UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021March 31, 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) | |
4201 Congress Street, Suite 175 Charlotte, North Carolina | 28209 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(704) 994-8279
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
| Common Shares, $0.01 par value | BTN | NYSE American |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 | |
| Common Stock, $0.01 par value | shares |
TABLE OF CONTENTS
| 2 |
PART I. Financial Information
Item 1. Financial Statements
Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par values)
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 10,372 | $ | 4,435 | ||||
| Restricted cash | 150 | 352 | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $613 and $1,006, respectively) | 4,446 | 5,558 | ||||||
| Inventories, net | 2,986 | 2,264 | ||||||
| Current assets of discontinued operations | - | 3,748 | ||||||
| Other current assets | 5,667 | 1,452 | ||||||
| Total current assets | 23,621 | 17,809 | ||||||
| Property, plant and equipment, net | 6,109 | 5,524 | ||||||
| Operating lease right-of-use assets | 3,842 | 4,304 | ||||||
| Finance lease right-of-use assets | 1 | 4 | ||||||
| Note receivable, net of current portion | 1,875 | - | ||||||
| Investments | 37,341 | 20,167 | ||||||
| Intangible assets, net | 132 | 353 | ||||||
| Goodwill | 937 | 938 | ||||||
| Long-term assets of discontinued operations | - | 6,372 | ||||||
| Other assets | 19 | 28 | ||||||
| Total assets | $ | 73,877 | $ | 55,499 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,915 | $ | 2,717 | ||||
| Accrued expenses | 2,400 | 2,182 | ||||||
| Short-term debt | 3,201 | 3,299 | ||||||
| Current portion of operating lease obligations | 562 | 619 | ||||||
| Current portion of finance lease obligations | 1 | 1,015 | ||||||
| Deferred revenue and customer deposits | 3,850 | 2,404 | ||||||
| Current liabilities of discontinued operations | - | 3,901 | ||||||
| Total current liabilities | 12,929 | 16,137 | ||||||
| Operating lease obligations, net of current portion | 3,408 | 3,817 | ||||||
| Finance lease obligations, net of current portion | - | 1,091 | ||||||
| Deferred income taxes | 5,218 | 3,099 | ||||||
| Long-term liabilities of discontinued operations | - | 4,066 | ||||||
| Other long-term liabilities | 229 | 223 | ||||||
| Total liabilities | 21,784 | 28,433 | ||||||
| Commitments, contingencies and concentrations (Note 14) | - | |||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $ per share; authorized shares, outstanding | - | - | ||||||
| Common stock, par value $ per share; authorized shares; issued and shares at September 30, 2021 and December 31, 2020, respectively; outstanding and shares at September 30, 2021 and December 31, 2020, respectively | 212 | 176 | ||||||
| Additional paid-in capital | 50,603 | 43,713 | ||||||
| Retained earnings | 24,123 | 5,654 | ||||||
| Treasury stock, shares at cost | (18,586 | ) | (18,586 | ) | ||||
| Accumulated other comprehensive loss | (4,259 | ) | (3,891 | ) | ||||
| Total stockholders’ equity | 52,093 | 27,066 | ||||||
| Total liabilities and stockholders’ equity | $ | 73,877 | $ | 55,499 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2021 and 2020
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net product sales | $ | 4,086 | $ | 4,138 | $ | 11,811 | $ | 11,370 | ||||||||
| Net service revenues | 2,030 | 1,423 | 5,170 | 4,164 | ||||||||||||
| Total net revenues | 6,116 | 5,561 | 16,981 | 15,534 | ||||||||||||
| Cost of products sold | 2,624 | 3,205 | 7,831 | 8,286 | ||||||||||||
| Cost of services | 1,044 | 1,192 | 3,078 | 4,067 | ||||||||||||
| Total cost of revenues | 3,668 | 4,397 | 10,909 | 12,353 | ||||||||||||
| Gross profit | 2,448 | 1,164 | 6,072 | 3,181 | ||||||||||||
| Selling and administrative expenses: | ||||||||||||||||
| Selling | 411 | 382 | 1,158 | 1,231 | ||||||||||||
| Administrative | 2,155 | 2,222 | 6,775 | 7,923 | ||||||||||||
| Total selling and administrative expenses | 2,566 | 2,604 | 7,933 | 9,154 | ||||||||||||
| Loss on disposal of assets | - | (18 | ) | - | (18 | ) | ||||||||||
| Loss from operations | (118 | ) | (1,458 | ) | (1,861 | ) | (5,991 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 21 | - | 54 | - | ||||||||||||
| Interest expense | (28 | ) | (109 | ) | (284 | ) | (372 | ) | ||||||||
| Foreign currency transaction gain (loss) | 162 | (172 | ) | (56 | ) | 51 | ||||||||||
| Unrealized gain on investments | 8,376 | - | 8,376 | - | ||||||||||||
| Other income, net | 1,692 | 2,749 | 1,847 | 2,867 | ||||||||||||
| Total other income | 10,223 | 2,468 | 9,937 | 2,546 | ||||||||||||
| Income (loss) from continuing operations before income taxes and equity method investment loss | 10,105 | 1,010 | 8,076 | (3,445 | ) | |||||||||||
| Income tax expense | (2,696 | ) | (614 | ) | (2,788 | ) | (996 | ) | ||||||||
| Equity method investment loss | (323 | ) | (460 | ) | (1,468 | ) | (580 | ) | ||||||||
| Net income (loss) from continuing operations | 7,086 | (64 | ) | 3,820 | (5,021 | ) | ||||||||||
| Net income from discontinued operations (Note 3) | - | 5,710 | 14,649 | 6,492 | ||||||||||||
| Net income | $ | 7,086 | $ | 5,646 | $ | 18,469 | $ | 1,471 | ||||||||
| Basic net income (loss) per share | ||||||||||||||||
| Continuing operations | $ | 0.38 | $ | - | $ | 0.21 | $ | (0.34 | ) | |||||||
| Discontinued operations | - | 0.38 | 0.82 | 0.44 | ||||||||||||
| Basic net income per share | $ | 0.38 | $ | 0.38 | $ | 1.03 | $ | 0.10 | ||||||||
| Diluted net income (loss) per share | ||||||||||||||||
| Continuing operations | $ | 0.38 | $ | - | $ | 0.21 | $ | (0.34 | ) | |||||||
| Discontinued operations | - | 0.38 | 0.81 | 0.44 | ||||||||||||
| Diluted net income per share | $ | 0.38 | $ | 0.38 | $ | 1.02 | $ | 0.10 | ||||||||
| Weighted-average shares used in computing net income (loss) per share: | ||||||||||||||||
| Basic | 18,437 | 14,789 | 17,870 | 14,699 | ||||||||||||
| Diluted | 18,700 | 14,789 | 18,042 | 14,699 | ||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 8,133 | $ | 8,731 | ||||
| Restricted cash | 150 | 150 | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $569 and $607, respectively) | 5,077 | 4,631 | ||||||
| Inventories, net | 2,862 | 3,271 | ||||||
| Other current assets | 5,123 | 4,992 | ||||||
| Total current assets | 21,345 | 21,775 | ||||||
| Property, plant and equipment, net | 14,329 | 6,226 | ||||||
| Operating lease right-of-use assets | 297 | 3,975 | ||||||
| Note receivable, net of current portion | - | 1,667 | ||||||
| Equity holdings | 42,014 | 41,133 | ||||||
| Film and television programming rights, net | 2,253 | - | ||||||
| Intangible assets, net | 15 | 69 | ||||||
| Goodwill | 956 | 942 | ||||||
| Other assets | 5 | 22 | ||||||
| Total assets | $ | 81,214 | $ | 75,809 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 4,564 | $ | 4,245 | ||||
| Accrued expenses | 3,291 | 2,994 | ||||||
| Short-term debt | 3,353 | 2,998 | ||||||
| Current portion of long-term debt | 209 | 23 | ||||||
| Current portion of operating lease obligations | 84 | 577 | ||||||
| Deferred revenue and customer deposits | 2,960 | 3,292 | ||||||
| Total current liabilities | 14,461 | 14,129 | ||||||
| Operating lease obligations, net of current portion | 283 | 3,586 | ||||||
| Long-term debt, net of current portion and deferred debt issuance costs, net | 5,157 | 105 | ||||||
| Deferred income taxes | 5,876 | 5,594 | ||||||
| Other long-term liabilities | 1,139 | 118 | ||||||
| Total liabilities | 26,916 | 23,532 | ||||||
| Commitments, contingencies and concentrations (Note 15) | - | - | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $ per share; authorized shares, outstanding | - | - | ||||||
| Common stock, par value $per share; authorized and shares at March 31, 2022 and December 31, 2021, respectively; issued and shares at March 31, 2022 and December 31, 2021, respectively; outstanding and shares at March 31, 2022 and December 31, 2021, respectively | 221 | 213 | ||||||
| Additional paid-in capital | 53,452 | 50,807 | ||||||
| Retained earnings | 22,789 | 23,591 | ||||||
| Treasury stock, shares at cost | (18,586 | ) | (18,586 | ) | ||||
| Accumulated other comprehensive loss | (3,578 | ) | (3,748 | ) | ||||
| Total stockholders’ equity | 54,298 | 52,277 | ||||||
| Total liabilities and stockholders’ equity | $ | 81,214 | $ | 75,809 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2022 and 2021
(In thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net product sales | $ | 7,703 | $ | 3,528 | ||||
| Net service revenues | 2,323 | 1,244 | ||||||
| Total net revenues | 10,026 | 4,772 | ||||||
| Cost of products sold | 5,858 | 2,443 | ||||||
| Cost of services | 1,657 | 1,169 | ||||||
| Total cost of revenues | 7,515 | 3,612 | ||||||
| Gross profit | 2,511 | 1,160 | ||||||
| Selling and administrative expenses: | ||||||||
| Selling | 541 | 476 | ||||||
| Administrative | 2,733 | 2,441 | ||||||
| Total selling and administrative expenses | 3,274 | 2,917 | ||||||
| Loss from operations | (763 | ) | (1,757 | ) | ||||
| Other income (expense): | ||||||||
| Interest income | 6 | 13 | ||||||
| Interest expense | (59 | ) | (90 | ) | ||||
| Foreign currency transaction (loss) gain | (342 | ) | 16 | |||||
| Unrealized gain on equity holdings | 1,728 | - | ||||||
| Other (expense) income, net | (202 | ) | 142 | |||||
| Total other income | 1,131 | 81 | ||||||
| Income (loss) from continuing operations before income taxes and equity method holding loss | 368 | (1,676 | ) | |||||
| Income tax expense | (350 | ) | (69 | ) | ||||
| Equity method holding loss | (820 | ) | (769 | ) | ||||
| Net loss from continuing operations | (802 | ) | (2,514 | ) | ||||
| Net income from discontinued operations (Note 3) | - | 14,325 | ||||||
| Net (loss) income | $ | (802 | ) | $ | 11,811 | |||
| Basic and diluted net (loss) income per share | ||||||||
| Continuing operations | $ | (0.04 | ) | $ | (0.15 | ) | ||
| Discontinued operations | - | 0.85 | ||||||
| Basic and diluted net (loss) income per share | $ | (0.04 | ) | $ | 0.70 | |||
| Weighted-average shares used in computing net (loss) income per share: | ||||||||
| Basic | 18,990 | 16,835 | ||||||
| Diluted | 18,990 | 16,835 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
Three and Nine Months Ended September 30,March 31, 2022 and 2021 and 2020
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | 7,086 | $ | 5,646 | $ | 18,469 | $ | 1,471 | ||||||||
| Adjustment to postretirement benefit obligation | (8 | ) | (8 | ) | (54 | ) | (13 | ) | ||||||||
| Unrealized loss on available-for-sale securities of equity method investments, net of tax | - | - | - | (75 | ) | |||||||||||
| Currency translation adjustment: | ||||||||||||||||
| Unrealized net change arising during period | (60 | ) | 379 | (314 | ) | (136 | ) | |||||||||
| Total other comprehensive (loss) income | (68 | ) | 371 | (368 | ) | (224 | ) | |||||||||
| Comprehensive income | $ | 7,018 | $ | 6,017 | $ | 18,101 | $ | 1,247 | ||||||||
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net (loss) income | $ | (802 | ) | $ | 11,811 | |||
| Adjustment to postretirement benefit obligation | (8 | ) | (46 | ) | ||||
| Currency translation adjustment: | ||||||||
| Unrealized net change arising during period | 178 | (356 | ) | |||||
| Total other comprehensive income (loss) | 170 | (402 | ) | |||||
| Comprehensive (loss) income | $ | (632 | ) | $ | 11,409 | |||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
Three and Nine Months Ended September 30,March 31, 2022 and 2021 and 2020
(In thousands)
(Unaudited)
| Common Stock (Shares) | Common Stock ($) | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||
| Balance at December 31, 2020 | 17,596 | $ | 176 | $ | 43,713 | $ | 5,654 | $ | (18,586 | ) | $ | (3,891 | ) | $ | 27,066 | |||||||||||||
| Net income | - | - | - | 11,811 | - | - | 11,811 | |||||||||||||||||||||
| Net other comprehensive loss | - | - | - | - | - | (402 | ) | (402 | ) | |||||||||||||||||||
| Vesting of restricted stock | 209 | 2 | (9 | ) | - | - | - | (7 | ) | |||||||||||||||||||
| Stock option exercise | ||||||||||||||||||||||||||||
| Stock option exercise, shares | ||||||||||||||||||||||||||||
| 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 | |||||||||||||
| Net income | - | - | - | 7,086 | - | - | 7,086 | |||||||||||||||||||||
| Net other comprehensive loss | - | - | - | - | - | (68 | ) | (68 | ) | |||||||||||||||||||
| Vesting of restricted stock | 67 | - | - | - | - | - | - | |||||||||||||||||||||
| Stock-based compensation expense | - | - | 213 | - | - | - | 213 | |||||||||||||||||||||
| Balance at September 30, 2021 | 21,231 | $ | 212 | $ | 50,603 | $ | 24,123 | $ | (18,586 | ) | $ | (4,259 | ) | $ | 52,093 | |||||||||||||
Common Stock | 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 | |||||||||||||
| Common Stock (Shares) | Common Stock ($) | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||
| Balance at December 31, 2019 | 17,410 | $ | 174 | $ | 42,589 | $ | 6,001 | $ | (18,586 | ) | $ | (4,469 | ) | $ | 25,709 | |||||||||||||
| Net loss | - | - | - | (447 | ) | - | - | (447 | ) | |||||||||||||||||||
| Net other comprehensive loss | - | - | - | - | - | (1,285 | ) | (1,285 | ) | |||||||||||||||||||
| Vesting of restricted stock | 35 | - | - | - | - | - | - | |||||||||||||||||||||
| Stock-based compensation expense | - | - | 273 | - | - | - | 273 | |||||||||||||||||||||
| Balance at March 31, 2020 | 17,445 | $ | 174 | $ | 42,862 | $ | 5,554 | $ | (18,586 | ) | $ | (5,754 | ) | $ | 24,250 | |||||||||||||
| Net loss | - | - | - | (3,728 | ) | - | - | (3,728 | ) | |||||||||||||||||||
| Net other comprehensive income | - | - | - | - | - | 690 | 690 | |||||||||||||||||||||
| Vesting of restricted stock | 107 | 2 | (2 | ) | - | - | - | - | ||||||||||||||||||||
| Stock-based compensation expense | - | - | 212 | - | - | - | 212 | |||||||||||||||||||||
| Balance at June 30, 2020 | 17,552 | $ | 176 | $ | 43,072 | $ | 1,826 | $ | (18,586 | ) | $ | (5,064 | ) | $ | 21,424 | |||||||||||||
| Net income | - | - | - | 5,646 | - | - | 5,646 | |||||||||||||||||||||
| Net income (loss) | - | - | - | 5,646 | - | - | 5,646 | |||||||||||||||||||||
| Net other comprehensive income | - | - | - | - | - | 371 | 371 | |||||||||||||||||||||
| Vesting of restricted stock | 32 | - | - | - | - | - | - | |||||||||||||||||||||
| Stock-based compensation expense | - | - | 239 | - | - | - | 239 | |||||||||||||||||||||
| Balance at September 30, 2020 | 17,584 | $ | 176 | $ | 43,311 | $ | 7,472 | $ | (18,586 | ) | $ | (4,693 | ) | $ | 27,680 | |||||||||||||
| 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 | |||||||||||||||||||||
| Net income loss | - | - | - | 11,811 | - | - | 11,811 | |||||||||||||||||||||
| Balance at March 31, 2021 | 21,095 | $ | 211 | $ | 50,295 | $ | 17,465 | $ | (18,586 | ) | $ | (4,293 | ) | $ | 45,092 | |||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
NineThree Months Ended September 30,March 31, 2022 and 2021 and 2020
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (loss) from continuing operations | $ | 3,820 | $ | (5,021 | ) | |||||||||||
| Net loss from continuing operations | $ | (802 | ) | $ | (2,514 | ) | ||||||||||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||||||||||
| (Recovery of) provision for doubtful accounts | (249 | ) | 453 | |||||||||||||
| Provision for obsolete inventory | 69 | 105 | ||||||||||||||
| Recovery of doubtful accounts | (15 | ) | (32 | ) | ||||||||||||
| Provision for (benefit from) obsolete inventory | 13 | (3 | ) | |||||||||||||
| Provision for warranty | 46 | 14 | 11 | 37 | ||||||||||||
| Depreciation and amortization | 985 | 843 | 366 | 274 | ||||||||||||
| Amortization and accretion of operating leases | 620 | 717 | 97 | 184 | ||||||||||||
| Equity method investment loss | 1,468 | 580 | ||||||||||||||
| Unrealized gain on investments | (8,376 | ) | - | |||||||||||||
| Equity method holding loss | 820 | 769 | ||||||||||||||
| Adjustment to SageNet promissory note in connection with prepayment (Note 3) | 202 | - | ||||||||||||||
| Unrealized gain on equity holdings | (1,728 | ) | - | |||||||||||||
| Deferred income taxes | 2,124 | 72 | 239 | (116 | ) | |||||||||||
| Stock-based compensation expense | 686 | 724 | 194 | 314 | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | 1,287 | 2,063 | (407 | ) | 975 | |||||||||||
