Notes
to the Consolidated Financial Statements
1.
Business Description and Basis of Presentation
Business
Description
FG
Group Holdings Inc. (previously Ballantyne Strong, Inc.) (“FG Group Holdings,” or the “Company”), a Nevada corporation,
is a holding company with business operations in the entertainment industry and holdings in public and privately held companies. The
Company historically has conducted a large portion of its operations primarily through its Strong Entertainment operating segment, which
manufactures and distributes premium large format projection screens and provides technical support services and other related products
and services to the cinema exhibition industry, theme parks, schools, museums and other entertainment-related markets. Strong Entertainment
also distributes and supports third party products, including digital projectors, servers, library management systems, menu boards and
sound systems. The Company also operates its Digital Ignition technology incubator and co-working facility in Alpharetta, Georgia. In
addition, the Company holds minority equity positions in three companies.
In
March 2022, the Company 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 2023 to raise additional capital to support its growth plans. If successful, the Company expects to
apply to have the Strong Global Entertainment common shares trade on the NYSE American under the ticker symbol “SGE” following
the initial public offering, and the Company would expect to continue to be the majority shareholder of Strong Global Entertainment.
Effective
December 23, 2022, the Company changed its name from Ballantyne Strong, Inc. to FG Group Holdings Inc. by filing a Certificate of Amendment
to our Certificate of Incorporation with the Secretary of State of the State of Delaware. Also effective December 23, 2022, the Company
changed its corporate domicile from Delaware to Nevada by merging with and into a newly-formed corporation, FG Group Holdings Inc. (Nevada),
which was incorporated in the State of Nevada for that purpose, pursuant to that certain Agreement and Plan of Merger dated October 19,
2022, and is now known as FG Group Holdings Inc., a Nevada corporation.
Effective
July 20, 2022, the Company’s Board of Directors approved the relocation of Ballantyne Strong’s headquarters from 4201 Congress
Street, Suite 175, Charlotte, North Carolina, 28209 to 5960 Fairview Road, Suite 275, Charlotte North Carolina, 28210.
In
February 2021, the Company completed the sale of its Convergent business segment. As a result of the divestiture, the Company has presented
Convergent’s operating results as discontinued operations for all periods presented. See Note 3 for additional details.
Basis
of Presentation
The
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
preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations and financial
position in future periods.
2.
Summary of Significant Accounting Policies
Revenue
Recognition
The
Company accounts for revenue using the following steps:
|
● |
Identify
the contract, or contracts, with a customer; |
|
● |
Identify
the performance obligations in the contract; |
|
● |
Determine
the transaction price; |
|
● |
Allocate
the transaction price to the identified performance obligations; and |
|
● |
Recognize
revenue when, or as, the Company satisfies the performance obligations. |
The
Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into
at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the
other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations,
the items are analyzed to determine whether they are distinct, whether the items have value on a standalone basis, and whether there
is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified
performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price
is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using
a cost-plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements
by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects
to provide and the contractual pricing based on those quantities. The Company only includes a portion of variable consideration in the
transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when
the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate,
its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the
magnitude of the variable consideration to the overall arrangement.
As
discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of
a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing
services. The Company typically does not have any material extended payment terms, as payment is due at or shortly after the time of
the sale. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The
Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced
to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration.
A contract liability is recognized as deferred revenue when the Company invoices clients, or receives cash, in advance of performing
the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related
performance obligation.
The
Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable
costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized
to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental
costs of obtaining a contract with a term of less than one year as a selling expense when incurred. The Company did not have any deferred
contract costs as of December 31, 2022 or December 31, 2021.
Screen
system sales
The
Company typically recognizes revenue on the sale of its screen systems when control of the screen is transferred to the customer, usually
at time of shipment. However, revenue is recognized upon delivery for certain international shipments with longer shipping transit times
because control transfers upon customer delivery. The cost of freight and shipping to the customer is recognized in cost of sales at
the time of transfer of control to the customer. For contracts that are long-term in nature, the Company believes that the use of the
percentage-of-completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of
progress towards completion, contract revenues, and contract costs. Under the percentage-of-completion method, revenue is recorded based
on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract.
Digital
equipment sales
The
Company recognizes revenue on sales of digital equipment when the control of the equipment is transferred, which typically occurs at
the time of shipment from the Company’s warehouse or drop-shipment from a third party. The cost of freight and shipping to the
customer is recognized in cost of sales at the time of transfer of control to the customer.
Field
maintenance and monitoring services
The
Company sells service contracts that provide maintenance and monitoring services to its Strong Entertainment customers. These contracts
are generally 12 months in length. Revenue related to service contracts is recognized ratably over the term of the agreement.
In
addition to selling service contracts, the Company also performs discrete time and materials-based maintenance and repair work for customers
in the Strong Entertainment segment. Revenue related to time and materials-based maintenance and repair work is recognized at the point
in time when the performance obligation has been fully satisfied.
Installation
services
The
Company performs installation services for its Strong Entertainment customers and recognizes revenue upon completion of the installations.
Extended
warranty sales
The
Company sells extended warranties to its Strong Entertainment customers. Typically, the Company is the primary obligor, and revenue is
recognized on a gross basis ratably over the term of the extended warranty.
Cash
and Cash Equivalents
All
short-term, highly liquid financial instruments are classified as cash equivalents in the consolidated balance sheets and statements
of cash flows. Generally, these instruments have maturities of three months or less from date of purchase. As of December 31, 2022, $0.7
million of the $3.8 million in cash and cash equivalents was held by our foreign subsidiary.
Restricted
Cash
Restricted
cash represented amounts held in a collateral account for the Company’s corporate travel and purchasing credit card program. During
2022, the Company switched its corporate travel and purchasing credit card program and is no longer required to maintain a collateral
account.
Equity
Holdings
The
Company accounts for its equity holdings using the equity method, at cost, or at fair value depending on the facts and circumstances
related to each individual holding. The Company applies the equity method of accounting to its holdings when it has significant
influence, but not controlling interest, in the entity. Judgment regarding the level of influence over each equity method holding
includes considering key factors such as ownership interest, representation on the board of directors, participation in
policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income or loss
resulting from these equity holdings is reported under the line item captioned “equity method holding loss” in our
consolidated statements of operations. The Company’s equity method holding is reported at cost and adjusted each
period for the Company’s share of the entity’s income or loss and dividends paid, if any. The Company’s share of
the entity’s income or loss is recorded on a one quarter lag for all equity method holdings. The Company classifies
distributions received from equity method holdings using the cumulative earnings approach on the consolidated statements
of cash flows.
Changes
in fair value of holdings in marketable equity securities of unconsolidated entities in which the Company is not able to exercise significant
influence (“Fair Value Holdings”) are recognized on the consolidated statement of operations. Nonmarketable equity holdings
in unconsolidated entities in which the Company is not able to exercise significant influence (“Cost Method Holdings”) are
accounted for at the Company’s initial cost, minus any impairment (if any), plus or minus changes resulting from observable price
changes in orderly transactions for the identical or a similar holding or security of the same issuer. Dividends on Fair Value Holdings
and Cost Method Holdings received are recorded as income.
The
Company assesses its equity holdings for impairment whenever events or changes in circumstances indicate that the carrying value of
an equity holding may not be recoverable. Management reviewed the underlying net assets of the Company’s equity method holding
as of December 31, 2022 and determined that the Company’s proportionate economic interest in the entity indicates that the
equity holding was not impaired. There were no observable price changes in orderly transactions for an identical or similar
holding or security of the Company’s Cost Method Holding during 2022. The carrying value of our equity method, Fair Value
Holdings and Cost Method Holdings is reported as “equity holdings” on the consolidated balance sheets. Notes 3
and 7 contain additional information on our equity method, Fair Value Holdings and Cost Method Holdings.
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. The accounts receivable balances on the consolidated balance sheets are net of an allowance for doubtful
accounts of $0.4 million and $0.6 million as of December 31, 2022 and 2021, respectively. Past due accounts are written off when our
efforts have been unsuccessful in collecting amounts due.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories include appropriate elements of material,
labor and manufacturing overhead. Inventory balances are net of reserves on slow moving or obsolete inventory based on management’s
review of inventories on hand compared to estimated future usage and sales, technological changes and product pricing.
The
following table details a roll-forward of the inventory reserve during 2022 (in thousands):
Schedule
of Inventory Reserve
| |
| | |
Inventory reserve balance at December 31, 2021 | |
$ | 467 | |
Inventory write-offs during 2022 | |
| (59 | ) |
Provision for inventory reserve during 2022 | |
| 49 | |
Reserve adjustments during 2022 | |
| 29 | |
Inventory reserve balance at December 31, 2022 | |
$ | 486 | |
Business
Combinations
The
Company uses the acquisition method of accounting for acquired businesses. Under the acquisition method, the financial statements reflect
the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are
recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated
fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the
fair value of assets acquired, particularly intangible assets. As a result, in the case of significant acquisitions, the Company normally
obtains the assistance of third-party valuation specialists in estimating fair values of tangible and intangible assets. The fair value
estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective
of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain.
Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates
and assumptions.
