Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
1.
Nature of Operations
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. 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 owns and operates its Digital Ignition technology incubator and co-working facility in Alpharetta, Georgia. In addition, the
Company holds minority equity positions in three companies.
The
Company has 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 expects to continue to be the majority
shareholder of Strong Global Entertainment.
2.
Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and all majority-owned and controlled domestic and foreign
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The
condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States
of America (also referred to as “GAAP”) for annual reporting purposes or those made in the Company’s Annual Report
on Form 10-K. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
The
condensed consolidated balance sheet as of December 31, 2022, was derived from the Company’s audited consolidated balance sheet
as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management,
reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results
of operations and cash flows for the respective interim periods. Certain prior period balances have been reclassified to conform to current
period presentation. The results for interim periods are not necessarily indicative of trends or results expected for a full year.
Unless
otherwise indicated, all references to “dollars” and “$” in this Quarterly Report on Form 10-Q are to, and amounts
are presented in, U.S. dollars.
Use
of Management Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results and changes in facts and circumstances
may alter such estimates and affect results of operations and financial position in future periods.
The coronavirus pandemic (“COVID-19”) and inflationary pressures
have been posing and may continue to pose challenges for our business. The COVID-19 global pandemic resulted in unprecedented impact to
consumer behaviors and our customers, particularly our customers’ ability and willingness to purchase our products and services.
The Company believes that consumer reticence to engage in outside-the-home activities, caused by the risk of contracting COVID-19, has
abated, and our customers have resumed more typical, pre-COVID-19 purchasing behaviors. And while we believe our customers made significant
progress in its recovery from the pandemic, the ongoing recovery will be contingent upon several key factors, including the volume of
new film content available, the box office performance of new film content released, the duration of the exclusive theatrical release
window, and evolving consumer behavior with competition from other forms of in- and out-of-home entertainment. There can be no assurances
that there will be no additional public health crises, including further resurgence or variants of COVID-19, which could reverse the current
trend and have a negative impact on the Company’s results of operations
Cash
and Cash Equivalents
All
short-term, highly liquid financial instruments are classified as cash equivalents in the condensed consolidated balance sheets and statements
of cash flows. Generally, these instruments have maturities of three months or less from date of purchase. As of March 31, 2023, $0.6
million of the $4.3 million in cash and cash equivalents was held by our foreign subsidiary.
Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for credit losses
based on several factors, including overall customer credit quality, historical write-off experience and a specific analysis that projects
the ultimate collectability of the account. As such, these factors may change over time causing the allowance level and bad debt expense
to be adjusted accordingly. Past due accounts are written off when our efforts have been unsuccessful in collecting amounts due.
Equity
Holdings
The
Company accounts for its equity holdings using the equity method, at cost, or at fair value depending on the facts and circumstances
related to each individual holding. The Company applies the equity method of accounting to its holdings when it has significant
influence, but not controlling interest, in the entity. Judgment regarding the level of influence over each equity method holding
includes considering key factors such as ownership interest, representation on the board of directors, participation in
policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income or loss
resulting from these equity holdings is reported under the line item captioned “equity method holding loss” in our
condensed consolidated statements of operations. The Company’s equity method 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 condensed consolidated statements
of cash flows.
Changes
in fair value of holdings in marketable equity securities of unconsolidated entities in which the Company is not able to exercise significant
influence (“Fair Value Holdings”) are recognized on the consolidated statement of operations. Nonmarketable equity holdings
in unconsolidated entities in which the Company is not able to exercise significant influence (“Cost Method Holdings”) are
accounted for at the Company’s initial cost, minus any impairment (if any), plus or minus changes resulting from observable price
changes in orderly transactions for the identical or a similar holding or security of the same issuer. Dividends on Fair Value Holdings
and Cost Method Holdings received are recorded as income.
The
Company assesses its equity holdings for impairment whenever events or changes in circumstances indicate that the carrying value of
an equity holding may not be recoverable. Management reviewed the underlying net assets of the Company’s equity method holding
as of March 31, 2023 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 the three months ended March 31, 2023. The carrying value of our equity
method, Fair Value Holdings and Cost Method Holdings is reported as “equity holdings” on the condensed consolidated
balance sheets. Note 6 contains additional information on our equity method, Fair Value Holdings and Cost Method Holdings
Film
and Television Programming Rights
Commencing
in March 2022, the Company began producing original productions and acquiring rights to films and television programming. Film and television
programming rights include the unamortized costs of in-process or in-development content produced or acquired by the Company. The Company’s
capitalized costs include all direct production and financing costs, capitalized interest when applicable, and production overhead. Film
and television program rights are stated at the lower of amortized cost or estimated fair value.