| Inventories | (793 | ) | (248 | ) | 426 | (53 | ) | |||||||||
| Current income taxes | (6 | ) | 338 | (185 | ) | (68 | ) | |||||||||
| Other assets | (2,028 | ) | (11 | ) | (246 | ) | (202 | ) | ||||||||
| Accounts payable and accrued expenses | (1,373 | ) | 2,551 | 149 | (743 | ) | ||||||||||
| Deferred revenue and customer deposits | 2,002 | 646 | (728 | ) | 286 | |||||||||||
| Operating lease obligations | (617 | ) | (720 | ) | (89 | ) | (188 | ) | ||||||||
| Net cash (used in) provided by operating activities from continuing operations | (335 | ) | 3,106 | |||||||||||||
| Net cash used in operating activities from continuing operations | (1,683 | ) | (1,080 | ) | ||||||||||||
| Net cash provided by operating activities from discontinued operations | 510 | 5,651 | - | 186 | ||||||||||||
| Net cash provided by operating activities | 175 | 8,757 | ||||||||||||||
| Net cash used in operating activities | (1,683 | ) | (894 | ) | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | $ | (650 | ) | $ | (511 | ) | (763 | ) | (47 | ) | ||||||
| Investment in GreenFirst Forest Products, Inc. (Note 6) | (9,977 | ) | - | |||||||||||||
| Investment in Firefly Systems, Inc. (Note 6) | - | (4,000 | ) | |||||||||||||
| Investment | ||||||||||||||||
| Net cash used in investing activities from continuing operations | (10,627 | ) | (4,511 | ) | ||||||||||||
| Net cash provided by (used in) investing activities from discontinued operations | 12,761 | (218 | ) | |||||||||||||
| Net cash provided by (used in) investing activities | 2,134 | (4,729 | ) | |||||||||||||
| Acquisition of programming rights | (395 | ) | - | |||||||||||||
| Receipt of SageNet promissory note (Note 3) | 2,300 | - | ||||||||||||||
| Net cash provided by (used in) investing activities from continuing operations | 1,142 | (47 | ) | |||||||||||||
| Net cash provided by investing activities from discontinued operations | - | 12,761 | ||||||||||||||
| Net cash provided by investing activities | 1,142 | 12,714 | ||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Principal payments on short-term debt | (509 | ) | (450 | ) | (79 | ) | (79 | ) | ||||||||
| Principal payments on long-term debt | (18 | ) | - | |||||||||||||
| Proceeds from stock issuance, net of costs | 6,310 | - | - | 6,310 | ||||||||||||
| Payments of withholding taxes related to net share settlement of equity awards | (80 | ) | - | - | (7 | ) | ||||||||||
| Proceeds from borrowing under credit facility | - | 5,040 | ||||||||||||||
| Repayment of borrowing under credit facility | - | (5,040 | ) | |||||||||||||
| Proceeds from Paycheck Protection Program Loan | - | 3,174 | ||||||||||||||
| Repayment of Paycheck Protection Program Loan | - | (3,174 | ) | |||||||||||||
| Proceeds from exercise of stock options | 9 | - | ||||||||||||||
| Payments on capital lease obligations | (2,106 | ) | (658 | ) | - | (242 | ) | |||||||||
| Net cash provided by (used in) financing activities from continuing operations | 3,624 | (1,108 | ) | |||||||||||||
| Net cash (used in) provided by financing activities from continuing operations | (97 | ) | 5,982 | |||||||||||||
| Net cash used in financing activities from discontinued operations | (155 | ) | (964 | ) | - | (155 | ) | |||||||||
| Net cash provided by (used in) financing activities | 3,469 | (2,072 | ) | |||||||||||||
| Net cash (used in) provided by financing activities | (97 | ) | 5,827 | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (43 | ) | 120 | 40 | 33 | |||||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash from continuing operations | (7,381 | ) | (2,393 | ) | (598 | ) | 4,888 | |||||||||
| Net increase in cash and cash equivalents and restricted cash from discontinued operations | 13,116 | 4,469 | - | 12,792 | ||||||||||||
| Net increase in cash and cash equivalents and restricted cash | 5,735 | 2,076 | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (598 | ) | 17,680 | |||||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | 4,787 | 5,302 | 8,881 | 4,787 | ||||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 10,522 | $ | 7,378 | $ | 8,283 | $ | 22,467 | ||||||||
| Components of cash and cash equivalents and restricted cash: | ||||||||||||||||
| Cash and cash equivalents | $ | 10,372 | $ | 7,026 | $ | 8,133 | $ | 22,317 | ||||||||
| Restricted cash | 150 | 352 | 150 | 150 | ||||||||||||
| Total cash and cash equivalents and restricted cash | $ | 10,522 | $ | 7,378 | $ | 8,283 | $ | 22,467 | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||||||
| Short-term borrowings to finance insurance | $ | 140 | $ | 142 | $ | 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”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 conductshistorically 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 alsoowns 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.
In August 2020,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 completedexpects to apply to have the saleStrong 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 its Strong Outdoor business segment, and inGlobal Entertainment.
In February 2021, the Company completed the sale of its Convergent business segment. As a result of these divestitures,the divestiture, the Company has presented Strong Outdoor’s and Convergent’s operating results as discontinued operations for all periods presented. See Note 3 for additional details.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and all majority-owned and controlled domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America (also referred to as “GAAP”) for annual reporting purposes or those made in the Company’s Annual Report on Form 10-K. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
The condensed consolidated balance sheet as of December 31, 20202021, 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.
| 8 |
Unless otherwise indicated, all references to “dollars” and “$” in this Quarterly Report on Form 10-Q are to, and amounts are presented in, U.S. dollars.
Use of Management Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.
Significant uncertaintyUncertainty 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 investments.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 2021,2022, and potentially beyond.
Cash and Cash Equivalents
All short-term, highly liquid financial instruments are classified as cash equivalents in the condensed consolidated balance sheets and statements of cash flows. Generally, these instruments have maturities of three months or less from date of purchase. As of September 30, 2021,March 31, 2022, $1.82.1 million of the $10.58.1 million in cash and cash equivalents was held by our foreign subsidiary.
Restricted Cash
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.
Investments
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 investmentsits holdings when it has significant influence, but not controlling interest, in the investee.entity. Judgment regarding the level of influence over each equity method investmentholding includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss)loss resulting from these investmentsequity holdings is reported under the line item captioned “equity method investment income (loss)”holding loss” in our condensed consolidated statements of operations. The Company’s equity method investmentsholdings are reported at cost and adjusted each period for the Company’s share of the investee’sentity’s income or loss and dividenddividends paid, if any. The Company’s share of the investee’sentity’s income or loss is recorded on a one quarter lag for all equity method investments.holdings. The Company classifies distributions received from equity method investmentsholdings using the cumulative earnings approach on the condensed consolidated statements of cash flows.
| 9 |
Changes in fair value of investmentsholdings in marketable equity securities of unconsolidated entities in which the Company is not able to exercise significant influence (Fair(“Fair Value Investments)Holdings”) are recognized on the condensed consolidated statement of operations. InvestmentsEquity holdings in nonmarketable unconsolidated entities in which the Company is not able to exercise significant influence (“Cost Method Investments”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 investmentholding or security of the same issuer. Dividends on fair value holdings and cost method investmentsholdings received are recorded as income.
The Company assesses investmentsits equity holdings for impairment whenever events or changes in circumstances indicate that the carrying value of an investmentequity holding may not be recoverable. Management reviewed the underlying net assets of the Company’s equity method investeeholding as of September 30, 2021March 31, 2022 and determined that the Company’s proportionate economic interest in the investeeentity indicates that the investmentequity holding was not impaired. There were no observable price changes in orderly transactions for identical or a similar investmentholding or security of the Company’s cost method investmentCost Method Holding during the three and nine months ended September 30, 2020.March 31, 2022. The carrying value of our equity method, fair value method and cost method investmentsholdings is reported as “investments”“equity holdings” on the condensed consolidated balance sheets. Notes 3 and 7 contain additional information on our equity method, fair value method and cost method investments.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 September 30, 2021March 31, 2022 and December 31, 2020.2021.
Fair values measured on a recurring basis at September 30, 2021March 31, 2022 (in thousands):
Schedule of Fair Value Measured Financial Assets and Liabilities
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | 10,372 | $ | - | $ | - | $ | 10,372 | $ | 8,133 | $ | - | $ | - | $ | 8,133 | ||||||||||||||||
| Restricted cash | 150 | - | - | 150 | 150 | - | - | 150 | ||||||||||||||||||||||||
| Fair value method investment | 20,192 | 20,192 | ||||||||||||||||||||||||||||||
| Fair value method equity holding | 24,387 | - | - | 24,387 | ||||||||||||||||||||||||||||
| Total | $ | 30,714 | $ | - | $ | - | $ | 30,714 | $ | 32,670 | $ | - | $ | - | $ | 32,670 | ||||||||||||||||
| 10 |
Fair values measured on a recurring basis at December 31, 20202021 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | 4,435 | $ | - | $ | - | $ | 4,435 | $ | 8,731 | $ | - | $ | - | $ | 8,731 | ||||||||||||||||
| Restricted cash | 352 | - | - | 352 | 150 | - | - | 150 | ||||||||||||||||||||||||
| Fair value method equity holding | 22,467 | - | - | 22,467 | ||||||||||||||||||||||||||||
| Total | $ | 4,787 | $ | - | $ | - | $ | 4,787 | $ | 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 investmentsholdings was $25.229.1 million at September 30, 2021March 31, 2022 (see Note 7).
Recently AdoptedIssued Accounting Pronouncements
In December 2019,June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.Instruments.” This ASU removes certain exceptionswill require the measurement of all expected credit losses for investments, intraperiod allocationsfinancial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and interim tax calculationsreasonable and addssupportable forecasts. The guidance to reduce complexity in accountingwas initially effective for income taxes. The effective date of the standard isCompany for annual reporting periods beginning after December 15, 2020, with early adoption permitted. The various amendments in the standard are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. The Company early adopted this ASU effective January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815.” This ASU clarifies the interaction between accounting standards related to equity securities, equity method investments and certain derivatives. The effective date of the standard is annual periods beginning after December 15, 2020,2019 and interim periods within those fiscal years. The adoption did not have a material impact on the Company’s consolidated financial statements.
In April 2020,November 2019, the FASB issued a question-and-answer documentASU 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 address stakeholder questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. The guidance allows concessions related to the timing of payments, where the total consideration has not changed, to not be accounted for as lease modifications. Instead, any such concessions can be accounted for as if no change was made to the contract or as variable lease payments. As a result of the COVID-19 pandemic, the Company received certain lease concessions in the form of rent deferrals during 2020.fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company chose to implementbelieves the policy election provided by the FASB to record rent concessions as if no modifications to leases contracts were made,adoption of this ASU will not significantly impact its results of operations and thus no changes to the lease obligations were recorded in respect to these concessions. As of September 30, 2021, the Company did not have any deferred rent outstanding.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 will receive twelve consecutive equal quarterly payments of principal, plus accrued interest thereon, commencing on March 31, 2022. The Company has elected to record the SageNet Promissory Note using its historical cost basis. Additionally, a portion of the Purchase Price was placed in escrow by SageNet, the release of which is contingent upon certain events and conditions specified in the Purchase Agreement. The Purchase Price is also subject to adjustment based on closing working capital of Convergent. As further consideration, SageNet also assumed approximately $5.7 million of third-party debt of Convergent, bringing the total enterprise value for Convergent’s equity interests to approximately $23.2 million. The Company recorded a gain of $14.9 million during the first quarter of 2021 related to the sale of Convergent. In January 2022, the Company entered into an amendment to the SageNet Promissory Note. Pursuant to the terms of the amendment, the Company received a prepayment of $2.3 million plus accrued interest. As a result of the prepayment, all terms of the SageNet Promissory Note have been satisfied.
Strong Outdoor
As part of transactions in May 2019 and August 2020, the Company divested its Strong Outdoor business segment. The Company’s Strong Outdoor business segment provided outdoor advertising and experiential marketing to advertising agencies and corporate accounts, primarily in New York City.
On May 21, 2019, Strong Digital Media, LLC (“SDM”), an indirect subsidiary of Ballantyne Strong, entered into a Taxicab Advertising Collaboration Agreement (the “Commercial Agreement”) and a Unit Purchase Agreement (the “Unit Purchase Agreement”)certain agreements with Firefly Systems, Inc. (“Firefly”), pursuant to which SDM agreed to make available to Firefly 300 digital taxi tops. Additionally, the parties agreed to coordinate the fulfilling of SDM’s agreements with the Metropolitan Taxicab Board of Trade, Inc. (“MTBOT”) and Creative Mobile Media, LLC (“CMM”), each dated February 8, 2018. Firefly agreed to fulfill the digital taxi top advertising obligations under the MTBOT agreement and CMM agreement, and SDM agreed to fulfill the non-digital taxi top advertising obligations under the MTBOT agreement and CMM agreement. Ballantyne Strong is a party to the Unit Purchase Agreement and agreed to guarantee the payment obligations of SDM under the Commercial Agreement.. As consideration for entering into these agreements, Ballantyne Strong received a total of $million worth of Firefly’s Series A-2 preferred shares, which includes $ 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”). The Firefly Series B-1 Shares, including those subsequently issued pursuant to an earn-out provision, were subject to a repurchase option for a period of three years to cover SDM’s indemnity obligations and other post-closing covenants under the Commercial Agreement and the Unit Purchase Agreement. As part of the Asset Purchase Agreement (as defined and described below), Firefly no longer has an option to repurchase any of the Firefly Series B-1 Shares held by SDM.