Intangible
Assets
The
Company’s intangible assets consist primarily of costs incurred to develop or obtain software, as well as costs incurred for upgrades
and enhancements resulting in new or enhanced functionality. The Company evaluates its intangible assets for impairment when events or
circumstances indicate that the carrying amount of these assets may not be recoverable. Intangible assets with definite lives are amortized
over their respective estimated useful lives to their estimated residual values. Significant judgments and assumptions are required in
the impairment evaluations.
Film
and Television Programming Rights
Commencing
in March 2022, the Company began producing original productions and acquiring rights to films and television programming. Film and television
programming rights include the unamortized costs of in-process or in-development content produced or acquired by the Company. The Company’s
capitalized costs include all direct production and financing costs, capitalized interest when applicable, and production overhead. Film
and television program rights are stated at the lower of amortized cost or estimated fair value.
The
costs of producing content are amortized using the individual-film-forecast method. These costs are amortized based on the ratio of the
current period’s revenues to management’s estimated remaining total gross revenues to be earned (“Ultimate Revenue”)
as of each reporting date to reflect the most current available information. Management’s judgment is required in estimating Ultimate
Revenue and the costs to be incurred throughout the life of each film or television program. Amortization is adjusted when necessary
to reflect increases or decreases in forecasted Ultimate Revenues.
For
an episodic television series, the period over which Ultimate Revenues are estimated cannot exceed ten years following the date of delivery
of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later. For films,
Ultimate Revenue includes estimates over a period not to exceed ten years following the date of initial release.
Content
assets are expected to be predominantly monetized individually and therefore are reviewed at the individual level when an event or change
in circumstance indicates a change in the expected usefulness of the content or the fair value may be less than the unamortized cost.
Due
to the inherent uncertainties involved in making such estimates of Ultimate Revenues and expenses, these estimates may differ from actual
results. In addition, in the normal course of our business, some films and titles will be more successful or less successful than anticipated.
Management regularly reviews and revises, when necessary, its Ultimate Revenue and cost estimates, which may result in a change in the
rate of amortization of film costs and participations and residuals and/or a write-down of all or a portion of the unamortized costs
of the film or television program to its estimated fair value. An increase in the estimate of Ultimate Revenue will generally result
in a lower amortization rate and, therefore, less film and television program amortization expense, while a decrease in the estimate
of Ultimate Revenue will generally result in a higher amortization rate and, therefore, higher film and television program amortization
expense, and also periodically result in an impairment requiring a write-down of the film cost to the title’s fair value. The Company
has not incurred any of these write-downs.
An
impairment charge would be recorded in the amount by which the unamortized costs exceed the estimated fair value. Estimates of future
revenue involve measurement uncertainties and it is therefore possible that reductions in the carrying value of capitalized costs may
be required because of changes in management’s future revenue estimates.
Goodwill
Goodwill
is not amortized and is tested for impairment at least annually, or whenever events or changes in circumstances indicate the carrying
amount of the asset may be impaired. The annual impairment test is performed as of December 31 each year. Significant judgment is involved
in determining if an indicator of impairment has occurred. The Company may consider indicators such as deterioration in general economic
conditions, adverse changes in the markets in which the reporting unit operates, increases in input costs that have negative effects
on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could
be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.
The
Company may first review for goodwill impairment by assessing qualitative factors to determine whether any impairment may exist. For
a reporting unit in which the Company concludes, based on the qualitative assessment, that it is more likely than not that the fair value
of the reporting unit is less than its carrying amount (or if the Company elects to skip the optional qualitative assessment), the Company
is required to perform a quantitative impairment test, which includes measuring the fair value of the reporting unit and comparing it
to the reporting unit’s carrying amount. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the
reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair value, the Company must record an impairment
loss for the amount that the carrying value of the reporting unit, including goodwill, exceeds the fair value of the reporting unit.
Goodwill
was recorded in connection with the acquisition of Peintures Elite, Inc. in 2013. A qualitative assessment was performed for the year
ended December 31, 2022 and it was determined that no events had occurred that would indicate an impairment was
more likely than not.
Property,
Plant and Equipment
Significant
expenditures for the replacement or expansion of property, plant and equipment are capitalized. Depreciation of property, plant and equipment
is provided over the estimated useful lives of the respective assets using the straight-line method. For financial reporting purposes,
assets are depreciated over the estimated useful lives of 20 years for buildings and improvements, the lesser of the lease term or the
estimated useful life for leasehold improvements, 3 to 10 years for machinery and equipment, 7 years for furniture and fixtures and 3
years for computers and accessories. The Company generally uses accelerated methods of depreciation for income tax purposes. The Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The recoverability of property, plant and equipment is based on management’s estimates of future undiscounted
cash flows and these estimates may vary due to a number of factors, some of which may be outside of management’s control. To the
extent that the Company is unable to achieve management’s forecasts of future income, it may become necessary to record impairment
losses for any excess of the net book value of property, plant and equipment over their fair value.
The
Company incurs maintenance costs on all of its major equipment. Repair and maintenance costs are expensed as incurred.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate at each interim
period based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. In assessing whether the deferred tax assets are realizable, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The
Company’s uncertain tax positions are evaluated in a two-step process, whereby 1) the Company determines whether it is more
likely than not that the tax positions will be sustained based on the technical merits of the position and 2) for those tax
positions that meet the more likely than not recognition threshold, the Company would recognize the largest amount of tax benefit
that is greater than fifty percent likely to be realized upon ultimate settlement with the related tax authority. The Company
accrues interest and penalties related to uncertain tax positions in the consolidated statements of operations as income tax
expense.
Other
Taxes
Sales
taxes assessed by governmental authorities, including sales, use and excise taxes, are recorded on a net basis. Such taxes are excluded
from revenues and are shown as a liability on the balance sheet until remitted to the appropriate taxing authorities.
Research
and Development
Research
and development related costs are charged to operations in the period incurred. Such costs amounted to $0.3 million and $0.2 million
for the years ended December 31, 2022 and 2021, respectively, and are included within administrative expenses on the consolidated
statements of operations.
Advertising
Costs
Advertising
and promotional costs are expensed as incurred and amounted to approximately $0.2 million and $0.1 million for the years ended December
31, 2022 and 2021, respectively, and are included within selling expenses on the consolidated statements of operations.
Fair
Value of Financial and Derivative 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 and liabilities measured at fair value based upon the level
within the fair value hierarchy in which the fair value measurements fall, as of December 31, 2022 and 2021.
Fair
values measured on a recurring basis at December 31, 2022 (in thousands):
Schedule
of Fair Value Measured Financial Assets and Liabilities
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash and cash equivalents | |
$ | 3,789 | | |
$ | - | | |
$ | - | | |
$ | 3,789 | |
Restricted cash | |
$ | 150 | | |
| - | | |
| - | | |
| - | |
Fair value method holding | |
| 16,792 | | |
| - | | |
| - | | |
| 16,792 | |
Total | |
$ | 20,581 | | |
$ | - | | |
$ | - | | |
$ | 20,581 | |
Fair
values measured on a recurring basis at December 31, 2021 (in thousands):
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash and cash equivalents | |
$ | 8,731 | | |
$ | - | | |
$ | - | | |
$ | 8,731 | |
Restricted cash | |
$ | 150 | | |
| - | | |
| - | | |
| - | |
Fair value method holding | |
| 22,467 | | |
| - | | |
| - | | |
| 22,467 | |
Total | |
$ | 31,348 | | |
$ | - | | |
$ | - | | |
$ | 31,198 | |
The
carrying values of all other financial assets and liabilities, including accounts receivable, accounts payable, accrued expenses and
short-term debt reported in the consolidated balance sheets equal or approximate their fair values due to the short-term nature of these
instruments. Based on a combination of the cash on hand as well as quoted market prices of the securities held by FGF Holdings (as defined
below), the liquidation value of the Company’s equity method holding was $8.1 million at December 31, 2022 (see Note 7).
All
non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which include
non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment).
(Loss)
Income Per Common Share
Basic
(loss) income per share has been computed on the basis of the weighted average number of shares of common stock outstanding. In periods
when the Company reported 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.
A
total of 136,055 common stock equivalents related to stock options and restricted stock units were excluded for the year ended December
31, 2022 as their inclusion would be anti-dilutive, thereby decreasing the net loss per share.
In
addition, options to purchase 489,500 and 339,500 shares of common stock were outstanding as of December 31, 2022 and
December 31, 2021, respectively, but were not included in the computation of diluted income (loss) per share as
the options’ exercise prices were greater than the average market price of the common shares for each year.
Stock
Compensation Plans
The
Company recognizes compensation expense for all stock-based payment awards based on estimated fair values on the date of grant. The Company
uses the straight-line amortization method over the vesting period of the awards. The Company has historically issued shares upon exercise
of stock options or vesting of restricted stock from new stock issuances. The Company estimates the fair value of restricted stock awards
based upon the market price of the underlying common stock on the date of grant. The fair value of stock options granted is calculated
using the Black-Scholes option pricing model. No stock-based compensation cost was capitalized as a part of inventory in 2022 and 2021.
Post-Retirement
Benefits
The
Company recognizes the overfunded or underfunded position of a defined benefit postretirement plan as an asset or liability in the
consolidated balance sheet, measures the plan’s assets and its obligations that determine its funded status as of each
consolidated balance sheet date and recognizes the changes in the funded status through comprehensive income (loss) in the year in
which the changes occur.