The
costs of producing content are amortized using the individual-film-forecast method. These costs are amortized based on the ratio of the
current period’s revenues to management’s estimated remaining total gross revenues to be earned (“Ultimate Revenue”)
as of each reporting date to reflect the most current available information. Management’s judgment is required in estimating Ultimate
Revenue and the costs to be incurred throughout the life of each film or television program. Amortization is adjusted when necessary
to reflect increases or decreases in forecasted Ultimate Revenues.
For
an episodic television series, the period over which Ultimate Revenues are estimated cannot exceed ten years following the date of delivery
of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later. For films,
Ultimate Revenue includes estimates over a period not to exceed ten years following the date of initial release.
Content
assets are expected to be predominantly monetized individually and therefore are reviewed at the individual level when an event or change
in circumstance indicates a change in the expected usefulness of the content or the fair value may be less than the unamortized cost.
Due
to the inherent uncertainties involved in making such estimates of Ultimate Revenues and expenses, these estimates may differ from actual
results. In addition, in the normal course of our business, some films and titles will be more successful or less successful than anticipated.
Management regularly reviews and revises, when necessary, its Ultimate Revenue and cost estimates, which may result in a change in the
rate of amortization of film costs and participations and residuals and/or a write-down of all or a portion of the unamortized costs
of the film or television program to its estimated fair value. An increase in the estimate of Ultimate Revenue will generally result
in a lower amortization rate and, therefore, less film and television program amortization expense, while a decrease in the estimate
of Ultimate Revenue will generally result in a higher amortization rate and, therefore, higher film and television program amortization
expense, and also periodically result in an impairment requiring a write-down of the film cost to the title’s fair value. The Company
has not 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.
Fair
Value of Financial Instruments
Assets
and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the valuation
of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value are classified
and disclosed in one of the following three categories:
| |
● |
Level
1 – inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities |
| |
● |
Level
2 – inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either
directly or indirectly |
| |
● |
Level
3 – inputs to the valuation techniques are unobservable for the assets or liabilities |
The
following tables present the Company’s financial assets measured at fair value based upon the level within the fair value hierarchy
in which the fair value measurements are classified, as of March 31, 2023 and December 31, 2022.
Fair
values measured on a recurring basis at March 31, 2023 (in thousands):
Schedule
of Fair Value Measured Financial Assets and Liabilities
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Cash and cash equivalents | |
$ | 4,349 | | |
$ | - | | |
$ | - | | |
$ | 4,349 | |
| Fair value method equity holding | |
| 13,677 | | |
| - | | |
| - | | |
| 13,677 | |
| Total | |
$ | 18,026 | | |
$ | - | | |
$ | - | | |
$ | 18,026 | |
Fair
values measured on a recurring basis at December 31, 2022 (in thousands):
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Cash and cash equivalents | |
$ | 3,789 | | |
$ | - | | |
$ | - | | |
$ | 3,789 | |
| Fair value method equity holding | |
| 16,792 | | |
| - | | |
| - | | |
| 16,792 | |
| Total | |
$ | 20,581 | | |
$ | - | | |
$ | - | | |
$ | 20,581 | |
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 $7.4 million at March 31, 2023 (see Note 6).
Recently
Adopted 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 requires 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 Company adopted this ASU effective January 1, 2023. Upon adoption the Company recorded a cumulative effect adjustment decreasing
retained earnings by $24 thousand.
3.
Revenue
The
Company accounts for revenue using the following steps:
| |
● |
Identify
the contract, or contracts, with a customer; |
| |
● |
Identify
the performance obligations in the contract; |
| |
● |
Determine
the transaction price; |
| |
● |
Allocate
the transaction price to the identified performance obligations; and |
| |
● |
Recognize
revenue when, or as, the Company satisfies the performance obligations. |
The
Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into
at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the
other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations,
the items are analyzed to determine whether they are distinct, whether the items have value on a standalone basis, and whether there
is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified
performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price
is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using
a cost-plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements
by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects
to provide and the contractual pricing based on those quantities. The Company only includes a portion of variable consideration in the
transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when
the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate,
its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the
magnitude of the variable consideration to the overall arrangement.
As
discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of
a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing
services. The Company typically does not have any material extended payment terms, as payment is due at or shortly after the time of
the sale. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The
Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced
to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration.
A contract liability is recognized as deferred revenue when the Company invoices clients, or receives cash, in advance of performing
the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related
performance obligation.
The
Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable
costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized
to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental
costs of obtaining a contract with a term of less than one year as a selling expense when incurred. The Company did not have any deferred
contract costs as of March 31, 2023 or December 31, 2022.