The 300 digital tops the Company has made available to Firefly are subject to a master equipment lease agreement which the Company entered into during 2017. Pursuant to the master lease agreement and the Unit Purchase Agreement, the Company will remain the primary obligor until such time as the lease expires. In addition, of the $ million worth of Firefly Series B-1 Shares received, $ million worth of such shares were eligible for repurchase by Firefly if the Company did not exercise the purchase option contained within the master lease agreement. Accordingly, the Company had deferred recognizing an investment related to these Firefly Series B-1 Shares eligible for repurchase until such time it was reasonably certain the Company would exercise the purchase option. The transaction, in effect, transferred control of the underlying asset to Firefly. As additional consideration for the right to use the digital taxi tops, Firefly agreed to pay for certain of Company’s operating expenses associated with the non-digital taxi tops. The Company concluded the payments that Firefly made on its behalf were variable payments and were not included in the calculation of the selling profit. Therefore, the Company recorded the benefit and the related operating expenses in the period when the changes in facts and circumstances on which the variable lease payments were based occurred. As part of the Asset Purchase Agreement (as defined and described below) the Taxicab Advertising Collaboration Agreement dated May 21, 2019 was terminated, which relieved the Company of its obligation to exercise the purchase option contained within the master lease agreement. As a result, the Company recognized an additional $1.2 million investment during the year ended December 31, 2020 related to the Firefly Series B-1 Shares that were previously eligible for repurchase by Firefly.
The Unit Purchase Agreement contained an earnout provision pursuant to which SDM obtained additional Firefly Series A-2 Shares. The earnout period was from May 22, 2019 through June 30, 2020. SDM was eligible to earn additional Firefly Series B-1 Shares equivalent to the cash collections under certain digital top contracts that were in place at the closing of the transaction. Ballantyne Strong received the shares earned pursuant to the earnout provision on August 3, 2020. In connection with the additional Firefly Series B-1 Shares that were received pursuant to the earnout, Ballantyne Strong recorded an additional $0.7 million gain on the Firefly transaction during the year ended December 31, 2020.
On August 3, 2020, SDM entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Firefly, pursuant to which SDM agreed to sell certain assets primarily related to its Strong Outdoor operating business to Firefly and continue to make available 300 digital taxi tops to Firefly. SDM retained certain accounts receivable as well as liabilities other than executory obligations under transferred contracts to the extent such liabilities are required to be performed following closing or constitute certain deferred revenue. The transaction closed on the same day..
As consideration for entering into the Asset Purchase Agreement, SDM received approximately $0.6 million in cash consideration and approximately $$3.2 million worth of Firefly Series A-3 preferred shares (the “Firefly Series A-3 Shares”). In connection with the closing of the transactions contemplated by the Asset Purchase Agreement, (i) SDM received approximately $ million worth of Firefly’sThe Series B-1A-3 preferred shares were subsequently renamed Firefly Series B-2 Shares which constituted the remaining shares to be issued pursuant to the Unit Purchase Agreement; (ii) Firefly no longer had an option to repurchase any of the(the “Firefly Series A-2 Shares held by SDM; (iii) all accounts payable to Firefly were cancelled and forgiven; and (iv) the Commercial Agreement dated May 21, 2019 was terminated, which relieved Ballantyne Strong of its obligation to exercise the purchase option contained within the master lease agreement. Ballantyne Strong recorded a gain of approximately $5.3 million during the third quarter of 2020 as a result of the transaction. B-2 Shares”).
As of September 30, 2021, SDMMarch 31, 2022, the Company held approximately $million worth of Firefly Series B-1 Shares which included the shares issued to SDM as part of the May 2019 transaction and $million worth of Firefly Series B-2 Shares (as defined below).Shares.
As contemplated by the Asset Purchase Agreement, Firefly Series B-1 Shares are held by SDM. The Asset Purchase Agreement includes customary representations and warranties. In connection with the Asset Purchase Agreement, SDM agreed to indemnify Firefly for excluded liabilities related to the transferred business.
Ballantyne Strong entered into a Master Services Agreement (the “Master Services Agreement”) with Firefly, pursuant to which Ballantyne Strong agreed to provide certain support services to Firefly, including remote equipment monitoring and diagnostics of screens, until no later than December 31, 2022, and to provide transition advertising instruction and integration services, content management services, ad-hoc reporting and analysis, wireless service, advertising content management services, and mapping data until no later than six months from closing. As consideration for entering into the Master Services Agreement, Ballantyne Strong received $2.0 million in cash consideration which the Company is recognizing as revenue ratably through the end of 2022.
The major classes of assets and liabilities included as part of discontinued operations as of December 31, 2020, are as follows (in thousands):
Schedule of Financial Results of Discontinued Operations
| December 31, 2020 | ||||||||||||
| Convergent | Strong Outdoor | Total | ||||||||||
| Accounts receivable, net | $ | 3,065 | $ | - | $ | 3,065 | ||||||
| Inventories, net | 312 | - | 312 | |||||||||
| Other current assets | 371 | - | 371 | |||||||||
| Total current assets of discontinued operations | 3,748 | - | 3,748 | |||||||||
| Property, plant and equipment, net | 3,172 | - | 3,172 | |||||||||
| Intangible assets, net | 753 | - | 753 | |||||||||
| Operating lease right-of-use assets | 212 | - | 212 | |||||||||
| Finance lease right-of-use assets | 2,235 | - | 2,235 | |||||||||
| Total long-term assets of discontinued operations | 6,372 | - | 6,372 | |||||||||
| Total assets of discontinued operations | $ | 10,120 | $ | - | $ | 10,120 | ||||||
| Accounts payable | $ | 449 | $ | - | $ | 449 | ||||||
| Accrued expenses | 812 | - | 812 | |||||||||
| Current portion of long-term debt | 1,075 | - | 1,075 | |||||||||
| Current portion of operating lease obligation | 108 | - | 108 | |||||||||
| Current portion of finance lease obligation | 859 | - | 859 | |||||||||
| Deferred revenue and customer deposits | 598 | - | 598 | |||||||||
| Total current liabilities of discontinued operations | 3,901 | - | 3,901 | |||||||||
| Long-term debt, net of current portion | 2,340 | - | 2,340 | |||||||||
| Operating lease obligation, net of current portion | 107 | - | 107 | |||||||||
| Finance lease obligation, net of current portion | 1,530 | - | 1,530 | |||||||||
| Other long-term liabilities | 89 | - | 89 | |||||||||
| Total long-term liabilities of discontinued operations | 4,066 | - | 4,066 | |||||||||
| Total liabilities of discontinued operations | $ | 7,967 | $ | - | $ | 7,967 | ||||||
The major line items constituting the net income from discontinued operations are as follows (in thousands):
Schedule of Financial Results of Discontinued Operations
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| Convergent | Strong Outdoor | Total | Convergent | Strong Outdoor | Total | |||||||||||||||||||
| Net revenues | $ | - | $ | - | $ | - | $ | 4,346 | $ | 148 | $ | 4,494 | ||||||||||||
| Cost of revenues | - | - | - | 2,263 | 160 | 2,423 | ||||||||||||||||||
| Gross profit | - | - | - | 2,083 | (12 | ) | 2,071 | |||||||||||||||||
| Selling and administrative expenses | - | - | - | 987 | 515 | 1,502 | ||||||||||||||||||
| Loss on disposal of assets | - | - | - | - | (64 | ) | (64 | ) | ||||||||||||||||
| Income (loss) from operations | - | - | - | 1,096 | (591 | ) | 505 | |||||||||||||||||
| Gain on Firefly transaction | - | - | - | - | 5,264 | 5,264 | ||||||||||||||||||
| Other expense | - | - | - | (147 | ) | - | (147 | ) | ||||||||||||||||
| Income from discontinued operations | - | - | - | 949 | 4,673 | 5,622 | ||||||||||||||||||
| Income tax benefit | - | - | - | 88 | - | 88 | ||||||||||||||||||
| Total net income from discontinued operations | $ | - | $ | - | $ | - | $ | 1,037 | $ | 4,673 | $ | 5,710 | ||||||||||||
|
|
Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
| Convergent | Strong Outdoor | Total | Convergent | Strong Outdoor | Total | Convergent | Strong Outdoor | Total | ||||||||||||||||||||||||||||
| Net revenues | $ | 1,472 | $ | - | $ | 1,472 | $ | 12,954 | $ | 1,587 | $ | 14,541 | $ | 1,472 | $ | - | $ | 1,472 | ||||||||||||||||||
| Cost of revenues | 746 | - | 746 | 7,286 | 1,487 | 8,773 | 746 | - | 746 | |||||||||||||||||||||||||||
| Gross profit | 726 | - | 726 | 5,668 | 100 | 5,768 | 726 | - | 726 | |||||||||||||||||||||||||||
| Selling and administrative expenses | 1,241 | - | 1,241 | 3,075 | 1,621 | 4,696 | 1,241 | - | 1,241 | |||||||||||||||||||||||||||
| Loss on disposal of assets | - | - | - | - | (64 | ) | (64 | ) | ||||||||||||||||||||||||||||
| (Loss) income from operations | (515 | ) | - | (515 | ) | 2,593 | (1,585 | ) | 1,008 | |||||||||||||||||||||||||||
| Loss from operations | (515 | ) | - | (515 | ) | |||||||||||||||||||||||||||||||
| Gain on Convergent transaction | 14,937 | - | 14,937 | - | - | - | 14,937 | 14,937 | ||||||||||||||||||||||||||||
| Gain on Firefly transaction | - | - | - | - | 5,966 | 5,966 | ||||||||||||||||||||||||||||||
| Other income (expense) | 194 | - | 194 | (464 | ) | 8 | (456 | ) | ||||||||||||||||||||||||||||
| Other expense | (39 | ) | - | (39 | ) | |||||||||||||||||||||||||||||||
| Income from discontinued operations | 14,616 | - | 14,616 | 2,129 | 4,389 | 6,518 | 14,383 | - | 14,383 | |||||||||||||||||||||||||||
| Income tax benefit (expense) | 33 | - | 33 | (26 | ) | - | (26 | ) | ||||||||||||||||||||||||||||
| Income tax expense | (58 | ) | - | (58 | ) | |||||||||||||||||||||||||||||||
| Total net income from discontinued operations | $ | 14,649 | $ | - | $ | 14,649 | $ | 2,103 | $ | 4,389 | $ | 6,492 | $ | 14,325 | $ | - | $ | 14,325 | ||||||||||||||||||
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.
| 12 |
The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients, or receives cash, in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.
The Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. The Company did not have any deferred contract costs as of September 30, 2021March 31, 2022 or December 31, 2020.2021.
The following tables disaggregate the Company’s revenue by major source and by operating segment for the three and nine months ended September 30,March 31, 2022 and 2021 and 2020 (in thousands):
Schedule of Disaggregation of Revenue
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Screen system sales | $ | 2,193 | $ | - | $ | 2,193 | $ | 1,631 | $ | - | $ | 1,631 | ||||||||||||
| Digital equipment sales | 1,408 | - | 1,408 | 2,192 | - | 2,192 | ||||||||||||||||||
| Extended warranty sales | 44 | - | 44 | 110 | - | 110 | ||||||||||||||||||
| Other product sales | 441 | - | 441 | 205 | - | 205 | ||||||||||||||||||
| Total product sales | 4,086 | - | 4,086 | 4,138 | - | 4,138 | ||||||||||||||||||
| Field maintenance and monitoring services | 1,436 | - | 1,436 | 875 | - | 875 | ||||||||||||||||||
| Installation services | 244 | - | 244 | 186 | - | 186 | ||||||||||||||||||
| Other service revenues | 56 | 294 | 350 | 61 | 301 | 362 | ||||||||||||||||||
| Total service revenues | 1,736 | 294 | 2,030 | 1,122 | 301 | 1,423 | ||||||||||||||||||
| Total | $ | 5,822 | $ | 294 | $ | 6,116 | $ | 5,260 | $ | 301 | $ | 5,561 | ||||||||||||
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||||||||||||||||||||
| Screen system sales | $ | 6,680 | $ | - | $ | 6,680 | $ | 5,566 | $ | - | $ | 5,566 | $ | 3,306 | $ | - | $ | 3,306 | $ | 2,047 | $ | - | $ | 2,047 | ||||||||||||||||||||||||
| Digital equipment sales | 3,890 | - | 3,890 | 4,529 | - | 4,529 | 3,544 | - | 3,544 | 1,175 | - | 1,175 | ||||||||||||||||||||||||||||||||||||
| Extended warranty sales | 105 | - | 105 | 418 | - | 418 | 100 | - | 100 | 32 | - | 32 | ||||||||||||||||||||||||||||||||||||
| Other product sales | 1,136 | - | 1,136 | 857 | - | 857 | 753 | - | 753 | 274 | - | 274 | ||||||||||||||||||||||||||||||||||||
| Total product sales | 11,811 | - | 11,811 | 11,370 | - | 11,370 | 7,703 | - | 7,703 | 3,528 | - | 3,528 | ||||||||||||||||||||||||||||||||||||
| Field maintenance and monitoring services | 3,545 | - | 3,545 | 3,030 | - | 3,030 | 1,618 | - | 1,618 | 863 | - | 863 | ||||||||||||||||||||||||||||||||||||
| Installation services | 674 | - | 674 | 518 | - | 518 | 371 | - | 371 | 71 | - | 71 | ||||||||||||||||||||||||||||||||||||
| Other service revenues | 91 | 860 | 951 | 123 | 493 | 616 | 28 | 306 | 334 | 10 | 300 | 310 | ||||||||||||||||||||||||||||||||||||
| Total service revenues | 4,310 | 860 | 5,170 | 3,671 | 493 | 4,164 | 2,017 | 306 | 2,323 | 944 | 300 | 1,244 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 16,121 | $ | 860 | $ | 16,981 | $ | 15,041 | $ | 493 | $ | 15,534 | $ | 9,720 | $ | 306 | $ | 10,026 | $ | 4,472 | $ | 300 | $ | 4,772 | ||||||||||||||||||||||||
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.contract
Digital equipment sales
The Company recognizes revenue on sales of digital equipment when the control of the equipment is transferred, which typically occurs at the time of shipment from the Company’s warehouse or drop-shipment from a third party. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer.
Field maintenance and monitoring services
The Company sells service contracts that provide maintenance and monitoring services to its Strong Entertainment customers. These contracts are generally 12 months in length. Revenue related to service contracts is recognized ratably over the term of the agreement.
In addition to selling service contracts, the Company also performs discrete time and materials-based maintenance and repair work for customers in the Strong Entertainment segment. Revenue related to time and materials-based maintenance and repair work is recognized at the point in time when the performance obligation has been fully satisfied.
| 13 |
Installation services
The Company performs installation services for its Strong Entertainment customers and recognizes revenue upon completion of the installations.
Extended warranty sales
The Company sells extended warranties toperforms installation services for its Strong Entertainment customers. When the Company is the primary obligor,customers and recognizes revenue is recognized on a gross basis ratably over the termupon completion of the extended warranty. In third party extended warranty sales, the Company is not the primary obligor, and revenue is recognized on a net basis at the time of the sale.installations.