Foreign
Currency Translation
For
the Company’s foreign subsidiary, the environment in which the business conducts operations is considered the functional
currency, generally the local currency. The assets and liabilities of the foreign subsidiary are translated into the United States
dollar at the foreign exchange rates in effect at the end of the period. Revenue and expenses of the Company’s foreign
subsidiary are translated using an average of the foreign exchange rates in effect during the period. Translation adjustments are
not included in determining net earnings but are presented in comprehensive loss within the consolidated statements of comprehensive
(loss) income. Transaction gains and losses that arise from foreign exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the consolidated statements of operations as incurred. If the Company
disposes of its holding in a foreign entity, any gain or loss on currency translation balance recorded in accumulated other
comprehensive loss would be recognized as part of the gain or loss on disposition.
Warranty
Reserves
In
most instances, digital products are covered by the manufacturing firm’s warranty; however, for certain customers, the Company
may grant warranties in excess of the manufacturer’s warranty. In addition, the Company provides warranty coverage on screens it
manufactures. The Company accrues for these costs at the time of sale. The following table summarizes warranty activity for the years
ended December 31 (in thousands):
Schedule
of Product Warranty Liability
| |
2022 | | |
2021 | |
Warranty accrual at beginning of year | |
$ | 136 | | |
$ | 79 | |
Charged to expense | |
| 299 | | |
| 141 | |
Claims paid, net of recoveries | |
| (117 | ) | |
| (85 | ) |
Foreign currency adjustment | |
| (9 | ) | |
| 1 | |
Warranty accrual at end of year | |
$ | 309 | | |
$ | 136 | |
Contingencies
The
Company accrues for contingencies when its assessments indicate that it is probable that a liability has been incurred and an amount
can be reasonably estimated. The Company’s estimates are based on currently available facts and its estimates of the ultimate outcome
or resolution. Actual results may differ from the Company’s estimates, resulting in an impact, positive or negative, on earnings.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments.” This ASU will require the measurement of all expected credit losses for financial assets, including
trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.
The guidance was initially effective for the Company for annual reporting periods beginning after December 15, 2019 and interim periods
within those fiscal years. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which, among other things, defers the effective
date of ASU 2016-13 for public filers that are considered smaller reporting companies as defined by the Securities and Exchange Commission
to fiscal years beginning after December 15, 2022, including interim periods within those years. The Company
believes the adoption of this ASU will not significantly impact its results of operations and financial position.
3.
Discontinued Operations
Convergent
As
part of a transaction that closed in February 2021, the Company divested its Convergent business segment. The Company’s Convergent
business segment delivered digital signage solutions and related services to large multi-location organizations in the United States
and Canada.
On
February 1, 2021, the Company entered into an Equity Purchase Agreement (together with the other related documents defined therein, the
“Purchase Agreement”), and closed the transactions contemplated by the Purchase Agreement, with SageNet LLC (“SageNet”).
Pursuant to the Purchase Agreement, a subsidiary of Ballantyne Strong sold 100% of the issued and outstanding limited liability company
membership interests (the “Equity Interests”) in Convergent, LLC (“Convergent”) to SageNet. The purchase price
for the Equity Interests (the “Purchase Price”) pursuant to the Purchase Agreement was (i) $15.0 million in cash and (ii)
$2.5 million in the form of a subordinated promissory note delivered by SageNet in favor of the Company (the “SageNet Promissory
Note”). Per the terms of the SageNet Promissory Note, the Company would receive twelve consecutive equal quarterly payments of
principal, plus accrued interest thereon, commencing on March 31, 2022. The Company has elected to record the SageNet Promissory Note
using its historical cost basis. Additionally, a portion of the Purchase Price was placed in escrow by SageNet, the release of which
is contingent upon certain events and conditions specified in the Purchase Agreement. The Purchase Price is also subject to adjustment
based on closing working capital of Convergent. As additional consideration, SageNet also assumed approximately $5.7 million of third-party
debt of Convergent, bringing the total enterprise value for Convergent’s equity interests to approximately $23.2 million. The Company
recorded a gain of $14.9 million during the first quarter of 2021 related to the sale of Convergent. In January 2022, the Company entered
into an amendment to the SageNet Promissory Note. Pursuant to the terms of the amendment, the Company received a prepayment of $2.3 million
plus accrued interest. As a result of the prepayment, all terms of the SageNet Promissory Note have been satisfied.
Strong
Outdoor
As
part of transactions in May 2019 and August 2020, the Company divested its Strong Outdoor business segment. The Company’s Strong
Outdoor business segment provided outdoor advertising and experiential marketing to advertising agencies and corporate accounts, primarily
in New York City.
On
May 21, 2019, Strong Digital Media, LLC (“SDM”), an indirect subsidiary of Ballantyne Strong, entered into certain agreements
with Firefly Systems, Inc. (“Firefly”). As consideration for entering into these agreements, Ballantyne Strong received a
total of $5.7 million worth of Firefly’s Series A-2 preferred shares, which includes $0.9 million pursuant to an earn-out provision.
The Series A-2 preferred shares were subsequently renamed Firefly Series B-1 Shares (the “Firefly Series B-1 Shares”).
On
August 3, 2020, SDM entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Firefly, pursuant to which
SDM agreed to sell certain assets primarily related to its Strong Outdoor operating business to Firefly. As consideration for entering
into the Asset Purchase Agreement, SDM received approximately $3.2 million worth of Firefly Series A-3 preferred shares (the “Firefly
Series A-3 Shares”). The Series A-3 preferred shares were subsequently renamed Firefly Series B-2 Shares (the “Firefly Series
B-2 Shares”).
As
of September 30, 2022, the Company held approximately $5.7 million of Firefly Series B-1 Shares and $7.2 million of Firefly
Series B-2 Shares.
In
August 2020, the Company 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, the Company received $2.0 million
in cash consideration which the Company recognized as revenue ratably through the end of 2022.
The
major line items constituting the net income from discontinued operations are as follows (in thousands):
Schedule
of Financial Results of Discontinued Operations
| |
Convergent | | |
Strong Outdoor | | |
Total | |
| |
Year Ended December 31, 2021 | |
| |
Convergent | | |
Strong Outdoor | | |
Total | |
Net revenues | |
$ | 1,472 | | |
$ | - | | |
$ | 1,472 | |
Cost of revenues | |
| 746 | | |
| - | | |
| 746 | |
Gross profit | |
| 726 | | |
| - | | |
| 726 | |
Selling and administrative expenses | |
| 1,241 | | |
| - | | |
| 1,241 | |
Loss on disposal of assets | |
| - | | |
| - | | |
| - | |
(Loss) income from operations | |
| (515 | ) | |
| - | | |
| (515 | ) |
Gain on Convergent transaction | |
| 14,814 | | |
| - | | |
| 14,814 | |
Gain on Firefly transaction | |
| - | | |
| - | | |
| - | |
Other income (expense) | |
| 195 | | |
| - | | |
| 195 | |
Income from discontinued operations | |
| 14,494 | | |
| - | | |
| 14,494 | |
Income tax benefit | |
| 72 | | |
| - | | |
| 72 | |
Total net income from discontinued operations | |
$ | 14,566 | | |
$ | - | | |
$ | 14,566 | |
4.
Revenue
The
following tables disaggregate the Company’s revenue by major source for the years ended December 31, 2022 and December 31, 2021
(in thousands):
Schedule
of Disaggregation of Revenue
| |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
| |
Year Ended December 31, 2022 | | |
Year Ended December 31, 2021 | |
| |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
Screen system sales | |
$ | 12,799 | | |
$ | - | | |
$ | 12,799 | | |
$ | 9,292 | | |
$ | - | | |
$ | 9,292 | |
Digital equipment sales | |
| 13,245 | | |
| - | | |
| 13,245 | | |
| 8,264 | | |
| - | | |
| 8,264 | |
Extended warranty sales | |
| 347 | | |
| - | | |
| 347 | | |
| 250 | | |
| - | | |
| 250 | |
Other product sales | |
| 3,728 | | |
| - | | |
| 3,728 | | |
| 1,825 | | |
| - | | |
| 1,825 | |
Total product sales | |
| 30,119 | | |
| - | | |
| 30,119 | | |
| 19,631 | | |
| - | | |
| 19,631 | |
Field maintenance and monitoring services | |
| 6,797 | | |
| - | | |
| 6,797 | | |
| 5,113 | | |
| - | | |
| 5,113 | |
Installation services | |
| 1,889 | | |
| - | | |
| 1,889 | | |
| 987 | | |
| - | | |
| 987 | |
Production services | |
| 914 | | |
| - | | |
| 914 | | |
| - | | |
| - | | |
| - | |
Other service revenues | |
| 148 | | |
| 1,370 | | |
| 1,518 | | |
| 155 | | |
| 1,144 | | |
| 1,299 | |
Total service revenues | |
| 9,748 | | |
| 1,370 | | |
| 11,118 | | |
| 6,255 | | |
| 1,144 | | |
| 7,399 | |
Total | |
$ | 39,867 | | |
$ | 1,370 | | |
$ | 41,237 | | |
$ | 25,886 | | |
$ | 1,144 | | |
$ | 27,030 | |
Revenues | |
$ | 39,867 | | |
$ | 1,370 | | |
$ | 41,237 | | |
$ | 25,886 | | |
$ | 1,144 | | |
$ | 27,030 | |
The
following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the years
ended December 31, 2022 and December 31, 2021 (in thousands):
Schedule
of Disaggregation of Revenue
| |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
| |
Year Ended December 31, 2022 | | |
Year Ended December 31, 2021 | |
| |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
Point in time | |
$ | 34,513 | | |
$ | 139 | | |
$ | 34,652 | | |
$ | 22,218 | | |
$ | 40 | | |
$ | 22,258 | |
Over time | |
| 5,354 | | |
| 1,231 | | |
| 6,585 | | |
| 3,668 | | |
| 1,104 | | |
| 4,772 | |
Total | |
$ | 39,867 | | |
$ | 1,370 | | |
$ | 41,237 | | |
$ | 25,886 | | |
$ | 1,144 | | |
$ | 27,030 | |
At
December 31, 2022, the unearned revenue amount associated with maintenance and monitoring services and extended warranty sales in which
the Company is the primary obligor was $0.5 million. The Company expects to recognize $0.6 million of unearned revenue amounts during
2023 and immaterial amounts during 2024-2026. The amount expected to be recorded during 2023 includes $0.1 million related to long-term
projects that the Company’s uses the percentage-of- completion method to recognize revenue.