The
following tables disaggregate the Company’s revenue by major source and by operating segment for the three months ended March 31,
2023 and 2022 (in thousands):
Schedule
of Disaggregation of Revenue
| | |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
| | |
Three Months Ended March 31, 2023 | | |
Three Months Ended March 31, 2022 | |
| | |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
| Screen system sales | |
$ | 2,582 | | |
$ | - | | |
$ | 2,582 | | |
$ | 3,306 | | |
$ | - | | |
$ | 3,306 | |
| Digital equipment sales | |
| 3,526 | | |
| - | | |
| 3,526 | | |
| 3,544 | | |
| - | | |
| 3,544 | |
| Extended warranty sales | |
| 51 | | |
| - | | |
| 51 | | |
| 100 | | |
| - | | |
| 100 | |
| Other product sales | |
| 1,045 | | |
| - | | |
| 1,045 | | |
| 753 | | |
| - | | |
| 753 | |
| Total product sales | |
| 7,204 | | |
| - | | |
| 7,204 | | |
| 7,703 | | |
| - | | |
| 7,703 | |
| Field maintenance and monitoring services | |
| 1,891 | | |
| - | | |
| 1,891 | | |
| 1,618 | | |
| - | | |
| 1,618 | |
| Installation services | |
| 802 | | |
| - | | |
| 802 | | |
| 371 | | |
| - | | |
| 371 | |
| Other service revenues | |
| 54 | | |
| 158 | | |
| 212 | | |
| 28 | | |
| 306 | | |
| 334 | |
| Total service revenues | |
| 2,747 | | |
| 158 | | |
| 2,905 | | |
| 2,017 | | |
| 306 | | |
| 2,323 | |
| Total | |
$ | 9,951 | | |
$ | 158 | | |
$ | 10,109 | | |
$ | 9,720 | | |
$ | 306 | | |
$ | 10,026 | |
Screen
system sales
The
Company typically recognizes revenue on the sale of its screen systems when control of the screen is transferred to the customer, usually
at time of shipment. However, revenue is recognized upon delivery for certain international shipments with longer shipping transit times
because control transfers upon customer delivery. The cost of freight and shipping to the customer is recognized in cost of sales at
the time of transfer of control to the customer. For contracts that are long-term in nature, the Company believes that the use of the
percentage-of-completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of
progress towards completion, contract revenues, and contract costs. Under the percentage-of-completion method, revenue is recorded based
on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract.
Digital
equipment sales
The
Company recognizes revenue on sales of digital equipment when the control of the equipment is transferred, which typically occurs at
the time of shipment from the Company’s warehouse or drop-shipment from a third party. The cost of freight and shipping to the
customer is recognized in cost of sales at the time of transfer of control to the customer.
Field
maintenance and monitoring services
The
Company sells service contracts that provide maintenance and monitoring services to its Strong Entertainment customers. These contracts
are generally 12 months in length. Revenue related to service contracts is recognized ratably over the term of the agreement.
In
addition to selling service contracts, the Company also performs discrete time and materials-based maintenance and repair work for customers
in the Strong Entertainment segment. Revenue related to time and materials-based maintenance and repair work is recognized at the point
in time when the performance obligation has been fully satisfied.
Installation
services
The
Company performs installation services for its Strong Entertainment customers and recognizes revenue upon completion of the installations.
Extended
warranty sales
The
Company performs installation services for its Strong Entertainment customers and recognizes revenue upon completion of the installations.
Timing
of revenue recognition
The
following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three
months ended March 31, 2023 and 2022 (in thousands):
Schedule
of Disaggregation of Revenue
| | |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
| | |
Three Months Ended March 31, 2023 | | |
Three Months Ended March 31, 2022 | |
| | |
Strong Entertainment | | |
Other | | |
Total | | |
Strong Entertainment | | |
Other | | |
Total | |
| Point in time | |
$ | 8,430 | | |
$ | 14 | | |
$ | 8,444 | | |
$ | 8,442 | | |
$ | 3 | | |
$ | 8,445 | |
| Over time | |
| 1,521 | | |
| 144 | | |
| 1,665 | | |
| 1,278 | | |
| 303 | | |
| 1,581 | |
| Total | |
$ | 9,951 | | |
$ | 158 | | |
$ | 10,109 | | |
$ | 9,720 | | |
$ | 306 | | |
$ | 10,026 | |
At
March 31, 2023, the unearned revenue amount associated with long-term projects that the Company uses the percentage-of-completion method
to recognize revenue, maintenance and monitoring services and extended warranty sales in which the Company is the primary obligor was
$0.8 million. The Company expects to recognize $0.8 million of the unearned revenue amounts during the remainder of 2023, and immaterial
amounts from 2024 through 2026.
4.
