in the first half 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 second quarter of 2022 with total cash and cash equivalents and restricted cash of $4.6 million compared to $8.9 million as of December 31, 2021. Of the $4.6 million as of June 30, 2022, $1.7 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 June 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 June 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 $2.8 million as of June 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 June 30, 2022.

 

Cash Flows from Operating Activities

 

Net cash used in operating activities from continuing operations was $3.0 million during the six months ended June 30, 2022, primarily due to cash outflows for selling and administrative expenses and reductions in working capital, partially offset by the operating income generated by Strong Entertainment. Net cash used in operating activities from continuing operations was $3.5 million during the six months ended June 30, 2021 primarily due to cash outflows for selling and administrative expense and reductions in working capital which was primarily a result of the recognition of a receivable of $1.5 million in connection with filing for the employee retention credits, partially offset by the operating income generated by Strong Entertainment.

 

36

 

 

Cash Flows from Investing Activities

 

Net cash used in investing activities from continuing operations was $0.9 million during the six months ended June 30, 2022, which consisted of a $2.0 million purchase of common stock of FGF, $0.8 million of capital expenditures and $0.3 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 $0.3 million during the six months ended June 30, 2021, which consisted entirely of capital expenditures.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities from continuing operations was $0.4 million during the six months ended June 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 $3.8 million during the six months ended June 30, 2021, which consisted of $6.3 million of net proceeds from the issuance of our common stock, partially offset by $2.4 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.

 

37

 

 

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

 

   Quarters Ended June 30, 
   2022   2021 
  

Strong

Entertainment

  

Corporate

and

Other

  

Discontinued

Operations

   Consolidated  

Strong

Entertainment

  

Corporate

and

Other

  

Discontinued

Operations

   Consolidated 
Net (loss) income  $       (1,371)  $(4,227)  $            -   $(5,598)  $641   $(1,393)  $          324   $(428)
Net income from discontinued operations   -    -    -    -    -    -    (324)   (324)
Net (loss) income from continuing operations   (1,371)   (4,227)   -    (5,598)   641    (1,393)   -    (752)
Interest expense, net   29    58    -    87    36    111    -    147 
Income tax (benefit) expense   (271)   (32)   -    (303)   17    6    -    23 
Depreciation and amortization   154    182    -    336    235    131    -    366 
EBITDA   (1,459)   (4,019)   -    (5,478)   929    (1,145)   -    (216)
Stock-based compensation expense   -    175    -    175    -    159    -    159 
Equity method holding loss (income)   -    960    -    960    383    (7)   -    376 
Unrealized loss on equiity holdings   1,932    2,246    -    4,178    -    -    -    - 
Foreign currency transaction (income) loss   (206)   -    -    (206)   234    -    -    234 
Employee retention credit   -    -    -    -    (1,049)   (245)   -    (1,294)
Adjusted EBITDA  $267   $(638)  $-   $(371)  $497   $(1,238)  $-   $(741)

 

   Six Months Ended June 30, 
   2022   2021 
  

Strong

Entertainment

  

Corporate

and

Other

  

Discontinued

Operations

   Consolidated  

Strong

Entertainment

  

Corporate

and

Other

  

Discontinued

Operations

   Consolidated 
Net (loss) income  $        (637)  $(5,762)  $             -   $(6,399)  $33   $(3,299)  $14,649   $11,383 
Net income from discontinued operations   -    -    -    -    -    -    (14,649)   (14,649)
Net (loss) income from continuing operations   (637)   (5,762)   -    (6,399)   33    (3,299)   -    (3,266)
Interest expense, net   53    87    -    140    60    164    -    224 
Income tax expense   40    7    -    47    79    13    -    92 
Depreciation and amortization   367    335    -    702    471    169    -    640 
EBITDA   (177)   (5,333)   -    (5,510)   643    (2,953)   -    (2,310)
Stock-based compensation expense   -    369    -    369    -    473    -    473 
Equity method holding loss   -    1,780    -    1,780    736    409    -    1,145 
Employee retention credit   -    -    -    -    (1,049)   (245)   -    (1,294)
Unrealized loss on equiity holdings   1,064    1,387    -    2,451    -    -    -    - 
Foreign currency transaction loss   134    2    -    136    218    -    -    218 
Gain on property and casualty insurance recoveries   -    -    -    -    (148)   -    -    (148)
Severance and other   -    222    -    222    15    87    -    102 
Adjusted EBITDA  $1,021   $(1,573)  $-   $(552)  $415   $(2,229)  $-   $(1,814)

 

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.

 

38

 

 

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 six months ended June 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. There were no significant changes in our critical accounting policies during the three months ended June 30, 2022.

 

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

 

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. The Company determined that no material changes to its internal control over financial reporting occurred or were required in response to the measures it has taken related to the COVID-19 pandemic, including remote working arrangements for many of its employees. The Company is continually monitoring and assessing the impact of COVID-19 on its internal controls in an effort to ensure that its internal controls respond to any changes in its operating environment.

 

39

 

 

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. 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.

 

40

 

 

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 second quarter of 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

 
         
April 2022         -   $     -            -    636,931 
May 2022   -    -    -    636,931 
June 2022   -    -    -    636,931 
Quarter Ended June 30, 2022   -   $-   $-    636,931 

 

41

 

 

Item 6. Exhibits

 

        Incorporated by Reference    
Exhibit
Number		   Document Description   Form   Exhibit   Filing
Date		   Filed
Herewith
                     
31.1   Rule 13a-14(a) Certification of Chief Executive Officer.               X
                     
31.2   Rule 13a-14(a) Certification of Chief Financial Officer.               X
                     
32.1**   18 U.S.C. Section 1350 Certification of Chief Executive Officer.               X
                     
32.2**   18 U.S.C. Section 1350 Certification of Chief Financial Officer.               X
                     
101 INS   Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.               X
                     
101 SCH   Inline XBRL Taxonomy Extension Schema Document.               X
                     
101 CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document .             X
                     
101 DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document.               X
                     
101 LAB   Inline XBRL Taxonomy Extension Label Linkbase Document.               X
                     
101 PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document.               X
                     
104   Cover Page Interactive Data File (embedded within the Inline XBRL document).               X

 

 

** Furnished herewith.

 

42

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BALLANTYNE STRONG, INC.        
           
By:

/s/ MARK D. ROBERSON

   By:

/s/ TODD R. MAJOR

  
 

Mark D. Roberson

Chief Executive Officer

(Principal Executive Officer)

    

Todd R. Major

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

  
           
Date: August 3, 2022   Date: August 3, 2022  

 

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