Timing of Revenue Recognition
The following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three and nine months ended September 30,March 31, 2022 and 2021 and 2020 (in thousands):
Schedule of Disaggregation of Revenue
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Point in time | $ | 4,795 | $ | 22 | $ | 4,817 | $ | 4,532 | $ | - | $ | 4,532 | ||||||||||||
| Over time | 1,027 | 272 | 1,299 | 728 | 301 | 1,029 | ||||||||||||||||||
| Total | $ | 5,822 | $ | 294 | $ | 6,116 | $ | 5,260 | $ | 301 | $ | 5,561 | ||||||||||||
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Point in time | $ | 13,648 | $ | 32 | $ | 13,680 | $ | 12,326 | $ | 6 | $ | 12,332 | ||||||||||||
| Over time | 2,473 | 828 | 3,301 | 2,715 | 487 | 3,202 | ||||||||||||||||||
| Total | $ | 16,121 | $ | 860 | $ | 16,981 | $ | 15,041 | $ | 493 | $ | 15,534 | ||||||||||||
Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||||||||||||||||
Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Point in time | $ | 8,442 | $ | 3 | $ | 8,445 | $ | 3,756 | $ | - | $ | 3,756 | ||||||||||||
| Over time | 1,278 | 303 | 1,581 | 716 | 300 | 1,016 | ||||||||||||||||||
| Total | $ | 9,720 | $ | 306 | $ | 10,026 | $ | 4,472 | $ | 300 | $ | 4,772 | ||||||||||||
At September 30, 2021,March 31, 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 $1.81.1 million. The Company expects to recognize $1.0 1.1million of the unearned revenue amounts during the remainder of 20212022 and $0.8 million during 2022.immaterial amounts from 2023 through 2026.
Basic net income (loss)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 net income from continuing operations, diluted net income per share has been computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options and certain non-vested restricted stock units. 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 income (loss)loss per share (in thousands):
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic weighted average shares outstanding | 18,437 | 14,789 | 17,870 | 14,699 | ||||||||||||
| Dilutive effect of stock options and certain non-vested restricted stock units | 263 | - | 172 | - | ||||||||||||
| Diluted weighted average shares outstanding | 18,700 | 14,789 | 18,042 | 14,699 | ||||||||||||
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Weighted average shares outstanding: | ||||||||
| Basic weighted average shares outstanding | 18,990 | 16,835 | ||||||
| Dilutive effect of stock options and certain non-vested restricted stock units | - | - | ||||||
| Diluted weighted average shares outstanding | 18,990 | 16,835 | ||||||
A total of and common stock equivalents related to stock options and restricted stock units were excluded for the three and nine months ended September 30, 2020,March 31, 2022 and March 31, 2021, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share. Options to purchase and shares of common stock were outstanding as of September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, respectively, but were not included in the computation of diluted loss per share as the options’ exercise prices were greater than the average market price of the common shares for each period.
| 14 |
6. Inventories
Inventories consisted of the following (in thousands):
Schedule of Inventories
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Raw materials and components | $ | 1,477 | $ | 1,584 | $ | 1,536 | $ | 1,680 | ||||||||
| Work in process | 532 | 141 | 385 | 399 | ||||||||||||
| Finished goods | 977 | 539 | 941 | 1,192 | ||||||||||||
| Inventories net | $ | 2,986 | $ | 2,264 | ||||||||||||
| Inventories, net | $ | 2,862 | $ | 3,271 | ||||||||||||
The inventory balances were net of reserves of approximately $0.40.5 million as of both September 30, 2021March 31, 2022 and December 31, 2020.2021. The inventory reserves primarily related to the Company’s finished goods inventory. A rollforward of the inventory reserve for the three months ended March 31, 2022 is as follows (in thousands):
Schedule of Inventory Reserve
| Inventory reserve balance at December 31, 2021 | $ | 467 | ||
| Inventory reserve, beginning balance | $ | 467 | ||
| Inventory write-offs during 2022 | (5 | ) | ||
| Provision for inventory reserve during 2022 | 13 | |||
| Inventory reserve balance at March 31, 2022 | $ | 475 | ||
| Inventory reserve, ending balance | $ | 475 |
7. InvestmentsEquity Holdings
The following summarizes our investmentsequity holdings (dollars in thousands):
Summary of Investments
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31 2021 | |||||||||||||||||||||||||||||
| Carrying Amount | Economic Interest | Carrying Amount | Economic Interest | Carrying Amount | Economic Interest | Carrying Amount | Economic Interest | |||||||||||||||||||||||||
| Equity Method Investments | ||||||||||||||||||||||||||||||||
| Equity Method Holding | ||||||||||||||||||||||||||||||||
| FG Financial Group, Inc. | $ | 4,052 | 20.7 | % | $ | 4,370 | 20.9 | % | $ | 4,729 | 25.1 | % | $ | 5,549 | 25.2 | % | ||||||||||||||||
| GreenFirst Forest Products Inc. | - | 2,697 | 29.6 | % | ||||||||||||||||||||||||||||
| Total Equity Method Investments | 4,052 | 7,067 | ||||||||||||||||||||||||||||||
| Fair Value Method Investment | ||||||||||||||||||||||||||||||||
| Fair Value Method Holding | ||||||||||||||||||||||||||||||||
| GreenFirst Forest Products Inc. | 20,192 | 8.6 | % | - | 24,387 | 8.6 | % | 22,467 | 8.6 | % | ||||||||||||||||||||||
| Cost Method Investment | ||||||||||||||||||||||||||||||||
| Cost Method Holding | ||||||||||||||||||||||||||||||||
| Firefly Systems, Inc. | 13,097 | 13,100 | 12,898 | 13,117 | ||||||||||||||||||||||||||||
| Total Investments | $ | 37,341 | $ | 20,167 | $ | 42,014 | $ | 41,133 | ||||||||||||||||||||||||
The following summarizes the (loss) incomeloss of equity method investeesholdings reflected in the condensed consolidated statements of operations (in thousands):
Summary of Income (Loss) of Equity Method Investees
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | |||||||||||||||||||
| Entity | ||||||||||||||||||||||||
| FG Financial Group, Inc. | $ | 91 | $ | (440 | ) | $ | (318 | ) | $ | (443 | ) | $ | (820 | ) | $ | (416 | ) | |||||||
| GreenFirst Forest Products Inc. | (414 | ) | (20 | ) | (1,150 | ) | (137 | ) | - | (353 | ) | |||||||||||||
| Total | $ | (323 | ) | $ | (460 | ) | $ | (1,468 | ) | $ | (580 | ) | $ | (820 | ) | $ | (769 | ) | ||||||
| 15 |
Equity Method InvestmentHolding
FG Financial Group, Inc.
FG Financial Group, Inc. (“FGF”) (formerly 1347 Property Insurance Holdings, Inc.) is a reinsurance and investment management holding company focused on opportunistic collateralized and loss capped reinsurance, while allocating capital to special purpose acquisition companies (each, a “SPAC”) and SPAC sponsor-related businesses.
The Company’s Chairman, D. Kyle Cerminara, is the chairman of the board of directors of FGF. As of September 30, 2021, Mr. Cerminara wasis affiliated with entities that, when combined with the Company’s ownership in FGF, own greater than 50%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 0tnot receive dividends from FGF during the three and nine months ended September 30, 2021March 31, 2022 or 2020.2021. Based on quoted market prices, the marketfair value of the Company’s ownership in FGF was approximately $5.14.5 million at September 30, 2021.as of March 31, 2022.
In OctoberThe summarized financial information presented below reflects the financial information of the Company’s equity method holdings for the three months ended December 31, 2021 FGF announcedand 2020, consistent with the closingCompany’s recognition of a public offering of common stock of shares at a price of $ per share. FGF also announced the commencement of a rights offering to holdersresults of its common stock distributing one right to purchase up to shares of common stock for each share outstanding as of October 25, 2021, entitling shareholders to purchase up to shares of common stock at $ per share through November 29, 2021. The Company intends to fully exercise its rights to acquire additional common shares of FGF in the rights offering.equity method holdings on a one-quarter lag (in thousands):
Summarized Financial Information
| For the three months ended December 31, | 2021 | 2020 | ||||||
| Revenue (1) | $ | 2,436 | $ | (243 | ) | |||
| Operating loss | $ | (3,267 | ) | $ | (3,178 | ) | ||
| Net loss | $ | (3,267 | ) | $ | (3,181 | ) | ||
| 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 March 31, 2022, the Company’s retained earnings included an accumulated deficit from its equity method holdings of approximately $7.2 million.
Fair Value Method InvestmentHolding
GreenFirst Forest Products, Inc.
GreenFirst Forest Products Inc. (“GreenFirst”) (formerly Itasca Capital Ltd.) is a publicly-traded Canadian company focused on environmentally sustainable forest management and lumber production. OnIn April 12, 2021, GreenFirst announced that it had entered into an asset purchase agreement (the “GreenFirst Purchase Agreement”) pursuant to which it would acquire a portfolio of forest and paper product assets (the “Assets”) at a purchase price of approximately US$214 million. GreenFirst filed a prospectus to conduct a backstopped rights offering (the “Rights Offering”) to finance a portion of the purchase price for the Assets. Pursuant to the prospectus, GreenFirst issued three rights (each a “Right”) for each of its outstanding shares of common stock (each a “Common Share”) with each Right being exercisable, at a subscription price of CDN$, to acquire a subscription receipt (each a “Subscription Receipt”“GreenFirst Acquisition”). On July 12, 2021, the Company received 21.1 million Rights. During July 2021, the Company sold 12.9 million Rights, which generated proceeds of approximately CDN$2.1 million, or approximately $1.7 million USD. In connection with the sale of the 12.9 million Rights, the Company recorded a $1.7 million realized gain on its investment in GreenFirst within other income, net on the condensed consolidated statement of operations during the third quarter of 2021. On July 30, 2021, the Company utilized the $1.7 million USD generated from the sale of Rights and approximately $8.3 million USD of cash on hand to exercise the remaining 8.3 million Rights and acquired Subscription Receipts for a total cost of CDN$12.4 million. On August 30, 2021, GreenFirst announced that it had completed the acquisition of the Assets. Upon the closing of the transactions contemplated by the Agreement, and without any further consideration, each Subscription Receipt was automatically exchanged into a Common Share. Following the exchange of the Subscription Receipts for Common Shares and the issuance of approximately 28.7 million Common Shares to the seller of the Assets, GreenFirst had a total of approximately 177.6 million Common Shares issued and outstanding. After the Subscription Receipts were exchanged into Common Shares, the Company holds approximately million common shares of GreenFirst.
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 acquisition of the Assets,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 investmentequity holding in GreenFirst. Following GreenFirst’s acquisition of the AssetsGreenFirst Acquisition and GreenFirst’s issuance of additional Common Shares, as described above,common shares, the Company’s ownership percentage decreased to 8.6% as of September 30, 2021. .As a result, the Company is no longer able to exercise significant influence over GreenFirst and the investmentequity holding in GreenFirst no longer qualifies for equity method accounting. Effective in the third quarter of 2021, the carrying amount of the Company’s investment in GreenFirst is determined using its fair value. As a result of applying the fair value method of accounting, the Company recorded an unrealized gain on investmentsequity holdings of approximately $8.41.7 million during the quarterthree months ended September 30,March 31, 2022. The Company did not receive dividends from GreenFirst during the three months ended March 31, 2022 or 2021. Based on quoted market prices, the marketfair value of the Company’s ownership in GreenFirst was $20.224.4 million as of September 30, 2021.March 31, 2022.
The Company did0t receive dividends from GreenFirst during the three and nine months ended September 30, 2021 or 2020. As of September 30, 2021, the Company’s retained earnings included an accumulated deficit from its equity method investees of approximately $5.5 million.
The summarized financial information presented below reflects the financial information of the Company’s equity method investees for the three and nine months ended June 30, 2021 and 2020, consistent with the Company’s recognition of the results of its equity method investments on a one-quarter lag (in thousands):
Summarized Financial Information
| For the nine months ended June 30, | 2021 | 2020 | ||||||
| Revenue (1) | $ | 5,049 | $ | (4,883 | ) | |||
| Operating loss | $ | (5,983 | ) | $ | (7,845 | ) | ||
| Net loss | $ | (5,954 | ) | $ | (3,020 | ) | ||
The summarized financial information presented above combines the results of FGF and GreenFirst. As noted above, the Company no longer applies the equity method of accounting to its investment in GreenFirst. Accordingly, the financial results of GreenFirst will be excluded from future presentation of summarized financial information of equity method investees.
Cost Method InvestmentHolding
The Company receivedholds approximately million and million Firefly Series B-1 and Firefly Series B-2 preferred shares, of Fireflyrespectively, which were acquired in connection with the transactions with Firefly in May 2019 and August 2020. See Note 3 for additional details. In addition, on August 3, 2020, the Company’s Canadian subsidiary, Strong/MDI Screen Systems, Inc. (“Strong/MDI”) entered into a Stock Purchase Agreement with Firefly, pursuant to which Strong/MDI agreed to purchase $Company holds an additional million worth of Firefly Series A-3 Shares, which were subsequently renamed Firefly Series B-2 Shares (the “Firefly Series B-2 Shares”).preferred shares, which were acquired in August 2020 pursuant to a stock purchase agreement with Firefly. The Company and its affiliated entities have designated Kyle Cerminara, Chairman of the Company’s board of directors and a principal of the Company’s largest shareholder, to Firefly’s board of directors.
8. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following as of September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
Schedule of Property, Plant and Equipment Net
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Land | $ | 50 | $ | 51 | $ | 2,345 | $ | 51 | ||||||||
| Buildings and improvements | 6,913 | 6,824 | 13,257 | 6,886 | ||||||||||||
| Machinery and other equipment | 5,840 | 4,635 | 6,056 | 5,992 | ||||||||||||
| Office furniture and fixtures | 871 | 946 | 892 | 837 | ||||||||||||
| Construction in progress | 147 | 154 | 120 | 393 | ||||||||||||
| Total properties, cost | 13,821 | 12,610 | 22,670 | 14,159 | ||||||||||||
| Less: accumulated depreciation | (7,712 | ) | (7,086 | ) | (8,341 | ) | (7,933 | ) | ||||||||
| Property, plant and equipment, net | $ | 6,109 | $ | 5,524 | $ | 14,329 | $ | 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 million shares of the Company’s common stock (the “Stock Grant”), and (iii) the issuance of a warrant to purchase an additional 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 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 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.