Net Loss Per Common Share
Basic
net loss per share has been computed on the basis of the weighted average number of shares of common stock outstanding. In periods when
the Company reported a net loss, there were no differences between average shares used to compute basic and diluted loss per share as
inclusion of stock options and restricted stock units would have been anti-dilutive in those periods. The following table summarizes
the weighted average shares used to compute basic and diluted net loss per share (in thousands):
Schedule
of Net(Loss) Income Per Share
| | |
2023 | | |
2022 | |
| | |
Three Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Weighted average shares outstanding: | |
| | |
| |
| Basic weighted average shares outstanding | |
| 19,470 | | |
| 18,990 | |
| Dilutive effect of stock options and certain non-vested restricted stock units | |
| - | | |
| - | |
| Diluted weighted average shares outstanding | |
| 19,470 | | |
| 18,990 | |
A
total of 140,420
and 225,379
common stock equivalents related to stock options and restricted stock units were excluded for the three months ended March 31, 2023
and March 31, 2022, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share. Options to purchase 489,500
and 354,500
shares of common stock were outstanding as of March 31, 2023 and March 31, 2022, respectively, but were not included in the
computation of diluted loss per share as the options’ exercise prices were greater than the average market price of the common
shares for each period.
5.
Inventories
Inventories
consisted of the following (in thousands):
Schedule of Inventories
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Raw materials and components | |
$ | 1,925 | | |
$ | 1,826 | |
| Work in process | |
| 448 | | |
| 279 | |
| Finished goods | |
| 1,287 | | |
| 1,284 | |
| Total | |
$ | 3,660 | | |
$ | 3,389 | |
The
inventory balances are net of reserves of approximately $0.5 million as of both March 31, 2023 and December 31, 2022. The inventory reserves
primarily related to the Company’s finished goods inventory. A rollforward of the inventory reserve for the three months ended
March 31, 2023, is as follows (in thousands):
Schedule
of Inventory Reserve
| | |
| | |
| Inventory reserve balance at December 31, 2022 | |
$ | 486 | |
| Inventory write-offs during 2023 | |
| (16 | ) |
| Provision for inventory reserve during 2023 | |
| 14 | |
| Inventory reserve balance at March 31, 2023 | |
$ | 484 | |
6.
Equity Holdings
The
following summarizes our equity holdings (dollars in thousands):
Summary of Investments
| | |
March 31, 2023 | | |
December 31 2022 | |
| | |
Carrying Amount | | |
Economic Interest | | |
Carrying Amount | | |
Economic Interest | |
| Equity Method Holding | |
| | | |
| | | |
| | | |
| | |
| FG Financial Holdings, LLC | |
$ | 7,181 | | |
| 47.3 | % | |
$ | 7,832 | | |
| 47.2 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Fair Value Method Holding | |
| | | |
| | | |
| | | |
| | |
| GreenFirst Forest Products Inc. | |
| 13,677 | | |
| 8.3 | % | |
| 16,792 | | |
| 8.4 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Cost Method Holding | |
| | | |
| | | |
| | | |
| | |
| Firefly Systems, Inc. | |
| 12,898 | | |
| | | |
| 12,898 | | |
| | |
| Total Investments | |
$ | 33,756 | | |
| | | |
$ | 37,522 | | |
| | |
Equity
Method Holding
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 FG Financial Group, Inc. (“FGF”) common
stock to FGF Holdings on September 12, 2022. 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
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.
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 $7.4 million as of March 31, 2023.
The
Company recorded an equity method loss related to FGF Holdings of $0.7 million during the three months ended March 31, 2023. As of March
31, 2023, the Company’s retained earnings included an accumulated deficit from its equity method holdings of approximately $6.7
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 qualified 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 $2.9 million during the three months ended
March 31, 2023, and a gain on equity holdings of 1.7 million during the three months ended March 31, 2022. The Company did not receive
dividends from GreenFirst during the three months ended March 31, 2023 or March 31, 2022. Based on quoted market prices, the fair value
of the Company’s ownership in GreenFirst was $13.7 million as of March 31, 2023.
Cost
Method Holding
Firefly
Systems, Inc. (“Firefly”) is a private company which operates a media network and digital advertising solutions on taxi and
rideshare vehicles. 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. 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.
7.
Property, Plant and Equipment, Net
Property,
plant and equipment, net consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):
Schedule of Property, Plant and Equipment
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Land | |
$ | 2,341 | | |
$ | 2,341 | |
| Buildings and improvements | |
| 12,761 | | |
| 12,756 | |
| Machinery and other equipment | |
| 4,860 | | |
| 4,786 | |
| Office furniture and fixtures | |
| 860 | | |
| 860 | |
| Construction in progress | |
| 15 | | |
| 11 | |
| Total properties, cost | |
| 20,837 | | |
| 20,754 | |
| Less: accumulated depreciation | |
| (8,344 | ) | |
| (8,105 | ) |
| Property, plant and equipment, net | |
$ | 12,493 | | |
$ | 12,649 | |
8.