5.
Inventories
Schedule of Inventories
| |
December 31, 2022 | | |
December 31, 2021 | |
Raw materials and components | |
$ | 1,826 | | |
$ | 1,680 | |
Work in process | |
| 279 | | |
| 399 | |
Finished goods | |
| 1,284 | | |
| 1,192 | |
Inventories, net | |
$ | 3,389 | | |
$ | 3,271 | |
The inventory balances are net of reserves of approximately $0.5 million as of both December 31, 2022 and December 31, 2021. The inventory
reserves primarily related to the Company’s finished goods inventory. A rollforward of the inventory reserve for 2022 is provided
in Note 2.
6.
Property, Plant and Equipment
Property,
plant and equipment include the following (in thousands):
Schedule of Property, Plant and Equipment
| |
December 31, 2022 | | |
December 31, 2021 | |
Land | |
$ | 2,341 | | |
$ | 51 | |
Buildings and improvements | |
| 12,756 | | |
| 6,886 | |
Machinery and other equipment | |
| 4,786 | | |
| 5,992 | |
Office furniture and fixtures | |
| 860 | | |
| 837 | |
Construction in progress | |
| 11 | | |
| 393 | |
Total properties, cost | |
| 20,754 | | |
| 14,159 | |
Less: accumulated depreciation | |
| (8,105 | ) | |
| (7,933 | ) |
Property, plant and equipment, net | |
$ | 12,649 | | |
$ | 6,226 | |
In
January 2022, the Company, through its wholly owned subsidiary, Digital Ignition, LLC, and Metrolina Alpharetta, LLC (“Metrolina”)
entered into an agreement pursuant to which the Company purchased a parcel of land with buildings and improvements in Alpharetta, Georgia.
The Company previously leased the building and uses it for its Digital Ignition technology incubator and co-working facility. The purchase
price consisted of (i) $5.8 million in cash, (ii) the grant of approximately 0.8 million shares of the Company’s common stock (the
“Stock Grant”), and (iii) the issuance of a warrant to purchase an additional 0.1 million shares of the Company’s common
stock (the “Stock Warrant”).
The
Stock Grant was made to Metrolina Capital Investors, LLC (“Metrolina Capital”) and consisted of approximately 0.8 million
shares of the Company’s common stock with a value equal to approximately $2.3 million. The number of shares of the Company’s
stock was determined based upon a price per share equal to the average of the closing price of our on the NYSE American exchange for
the 60 most recent trading days prior to February 1, 2022, rounded up to the nearest whole number of shares. Additionally, the Company
issued the Stock Warrant to Metrolina Capital, consisting of a ten-year warrant to purchase up to 0.1 million shares of the Company’s
common stock at an exercise price per share of $3.00. In connection with the issuance of Stock Warrant, the Company and Metrolina agreed
that other warrants previously granted by the Company to Metrolina were cancelled and terminated.
Depreciation
expense approximated $1.3 million and $1.0 million for the years ended December 31, 2022 and December 31, 2021,
respectively.
7.
Equity Holdings
The
following summarizes our equity holdings (dollars in thousands):
Summary of Investments
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
Carrying Amount | | |
Economic Interest | | |
Carrying Amount | | |
Economic Interest | |
Equity Method Holdings | |
| | | |
| | | |
| | | |
| | |
FG Financial Holdings, LLC | |
$ | 7,832 | | |
| 47.2 | % | |
$ | - | | |
| | |
FG Financial Group, Inc. | |
| - | | |
| | | |
| 5,549 | | |
| 25.2 | % |
Total Equity Method Investments | |
| 7,832 | | |
| | | |
| 5,549 | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Fair Value Method Holding | |
| | | |
| | | |
| | | |
| | |
GreenFirst Forest Products Inc. | |
| 16,792 | | |
| 8.4 | % | |
| 22,467 | | |
| 8.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Cost Method Holding | |
| | | |
| | | |
| | | |
| | |
Firefly Systems, Inc. | |
| 12,898 | | |
| | | |
| 13,117 | | |
| | |
Total Equity Holdings | |
$ | 37,522 | | |
| | | |
$ | 41,133 | | |
| | |
The
following summarizes the income (loss) of equity method holdings reflected in the consolidated statements of operations (in thousands):
Summary
of Income (Loss) of Equity Method Investee
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Entity | |
| | | |
| | |
FG Financial Group, Inc. | |
$ | (2,578 | ) | |
$ | (1,221 | ) |
FG Financial Holdings, LLC | |
| 2,981 | | |
| - | |
GreenFirst Forest Products Inc. | |
| - | | |
| (1,150 | ) |
Total | |
$ | 403 | | |
$ | (2,371 | ) |
Loss from equity method holdings | |
$ | 403 | | |
$ | (2,371 | ) |
Equity
Method Holding
FG
Financial Group, Inc. (“FGF”) is a publicly-traded reinsurance and investment management holding company focused on
opportunistic collateralized and loss capped reinsurance, while allocating capital to special purpose acquisition companies (each, a
“SPAC”) and SPAC sponsor-related businesses.
In
June 2022, FGF announced the closing of a public offering of common stock of 2,750,000 shares at a price of $1.58. The Company participated
in the public offering and purchased 1,265,822 shares of FGF common stock. Following the purchase, the Company’s FGF holdings total
approximately 2.9 million shares of FGF common stock.
The
Company’s Chairman, D. Kyle Cerminara, is the chairman of the board of directors of FGF. Mr. Cerminara is affiliated with entities
that, when combined with the Company’s ownership in FGF, own greater than 50% of FGF. Since FGF does not depend on the Company
for continuing financial support to maintain operations, the Company has determined that FGF is not a variable interest entity, and therefore,
the Company is not required to determine the primary beneficiary of FGF for potential consolidation. The Company did not receive dividends
from FGF during the year ended December 31, 2022 or 2021.
FG
Financial Holdings, LLC (“FGF Holdings”) is a limited liability company formed under the Delaware Limited Liability Company
Act. The Company is a member of FGF Holdings and contributed its 2.9 million shares of FGF common stock to FGF Holdings on September
12, 2022. In consideration of its contribution to FGF Holdings, the Company was issued Series B Common Interests of FGF Holdings and
50% of the voting power over FGF Holdings. The members of FGF Holdings agreed that the powers of FGF Holdings shall be exercised by,
or under the authority of, its managers. FGF Holdings has two managers, one of which was appointed by the Company. The Company designated
its Chairman, D. Kyle Cerminara, to serve as a manager of FGF Holdings. The managers of FGF Holdings, acting unanimously, have the right,
power and authority on behalf of FGF Holdings and in its name to execute documents or other instruments and exercise all of the rights,
power and authority of FGF Holdings. Allocations of profits and losses and distributions of cash are made in accordance with the terms
of the FGF Holdings operating agreement.
The
Company has the ability to significantly influence FGF Holdings through its 50%
voting power but does not maintain a controlling interest. Accordingly, the Company applied the equity method of accounting to its
interest in FGF Holdings. The Company accounted for the transfer of the 2.9
million shares of FGF common stock to FGF Holdings as a change in interest and recognized a gain of $0.9
million during the third quarter of 2022, which was included in the equity method holding income on the consolidated
statements of operations.
The
Company is able to determine the value of its equity method holding in FGF Holdings using the quoted market prices of FGF common and
preferred shares. Accordingly, the Company no longer needs to elect to recognize the results of its equity method holding in FGF Holdings
in its statement of operations on a one-quarter lag.
Based
on quoted market prices of the assets held by FGF Holdings, as well as the liabilities and cash balance on hand, the liquidation
value of the Company’s LLC interest in FGF Holdings was approximately $8.1
million as of December 31, 2022.
As
of December 31, 2022, the Company’s retained earnings included an accumulated deficit from its equity method holdings of approximately
$6.0 million.