10. Goodwill
The following represents a summary of changes in the Company’s carrying amount of goodwill for the ninethree months ended September 30, 2021March 31, 2022 (in thousands):
Summary of Changes in Carrying Amount of Goodwill
| Balance as of December 31, 2020 | $ | 938 | ||
| Foreign currency translation adjustment | (1 | ) | ||
| Balance as of September 30, 2021 | $ | 937 |
| Balance as of December 31, 2021 | $ | 942 | ||
| Foreign currency translation adjustment | 14 | |||
| Balance as of March 31, 2022 | $ | 956 |
10.11. Debt
The Company’s short-term debt and long-term debt consisted of the following as of September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
Schedule of Short-termShort term and Long term Debt
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Short-term debt: | ||||||||||||||||
| Strong/MDI 20-year installment loan | $ | 2,727 | $ | 2,906 | $ | 2,661 | $ | 2,682 | ||||||||
| Strong/MDI 5-year equipment loan | 334 | 393 | 300 | 316 | ||||||||||||
| Insurance note payable | 140 | - | 392 | - | ||||||||||||
| Total short-term debt | $ | 3,201 | $ | 3,299 | $ | 3,353 | $ | 2,998 | ||||||||
| Long-term debt: | ||||||||||||||||
| Tenant improvement loan | $ | 187 | $ | 128 | ||||||||||||
| Digital Ignition building loan | 5,234 | - | ||||||||||||||
| Total long-term debt | $ | 5,421 | $ | 128 | ||||||||||||
| Less: current portion | (209 | ) | (23 | ) | ||||||||||||
| Less: deferred debt issuance costs, net | (55 | ) | - | |||||||||||||
| Long-term debt, net of current portion and deferred debt issuance costs, net | $ | 5,157 | $ | 105 | ||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Deferred debt issuance costs | $ | 56 | $ | - | ||||
| Less: accumulated amortization | (1 | ) | - | |||||
| Deferred debt issuance costs, net | $ | 55 | $ | - | ||||
Estimated future amortization expense of deferred debt issuance costs is as follows (in thousands):
Schedule of Amortization Expense of Deferred Issuance Costs
| Remainder of 2022 | $ | 9 | ||
| 2023 | 11 | |||
| 2024 | 11 | |||
| 2025 | 11 | |||
| 2026 | 11 | |||
| Thereafter | 2 | |||
| Total | $ | 55 |
Strong/MDI Installment Loans and Revolving Credit Facility
On September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and restated May 15, 2018, with a bank consisting of a revolving line of credit for up to CDN$CAD$3.5 million, subject to a borrowing base requirement, a 20-year installment loan for up to CDN$CAD$6.0million and a 5-year installment loan for up to CDN$CAD$0.5 million. On June 7, 2021, Strong/MDI entered into a demand credit agreement (the “2021 Credit Agreement”), which amended and restated the demand credit agreement dated as of September 5, 2017. The 2021 credit agreement consists of a revolving line of credit for up to CDN$CAD$2.0 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$CAD$5.1 million and a 5-year installment loan for up to CDN$CAD$0.5 million. Amounts outstanding under the line of credit are payable on demand and bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans bear interest at the lender’s prime rate plus 0.5%0.5% and are payable in monthly installments, including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The 2021 Credit Agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity method investments)holdings) not exceeding 2.5 to 1, a current ratio (excluding amounts due from related parties) of at least 1.3 to 1 and minimum “effective equity” of CDN$CAD$4.0 million.million. As of September 30, 2021,March 31, 2022, there was CDN$CAD$3.53.3 million, or approximately $2.7 million, of principal outstanding on the 20-year installment loan, which bears variable interest at 2.95%2.95%. As of September 30, 2021,March 31, 2022, there was CDN$CAD$0.4 million, or approximately $0.3 million, of principal outstanding on the 5-year installment loan, which also bears variable interest at 2.95%2.95%. Strong/MDI was in compliance with its debt covenants as of September 30, 2021.March 31, 2022.
| 18 |
Tenant Improvement Loan
During the fourth quarter of 2021, the Company entered into a lease for a combined office and warehouse in Omaha, Nebraska. The Company incurred total costs of approximately $0.4 million to complete the build-out of the new combined office and warehouse facility. The landlord has agreed to fund approximately 50% of the build-out costs, and the Company is required to repay the portion funded by the landlord in equal monthly installments through the end of the initial lease term in February 2027. Through the end of 2021, the Company incurred approximately $0.2 million of total costs to build out the facility, of which approximately $0.1 million was funded by the landlord. The Company completed the build-out during the first quarter of 2022 and incurred an additional $0.2 million of total costs to complete the build-out, of which approximately $0.1 million was funded by the landlord.
Digital Ignition Building Loam
As discussed in Note 8, in January 2022 the Company purchased a parcel of land with buildings and improvements in Alpharetta, Georgia. In connection with the purchase of the land and building, the Company entered into a Commercial Loan Agreement (the “Loan Agreement”) with Community First Bank (the “Lender”), dated February 1, 2022. Pursuant to the Loan Agreement, the Lender agreed to lend the Company approximately $5.3 million (the “Loan Amount”), and the Borrower agreed to repay the Loan Amount pursuant to the terms of a promissory note (the “Note”).
The term of the Loan Agreement runs from February 1, 2022, until the Loan Amount is repaid in full by the Company or the Loan Agreement is terminated pursuant to its terms or by agreement between the Company and the Lender. The terms of the Note include (i) a fixed interest rate of 4%, (ii) maturity date of February 1, 2027, (iii) monthly payments of approximately $32 thousand beginning on March 1, 2022, and continuing on the first of each month until the maturity date or until the Note has been paid in full, (iv) a default interest of 8% in the event of a default pursuant to the terms of the Note, and (v) prepayment penalties of (a) 3% of all excess payments during the first two years of the term of the Note, (b) 2% of all excess payments during the third and fourth years of the term of the Note, and (c) 1% of all excess payments made during the fifth year of the term of the Note.
The Note includes standard events of default and references defaults under the Loan Agreement and the Deed to Secure Debt as events of default under the Note. The Company has a right to cure any curable events of default.
| 19 |
Contractual Principal Payments
Contractual required principal payments on the Company’s long-term debt at March 31, 2022 are as follows (in thousands):
Schedule of Contractual Principal Payments of Long-term Debt
| Tenant Improvement Loan | Digital Ignitiion Building Loan | Total | ||||||||||
| Remainder of 2022 | $ | 26 | $ | 130 | $ | 156 | ||||||
| 2023 | 36 | 180 | 216 | |||||||||
| 2024 | 38 | 187 | 225 | |||||||||
| 2025 | 39 | 195 | 234 | |||||||||
| 2026 | 41 | 203 | 244 | |||||||||
| Thereafter | 7 | 4,339 | 4,346 | |||||||||
| Total | $ | 187 | $ | 5,234 | $ | 5,421 | ||||||
11.12. Leases
The Company and its subsidiaries lease plant and office facilities and equipment under operating and finance leases expiring through 2028.2027. The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain of the leases contain extension options; however, the Company has not included such options as part of its right-of-use assets and lease liabilities because it does not expect to extend the leases. The Company measures and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company’s estimated incremental borrowing rate for loans with similar collateral and duration.
The Company elected to not apply the recognition requirements of Accounting Standards Codification Topic 842, “Leases,” to leases of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases are recognized in operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
The Company elected, as a lessee, for all classes of underlying assets, to not separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
| 20 |
The following tables present the Company’s lease costs and other lease information (dollars in thousands):
Schedule of Lease Costs and Other Lease Information
| Three Months Ended | ||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | March 31, 2022 | March 31, 2021 | |||||||||||||||||||
| Lease cost | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 1 | $ | 227 | $ | 3 | $ | 658 | $ | - | $ | 242 | ||||||||||||
| Interest on lease liabilities | - | 81 | 292 | 265 | - | 66 | ||||||||||||||||||
| Operating lease cost | 218 | 304 | 666 | 918 | 105 | 233 | ||||||||||||||||||
| Short-term lease cost | 13 | 12 | 42 | 40 | 14 | 15 | ||||||||||||||||||
| Sublease income | (93 | ) | (92 | ) | (246 | ) | (278 | ) | (32 | ) | (72 | ) | ||||||||||||
| Net lease cost | $ | 139 | $ | 532 | $ | 757 | $ | 1,603 | $ | 87 | $ | 484 | ||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | March 31, 2022 | March 31, 2021 | |||||||||||||||||||
| Other information | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||
| Operating cash flows from finance leases | $ | - | $ | 81 | $ | 292 | $ | 265 | $ | - | $ | 66 | ||||||||||||
| Operating cash flows from operating leases | $ | 203 | $ | 239 | $ | 617 | $ | 720 | $ | 92 | $ | 211 | ||||||||||||
| Financing cash flows from finance leases | $ | 1 | $ | 227 | $ | 2,106 | $ | 658 | $ | - | $ | 242 | ||||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
September 30, 2021 | ||||||||
| Weighted-average remaining lease term - operating leases (years) | ||||||||
| Weighted-average discount rate - operating leases | 4.5 | % |
The following table presents a maturity analysis of the Company’s operating lease liabilities as of September 30, 2021March 31, 2022 (in thousands):
Schedule of Future Minimum Lease Payments
| Operating Leases | Operating Leases | |||||||
| Remainder of 2021 | $ | 202 | ||||||
| 2022 | 706 | |||||||
| Remainder of 2022 | $ | 80 | ||||||
| 2023 | 656 | 76 | ||||||
| 2024 | 669 | 78 | ||||||
| 2025 | 682 | 79 | ||||||
| 2026 | 81 | |||||||
| Thereafter | 1,765 | 14 | ||||||
| Total lease payments | 4,680 | 408 | ||||||
| Less: Amount representing interest | (710 | ) | (41 | ) | ||||
| Present value of lease payments | 3,970 | 367 | ||||||
| Less: Current maturities | (562 | ) | (84 | ) | ||||
| Lease obligations, net of current portion | $ | 3,408 | $ | 283 | ||||
On March 2, 2021, the Company received a notice of default and demand (the “Default Notice”) from Huntington Technology Finance, Inc. (“Huntington”). The Default Notice alleged the occurrence of an event of default under the terms of the Master Equipment Lease Agreement dated May 19, 2017 (the “Lease Agreement”), pursuant to which the Company’s subsidiaries lease certain digital taxi top advertising signs. The Company made all required payments to Huntington during the term of the Lease Agreement. The Default Notice did not allege that the Company has failed to make any payment or incurred any economic or payment default. Rather, the Default Notice alleged that the Company violated certain technical covenants in the Lease Agreement. Huntington demanded accelerated payment of the outstanding principal balance plus lessor profit and a fair market value buyout of the assets under lease within ten days of the receipt of the Default Notice. The Company disputed Huntington’s assertion that an event of default had occurred under the Lease Agreement and believes that many of the assertions made in the Default Notice are false, and that the claims made in the Default Notice are therefore baseless. Accordingly, on March 3, 2021, the Company provided a written response to Huntington detailing the Company’s position that Huntington’s allegations of an event of default under the Lease Agreement are unfounded, and asserting the Company’s good faith belief that the Company has abided by the terms, conditions, and covenants of the Lease Agreement. In order to resolve the situation and avoid the potential costs of a lengthy legal dispute, on April 2, 2021, the Company entered into an Agreement of Forbearance and Conditional Sale (the “Settlement Agreement”) with Huntington and CCA Financial, LLC. The amounts payable by the Company pursuant to the Settlement Agreement include only payments contractually due under the Lease Agreement and do not include any additional penalties, interest, or liquidation damages. The Company agreed to accelerate payment of the $2.1 million remaining payments contractually due under the Lease Agreement and to exercise its option to purchase the leased assets for $1.0 million. The $2.1 million plus sales tax owed under the Lease Agreement was paid upon execution of the Settlement Agreement and the lease equipment buyout will be paid in twelve monthly installments from June 1, 2021 to May 1, 2022. Upon payment in full, the Lease Agreement and all obligations thereunder will terminate.
12.13. Income Taxes and Other Taxes
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction in recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence, including recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance should be recorded against all of the Company’s U.S. tax jurisdiction deferred tax assets as of September 30, 2021March 31, 2022 and December 31, 2020.2021.
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 of 2017 provides for a territorial tax system, which began in 2018. It includes the global intangible low-taxed income (“GILTI”) provision. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. As a result of the GILTI provisions, the Company’s inclusion of taxable income was incorporated into the overall net operating loss and valuation allowance for the three and nine months ended September 30, 2021March 31, 2022 and comparative September 30, 2020,March 31, 2021, as well as December 31, 2020.2021.
Changes in tax laws may affect recorded deferred tax assets and liabilities and the Company’s effective tax rate in the future. OnIn March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act made significant changes to Federal tax laws, including certain changes that are retroactive to the 2019 tax year. The effects of these changes relate to deferred tax assets and net operating losses; all of which are offset by valuation allowance. There were no material income tax consequences of this enacted legislation on the reporting period of these condensed consolidated financial statements.
The Company is subject to possible examinations not yet initiated for Federal purposes for fiscal years 20172018 through 2019.2020. 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, second and third quarters of 2021. In July 2021, the Company applied for a refund of $1.5 million of payroll taxes previously paid and recognized a corresponding reduction in compensation expenses during the three months ending June 30, 2021. Of the $1.5 million, $0.8 million was recorded within cost of services, $0.1 million was recorded withing selling expenses, $0.4 million was recorded withing general and administrative expenses and $0.2 million was recorded within discontinued operations on the condensed consolidated statement of operations. In September 2021, the Company applied for a refund of $0.6 million of payroll taxes previously paid and recognized a corresponding reduction in compensation expenses during the three months ending September 30, 2021. Of the $0.6 million, $0.4 million was recorded within cost of services and $0.2 million was recorded within general and administrative expenses.
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 $
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 shares and (ii) extend the expiration date of the 2017 Plan by approximately two years, until . As of September 30, 2021,March 31, 2022, approximately million shares were available for issuance under the amended and restated 2017 Plan.
| 22 |
Stock Options
Summary of Stock OptionsOption Activities
| Number of Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at December 31, 2020 | 1,009,500 | $ | 3.99 | $ | 51 | |||||||||||
| Granted | - | |||||||||||||||
| Exercised | (4,000 | ) | 2.25 | 10 | ||||||||||||
| Forfeited | (156,000 | ) | 4.10 | |||||||||||||
| Expired | (190,000 | ) | 5.03 | |||||||||||||
| Outstanding at September 30, 2021 | 659,500 | $ | 3.68 | $ | 243 | |||||||||||
| Exercisable at September 30, 2021 | 329,500 | $ | 4.49 | $ | 24 | |||||||||||
| 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 | $ | 187 | |||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | |||||||||||||||
| Forfeited | (12,000 | ) | 1.60 | |||||||||||||
| Expired | (8,000 | ) | 3.54 | |||||||||||||
| Outstanding at March 31, 2022 | 639,500 | $ | 3.72 | $ | 199 | |||||||||||
| Exercisable at March 31, 2022 | 403,500 | $ | 4.36 | $ | 55 | |||||||||||
The aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money options had been exercised and sold on the date indicated.
As of September 30, 2021,March 31, 2022, stock option awards were non-vested. Unrecognized compensation cost related to non-vested stock options was approximately $ million, which is expected to be recognized over a weighted average period of 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.
Summary of Restricted Stock Activity
| Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||||||||
| Non-vested at December 31, 2020 | 604,687 | $ | 2.38 | |||||||||||||
| Non-vested at December 31, 2021 | 314,079 | $ | 2.45 | |||||||||||||
| Granted | 122,609 | 3.00 | - | |||||||||||||
| Shares vested | (358,218 | ) | 2.62 | - | ||||||||||||
| Shares forfeited | - | - | ||||||||||||||
| Non-vested at September 30, 2021 | 369,078 | $ | 2.36 | |||||||||||||
| Non-vested at March 31, 2022 | 314,079 | $ | 2.45 | |||||||||||||
As of September 30, 2021,March 31, 2022, the total unrecognized compensation cost related to non-vested restricted stock unit awards was approximately $million, which is expected to be recognized over a weighted average period of years..
| 23 |
14.
15. Commitments, Contingencies and Concentrations
Litigation
The Company is involved, from time to time, in certain legal disputes in the ordinary course of business operations.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 39%49 and 46%% of consolidated net revenues during the three and nine months ended September 30, 2021,March 31, 2022, respectively. Trade accounts receivable from these customers represented approximately 55%49% of net consolidated receivables at September 30, 2021.March 31, 2022. None of the Company’s customers accounted for more than 10%10% of both its consolidated net revenues during the three and nine months ended September 30, 2021March 31, 2022 and its net consolidated receivables as of September 30, 2021.March 31, 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 and the SageNet Promissory Note.receivable. The Company sells product to a large number of customers in many different geographic regions. To minimize credit risk, the Company performs ongoing credit evaluations of its customers’ financial condition.
Insurance Recoveries
During February 2019, one portion of Strong/MDI’s Quebec, Canada facility sustained damage as a result of inclement weather. The Company has property and casualty and business interruption insurance and has made claims for reimbursement of incurred costs of the affected portion of the facility and compensation for the Company’s business interruption losses. During the third quarter of 2020, the Company reached a settlement with its insurance company which resolved all contingencies related to its business interruption claim, which resulted in an insurance recovery gain of approximately $2.7 million, which is included within Other income, net on the condensed consolidated statement of operations.