Film and Television Programming Rights, Net
Film and television programming rights, net consisted of the following
as of March 31, 2023 and December 31, 2022 (in thousands):
Schedule
of Development Assets Acquired
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Television series in development | |
$ | 1,362 | | |
$ | 1,308 | |
| Films in development | |
| 222 | | |
| 193 | |
| Total | |
$ | 1,584 | | |
$ | 1,501 | |
The
Company has not yet commenced amortization of the projects as they were still in development at March 31, 2023.
A
rollforward of film and television programming rights, net for the three months ended March 31, 2023, is as follows (in thousands):
Schedule
of Film and Television Programming Rights
| Balance at December 31, 2022 | |
$ | 1,501 | |
| Expenditures on in-process projects | |
| 83 | |
| Balance at March 31, 2023 | |
$ | 1,584 | |
In March 2022, Strong Studios acquired the rights to original feature films
and television series from Landmark Studio Group LLC (“Landmark”), including the assignment of 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 produced revenue as of March 31, 2023. 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: $1.0 million to Safehaven, $0.3 million to Flagrant and $0.4 million to Shadows in the Vineyard.
The Company also agreed to issue to Landmark no later than 10 days after the completion of the initial public offering of Strong Global
Entertainment, a warrant to purchase up to 150,000 common shares of Strong Global Entertainment, exercisable for three years beginning
six months after the consummation of the initial public offering, at an exercise price equal to the per-share offering price of Strong
Global Entertainment’s common shares in the initial public offering (the “Landmark Warrant”). The Landmark Warrant
allows for cashless exercise in certain limited circumstances and provides for certain registration rights for such warrant shares. In
the event that an initial public offering of Strong Global Entertainment does not occur within a specified time, Landmark would have the right to surrender
the warrant in exchange for 2.5% ownership in Strong Studios.
As
a condition precedent to entry into the AA Agreement, Strong Studios agreed to enter into distribution agreements for Safehaven
and Flagrant (the “AA Distribution Agreements”) with Screen Media Ventures, LLC (“SMV”). Pursuant to the
AA Distribution Agreements, SMV agreed to purchase the global distribution rights to Safehaven for $6.5
million and Flagrant for $2.5
million upon delivery of each project. In 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.
During
the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven 2022”) was established to manage the production and financing
of Safehaven. 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 March 31, 2023. 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 March
31, 2023, Safehaven 2022 had borrowed $9.6 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
consolidated statement of operations.
Safehaven
2022 did not record any income or expense during the three months ended March 31, 2023, because all costs incurred by Safehaven 2022
related to the in-process production 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 March 31, 2023, is as follows (in thousands):
Schedule
of Balance Sheets
| | |
| | |
| Cash | |
$ | 37 | |
| Television programming rights | |
| 11,118 | |
| Other assets | |
| 76 | |
| Total assets | |
$ | 11,231 | |
| | |
| | |
| Accounts payable and accrued expenses | |
$ | 10 | |
| Due to Strong Studios | |
| 1,625 | |
| Debt | |
| 9,596 | |
| Equity | |
| - | |
| Total liabilities and equity | |
$ | 11,231 | |
9.
Goodwill
The
following represents a summary of changes in the Company’s carrying amount of goodwill for the three months ended March 31, 2023
(in thousands):
Summary of Changes in Carrying Amount of Goodwill
| Balance as of December 31, 2022 | |
$ | 882 | |
| Foreign currency translation adjustment | |
| - | |
| Balance as of March 31, 2023 | |
$ | 882 | |
10.