Fair
Value Method Holding
GreenFirst
Forest Products Inc. (“GreenFirst”) is a publicly-traded Canadian company focused on environmentally sustainable forest management
and lumber production. In April 2021, GreenFirst announced that it had entered into an asset purchase agreement pursuant to which it
would acquire a portfolio of forest and paper product assets (the “GreenFirst Acquisition”). The Company’s Chairman,
Mr. Cerminara, served as a member of the board of directors of GreenFirst from June 2016 to October 2021, and was also appointed Chairman
of GreenFirst from June 2018 to June 2021. Prior to the closing of the GreenFirst Acquisition, the Company held a 20.7% ownership position
in GreenFirst. The Company’s 20.7% ownership of GreenFirst, combined with Mr. Cerminara’s board seat, provided the Company
with significant influence over GreenFirst, but not a controlling interest. Accordingly, the Company applied the equity method of accounting
to its equity holding in GreenFirst. Following the GreenFirst Acquisition and GreenFirst’s issuance of additional common shares,
the Company’s ownership percentage decreased to 8.6%. As a result, the Company is no longer able to exercise significant influence
over GreenFirst and the equity holding in GreenFirst no longer qualifies for equity method accounting. As a result of applying the fair
value method of accounting, the Company recorded a loss on equity holdings of approximately $4.5 million during 2022, of which $4.4 million
was an unrealized loss and $0.1 million was a realized loss. During 2021, a gain on equity holdings of $12.3 million, of which $10.6
million was unrealized and $1.7 million was realized. The Company did not receive dividends from GreenFirst during the year ended December 31, 2022 or 2021. Based on quoted market prices, the fair value of the Company’s ownership in GreenFirst
was $16.7 million as of December 31, 2022.
Cost
Method Holding
The
Company holds approximately 1.1 million and 0.6 million Firefly Series B-1 and Firefly Series B-2 preferred shares, respectively, which
were acquired in connection with the transactions with Firefly in May 2019 and August 2020. See Note 3 for additional details. In addition,
the Company holds an additional 0.7 million Firefly Series B-2 preferred shares, which were acquired in August 2020 pursuant to a stock
purchase agreement with Firefly. The Company and its affiliated entities have designated Kyle Cerminara, Chairman of the Company’s
board of directors and a principal of the Company’s largest shareholder, to Firefly’s board of directors.
8.
Film and Television Programming Rights, Net
Schedule
of Development Assets Acquired
| |
December 31, 2022 | | |
December 31, 2021 | |
Television series in development | |
$ | 1,308 | | |
$ | - | |
Films in development | |
| 193 | | |
| - | |
Total | |
$ | 1,501 | | |
$ | - | |
The
Company has not yet commenced amortization of the projects as they were still in development at December 31, 2022.
A
rollforward of film and television programming rights, net for year ended December 31, 2022 is as follows (in thousands):
Schedule
of Film and Television Programming Rights
Balance at December 31, 2021 | |
$ | - | |
In-process projects acquired from Landmark | |
| 1,670 | |
Warrant to be issued to Landmark | |
| 364 | |
Expenditures on in-process projects | |
| 459 | |
Reclass from other assets | |
| 124 | |
Reclass of reimbursable costs associated with Safehaven | |
| (1,116 | ) |
Balance at December 31, 2022 | |
$ | 1,501 | |
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 $1.7
million acquisition price was allocated to three
projects in development, including $1.0
million to Safehaven, $0.3
million to Flagrant and $0.4
million to Shadows in the Vineyard. The
Company also agreed to issue to Landmark no later than 10 days after the completion of the initial public offering of Strong Global Entertainment,
a warrant to purchase up to 150,000
common shares of Strong Global Entertainment,
exercisable for three years beginning six months after the consummation of the initial public offering, at an exercise price equal to
the per-share offering price of Strong Global Entertainment’s common shares in the initial public offering (the “Landmark
Warrant”). The Landmark Warrant allows for cashless exercise in certain limited circumstances and provides for certain registration
rights for such warrant shares. In the event that an initial public offering of the Company does not occur within a specified time, Landmark
would have the right to surrender the warrant in exchange for 2.5%
ownership in Strong Studios.
As
a condition precedent to entry into the AA Agreement, Strong Studios agreed to enter into distribution agreements for the AA Projects
(the “AA Distribution Agreements”) with Screen Media Ventures, LLC (“SMV”). Pursuant to the AA Distribution Agreements,
SMV agreed to purchase the global distribution rights to Safehaven for $6.5 million and Flagrant for $2.5 million upon
delivery of each project. In January 2023, Strong Studios amended its agreement with SMV resulting in Strong Studios retaining the worldwide
global distribution rights for the Flagrant series and releasing SMV from the obligation to purchase the distribution rights for
the series.
In
accordance with Accounting Standards Codification (“ASC”) 926 Entertainment - Films, costs of acquiring and producing films
and television programs are capitalized when incurred. In connection with the transaction, and using the guidance in “Acquisition
of Assets Rather than a Business” subsections contained within ASC 805 Business Combinations, the Company allocated the $1.7 million
acquisition price to the various projects under development based upon the historical costs incurred by Landmark, which the Company believes
approximates fair value. The Company also recorded a liability for the $1.4 million of remaining installment payments it will make to
Landmark. Finally, the Company also determined the fair value of the Landmark Warrant and allocated an additional $0.4 million to the
various projects under development. The Company will recognize the remaining payment contingencies that may be due to Landmark, which
include distribution fees and profit participations that will be incurred following the completion and exploitation of each project,
when the contingencies are resolved, and the amounts become payable.
The
fair value of the Landmark Warrant was estimated on the date of grant using a Black-Scholes valuation model with the following assumptions:
Summary
of Warrants Granted Valuation Using Black Scholes Pricing Method
Expected dividend yield at date of grant | |
| 0.00 | % |
Risk-free interest rate | |
| 1.7 | % |
Expected stock price volatility | |
| 72.9 | % |
Expected life of warrants (in years) | |
| 3.0 | |
During
the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven 2022”) was established to manage the production and financing
of Safehaven, one of the projects acquired from Landmark. Strong Studios owns 49% of Safehaven 2022 and the remaining 51% is owned
by Unbounded Services, LLC (“Unbounded”). No consideration was paid by Strong Studios in exchange for its 49% equity interest
in Safehaven 2022. Unbounded also did not contribute any assets or liabilities to Safehaven 2022 and agreed to provide day-to-day management
services in exchange for their 51% ownership. Unbounded will also serve as a co-producer on the project. Strong Studios assigned the
Landmark distribution agreement to Safehaven 2022, and the Landmark distribution agreement serves as collateral for the production financing
at Safehaven 2022. Strong Studios and Unbounded will share profits and losses, if any, from Safehaven 2022 on a pro-rata basis based
on their relative ownership percentages.
Strong
Studios allocated $1.0
million of the $1.7
million acquisition price to Safehaven and incurred an additional $0.1
million of development costs during 2022. Strong Studios transferred the $1.1
million in intellectual property representing the rights and assets related to Safehaven and Safehaven 2022 agreed to
reimburse Strong Studios $1.1
million for those costs following payment of any senior secured debt and prior to any profit participations or equity distributions.
Safehaven 2022 reimbursed the $0.1 million of development costs incurred by Strong Studios, and the remaining $1.0
million payable to Strong Studios represents an obligation of Safehaven 2022 to Strong Studios and is not contingent on any specific
event. Accordingly, the Company has classified the amount due from Safehaven 2022 as a receivable within other current assets on its
consolidated balance sheet as of December 31, 2022. Strong Studios expects Safehaven 2022 to reimburse the acquisition cost
allocated to the project based on its ultimate expected revenues and profits from the exploitation of the project. Safehaven 2022
will begin to generate revenue and expenses upon delivery of the completed Safehaven series to SMV, which is expected to
occur in mid-2023. The
$6.5 million minimum guarantee is due and payable to Safehaven 2022 in installments of 25% upon delivery and acceptance, 25% three
months thereafter, and the remaining 50% six months thereafter. Upon delivery and acceptance, Safehaven 2022 expects to
recognize $6.5
million in initial revenue from the distribution rights and will record cost of sales using the individual-film-forecast method
based on the ratio of the current period’s revenues to management’s estimated remaining total gross revenues to be
earned. Safehaven 2022 is an equity method holding and the Company will reflect its proportionate share of the net periodic profit
and loss of Safehaven 2022 as equity method income (loss) during each reporting period.
Safehaven
2022 entered into a Loan and Security Agreement with Bank of Hope to provide interim production financing for the Safehaven
production, secured by the Landmark distribution agreement. Safehaven 2022 is the sole borrower and guarantor under the loan agreement.
As of December 31, 2022, Safehaven 2022 had borrowed $9.4 million under the facility for production costs incurred to that date. Safehaven
2022 has also received working capital advances of $0.6 million from Strong Studios. Strong Studios expects Safehaven 2022 to reimburse
the working capital advances in the second half of 2023.
Strong
Studios reviewed its ownership in Safehaven 2022 and concluded that it has significant influence, but not a controlling interest, in
Safehaven 2022 based on its ownership being less than 50% along with having one of three representatives on the board of managers of
Safehaven 2022. Strong Studios also reviewed whether it otherwise had the power to make decisions that significantly impact the economic
performance of Safehaven 2022 and concluded that it did not control the entity and is not the primary beneficiary. Accordingly, the Company
will apply the equity method of accounting to its equity holding in Safehaven 2022 and will record its proportionate share of the net
income/loss resulting from the equity holding as a single line item captioned “equity method holding income (loss)” on its
statement of operations.