15.16. Business Segment Information
The Company conducts its operations primarily through its Strong Entertainment business segment which manufactures and distributes premium large format projection screens and provides technical support services and other related products and services to the cinema exhibition industry, theme parks, schools, museums and other entertainment-related markets. Strong Entertainment also distributes and supports third party products, including digital projectors, servers, library management systems, menu boards and sound systems. Strong Studios, which is part of the Strong Entertainment operating segment, develops and produces original feature films and television series. The Company’s operating segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance.
Summary by Business Segments
Schedule of Segment Reporting Information by Segment
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | |||||||||||||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||
| Net revenues | ||||||||||||||||||||||||
| Strong Entertainment | $ | 5,822 | $ | 5,260 | $ | 16,121 | $ | 15,041 | $ | 9,720 | $ | 4,472 | ||||||||||||
| Other | 294 | 301 | 860 | 493 | 306 | 300 | ||||||||||||||||||
| Total net revenues | 6,116 | 5,561 | 16,981 | 15,534 | 10,026 | 4,772 | ||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||
| Strong Entertainment | 2,154 | 889 | 5,428 | 2,769 | 2,205 | 889 | ||||||||||||||||||
| Other | 294 | 275 | 644 | 412 | 306 | 271 | ||||||||||||||||||
| Total gross profit | 2,448 | 1,164 | 6,072 | 3,181 | 2,511 | 1,160 | ||||||||||||||||||
| Operating income (loss) | ||||||||||||||||||||||||
| Operating loss | ||||||||||||||||||||||||
| Strong Entertainment | 1,028 | (79 | ) | 2,150 | (894 | ) | 610 | (247 | ) | |||||||||||||||
| Other | (142 | ) | (15 | ) | (577 | ) | (457 | ) | (134 | ) | (13 | ) | ||||||||||||
| Total segment operating income (loss) | 886 | (94 | ) | 1,573 | (1,351 | ) | 476 | (260 | ) | |||||||||||||||
| Unallocated administrative expenses | (1,004 | ) | (1,364 | ) | (3,434 | ) | (4,640 | ) | (1,239 | ) | (1,497 | ) | ||||||||||||
| Loss from operations | (118 | ) | (1,458 | ) | (1,861 | ) | (5,991 | ) | (763 | ) | (1,757 | ) | ||||||||||||
| Other income, net | 10,223 | 2,468 | 9,937 | 2,546 | 1,131 | 81 | ||||||||||||||||||
| Income (loss) from continuing operations before income taxes and equity method investment loss | $ | 10,105 | $ | 1,010 | $ | 8,076 | $ | (3,445 | ) | |||||||||||||||
| Income (loss) from continuing operations before income taxes and equity method holding loss | $ | 368 | $ | (1,676 | ) | |||||||||||||||||||
Schedule of Reconciliation of Assets from Segment to Consolidated
| (In thousands) | September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | ||||||||||||
| Identifiable assets | ||||||||||||||||
| Strong Entertainment | $ | 37,231 | $ | 21,408 | $ | 37,919 | $ | 38,518 | ||||||||
| Corporate assets | 36,646 | 23,971 | 43,295 | 37,291 | ||||||||||||
| Discontinued operations | - | 10,120 | ||||||||||||||
| Total | $ | 73,877 | $ | 55,499 | $ | 81,214 | $ | 75,809 | ||||||||
Summary by Geographical Area
Schedule of Segment Reporting Information by Geographic Area
| (In thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | ||||||||||||||||||
| Net revenues | ||||||||||||||||||||||||
| United States | $ | 4,735 | $ | 4,529 | $ | 13,831 | $ | 12,598 | $ | 8,783 | $ | 4,149 | ||||||||||||
| Canada | 524 | 336 | 1,101 | 854 | 406 | 197 | ||||||||||||||||||
| China | 197 | 507 | 355 | 775 | 235 | 2 | ||||||||||||||||||
| Mexico | 1 | - | 15 | 78 | - | 16 | ||||||||||||||||||
| Latin America | 45 | - | 146 | 328 | 147 | 42 | ||||||||||||||||||
| Europe | 244 | 38 | 442 | 262 | 96 | 51 | ||||||||||||||||||
| Asia (excluding China) | 290 | 24 | 636 | 337 | 153 | 132 | ||||||||||||||||||
| Other | 80 | 127 | 455 | 302 | 206 | 183 | ||||||||||||||||||
| Total | $ | 6,116 | $ | 5,561 | $ | 16,981 | $ | 15,534 | $ | 10,026 | $ | 4,772 | ||||||||||||
SummarySchedule of Identifiable Assets by Geographical Area
| (In thousands) | September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | ||||||||||||
| Identifiable assets | ||||||||||||||||
| United States | $ | 26,911 | $ | 34,924 | $ | 55,035 | $ | 46,585 | ||||||||
| Canada | 46,966 | 20,575 | 26,179 | 29,224 | ||||||||||||
| Total | $ | 73,877 | $ | 55,499 | $ | 81,214 | $ | 75,809 | ||||||||
Net revenues by business segment are to unaffiliated customers. Net revenues by geographical area are based on destination of sales. Identifiable assets by geographical area are based on location of facilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. Management’s discussion and analysis contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical are forward-looking and reflect expectations for future Company performance. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties, including but not limited to those discussed in the “Risk Factors” section contained in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, 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)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 ownership positions;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)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 be further be, exacerbated by the COVID-19 pandemic, (including variants thereof), 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.
| 26 |
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.
We sold the operations of our Strong Outdoor business segment during August 2020 and the operations of our Convergent business segment during February 2021. As a result of these divestitures, we have presented Strong Outdoor’s and Convergent’s operating results as discontinued operations for all periods presented. Note 3 to the condensed consolidated financial statements contains additional information regarding these transactions. Accordingly, all comparisons of results of operations exclude results of the discontinued operations unless otherwise stated.
In connection with the sale of our Strong Outdoor operating business to Firefly Systems, Inc. (“Firefly”) in August 2020, we entered into a Master Services Agreement (the “Master Services Agreement”) with Firefly. Pursuant to the Master Services Agreement, weand agreed to provide certain support services to Firefly, including remote equipment monitoring and diagnostics of screens until no later than December 31, 2022 and transition advertising instruction and integration services, content management services, ad-hoc reporting and analysis, wireless service, advertising content management services, and mapping data until no later than six months from closing.Firefly. In addition, we use our facility in Alpharetta, Georgia for our Digital Ignition technology incubator and co-working facility. These businessResults of those operations are included within “Other” when comparingin 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 2021 to 2020.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 hasand 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, and new variants of COVID-19, 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.
| 27 |
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, and we are currently evaluating the timing of when we will be able to commence operations at the facility in light of current travel restrictions.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 investments;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 Consolidated Appropriations Act extendedfuture and expanded the availabilityultimate impact of the CARES Act employee retention credit through June 30, 2021. Subsequently,COVID-19 pandemic on our business and results of operations beyond the American Rescue Plan Actfirst quarter of 2021 (‘ARP Act’), enactedfiscal year 2022 is unknown and will depend on March 11, 2021, extendedfuture developments, which are highly uncertain and expandedcannot be predicted with confidence, including the availabilityduration and severity of the employee retention credit through December 31, 2021, however, certain provisions apply only after December 31, 2020. This new legislation expanded the groupCOVID-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 qualifyingcontinued business to include businesses with fewer than 500 employeesdisruption and those who previously qualified for the Paycheck Protection Program (the “PPP Loan”). The employee retention credit is calculatedreduced operations. However, we expect that our results of operations, including revenues, in future periods will continue to be equal to 70%adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include the possibility 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, second and third 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 ended June 30, 2021. In September 2021, we applied for a refund of $0.6 million of payroll taxes previously paid and recognized a corresponding reduction in compensation expenses during the three months ended September 30, 2021. Of the $0.6 million, $0.4 million was recorded within cost of services and $0.2 million was recorded within general and administrative expenses. We have not yet determined whether we will qualify for additional credits for the fourth quarter of 2021.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.
| 28 |
Results of Operations
The following table sets forth our operating results for the periods indicated:
| Three Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Net revenues | $ | 6,116 | $ | 5,561 | $ | 555 | 10.0 | % | ||||||||
| Cost of revenues | 3,668 | 4,397 | (729 | ) | (16.6 | )% | ||||||||||
| Gross profit | 2,448 | 1,164 | 1,284 | 110.3 | % | |||||||||||
| Gross profit percentage | 40.0 | % | 20.9 | % | ||||||||||||
| Selling and administrative expenses | 2,566 | 2,604 | (38 | ) | (1.5 | )% | ||||||||||
| Loss on disposal of assets | - | (18 | ) | 18 | (100.0 | )% | ||||||||||
| Loss from operations | (118 | ) | (1,458 | ) | 1,340 | (91.9 | )% | |||||||||
| Other income | 10,223 | 2,468 | 7,755 | 314.2 | % | |||||||||||
| Income before income taxes and equity method investment loss | 10,105 | 1,010 | 9,095 | 900.5 | % | |||||||||||
| Income tax expense | (2,696 | ) | (614 | ) | (2,082 | ) | 339.1 | % | ||||||||
| Equity method investment loss | (323 | ) | (460 | ) | 137 | (29.8 | )% | |||||||||
| Net income (loss) from continuing operations | $ | 7,086 | $ | (64 | ) | $ | 7,150 | n/m | ||||||||
| n/m = not meaningful | ||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
| Net revenues | $ | 16,981 | $ | 15,534 | $ | 1,447 | 9.3 | % | $ | 10,026 | $ | 4,772 | $ | 5,254 | 110.1 | % | ||||||||||||||||
| Cost of revenues | 10,909 | 12,353 | (1,444 | ) | (11.7 | )% | 7,515 | 3,612 | 3,903 | 108.1 | % | |||||||||||||||||||||
| Gross profit | 6,072 | 3,181 | 2,891 | 90.9 | % | 2,511 | 1,160 | 1,351 | 116.5 | % | ||||||||||||||||||||||
| Gross profit percentage | 35.8 | % | 20.5 | % | 25.0 | % | 24.3 | % | ||||||||||||||||||||||||
| Selling and administrative expenses | 7,933 | 9,154 | (1,221 | ) | (13.3 | )% | 3,274 | 2,917 | 357 | 12.2 | % | |||||||||||||||||||||
| Loss on disposal of assets | - | (18 | ) | 18 | (100.0 | )% | ||||||||||||||||||||||||||
| Loss from operations | (1,861 | ) | (5,991 | ) | 4,130 | (68.9 | )% | (763 | ) | (1,757 | ) | 994 | (56.6 | )% | ||||||||||||||||||
| Other income | 9,937 | 2,546 | 7,391 | 290.3 | % | 1,131 | 81 | 1,050 | 1296.3 | % | ||||||||||||||||||||||
| Income (loss) before income taxes and equity method investment loss | 8,076 | (3,445 | ) | 11,521 | (334.4 | )% | ||||||||||||||||||||||||||
| Income (loss) before income taxes and equity method holding loss | 368 | (1,676 | ) | 2,044 | (122.0 | )% | ||||||||||||||||||||||||||
| Income tax expense | (2,788 | ) | (996 | ) | (1,792 | ) | 179.9 | % | (350 | ) | (69 | ) | (281 | ) | 407.2 | % | ||||||||||||||||
| Equity method investment loss | (1,468 | ) | (580 | ) | (888 | ) | 153.1 | % | ||||||||||||||||||||||||
| Net income (loss) from continuing operations | $ | 3,820 | $ | (5,021 | ) | $ | 8,841 | (176.1 | )% | |||||||||||||||||||||||
| Equity method holding loss | (820 | ) | (769 | ) | (51 | ) | 6.6 | % | ||||||||||||||||||||||||
| Net loss from continuing operations | $ | (802 | ) | $ | (2,514 | ) | $ | 1,712 | (68.1 | )% | ||||||||||||||||||||||
Three Months Ended September 30, 2021March 31, 2022 Compared to the Three Months Ended September 30, 2020March 31, 2021
Revenues
Net revenues during the quarter ended September 30, 2021March 31, 2022 increased 10.0%110.1% to $6.1$10.0 million from $5.6$4.8 million during the quarter ended September 30, 2020.March 31, 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. Those increases were partially offset by large a projection equipment sale in the prior year.
| Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
| Strong Entertainment | $ | 5,822 | $ | 5,260 | $ | 562 | 10.7 | % | $ | 9,720 | $ | 4,472 | $ | 5,248 | 117.4 | % | ||||||||||||||||
| Other | 294 | 301 | (7 | ) | (2.3 | )% | 306 | 300 | 6 | 2.0 | % | |||||||||||||||||||||
| Total net revenues | $ | 6,116 | $ | 5,561 | $ | 555 | 10.0 | % | $ | 10,026 | $ | 4,772 | $ | 5,254 | 110.1 | % | ||||||||||||||||
Strong Entertainment
Revenue from Strong Entertainment increased 10.7%117.4% to $5.8$9.7 million in the third quarter of 2021 from $5.3 million in the third quarter of 2020. The year-over-year increase in revenue was primarily due to higher revenues from screens systems, field maintenance and monitoring services and our Eclipse curvilinear screen projects. Those increases were partially offset by the timing of a large projection equipment sale in the third quarter of 2020, which skews the quarterly comparison.
While major markets have eased COVID-19-related restrictions, or lifted them entirely, we expect the pace of recovery of our Strong Entertainment revenue will continue to be dependent upon the overall measures in place to control COVID-19 and the pace at which studios release new feature films to market. Studios recently resumed releasing major movies to the cinemas and continue to have a backlog of content planned for release in 2022 and 2023. In addition, we believe many of our customers will benefit from government programs such as the Shuttered Venue Operators Grant, which has allocated over $16 billion of assistance to the entertainment industry.
Gross Profit
Consolidated gross profit increased to $2.4 million during the quarter ended September 30, 2021 from $1.2 million during the quarter ended September 30, 2020. As a percentage of revenue, gross profit was 40.0% and 20.9% for the quarters ended September 30, 2021 and September 30, 2020, respectively. Excluding the impact of employee retention credits in the current period, gross profit for the quarter ended September 30, 2021 would have been 33.1%, as compared with 20.9% in the prior year.
| Three Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 2,154 | $ | 889 | $ | 1,265 | 142.3 | % | ||||||||
| Other | 294 | 275 | 19 | 6.9 | % | |||||||||||
| Total gross profit | $ | 2,448 | $ | 1,164 | $ | 1,284 | 110.3 | % | ||||||||
Strong Entertainment
Gross profit in the Strong Entertainment segment was $2.2 million or 37.0% of revenues in the third quarter of 2021, which included a positive impact of $0.4 million as a result of the employee retention credit. Excluding the impact of the employee retention credit, gross profit would have been 29.7% of revenue compared to 16.9% in the prior year. The increase in gross profit dollars was primarily attributable to higher screen and field service revenues and the $0.4 million employee retention credit.
(Loss)Income From Operations
Consolidated loss from operations was $0.1 million in the third quarter of 2021 compared to $1.5 million in the third quarter of 2020.
| Three Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 1,028 | $ | (79 | ) | $ | 1,107 | (1401.3 | )% | |||||||
| Other | (142 | ) | (15 | ) | (127 | ) | 846.7 | % | ||||||||
| Total segment operating income (loss) | 886 | (94 | ) | 980 | (1,042.6 | )% | ||||||||||
| Unallocated administrative expenses | (1,004 | ) | (1,364 | ) | 360 | (26.4 | )% | |||||||||
| Total loss from operations | $ | (118 | ) | $ | (1,458 | ) | $ | 1,340 | (91.9 | )% | ||||||
Strong Entertainment generated income from operations of $1.0 million in the third quarter of 2021 compared to a loss from operations of $0.1 million in the third quarter of 2020. The improvement in income from operations was primarily due to the increase in revenue and gross profit described above and $0.1 million of employee retention credits included in selling and administrative expenses.