Debt
The
Company’s short-term debt and long-term debt consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):
Schedule
of Short term and Long term Debt
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Short-term debt: | |
| | | |
| | |
| Strong/MDI 20-year installment loan | |
$ | 2,262 | | |
$ | 2,289 | |
| Strong/MDI 5-year equipment loan | |
| - | | |
| 221 | |
| Strong/MDI revolving credit facility | |
| 1,372 | | |
| - | |
| Insurance note payable | |
| 454 | | |
| - | |
| Total short-term debt | |
$ | 4,088 | | |
$ | 2,510 | |
| | |
| | | |
| | |
| Long-term debt: | |
| | | |
| | |
| Tenant improvement loan | |
$ | 153 | | |
$ | 162 | |
| Digital Ignition building loan | |
| 5,059 | | |
| 5,105 | |
| Total long-term debt | |
$ | 5,212 | | |
$ | 5,267 | |
| Less: current portion | |
| (217 | ) | |
| (216 | ) |
| Less: deferred debt issuance costs, net | |
| (44 | ) | |
| (47 | ) |
| Long-term debt, net of current portion and deferred debt issuance costs, net | |
$ | 4,951 | | |
$ | 5,004 | |
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Deferred debt issuance costs | |
$ | 56 | | |
$ | 56 | |
| Less: accumulated amortization | |
| (12 | ) | |
| (9 | ) |
| Deferred debt issuance costs, net | |
$ | 44 | | |
$ | 47 | |
Estimated
future amortization expense of deferred debt issuance costs is as follows (in thousands):
Schedule of Amortization Expense of Deferred Issuance Costs
| | |
| | |
| Remainder of 2023 | |
$ | 9 | |
| 2024 | |
| 11 | |
| 2025 | |
| 11 | |
| 2026 | |
| 11 | |
| 2027 | |
| 2 | |
| Thereafter | |
| - | |
| Total | |
$ | 44 | |
Strong/MDI
Installment Loans and Revolving Credit Facility
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and restated
May 15, 2018, with Canadian Imperial Bank of Commerce (“CIBC”) 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 consisted 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 CIBC. Amounts
outstanding under the installment loans bear interest at CIBC’s prime rate plus 0.5% and are payable in monthly installments,
including interest, over their respective borrowing periods. CIBC 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 required 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.
In
January 2023, Strong/MDI and CIBC 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. The 5-year installment note was paid in full in connection with entering into the 2023
Credit Agreement. As of March 31, 2023, 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 7.20%.
Strong/MDI was in compliance with its debt covenants as of March 31, 2023. In May 2023, Strong/MDI and CIBC entered into an amendment to the 2023 Credit Agreement which reduced the amount
available under the revolving line of credit to CAD$3.4 million, and CIBC provided an undertaking to Strong/MDI to a release of CIBC’s
security interest in certain assets to be transferred to a subsidiary in connection with transactions related to the announced initial
public offering of Strong Global Entertainment.
Tenant
Improvement Loan
During
the fourth quarter of 2021, the Company entered into a lease for a combined office and warehouse in Omaha, Nebraska. The Company incurred
total costs of approximately $0.4 million to complete the build-out of the new combined office and warehouse facility. The landlord has
agreed to fund approximately 50% of the build-out costs, and the Company is required to repay the portion funded by the landlord in equal
monthly installments through the end of the initial lease term in February 2027. Through the end of 2021, the Company incurred approximately
$0.2 million of total costs to build out the facility, of which approximately $0.1 million was funded by the landlord. The Company completed
the build-out during the first quarter of 2022 and incurred an additional $0.2 million of total costs to complete the build-out, of which
approximately $0.1 million was funded by the landlord.
Digital
Ignition Building Loam
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 March 31, 2023, are as follows (in thousands):
Schedule
of Contractual Principal Payments of Long-term Debt
| | |
Tenant Improvement Loan | | |
Digital Ignitiion Building Loan | | |
Total | |
| Remainder of 2023 | |
$ | 26 | | |
| 134 | | |
$ | 160 | |
| 2024 | |
| 38 | | |
| 187 | | |
| 225 | |
| 2025 | |
| 40 | | |
| 195 | | |
| 235 | |
| 2026 | |
| 42 | | |
| 203 | | |
| 245 | |
| 2027 | |
| 7 | | |
| 4,340 | | |
| 4,347 | |
| Thereafter | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 153 | | |
$ | 5,059 | | |
$ | 5,212 | |
11.
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
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Lease cost | |
Three Months Ended | |
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Finance lease cost: | |
| | | |
| | |
| Amortization of right-of-use assets | |
$ | 33 | | |
$ | - | |
| Interest on lease liabilities | |
| 13 | | |
| - | |
| Operating lease cost | |
| 36 | | |
| 105 | |
| Short-term lease cost | |
| 17 | | |
| 14 | |
| Sublease income | |
| - | | |
| (32 | ) |
| Net lease cost | |
$ | 99 | | |
$ | 87 | |
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Other information | |
Three Months Ended | |
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
| Operating cash flows from finance leases | |
$ | 13 | | |
$ | - | |
| Operating cash flows from operating leases | |
$ | 32 | | |
$ | 92 | |
| Financing cash flows from finance leases | |
$ | 26 | | |
$ | - | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | |
$ | - | | |
$ | - | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | |
$ | - | | |
$ | - | |
| | |
| | | |
| | |
| Weighted-average remaining lease term - finance leases (years) | |
| | | |
| 1.7 | |
| Weighted-average remaining lease term - operating leases (years) | |
| | | |
| 3.4 | |
| Weighted-average discount rate - finance leases | |
| | | |
| 4.7 | % |
| Weighted-average discount rate - operating leases | |
| | | |
| 3.7 | % |
The
following table presents a maturity analysis of the Company’s operating and finance lease liabilities as of March 31, 2023 (in
thousands):
Schedule of Future Minimum Lease Payments
| | |
Operating Leases | | |
Finance Leases | |
| Remainder of 2023 | |
$ | 99 | | |
$ | 127 | |
| 2024 | |
| 101 | | |
| 170 | |
| 2025 | |
| 79 | | |
| 416 | |
| 2026 | |
| 81 | | |
| 16 | |
| 2027 | |
| 14 | | |
| 5 | |
| Thereafter | |
| - | | |
| - | |
| Total lease payments | |
| 374 | | |
| 734 | |
| Less: Amount representing interest | |
| (29 | ) | |
| (95 | ) |
| Present value of lease payments | |
| 345 | | |
| 639 | |
| Less: Current maturities | |
| (118 | ) | |
| (125 | ) |
| Lease obligations, net of current portion | |
$ | 227 | | |
$ | 514 | |
12.