Safehaven
2022 did not record any income or expense during 2022 because all costs incurred by Safehaven 2022 were related to the in-process production
and have been capitalized. Upon delivery and acceptance of the project, Safehaven 2022 expects to recognize revenue from the distribution
rights and will record cost of sales using the individual-film-forecast method based on the ratio of the current period’s revenues
to management’s estimated remaining total gross revenues to be earned. A summary of the balance sheet of Safehaven 2022 as of December
31, 2022, is as follows (in thousands):
Schedule
of Balance Sheets
| |
| | |
Cash | |
$ | 117 | |
Television programming rights | |
| 10,890 | |
Other assets | |
| 59 | |
Total assets | |
$ | 11,066 | |
| |
| | |
Accounts payable and accrued expenses | |
$ | 25 | |
Due to Strong Studios | |
| 1,625 | |
Debt | |
| 9,416 | |
Equity | |
| - | |
Total liabilities and equity | |
$ | 11,066 | |
9.
Goodwill
All
of the Company’s goodwill is related to the Strong Entertainment segment. The following represents a summary of changes in the
Company’s carrying amount of goodwill (in thousands):
Summary of Changes in Carrying Amount of Goodwill
Balance as of December 31, 2021 | |
$ | 942 | |
Foreign currency translation adjustment | |
| (60 | ) |
Balance as of December 31, 2022 | |
$ | 882 | |
10.
Accrued Expenses
The
major components of current accrued expenses are as follows (in thousands):
Schedule of Accrued Expenses
| |
December 31, 2022 | | |
December 31, 2021 | |
Employee-related | |
$ | 1,438 | | |
$ | 1,538 | |
Film and television programming rights | |
| 1,709 | | |
| - | |
Legal and professional fees | |
| 822 | | |
| 524 | |
Warranty obligation | |
| 309 | | |
| 136 | |
Interest and taxes | |
| 653 | | |
| 385 | |
Post-retirement benefit obligation | |
| 15 | | |
| 6 | |
Other | |
| 221 | | |
| 405 | |
Total | |
$ | 5,167 | | |
$ | 2,994 | |
The
major components of other long-term liabilities are as follows (in thousands):
Schedule
of Long Term Accrued Liabilities
| |
December 31, 2022 | | |
December 31, 2021 | |
Post-retirement benefit obligation | |
$ | 99 | | |
$ | 108 | |
Deferred revenue | |
| 6 | | |
| 10 | |
Total | |
$ | 105 | | |
$ | 118 | |
11.
Income Taxes
(Loss)
income from continuing operations before income taxes consists of (in thousands):
Schedule of Income Before Income Tax, Domestic and Foreign
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
United States | |
$ | (7,956 | ) | |
$ | (4,758 | ) |
Foreign | |
| 1,275 | | |
| 11,365 | |
Total | |
$ | (6,681 | ) | |
$ | 6,607 | |
Income
tax expense from continuing operations consists of (in thousands):
Schedule of Components of Income Tax Expense (Benefit)
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
Federal: | |
| | | |
| | |
Current | |
$ | - | | |
$ | - | |
Federal
current | |
| - | | |
| - | |
Deferred | |
| - | | |
| - | |
Federal
deferred | |
| | | |
| | |
Total | |
| - | | |
| - | |
Federal
total | |
| - | | |
| - | |
State: | |
| | | |
| | |
Current | |
| 22 | | |
| 46 | |
State
current | |
| 22 | | |
| 46 | |
Deferred | |
| - | | |
| - | |
State
deferred | |
| | | |
| | |
Total | |
| 22 | | |
| 46 | |
State
total | |
| 22 | | |
| 46 | |
Foreign: | |
| | | |
| | |
Current | |
| 1,173 | | |
| 713 | |
Foreign
current | |
| 1,173 | | |
| 713 | |
Deferred | |
| (722 | ) | |
| 2,477 | |
Foreign
deferred | |
| (722 | | |
| 2,477 | |
Total | |
| 451 | | |
| 3,190 | |
Foreign
total | |
| 451 | | |
| 3,190 | |
Total | |
$ | 473 | | |
$ | 3,236 | |
Income
tax expense from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate to pretax (loss)
income from continuing operations as follows (in thousands):
Schedule of Effective Income Tax Rate Reconciliation
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
Expected federal income tax expense (benefit) | |
$ | (1,403 | ) | |
$ | 1,388 | |
State income taxes, net of federal benefit | |
| (662 | ) | |
| 36 | |
Foreign tax rate differential | |
| 71 | | |
| 625 | |
Change in state tax rate | |
| (303 | ) | |
| (713 | ) |
Change in valuation allowance | |
| 2,568 | | |
| 2,084 | |
GILTI inclusion | |
| - | | |
| 213 | |
Return to provision | |
| 61 | | |
| (314 | ) |
Foreign dividend inclusion | |
| 69 | | |
| 438 | |
Deferred tax adjustments | |
| 15 | | |
| (333 | ) |
Other | |
| 57 | | |
| (188 | ) |
Total | |
$ | 473 | | |
$ | 3,236 | |
Deferred
tax assets and liabilities were comprised of the following (in thousands):
Schedule of Deferred Tax Assets and Liabilities
| |
December 31, 2022 | | |
December 31, 2021 | |
Deferred tax assets: | |
| | | |
| | |
Deferred revenue | |
$ | 110 | | |
$ | 415 | |
Non-deductible accruals | |
| 79 | | |
| 115 | |
Inventory reserves | |
| 124 | | |
| 217 | |
Stock compensation expense | |
| 587 | | |
| 889 | |
Warranty reserves | |
| 81 | | |
| 35 | |
Uncollectible receivable reserves | |
| 68 | | |
| 100 | |
Net operating losses | |
| 5,888 | | |
| 8,561 | |
Fair value adjustment to notes receivable | |
| - | | |
| 546 | |
Tax credits | |
| 1,699 | | |
| 1,699 | |
Disallowed interest expense | |
| 1,460 | | |
| 873 | |
Equity in income of equity method holdings | |
| 13 | | |
| (1,262 | ) |
Other | |
| 162 | | |
| 340 | |
Total deferred tax assets | |
| 10,271 | | |
| 12,528 | |
Valuation allowance | |
| (11,645 | ) | |
| (13,640 | ) |
Net deferred tax assets after valuation allowance | |
| (1,374 | ) | |
| (1,112 | ) |
Deferred tax liabilities: | |
| | | |
| | |
Depreciation and amortization | |
| 544 | | |
| 1,618 | |
Cash repatriation | |
| 2,933 | | |
| 2,864 | |
Total deferred tax liabilities | |
| 3,477 | | |
| 4,482 | |
Net deferred tax liability | |
$ | (4,851 | ) | |
$ | (5,594 | ) |
During
the year ended December 31, 2021, the Company sold its Convergent business segment. See Note 3 for additional details. The tax expense/benefit
for these business segments have been allocated to discontinued operations; however, the Company has sufficient net operating losses
to offset taxable income/loss from these discontinued operations, all of which is offset by a valuation allowance.
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 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 of $11.6 million and $13.6
million should be recorded against the Company’s U.S. tax jurisdiction deferred tax assets as of December 31, 2022 and 2021, respectively.
The overall change in valuation allowance was a reduction of $2.1 million; however some changes in valuation allowance were allocated
to discontinued operations. The effective tax rate above relates only to continuing operations.
The
Company recorded a deferred tax liability related to withholding tax on the repatriation of earnings from its Canadian subsidiary of
$2.9 million as of both December 31, 2022 and December 31, 2021.
A
provision of Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was the implementation of the Global Intangible-Low Taxed
Income Tax, or “GILTI.” The Company has elected to account for the impact of GILTI in the period in which the tax actually
applies to the Company. During the year ended December 31, 2022, the Company did not incur any additional taxable income as a result
of this provision. The Company is electing the GILTI High Tax Exclusion.
The
Company’s gross net operating loss carryforwards for Federal tax purposes total approximately $19.7 million and $35.5 million at
December 31, 2022 and 2021 respectively, expiring at various times in 2033 through 2037 for Federal losses generated through December
31, 2017. Though the Company incurred a taxable loss for the year ended December 31, 2022, gross net operating loss carryforwards decreased
due to the sale of Convergent. The Federal and state losses previously allocated to Convergent are no longer available to the Company
to offset future taxable income. Therefore, the related deferred tax asset and offsetting valuation allowance has been removed. As a
result of the 2017 Tax Act, all Federal net operating losses that are generated beginning January 1, 2018 and beyond will carryforward
indefinitely. The Company has foreign tax credit carryforwards of approximately $1.7 million as of December 31, 2022, that expire in
2024. Utilization of these losses may be limited in the event certain changes in ownership occur.
In
March of 2020, The Coronavirus Aid, Relief, and Economic Security Act was enacted and made significant changes to Federal tax laws, including
certain changes that were retroactive to the 2019 tax year. Changes in tax laws are accounted for in the period of enactment and the
retroactive effects are recognized in these financial statements. There were no material income tax consequences of this enacted legislation
on the reporting period of these financial statements.
The
Company is subject to possible examinations not yet initiated for Federal purposes for the fiscal years 2019, 2020 and 2021. In most
cases, the Company has examinations open for state or local jurisdictions based on the particular jurisdiction’s statute of
limitations.