Unallocated administrative expenses decreased to $1.0 million in the third quarter of 2021 compared to $1.4 million in the third quarter of 2020. The decrease was driven primarily by the recognition of employee retention credits of $0.2 million, lower compensation and benefits, as well as reductions in information technology expenses, costs associated with contractors and consultants and audit and tax expenses, all of which were due to our initiatives to reduce overall administrative expenses.
Other Financial Items
Total other income of $10.2 million during the third quarter of 2021 primarily consisted of a $8.4 million unrealized gain on investments, $1.7 million realized gain on investments, and $0.2 million of foreign currency transaction adjustments. For the third quarter of 2020, total other income of $2.5 million primarily consisted of a $2.7 million gain on our business interruption claim for the weather-related incident at our production facility in Quebec, partially offset by foreign currency transaction adjustments of $0.2 million and $0.1 million of interest expense.
Income tax expense was approximately $2.7 million during the third quarter of 2021 compared to $0.6 million during the third quarter of 2020. Our income tax expense consisted primarily of income tax on foreign earnings and deferred tax expense on the unrealized gain on investments.
We recorded equity method investment loss of $0.3 million during the third quarter of 2021, consisting of $0.4 million loss from GreenFirst, partially offset by a $0.1 million of income from FGF. We recorded an equity method investment loss of $0.5 million in the third quarter of 2020, consisting of $0.4 million from GreenFirst and $20 thousand from FGF.
As a result of the items outlined above, we generated net income from continuing operations of $7.1 million, or $0.38 per basic and diluted share, in the third quarter of 2021, compared to a net loss from continuing operations of $0.1 million, or $0.00 per basic and diluted share, in the third quarter of 2020.
Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
Revenues
Net revenues during the nine months ended September 30, 2021 increased 9.3% to $17.0 million from $15.5 million during the nine months ended September 30, 2020. 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 screen systems.
| Nine Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 16,121 | $ | 15,041 | $ | 1,080 | 7.2 | % | ||||||||
| Other | 860 | 493 | 367 | 74.4 | % | |||||||||||
| Total net revenues | $ | 16,981 | $ | 15,534 | $ | 1,447 | 9.3 | % | ||||||||
Strong Entertainment
Revenue from Strong Entertainment increased 7.2% to $16.1 million in the first nine months of 2021 from $15.0 million in the first nine months of 2020. We started experiencing the negative effects of the COVID-19 pandemic late in the first quarter of 2020, which continued into2022 from $4.5 million in the thirdfirst quarter of 2020.2021. The increase from the prior year was due to a $4.2 million increase in product revenue and a $1.0 million increase in service revenue. Demand and revenue from both product sales and service revenue benefited from the continuing recovery from the impact of COVID-19. As restrictions eased during the first nine months of 2021 and customer demand increased, revenues from screens systems and our Eclipse curvilinear screen projects have increased compared to the same period in 2020.2021. Revenue during the three months ended March 31, 2021 was negatively impacted by the COVID-19 pandemic, including lower revenues from equipment sales and field service projects.
While major markets have eased COVID-19 related restrictions, or lifted them entirely, we expect the pace of recovery of our Strong Entertainment 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. Studios recently resumed releasing major movies to the cinemas and continue to have a backlog of content planned for release in 2022 and 2023. In addition, we believe many of our customers will benefithave benefited from government programs such as the Shuttered Venue Operators Grant, which has allocated over $16$14 billion of assistance to the entertainment industry.
Gross Profit
Consolidated gross profit increased 90.9% to $6.1$2.5 million during the nine monthsquarter ended September 30, 2021March 31, 2022 from $3.2$1.2 million during the nine monthsquarter ended September 30, 2020.March 31, 2021. As a percentage of revenue, gross profit was 35.8%25.0% and 20.5%24.3% for the nine monthsquarters ended September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, respectively. Excluding the impact of employee retention credits, gross profit during the nine months ended September 30, 2021 would have been 25.8%, as compared with 20.5% in the prior year.
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
| Strong Entertainment | $ | 5,428 | $ | 2,769 | $ | 2,659 | 96.0 | % | $ | 2,205 | $ | 889 | $ | 1,316 | 148.0 | % | ||||||||||||||||
| Other | 644 | 412 | 232 | 56.3 | % | 306 | 271 | 35 | 12.9 | % | ||||||||||||||||||||||
| Total gross profit | $ | 6,072 | $ | 3,181 | $ | 2,891 | 90.9 | % | $ | 2,511 | $ | 1,160 | $ | 1,351 | 116.5 | % | ||||||||||||||||
Strong Entertainment
Gross profit in the Strong Entertainment segment was $5.4$2.2 million or 33.7%22.7% of revenues in the first nine monthsquarter of 2021 compared to $2.8 million or 18.4% of revenues in the first nine months of 2020. The nine months ended September 30, 2021 included a positive impact of $1.3 million as a result of the employee retention credit. Excluding the impact of the employee retention credit, gross profit for the nine months ended September 30, 2021 would have been 25.8% of revenue.2022. The increase in gross profit dollars was primarily attributable to the higher screen, equipment and field service revenue. Gross profit from product sales was $1.8 million or 24.0% of revenues for the first quarter of 2022 compared to $1.1 million or 30.8% of revenues for the first quarter of 2021. Gross profit from service revenue andwas $0.4 million or 17.9% of revenues for the $1.3first quarter of 2022 compared to negative $0.1 million employee retention credit as well as actions taken to control costs.
or negative 10.8% of revenues for the first quarter of 2021.
(Loss) IncomeLoss From Operations
Consolidated loss from operations was $1.9$0.8 million in the first nine monthsquarter of 20212022 compared to $6.0$1.8 million in the first nine monthsquarter of 2020.2021.
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
| Strong Entertainment | $ | 2,150 | $ | (894 | ) | $ | 3,044 | (340.5 | )% | $ | 610 | $ | (247 | ) | $ | 857 | (347.0 | )% | ||||||||||||||
| Other | (577 | ) | (457 | ) | (120 | ) | 26.2 | % | (134 | ) | (13 | ) | (121 | ) | 930.8 | % | ||||||||||||||||
| Total segment operating income (loss) | 1,573 | (1,351 | ) | 2,924 | (216.4 | )% | 476 | (260 | ) | 736 | (283.1 | )% | ||||||||||||||||||||
| Unallocated administrative expenses | (3,434 | ) | (4,640 | ) | 1,206 | (26.0 | )% | (1,239 | ) | (1,497 | ) | 258 | (17.2 | )% | ||||||||||||||||||
| Total loss from operations | $ | (1,861 | ) | $ | (5,991 | ) | $ | 4,130 | (68.9 | )% | $ | (763 | ) | $ | (1,757 | ) | $ | 994 | (56.6 | )% | ||||||||||||
Strong Entertainment generated income from operations of $2.2$0.6 million in the first nine monthsquarter of 20212022 compared to a loss from operations of $0.9$0.2 million in the first nine monthsquarter of 2020.2021. The improvement in income from operations was primarily due to the increase in revenue and gross profit described above, and $0.3 million of employee retention credits includedpartially offset by an increase in selling and administrative expenses due to higher compensation and benefits, marketing and travel and entertainment expenses.
Unallocated administrative expenses decreased to $3.4$1.2 million in the nine months ended September 30, 2021first quarter of 2022 compared to $4.6$1.5 million in the same periodfirst quarter of 2020.2021. The decrease was driven primarily by the recognition of employee retention credits of $0.3 million, lower compensation and benefits as well as reductions in information technology expenses, costs associated with contractors and consultants and audit and tax expenses, all of which were due to our initiatives to reduce overall administrative expenses.stock-based compensation.
Other Financial Items
Total other income of $9.9$1.1 million during the first nine monthsquarter of 20212022 primarily consisted of a $8.4$1.7 million unrealized gain on investments, $1.7 million realized gain on investments, a $0.1 million gain on our property and insurance claim for the weather-related incident at our production facility in Quebec, Canada,equity holdings, partially offset by $0.1$0.3 million of foreign currency transaction adjustments, a $0.2 million adjustment to the carrying value of the SageNet Promissory Note in connection with a prepayment, and $0.2$0.1 million of interest expense. Total other income of $2.5$0.1 million during the nine months ended September 30, 2020first quarter of 2021 primarily consisted of a $2.9$0.1 million gain on our property and casualty and business interruption claims for the weather-related incident at our production facility in Quebec, Canada, partially offset by $0.4 million of interest expense.Quebec.
Income tax expense during the first nine months of 2021 was $2.8 million, which compared to $1.0approximately $0.4 million during the first nine monthsquarter of 2020.2022 compared to $0.1 million during the first quarter of 2021. Our income tax expense consisted primarily of current and deferred income tax on foreign earnings, which includes the realized and deferred tax expenseunrealized gains on the unrealized gain on investments.equity holdings.
We recorded ana loss on our equity method investment lossholding of $1.5$0.8 million during the first nine monthsquarter of 2021, consisting of $1.1million from GreenFirst and $0.3 million from FGF.2022. We recorded ana loss on our equity method investment lossholdings of $0.6$0.8 million duringin the first nine monthsquarter of 2020,2021, consisting of $0.4 million from FGFeach of GreenFirst and $0.1 million from GreenFirst.FGF.
As a result of the items outlined above, we generated a net incomeloss from continuing operations of $3.8$0.8 million, or $0.21$0.04 per basic and diluted share, in the first nine monthsquarter of 2021,2022, compared to a net loss from continuing operations of $5.0$2.5 million, or $0.34$0.15 per basic and diluted share, in the first nine monthsquarter of 2020.2021.
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, investments,equity holdings, and other general corporate activities. Our capital expenditures during 2020 included costs incurred in the construction of the Strong Entertainment production facility in Quebec, Canada that sustained damage as a result of inclement weather. During the third quarter of 2021, we increased our investment in GreenFirst by exercising 8.3 million rights for a total cost of approximately $10.0 million. The rights were exchanged into common shares of GreenFirst, and after the conversion the Company holds 15.3 million shares of GreenFirst common stock. As of September 30, 2021, the fair value of our investment in GreenFirst was approximately $20.2 million.
We ended the thirdfirst quarter of 20212022 with total cash and cash equivalents and restricted cash of $10.5$8.3 million compared to $4.8$8.9 million as of December 31, 2020.2021. Of the $10.5$8.3 million as of September 30, 2021, $1.8March 31, 2022, $2.1 million was held by our Canadian subsidiary, Strong/MDI, and $0.2 million was restricted. Strong/MDI makes intercompany loans to the U.S. parent company which do not trigger Canadian withholding taxes if they meet certain requirements. As of September 30, 2021,March 31, 2022, the parent company had outstanding intercompany loans from Strong/MDI of approximately $34.6$38.6 million. In the event those loans are not repaid, or are recharacterized as dividends to the U.S. parent company, we would be required to pay 5% Canadian withholding taxes, which have been fully accrued as of September 30, 2021.March 31, 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.
In February 2021, we closed two transactions which further strengthened the Company’s balance sheet, increasing the Company’s cash position and reducing the Company’s debt and lease obligation.
On February 1, 2021, we 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”). 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 our favor (the “SageNet Promissory Note”). Per the terms of the SageNet Promissory Note, we will receive twelve consecutive equal quarterly payments of principal, plus accrued interest thereon, commencing on March 31, 2022. 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.
On February 3, 2021, we entered into an underwriting agreement in connection with a public offering (the “Offering”) pursuant to which we agreed to issue and sell approximately 3.3 million shares of our common stock, at a public offering price of $2.30 per share. The Offering closed on February 8, 2021. The net proceeds from the Offering were approximately $6.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
On March 2, 2021, we received a notice of default and demand (the “Default Notice”) from Huntington Technology Finance, Inc. (“Huntington”). The Default Notice alleged the occurrence of an event of default under the terms of the Master Equipment Lease Agreement dated May 19, 2017 (the “Lease Agreement”), pursuant to which our subsidiaries lease certain digital taxi top advertising signs. We have made all required payments to Huntington during the term of the Lease Agreement and expect to continue to make monthly payments on a timely basis. The Default Notice did not allege that we have failed to make any payment or incurred any economic or payment default. Rather, the Default Notice alleged that we violated certain technical covenants in the Lease Agreement. Huntington demanded accelerated payment of the outstanding principal balance plus lessor profit and a fair market value buyout of the assets under lease within ten days of the receipt of the Default Notice. We disputed Huntington’s assertion that an event of default had occurred under the Lease Agreement and believe that many of the assertions made in the Default Notice are false and that the claims made in the Default Notice are therefore baseless. Accordingly, on March 3, 2021, we provided a written response to Huntington detailing our position that Huntington’s allegations of an event of default under the Lease Agreement are unfounded, and asserting our good faith belief that we have abided by the terms, conditions and covenants of the Lease Agreement. In order to resolve the situation and avoid the potential costs of a lengthy legal dispute, on April 2, 2021, we entered into an Agreement of Forbearance and Conditional Sale (the “Settlement Agreement”) with Huntington and CCA Financial, LLC. The amounts payable by us pursuant to the Settlement Agreement include only payments contractually due under the Lease Agreement and do not include any additional penalties, interest, or liquidation damages. We agreed to accelerate payment of the $2.1 million remaining payments contractually due under the Lease Agreement and to exercise our option to purchase the leased assets for $1.0 million. The $2.1 million plus sales tax owed under the Lease Agreement was paid upon execution of the Settlement Agreement and the lease equipment buyout will be paid in twelve monthly installments from June 1, 2021 to May 1, 2022. Upon payment in full, the Lease Agreement and all obligations thereunder will terminate.
We believe that our existing sources of liquidity, including cash and cash equivalents, operating cash flow, credit facilities, equity investments,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 investmentequity 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 1011 to the condensed consolidated financial statements for a description of our debt as of September 30, 2021.March 31, 2022.
Cash Flows from Operating Activities
Net cash used in operating activities from continuing operations was $0.3$1.7 million during the ninethree months ended September 30, 2021March 31, 2022, primarily due to cash outflows for selling and administrative expenseexpenses and reductions in working capital, which was primarily a result of the recognition of a receivable of $2.1 million in connection with filing for the employee retention credits, partially offset by the operating income generated by Strong Entertainment. Net cash provided byused in operating activities from continuing operations was $5.7$1.1 million in the first ninethree months of 20202021 primarily due to improvements in working capital, partially offset by the operating loss generated by Strong Entertainment and theas well as cash outflows for selling and administrative expenses.