Income and Other Taxes
In
assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income
and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction in recent years is a significant
piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence, including
recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance should be recorded against
all of the Company’s U.S. tax jurisdiction deferred tax assets as of March 31, 2023 and December 31, 2022.
The
Tax Cuts and Jobs Act provides for a territorial tax system, which began in 2018. It includes the global intangible low-taxed
income (“GILTI”) provision. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary
earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The GILTI provisions also allow for a high-tax
exclusion if the effective tax rate of the tested income is greater than 18.9%. The Company has evaluated these regulations in determining
the appropriate amount of the inclusion for the tax provision. The effective tax rate on the tested income is greater than 18.9%; thus,
the Company is utilizing the GILTI high-tax exclusion for purposes of the tax provision for the three months ended March 31, 2023, as
well as December 31, 2022.
Changes
in tax laws may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. In March 2020, the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted and made significant changes to Federal tax laws,
including certain changes that were retroactive to the 2019 tax year. The effects of these changes relate to deferred tax assets and
net operating losses; all of which are offset by valuation allowance. There were no material income tax consequences of this enacted
legislation on the reporting period of these financial statements.
The
Company is subject to possible examinations not yet initiated for Federal purposes for the fiscal years 2019 through 2021. The Company
is also subject to possible examinations for state and local purposes. In most cases, these examinations in the state and local jurisdictions
remain open based on the particular jurisdiction’s statute of limitations.
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 $0.1 million and $0.2 million for the three months ended March 31,
2023 and March 31, 2022, 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 March 31, 2023, approximately 2.3 million shares were available
for issuance under the amended and restated 2017 Plan.
Stock
Options
The
following table summarizes stock option activity for the three months ended March 31, 2023:
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, 2022 | |
| 639,500 | | |
$ | 3.72 | | |
| 5.6 | | |
$ | 127 | |
| Granted | |
| - | | |
| | | |
| | | |
| | |
| Exercised | |
| - | | |
| | | |
| | | |
| | |
| Forfeited | |
| - | | |
| | | |
| | | |
| | |
| Expired | |
| - | | |
| | | |
| | | |
| | |
| Outstanding at March 31, 2023 | |
| 639,500 | | |
$ | 3.72 | | |
| 5.3 | | |
$ | 45 | |
| Exercisable at March 31, 2023 | |
| 499,500 | | |
$ | 4.13 | | |
| 4.9 | | |
$ | 18 | |
The
aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money
options had been exercised and sold on the date indicated.
As
of March 31, 2023, 140,000 stock option awards were non-vested. Unrecognized compensation cost related to non-vested stock options was
approximately $0.1 million, which is expected to be recognized over a weighted average period of 1.8 years.
Restricted
Stock Units
The
Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of
grant. The following table summarizes restricted stock unit activity for the three months ended March 31, 2023:
Summary of Restricted Stock Activity
| | |
Number of Restricted Stock Units | | |
Weighted Average Grant Date Fair Value | |
| Non-vested at December 31, 2022 | |
| 206,934 | | |
$ | 2.06 | |
| Granted | |
| - | | |
| | |
| Shares vested | |
| - | | |
| | |
| Shares forfeited | |
| - | | |
| | |
| Non-vested at March 31, 2023 | |
| 206,934 | | |
$ | 2.06 | |
As
of March 31, 2023, the total unrecognized compensation cost related to non-vested restricted stock unit awards was approximately $0.1
million, which is expected to be recognized over a weighted average period of 0.3 years.
14.
Commitments, Contingencies and Concentrations
Litigation
The
Company is involved, from time to time, in certain legal disputes in the ordinary course of business. No such disputes, individually
or in the aggregate, are expected to have a material effect on the Company’s business or financial condition.