Estimated
amounts related to underpayment of income taxes, including interest and penalties, are classified as a component of income tax expense
in the consolidated statements of operations and were not material for the years ended December 31, 2022 and 2021. Amounts accrued for
estimated underpayment of income taxes were zero as of December 31, 2022 and 2021.
12.
Debt
The
Company’s short-term and long-term debt consist of the following (in thousands):
Schedule of Short term and Long term Debt
| |
December 31, 2022 | | |
December 31, 2021 | |
Short-term debt: | |
| | | |
| | |
Strong/MDI 20-year installment loan | |
$ | 2,289 | | |
$ | 2,682 | |
Strong/MDI 5-year equipment loan | |
| 221 | | |
| 316 | |
Total short-term debt | |
$ | 2,510 | | |
$ | 2,998 | |
| |
| | | |
| | |
Long-term debt: | |
| | | |
| | |
Tenant improvement loan | |
$ | 162 | | |
$ | 128 | |
Digital Ignition building loan | |
| 5,105 | | |
| - | |
Total long-term debt | |
$ | 5,267 | | |
$ | 128 | |
Less: current portion | |
| (216 | ) | |
| (23 | ) |
Less: deferred debt issuance costs, net | |
| (47 | ) | |
| - | |
Long-term debt, net of current portion and deferred debt issuance costs, net | |
$ | 5,004 | | |
$ | 105 | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Deferred debt issuance costs | |
$ | 56 | | |
$ | - | |
Less: accumulated amortization | |
| (9 | ) | |
| - | |
Deferred debt issuance costs, net | |
$ | 47 | | |
$ | - | |
Estimated
future amortization expense of deferred debt issuance costs is as follows (in thousands):
Schedule of Amortization Expense of Deferred Issuance Costs
| |
| | |
2023 | |
$ | 11 | |
2024 | |
| 11 | |
2025 | |
| 11 | |
2026 | |
| 11 | |
2027 | |
| 3 | |
Thereafter | |
| - | |
Total | |
$ | 47 | |
Strong/MDI
Installment Loans
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and restated
May 15, 2018, with a bank consisting of a revolving line of credit for up to CAD$3.5 million, subject to a borrowing base requirement,
a 20-year installment loan for up to CAD$6.0 million and a 5-year installment loan for up to CAD$0.5 million. On June 7, 2021, Strong/MDI
entered into a demand credit agreement (the “2021 Credit Agreement”), which amended and restated the demand credit agreement
dated as of September 5, 2017. The 2021 credit agreement consists of a revolving line of credit for up to CAD$2.0 million subject to
a borrowing base requirement, a 20- year installment loan for up to CAD$5.1 million and a 5-year installment loan for up to CAD$0.5 million.
Amounts outstanding under the line of credit are payable on demand and bear interest at the prime rate established by the lender. Amounts
outstanding under the installment loans bear interest at the lender’s prime rate plus 0.5% and are payable in monthly installments,
including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at any time.
The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s
assets. The 2021 Credit Agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible
stockholders’ equity, less amounts receivable from affiliates and equity method holdings) not exceeding 2.5 to 1, a current ratio
(excluding amounts due from related parties) of at least 1.3 to 1 and minimum “effective equity” of CAD$4.0 million. As of
December 31, 2022, there was CAD$3.1 million, or approximately $2.3 million, of principal outstanding on the 20-year installment loan,
which bears variable interest at 6.95%. As of December 31, 2022, there was CAD$0.3 million, or approximately $0.2 million, of principal
outstanding on the 5-year installment loan, which also bears variable interest at 6.95%. Strong/MDI was in compliance with its debt covenants
as of December 31, 2022.
In
January 2023, Strong/MDI entered into a demand credit agreement (the “2023 Credit Agreement”), which amended and restated
the 2021 Credit Agreement. The 2023 Credit Agreement consists of a revolving line of credit for up to CAD$5.0 million and a 20-year installment
loan for up to CAD$3.1 million. Under the 2023 Credit Agreement: (i) the amount outstanding under the line of credit is payable on demand
and bears interest at the lender’s prime rate plus 1.0% and (ii) the amount outstanding under the installment loan
bears interest at the lender’s prime rate plus 0.5% and is payable in monthly installments, including interest, over their respective
borrowing periods. The lender may also demand repayment of the installment loan at any time. The 2023 Credit Agreement is secured by
a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The 2023 Credit Agreement requires
Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable
from affiliates and equity holdings) not exceeding 2.5 to 1 and a fixed charge coverage ratio of not less than 1.1 times earnings before
interest, income taxes, depreciation and amortization.
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 Loan
As
discussed in Note 6, in January 2022 the Company purchased a parcel of land with buildings and improvements in Alpharetta, Georgia. In
connection with the purchase of the land and building, the Company entered into a Commercial Loan Agreement (the “Loan Agreement”)
with Community First Bank (the “Lender”), dated February 1, 2022. Pursuant to the Loan Agreement, the Lender agreed to lend
the Company approximately $5.3 million (the “Loan Amount”), and the Borrower agreed to repay the Loan Amount pursuant to
the terms of a promissory note (the “Note”).
The
term of the Loan Agreement runs from February 1, 2022, until the Loan Amount is repaid in full by the Company or the Loan Agreement is
terminated pursuant to its terms or by agreement between the Company and the Lender. The terms of the Note include (i) a fixed interest
rate of 4%, (ii) maturity date of February 1, 2027, (iii) monthly payments of approximately $32 thousand beginning on March 1, 2022,
and continuing on the first of each month until the maturity date or until the Note has been paid in full, (iv) a default interest of
8% in the event of a default pursuant to the terms of the Note, and (v) prepayment penalties of (a) 3% of all excess payments during
the first two years of the term of the Note, (b) 2% of all excess payments during the third and fourth years of the term of the Note,
and (c) 1% of all excess payments made during the fifth year of the term of the Note.
The
Note includes standard events of default and references defaults under the Loan Agreement and the Deed to Secure Debt as events of default
under the Note. The Company has a right to cure any curable events of default.
Contractual
Principal Payments
Contractual
required principal payments on the Company’s long-term debt at December 31, 2022 are as follows (in thousands):
Schedule
of Contractual Principal Payments of Long-term Debt
| |
Tenant Improvement Loan | | |
Digital Ignition Building Loan | | |
Total | |
2023 | |
$ | 36 | | |
| 180 | | |
$ | 216 | |
2024 | |
| 38 | | |
| 187 | | |
| 225 | |
2025 | |
| 39 | | |
| 195 | | |
| 234 | |
2026 | |
| 42 | | |
| 203 | | |
| 245 | |
2027 | |
| 7 | | |
| 4,340 | | |
| 4,347 | |
Thereafter | |
| - | | |
| - | | |
| - | |
Total | |
$ | 162 | | |
$ | 5,105 | | |
$ | 5,267 | |
13.
Stock Compensation
The
Company recognizes compensation expense for all stock-based payment awards based on estimated grant date fair values. Stock-based compensation
expense included in selling and administrative expenses approximated $0.7 million and $0.9 million for the years ended December 31, 2022
and December 31, 2021, respectively.
The
Company’s 2017 Omnibus Equity Compensation Plan (“2017 Plan”) was approved by the Company’s stockholders and
provides the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights,
restricted shares, restricted stock units, performance shares, performance units and other stock- based awards and cash-based
awards. Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company. On
December 17, 2019, the Company’s stockholders approved the amendment and restatement of the 2017 Plan to (i) increase the
number of shares of the Company’s common stock authorized for issuance under the 2017 Plan by 1,975,000 shares and (ii) extend
the expiration date of the 2017 Plan by approximately two years, until October 27, 2029. As of December 31, 2022, 2,312,911 shares
were available for issuance under the amended and restated 2017 Plan.
Stock
Options
The
following table summarizes stock option activity for 2022:
Summary of Stock Option Activities
| |
Number of Options | | |
Weighted Average Exercise Price Per Share | | |
Weighted Average Remaining Contractual Term (Years) | | |
Aggregate Intrinsic Value (in thousands) | |
Outstanding at December 31, 2021 | |
| 659,500 | | |
$ | 3.68 | | |
| 6.6 | | |
$ | 187 | |
Granted | |
| - | | |
| | | |
| | | |
| | |
Exercised | |
| - | | |
| | | |
| | | |
| | |
Forfeited | |
| (12,000 | ) | |
| 1.60 | | |
| | | |
| | |
Expired | |
| (8,000 | ) | |
| 3.54 | | |
| | | |
| | |
Outstanding at December 31, 2022 | |
| 639,500 | | |
$ | 3.72 | | |
| 5.6 | | |
$ | 127 | |
Exercisable at December 31, 2022 | |
| 464,000 | | |
$ | 4.09 | | |
| 5.2 | | |
$ | 57 | |
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.
The
Company did not grant stock options during the years ended December 31, 2022 and December 31, 2021. As of December 31, 2022, 175,500
stock option awards were non-vested. Unrecognized compensation costs related to all stock options outstanding amounted to $0.1 million
at December 31, 2022, which is expected to be recognized over a weighted-average period of 1.9 years.