Cash Flows from Investing Activities
Net cash used inprovided by investing activities from continuing operations was $10.6$1.1 million during the ninethree months ended September 30, 2021,March 31, 2022, which consisted of a $10.0the $2.3 million increase to our investment in GreenFirst and $0.7receipt of the SageNet Promissory Note, partially offset by $0.8 million of capital expenditures.expenditures and $0.4 million outflow related to the acquisition of film and television programming rights. Net cash used in investing activities from continuing operations was $4.6 million$47 thousand in the first ninethree months of 2020,2021, which consisted entirely of a $4.1 million investment in Firefly and capital expenditures of $0.5 million.expenditures.
| 32 |
Cash Flows from Financing Activities
Net cash used in financing activities from continuing operations was $0.1 million during the three months ended March 31, 2022, which consisted of principal payments on short-term and long-term debt. Net cash provided by financing activities from continuing operations was $3.6$6.0 million during the ninethree months ended September 30, 2021,March 31, 2022, which primarily consisted of $6.3 million of net proceeds from the issuance of our common stock, partially offset by $2.6$0.3 million of principal payments on finance leases and short-term debt. Net cash used in financing activities from continuing operations was $1.1 million during the nine months ended September 30, 2020, which consisted 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), unrealized gains (losses) on investments, fair value adjustments, severance, foreign currency transaction gains (losses), transactional gains and expenses, gains on insurance recoveries certain tax credits 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.
| 33 |
The following table sets forth reconciliations of net loss under GAAP to EBITDA and Adjusted EBITDA (in thousands):
| Quarters Ended September 30, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| Strong Entertainment | Corporate and Other | Discontinued Operations | Consolidated | Strong Entertainment | Corporate and Other | Discontinued Operations | Consolidated | |||||||||||||||||||||||||
| Net income (loss) | $ | 7,685 | $ | (599 | ) | $ | - | $ | 7,086 | $ | 1,939 | $ | (2,003 | ) | $ | 5,710 | $ | 5,646 | ||||||||||||||
| Net income from discontinued operations | - | - | - | - | - | - | (5,710 | ) | (5,710 | ) | ||||||||||||||||||||||
| Net income ( loss) from continuing operations | 7,685 | (599 | ) | - | 7,086 | 1,939 | (2,003 | ) | - | (64 | ) | |||||||||||||||||||||
| Interest expense (income), net | 25 | (18 | ) | - | 7 | 24 | 85 | - | 109 | |||||||||||||||||||||||
| Income tax expense | 2,327 | 369 | - | 2,696 | 488 | 126 | - | 614 | ||||||||||||||||||||||||
| Depreciation and amortization | 216 | 129 | - | 345 | 226 | 46 | - | 272 | ||||||||||||||||||||||||
| EBITDA | 10,253 | (119 | ) | - | 10,134 | 2,677 | (1,746 | ) | - | 931 | ||||||||||||||||||||||
| Stock-based compensation expense | - | 213 | - | 213 | - | 239 | - | 239 | ||||||||||||||||||||||||
| Equity method investment loss (income) | 414 | (91 | ) | - | 323 | 20 | 440 | - | 460 | |||||||||||||||||||||||
| Employee retention credit | (527 | ) | (90 | ) | - | (617 | ) | - | - | - | - | |||||||||||||||||||||
| Realized gain on investments | (1,689 | ) | - | - | (1,689 | ) | - | - | - | - | ||||||||||||||||||||||
| Unrealized gain on investments | (7,648 | ) | (728 | ) | - | (8,376 | ) | - | - | - | - | |||||||||||||||||||||
| Loss on disposal of assets and impairment charges | - | - | - | - | - | 18 | 18 | |||||||||||||||||||||||||
| Foreign currency transaction (income) loss | (162 | ) | - | - | (162 | ) | 172 | - | - | 172 | ||||||||||||||||||||||
| Gain on property and casualty insurance recoveries | - | - | - | - | (2,736 | ) | - | - | (2,736 | ) | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 641 | $ | (815 | ) | $ | - | $ | (174 | ) | $ | 133 | $ | (1,049 | ) | $ | - | $ | (916 | ) | ||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| Strong Entertainment | Corporate and Other | Discontinued Operations | Consolidated | Strong Entertainment | Corporate and Other | Discontinued Operations | Consolidated | |||||||||||||||||||||||||
| Net income (loss) | $ | 7,719 | $ | (3,899 | ) | $ | 14,649 | $ | 18,469 | $ | 917 | $ | (5,938 | ) | $ | 6,492 | $ | 1,471 | ||||||||||||||
| Net income (loss) from discontinued operations | - | - | (14,649 | ) | (14,649 | ) | - | - | (6,492 | ) | (6,492 | ) | ||||||||||||||||||||
| Net income (loss) from continuing operations | 7,719 | (3,899 | ) | - | 3,820 | 917 | (5,938 | ) | - | (5,021 | ) | |||||||||||||||||||||
| Interest expense, net | 84 | 146 | - | 230 | 91 | 281 | - | 372 | ||||||||||||||||||||||||
| Income tax expense | 2,406 | 382 | - | 2,788 | 853 | 143 | - | 996 | ||||||||||||||||||||||||
| Depreciation and amortization | 687 | 298 | - | 985 | 688 | 155 | - | 843 | ||||||||||||||||||||||||
| EBITDA | 10,896 | (3,073 | ) | - | 7,823 | 2,549 | (5,359 | ) | - | (2,810 | ) | |||||||||||||||||||||
| Stock-based compensation expense | - | 686 | - | 686 | - | 724 | - | 724 | ||||||||||||||||||||||||
| Equity method investment loss | 1,150 | 318 | - | 1,468 | 137 | 443 | - | 580 | ||||||||||||||||||||||||
| Employee retention credit | (1,576 | ) | (336 | ) | - | (1,912 | ) | - | - | - | - | |||||||||||||||||||||
| Realized gain on investments | (1,689 | ) | - | - | (1,689 | ) | - | - | - | - | ||||||||||||||||||||||
| Unrealized gain on investments | (7,648 | ) | (728 | ) | - | (8,376 | ) | - | - | - | - | |||||||||||||||||||||
| Loss on disposal of assets and impairment charges | - | - | - | - | - | 18 | 18 | |||||||||||||||||||||||||
| Foreign currency transaction loss (income) | 56 | - | - | 56 | (51 | ) | - | - | (51 | ) | ||||||||||||||||||||||
| Gain on property and casualty insurance recoveries | (148 | ) | - | - | (148 | ) | (2,850 | ) | - | - | (2,850 | ) | ||||||||||||||||||||
| Severance and other | 15 | 87 | - | 102 | 78 | 7 | - | 85 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 1,056 | $ | (3,046 | ) | $ | - | $ | (1,990 | ) | $ | (137 | ) | $ | (4,167 | ) | $ | - | $ | (4,304 | ) | |||||||||||
| Quarters Ended March 31, | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||
| Strong Entertainment | Corporate and Other | Discontinued Operations | Consolidated | Strong Entertainment | Corporate and Other | Discontinued Operations | Consolidated | |||||||||||||||||||||||||
| Net income (loss) | $ | 735 | $ | (1,537 | ) | $ | - | $ | (802 | ) | $ | (608 | ) | $ | (1,906 | ) | $ | 14,325 | $ | 11,811 | ||||||||||||
| Net income from discontinued operations | - | - | - | - | - | - | (14,325 | ) | (14,325 | ) | ||||||||||||||||||||||
| Net income ( loss) from continuing operations | 735 | (1,537 | ) | - | (802 | ) | (608 | ) | (1,906 | ) | - | (2,514 | ) | |||||||||||||||||||
| Interest expense, net | 24 | 29 | - | 53 | 24 | 53 | - | 77 | ||||||||||||||||||||||||
| Income tax expense | 311 | 39 | - | 350 | 63 | 6 | - | 69 | ||||||||||||||||||||||||
| Depreciation and amortization | 213 | 153 | - | 366 | 236 | 38 | - | 274 | ||||||||||||||||||||||||
| EBITDA | 1,283 | (1,316 | ) | - | (33 | ) | (285 | ) | (1,809 | ) | - | (2,094 | ) | |||||||||||||||||||
| Stock-based compensation expense | - | 194 | - | 194 | - | 314 | - | 314 | ||||||||||||||||||||||||
| Equity method holding loss | - | 820 | - | 820 | 353 | 416 | - | 769 | ||||||||||||||||||||||||
| Unrealized gain on equiity holdings | (868 | ) | (860 | ) | - | (1,728 | ) | - | - | - | - | |||||||||||||||||||||
| Foreign currency transaction (income) loss | 342 | - | - | 342 | (16 | ) | - | - | (16 | ) | ||||||||||||||||||||||
| Gain on property and casualty insurance recoveries | - | - | - | - | (148 | ) | - | - | (148 | ) | ||||||||||||||||||||||
| Severance and other | - | 222 | - | 222 | 15 | 87 | - | 102 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 757 | $ | (940 | ) | $ | - | $ | (183 | ) | $ | (81 | ) | $ | (992 | ) | $ | - | $ | (1,073 | ) | |||||||||||
Hedging and Trading Activities
Our primary exposure to foreign currency fluctuations pertains to our subsidiary in Canada. In certain instances, we may enter into a foreign exchange contract to manage a portion of this risk. We do not have any trading activities that include non-exchange traded contracts at fair value.
Seasonality
Generally, our revenue and earnings fluctuate moderately from quarter to quarter. As we increase our sales in our current markets, and as we expand into new markets in different geographies, it is possible we may experience different seasonality patterns in our business. As a result, the results of operations for the three and nine months ended September 30, 2021March 31, 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, 2020.2021. 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 September 30, 2021.March 31, 2022.
| 34 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable as we are a “smaller reporting company.”
Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at ensuring that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (as amended) is (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. The Company determined that no material changes to its internal control over financial reporting occurred or were required in response to the measures it has taken related to the COVID-19 pandemic, including remote working arrangements for many of its employees. The Company is continually monitoring and assessing the impact of COVID-19 on its internal controls in an effort to ensure that its internal controls respond to any changes in its operating environment.
PART II. Other Information
Item 1. Legal Proceedings
In the ordinary course of our business operations, we are involved, from time to time, in certain legal disputes. No such disputes, individually or in the aggregate, are expected to have a material effect onWe and certain of our business or financial condition.
Wesubsidiaries are named as a defendantdefendants 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 Ballantyne Strong.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 intendintends 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, 20202021 (the “2021 Form 10-K”) includes a detailed discussion of the Company’s risk factors. ThereAs of the date of this filing, except as set forth herein, there have been no material changes to the risk factors as previously disclosed. The Risk Factors set forth in the 2021 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2021 Form 10-K, could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We are entering a new line of business which could require additional capital.
The production, acquisition and distribution of feature films and series content requires substantial capital. We intend to mitigate risks by pre-selling rights to content and utilizing tax credit incentives in most cases to offset production costs. However, a significant amount of time may elapse between our expenditure of funds and the receipt of revenues after release or distribution of such content. Although we intend to reduce the risks of production exposure through pre-sale of rights, tax credit programs, government and industry programs, co-financiers and other sources, we cannot assure you that we will successfully implement these arrangements or that we will not be subject to substantial financial risks relating to the production, acquisition and distribution of content. Additionally, the production, completion and distribution of motion picture and television content can be subject to a number of uncertainties, including delays and increased expenditures due to disruptions or events beyond our control. As a result, if production incurs substantial budget overruns, we may have to seek additional financing or fund the overrun ourselves. We cannot make assurances regarding the availability of such additional financing on terms acceptable to us, or that we will recoup these costs. For instance, increased costs or budget overruns incurred with respect to a particular film may prevent a picture from being completed or released or may result in a delayed release and the postponement to a potentially less favorable date, all of which could cause a decline in performance, and, thus, the overall financial success of such film. Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We may incur significant write-offs if our projects do not perform well enough to recoup costs.
We will be required to amortize content capitalized production costs over the expected revenue streams as we recognize revenue from films or other projects. The amount of production costs that will be amortized each quarter depends on, among other things, how much future revenue we expect to receive from each project. Unamortized production costs will be evaluated for impairment each reporting period on a project-by-project basis. If estimated remaining revenue is not sufficient to recover the unamortized production costs, including because of delayed theatrical distribution of films as a result of the COVID-19 global pandemic and its effects, those costs would be written down to fair value. In any given quarter, if we lower our previous forecast with respect to total anticipated revenue from any film or other project, we may be required to accelerate amortization or record impairment charges with respect to the unamortized costs, even if we previously recorded impairment charges for such film or other project. Such impairment charges could adversely impact our business, operating results and financial condition.
Our revenues and results of operations may fluctuate significantly from period to period.
Our revenues and results of operations can vary based on the timing of shipments of our cinema products particularly with regard to the timing of cinema screen shipments and timing of customer orders and shipments of projection equipment. With the launch of Strong Studios, those fluctuations could increase on a quarter-to-quarter basis as timing of revenue and amortization of production costs will depend on timing delivery of content, among other factors. The degree of commercial success of content that we sell, license or distribute, which cannot be predicted with certainty may cause our revenue and earnings results to fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future periods.
| 35 |
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 thirdfirst quarter of 2021:
ISSUER PURCHASES OF EQUITY SECURITIES2022:
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||||||
| Period | Total Number of | Average Price | Total Number of | The Maximum | ||||||||||||||||
| - | $ | - | - | 636,931 | ||||||||||||||||
| - | - | - | 636,931 | |||||||||||||||||
| - | - | - | 636,931 | |||||||||||||||||
| Quarter Ended | - | $ | - | $ | - | 636,931 | ||||||||||||||
Item 6. Exhibits
| Incorporated by Reference | Incorporated by Reference | |||||||||||||||||||
| Exhibit Number | Document Description | Form | Exhibit | Filing Date | Filed Herewith | Document Description | Form | Exhibit | Filing Date | Filed Herewith | ||||||||||
| 10.1 | Amendment to Executive Employment Agreement, executed as of September 3, 2021, by and between Ballantyne Strong, Inc., and Mark Roberson. | 8-K | 10.1 | September 8, 2021 | Assignment and Attachment Agreement, dated March 3, 2022, by and among Ballantyne Strong, Inc., Strong Studios, Inc., and Landmark Studio Group, LLC. | 8-K | 10.1 | March 7, 2022 | ||||||||||||
| 10.2 | Purchase Agreement, dated March 3, 2022, by and among Ballantyne Strong, Inc., Strong Studios, Inc., and Landmark Studio Group, LLC. | 8-K | 10.2 | March 7, 2022 | ||||||||||||||||
| 10.3 | Contract of Sale, dated January 28, 2022, by and among Ballantyne Strong, Inc., Digital Ignition, LLC, and Metrolina Alpharetta, LLC. | 8-K | 10.1 | February 3, 2022 | ||||||||||||||||
| 10.4 | Stock Grant Agreement, dated February 1, 2022, by and between Ballantyne Strong, Inc. and Metrolina Capital Investors, LLC. | 8-K | 10.2 | February 3, 2022 | ||||||||||||||||
| 10.5 | Stock Warrant, dated February 1, 2022, by and between Ballantyne Strong, Inc. and Metrolina Capital Investors, LLC. | 8-K | 10.3 | February 3, 2022 | ||||||||||||||||
| 10.6 | Commercial Loan Agreement, dated February 1, 2022, by and among Ballantyne Strong, Inc., Digital Ignition, LLC, and Community First Bank. | 8-K | 10.4 | February 3, 2022 | ||||||||||||||||
| 10.7 | Promissory Note, dated February 1, 2022, executed by Ballantyne Strong, Inc. and Digital Ignition, LLC in favor of Community First Bank. | 8-K | 10.5 | February 3, 2022 | ||||||||||||||||
| 10.8 | Deed to Secure Debt, dated February 1, 2022, executed by Digital Ignition, LLC in favor of Community First Bank. | 8-K | 10.6 | February 3, 2022 | ||||||||||||||||
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer. | X | Rule 13a-14(a) Certification of Chief Executive Officer. | X | ||||||||||||||||
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer. | X | Rule 13a-14(a) Certification of Chief Financial Officer. | X | ||||||||||||||||
| 32.1** | 18 U.S.C. Section 1350 Certification of Chief Executive Officer. | X | 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 | 18 U.S.C. Section 1350 Certification of Chief Financial Officer. | X | ||||||||||||||||
| 101 | The following materials from Ballantyne Strong, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to the Condensed Consolidated Financial Statements. | X | ||||||||||||||||||
| 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 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | X | ||||||||||||||||
| ** | Furnished herewith. |
** Furnished herewith.
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 (Principal Financial Officer and Principal Accounting Officer) | ||||
| Date: | Date: | ||||