The
Company and certain of its subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to
asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past
distribution of commercial lighting products containing wiring that may have contained asbestos. Each case names dozens of corporate
defendants in addition to the Company. In the Company’s experience, a large percentage of these types of claims have never
been substantiated and have been dismissed by the courts. The Company has not suffered any adverse verdict in a trial court
proceeding related to asbestos claims and intends to continue to defend these lawsuits. As of March 31, 2023, 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.
Concentrations
The
Company’s top ten customers accounted for approximately 57% of consolidated net revenues during the three months ended March 31,
2023. Trade accounts receivable from these customers represented approximately 80% of net consolidated receivables at March 31, 2023.
One of the Company’s customers accounted for more than 10% of both its consolidated net revenues during the three months ended
March 31, 2023 and its net consolidated receivables as of March 31, 2023. While the Company believes its relationships with such customers
are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption
in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial
condition and results of operations. The Company could also be adversely affected by such factors as changes in foreign currency rates
and weak economic and political conditions in each of the countries in which the Company sells its products.
Financial
instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. The Company
sells product to a large number of customers in many different geographic regions. To minimize credit risk, the Company performs ongoing
credit evaluations of its customers’ financial condition.
15.
Business Segment Information
The
Company conducts its operations primarily through its Strong Entertainment business segment which manufactures and distributes premium
large format projection screens and provides technical support services and other related products and services to the cinema exhibition
industry, theme parks, schools, museums and other entertainment-related markets. Strong Entertainment also distributes and supports third
party products, including digital projectors, servers, library management systems, menu boards and sound systems. Strong Studios, which
is part of the Strong Entertainment operating segment, develops and produces original feature films and television series. The Company’s
operating segments were determined based on the manner in which management organizes segments for making operating decisions and assessing
performance.
Summary
by Business Segments
Schedule of Segment Reporting Information by Segment
| | |
2023 | | |
2022 | |
| | |
Three Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| | |
(in thousands) | |
| Net revenues | |
| | | |
| | |
| Strong Entertainment | |
$ | 9,951 | | |
$ | 9,720 | |
| Other | |
| 158 | | |
| 306 | |
| Total net revenues | |
| 10,109 | | |
| 10,026 | |
| | |
| | | |
| | |
| Gross profit | |
| | | |
| | |
| Strong Entertainment | |
| 2,320 | | |
| 2,205 | |
| Other | |
| 158 | | |
| 306 | |
| Total gross profit | |
| 2,478 | | |
| 2,511 | |
| | |
| | | |
| | |
| Operating income (loss) | |
| | | |
| | |
| Strong Entertainment | |
| 576 | | |
| 610 | |
| Other | |
| (169 | ) | |
| (134 | ) |
| Total segment operating income | |
| 407 | | |
| 476 | |
| Unallocated administrative expenses | |
| (1,185 | ) | |
| (1,239 | ) |
| Loss from operations | |
| (778 | ) | |
| (763 | ) |
| Other (expense) income, net | |
| (2,859 | ) | |
| 1,131 | |
Reconciliation of
Assets from Segment to Consolidated
| (In thousands) | |
March 31, 2023 | | |
December 31, 2022 | |
| Identifiable assets | |
| | | |
| | |
| Strong Entertainment | |
$ | 34,196 | | |
$ | 35,392 | |
| Corporate assets | |
| 34,391 | | |
| 36,361 | |
| Total | |
$ | 68,587 | | |
$ | 71,753 | |
Summary
by Geographical Area
Schedule of Segment Reporting Information by Geographic Area
| (In thousands) | |
2023 | | |
2022 | |
| | |
Three Months Ended March 31, | |
| (In thousands) | |
2023 | | |
2022 | |
| Net revenues | |
| | | |
| | |
| United States | |
$ | 8,735 | | |
$ | 8,783 | |
| Canada | |
| 313 | | |
| 406 | |
| China | |
| 22 | | |
| 235 | |
| Latin America | |
| 256 | | |
| 147 | |
| Europe | |
| 396 | | |
| 96 | |
| Asia (excluding China) | |
| 153 | | |
| 153 | |
| Other | |
| 234 | | |
| 206 | |
| Total | |
$ | 10,109 | | |
$ | 10,026 | |
Summary
of Identifiable Assets by Geographical Area
| (In thousands) | |
March 31, 2023 | | |
December 31, 2022 | |
| Identifiable assets | |
| | | |
| | |
| United States | |
$ | 49,638 | | |
$ | 51,423 | |
| Canada | |
| 18,949 | | |
| 20,330 | |
| Total | |
$ | 68,587 | | |
$ | 71,753 | |
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.