Restricted
Stock Shares and Restricted Stock Units
The
following table summarizes restricted stock unit activity for 2022:
Summary of Restricted Stock Activity
| |
Number of Restricted Stock Units | | |
Weighted Average Grant Date Fair Value | |
Non-vested at December 31, 2021 | |
| 314,079 | | |
$ | 2.45 | |
Granted | |
| 120,829 | | |
| 2.40 | |
Shares vested | |
| (227,974 | ) | |
| 2.78 | |
Shares forfeited | |
| - | | |
| | |
Non-vested at December 31, 2022 | |
| 206,934 | | |
$ | 2.06 | |
The
Company awarded a total of 120,829
and 122,609
restricted stock units to its board of directors during the years ended December 31, 2022 and 2021, respectively. The Company
estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant.
The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2022 and 2021 was
$2.48
and $3.00,
respectively. The fair value of restricted stock awards that vested during the years ended December 31, 2022 and 2021 was $0.6
million and $0.4
million, respectively.
As
of December 31, 2022, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $0.2 million,
which is expected to be recognized over a weighted average period of 0.6 years.
14.
Compensation and Benefit Plans
Retirement
Plan
The
Company sponsors a defined contribution 401(k) plan (the “Plan”) for all eligible employees. Pursuant to the provisions
of the Plan, employees may defer up to 100% of their compensation. The Company will match 50% of the amount deferred up to 6% of
their compensation. The contributions made to the Plan by the Company were approximately $0.2 million and $0.1 million for the years
ended December 31, 2022 and 2021, respectively.
15.
Leases
The
Company and its subsidiaries lease plant and office facilities and equipment under operating and finance leases expiring through 2027.
The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease
if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over
the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the
use of the asset and (b) the right to direct the use of the asset.
Right-of-use
assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement
date. Certain of the leases contain extension options; however, the Company has not included such options as part of its right-of-use
assets and lease liabilities because it does not expect to extend the leases. The Company measures and records a right-of-use asset and
lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is
not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company’s estimated
incremental borrowing rate for loans with similar collateral and duration.
The
Company elected to not apply the recognition requirements of Accounting Standards Codification Topic 842, “Leases,” to leases
of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option
to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases
are recognized in operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation
for those payments is incurred.
The
Company elected, as a lessee, for all classes of underlying assets, to not separate nonlease components from lease components and instead
to account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
The
following tables present the Company’s lease costs and other lease information (dollars in thousands):
Schedule of Lease
Costs and Other Lease Information
| |
December 31, 2022 | | |
December 31, 2021 | |
Lease cost | |
Year Ended | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Finance lease cost: | |
| | | |
| | |
Amortization of right-of-use assets | |
$ | 37 | | |
$ | 3 | |
Interest on lease liabilities | |
| 12 | | |
| 292 | |
Operating lease cost | |
| 243 | | |
| 882 | |
Short-term lease cost | |
| 53 | | |
| 56 | |
Sublease income | |
| (32 | ) | |
| (335 | ) |
Net lease cost | |
$ | 313 | | |
$ | 898 | |
Other information | |
Year Ended | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows from finance leases | |
$ | 12 | | |
$ | 292 | |
Operating cash flows from operating leases | |
$ | 202 | | |
$ | 819 | |
Financing cash flows from finance leases | |
$ | 36 | | |
$ | 2,106 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | |
$ | 97 | | |
$ | 291 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | |
$ | 703 | | |
$ | - | |
| |
As of December 31, 2022 | |
Weighted-average remaining lease term - finance leases (years) | |
| 1.9 | |
Weighted-average remaining lease term - operating leases (years) | |
| 3.6 | |
Weighted-average discount rate - finance leases | |
| 4.9 | % |
Weighted-average discount rate - operating leases | |
| 3.6 | % |
The
following table presents a maturity analysis of the Company’s operating and finance lease liabilities as of December 31, 2022 (in
thousands):
Schedule of Future Minimum Lease Payments
| |
Operating Leases | | |
Finance Leases | |
2023 | |
$ | 131 | | |
$ | 170 | |
2024 | |
| 101 | | |
| 170 | |
2025 | |
| 79 | | |
| 403 | |
2026 | |
| 81 | | |
| 16 | |
2027 | |
| 14 | | |
| 5 | |
Thereafter | |
| - | | |
| - | |
Total lease payments | |
| 406 | | |
| 764 | |
Less: Amount representing interest | |
| (33 | ) | |
| (97 | ) |
Present value of lease payments | |
| 373 | | |
| 667 | |
Less: Current maturities | |
| (116 | ) | |
| (117 | ) |
Lease obligations, net of current portion | |
$ | 257 | | |
$ | 550 | |
16.
Commitments, Contingencies and Concentrations
Concentrations
The
Company’s top ten customers accounted for approximately 49% of 2022 consolidated net revenues. Trade accounts receivable from these
customers represented approximately 68% of net consolidated receivables at December 31, 2022. None of the Company’s customers accounted
for more than 10% of both its consolidated net revenues during 2022 and its net consolidated receivables as of December 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.
Litigation
The
Company is involved, from time to time, in certain legal disputes in the ordinary course of business. No such disputes, individually
or in the aggregate, are expected to have a material effect on the Company’s business or financial condition.
The
Company and certain of its subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing
materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of commercial
lighting products containing wiring that may have contained asbestos. Each case names dozens of corporate defendants in addition to us.
In our 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. As of December 31, 2022, the Company has a loss contingency reserve of approximately $0.2 million, which represents the Company’s
estimate of its potential losses related to the settlement of open cases. During 2022 and the first quarter of 2023, the Company settled
three cases, which resulted in payments totaling $53 thousand. When appropriate, the Company may settle additional claims in the future.
The Company does not expect the resolution of these cases to have a material adverse effect on its consolidated financial condition,
results of operations or cash flows.
17.
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.
Schedule of Segment Reporting Information by Segment
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
| |
(in thousands) | |
Net revenues | |
| | | |
| | |
Strong Entertainment | |
$ | 39,867 | | |
$ | 25,886 | |
Other | |
| 1,370 | | |
| 1,144 | |
Total net revenues | |
| 41,237 | | |
| 27,030 | |
| |
| | | |
| | |
Gross profit | |
| | | |
| | |
Strong Entertainment | |
| 9,546 | | |
| 7,283 | |
Other | |
| 1,370 | | |
| 927 | |
Total gross profit | |
| 10,916 | | |
| 8,210 | |
| |
| | | |
| | |
Operating income (loss) | |
| | | |
| | |
Strong Entertainment | |
| 2,761 | | |
| 2,211 | |
Other | |
| (736 | ) | |
| (718 | ) |
Total segment operating income | |
| 2,025 | | |
| 1,493 | |
Unallocated administrative expenses | |
| (4,385 | ) | |
| (4,593 | ) |
Unallocated loss on disposal of assets | |
| - | | |
| (38 | ) |
Loss from operations | |
| (2,360 | ) | |
| (3,138 | ) |
Other (loss) income, net | |
| (4,724 | ) | |
| 12,116 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
| |
(in thousands) | |
Capital expenditures: | |
| | | |
| | |
Strong Entertainment | |
$ | 253 | | |
$ | 394 | |
Other | |
| 662 | | |
| 1,133 | |
Total capital expenditures from continuing operations | |
$ | 915 | | |
$ | 1,527 | |
| |
| | | |
| | |
Depreciation, amortization and impairment: | |
| | | |
| | |
Strong Entertainment | |
$ | 697 | | |
$ | 907 | |
Other | |
| 700 | | |
| 399 | |
Total depreciation, amortization and impairment from continuing operations | |
$ | 1,397 | | |
$ | 1,306 | |
Reconciliation of
Assets from Segment to Consolidated
(In thousands) | |
December 31, 2022 | | |
December 31, 2021 | |
Identifiable assets | |
| | | |
| | |
Strong Entertainment | |
$ | 35,392 | | |
$ | 38,518 | |
Corporate assets | |
| 36,361 | | |
| 37,291 | |
Total | |
$ | 71,753 | | |
$ | 75,809 | |
Assets | |
$ | 71,753 | | |
$ | 75,809 | |
Summary
by Geographical Area
Schedule of Segment Reporting Information by Geographic Area
(In thousands) | |
2022 | | |
2021 | |
| |
Years December 31, | |
(In thousands) | |
2022 | | |
2021 | |
Net revenues | |
| | | |
| | |
United States | |
$ | 35,869 | | |
$ | 22,462 | |
Canada | |
| 1,622 | | |
| 1,600 | |
China | |
| 327 | | |
| 454 | |
Mexico | |
| 20 | | |
| 16 | |
Latin America | |
| 592 | | |
| 424 | |
Europe | |
| 1,076 | | |
| 537 | |
Asia (excluding China) | |
| 809 | | |
| 992 | |
Other | |
| 922 | | |
| 545 | |
Total | |
$ | 41,237 | | |
$ | 27,030 | |
Net revenues | |
$ | 41,237 | | |
$ | 27,030 | |
Summary
of Identifiable Assets by Geographical Area
(In thousands) | |
December 31, 2022 | | |
December 31, 2021 | |
Identifiable assets | |
| | |
| |
United States | |
$ | 51,423 | | |
$ | 46,585 | |
Canada | |
| 20,330 | | |
| 29,224 | |
Total | |
$ | 71,753 | | |
$ | 75,809 | |
Assets | |
$ | 71,753 | | |
$ | 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.