SEC Form 10-Q filed by Ballantyne Strong Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Securities registered pursuant to Section 12(b) of the Act:
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by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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| ☒ | Smaller reporting company | ||
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| Class | Outstanding as of November 7, 2023 | |
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TABLE OF CONTENTS
| 2 |
PART I. Financial Information
Item 1. Financial Statements
FG Group Holdings Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (net of credit allowances of $ | ||||||||
| Inventories, net | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Finance lease right-of-use asset | ||||||||
| Equity holdings | ||||||||
| Film and television programming rights, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Short-term debt | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of operating lease obligations | ||||||||
| Current portion of finance lease obligations | ||||||||
| Deferred revenue and customer deposits | ||||||||
| Total current liabilities | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Long-term debt, net of current portion and deferred debt issuance costs, net | ||||||||
| Deferred income taxes | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments, contingencies and concentrations (Note 17) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $ per share; authorized shares, outstanding | ||||||||
| Common stock, par value $ per share; authorized shares; issued and shares at September 30, 2023 and December 31, 2022, respectively; outstanding and shares at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock, shares at cost | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total FG Group Holdings shareholders’ equity | ||||||||
| Equity attributable to non-controlling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
FG Group Holdings Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2023 and 2022
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net product sales | $ | $ | $ | $ | ||||||||||||
| Net service revenues | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Total cost of products | ||||||||||||||||
| Total cost of services | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling and administrative expenses: | ||||||||||||||||
| Selling | ||||||||||||||||
| Administrative | ||||||||||||||||
| Total selling and administrative expenses | ||||||||||||||||
| Gain on disposal of assets | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency transaction gain (loss) | ( | ) | ||||||||||||||
| Unrealized loss on equity holdings | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes and equity method holding loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax beneft (expense) | ( | ) | ( | ) | ||||||||||||
| Equity method holding loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to FG Group Holdings | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted-average shares used in computing net loss per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
FG Group Holdings Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
Three and Nine Months Ended September 30, 2023 and 2022
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Adjustment to postretirement benefit obligation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Removal of unrealized gain on available-for sale securities of equity method holding | ( | ) | ( | ) | ||||||||||||
| Currency translation adjustment: | ||||||||||||||||
| Unrealized net change arising during period | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss attributable to FG Group Holdings | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
FG Group Holdings Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
Three and Nine Months Ended September 30, 2023 and 2022
(In thousands)
(Unaudited)
| Common Stock (Shares) | Common Stock ($) | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total FG Group Holdings Shareholders’ Equity | Non-contolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Cumulative effect of adoption of accounting principle | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net other comprehensive loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net other comprehensive income | - | ( | ) | |||||||||||||||||||||||||||||||||
| IPO of Strong Global Entertainment, Inc. and issuance of Landmark warrant, net of costs | - | |||||||||||||||||||||||||||||||||||
| Non-controlling interest allocation | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Payments of withholding taxes for net share settlement of equity awards | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net other comprehensive loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Payments of withholding taxes for net share settlement of equity awards | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Issuance of SGE common stock in connection with acquisition of Unbounded (Note 9) | - | |||||||||||||||||||||||||||||||||||
| Non-controlling interest allocation | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Common Stock (Shares) | Common Stock ($) | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total FG Group Holdings Shareholders’ Equity | Non-contolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net other comprehensive income | - | |||||||||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net other comprehensive loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net other comprehensive loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
FG Group Holdings Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2023 and 2022
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||
| (Recovery of) provision for doubtful accounts | ( | ) | ||||||
| Benefit from obsolete inventory | ( | ) | ||||||
| Provision for warranty | ||||||||
| Depreciation and amortization | ||||||||
| Amortization and accretion of operating leases | ||||||||
| Equity method holding loss | ||||||||
| Adjustment to SageNet promissory note in connection with prepayment | ||||||||
| Unrealized loss on equity holdings | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Stock-based compensation expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Current income taxes | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deferred revenue and customer deposits | ( | ) | ( | ) | ||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Acquisition of programming rights | ( | ) | ( | ) | ||||
| Sale (purchase) of equity holdings | ( | ) | ||||||
| Receipt of SageNet promissory note | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payments on short-term debt | ( | ) | ( | ) | ||||
| Principal payments on long-term debt | ( | ) | ( | ) | ||||
| Proceeds from Strong Global Entertainment initial public offering | ||||||||
| Borrowings under credit facility | ||||||||
| Repayments under credit facility | ( | ) | ||||||
| Payments of withholding taxes for net share settlement of equity awards | ( | ) | ( | ) | ||||
| Payments on finance lease obligations | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Components of cash and cash equivalents and restricted cash: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Short-term borrowings to finance insurance | $ | $ | ||||||
| Issuance of Strong Global Entertainment common stock in connection with acquisition of Unbounded (Note 9) | $ | $ | ||||||
| Issuance of debt, common shares, and warrants in connection with purchase of Digital Ignition building | $ | $ | ||||||
| Amount payable to Landmark Studio Group in connection with acquisition of projects (Note 10) | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
FG Group Holdings Inc. and Subsidiaries
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. The Company’s holdings primarily consist of equity securities in public and private companies and real estate holdings in the United States and Canada.
The
Company has historically conducted a large portion of its operations primarily through its Strong Entertainment operating segment. The
Company completed the Separation (as defined below) and initial public offering (“IPO”) of the Strong Entertainment business
on May 18, 2023. Following this transaction, Strong Global Entertainment became a separate publicly listed company, and FG Group Holdings
holds approximately
Strong Global Entertainment 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.
Following the Separation and IPO, the operations of the Strong Entertainment operating segment are part of a newly established British Columbia corporation, Strong Global Entertainment, Inc. (“Strong Global Entertainment”). Strong Global Entertainment’s common shares are listed on the NYSE American under the ticker symbol “SGE.” In connection with the IPO, the Company and Strong Global Entertainment (and the subsidiaries of each) entered into a Master Asset Purchase Agreement, an IP Assignment Agreement, the FG Group Holdings Asset Transfer Agreement, the FG Group Holdings IP Assignment Agreement, the Joliette Plant Lease, the Share Transfer Agreements and a number of other agreements to govern the separation of the legacy Strong Entertainment business from the Company and the contribution of certain of the related business and assets to Strong Global Entertainment (the “Separation”). Under the Management Services Agreement, Strong Global Entertainment and the Company provide certain services to each other, which include information technology, legal, finance and accounting, human resources, tax, treasury, and other services, and charges a fee that is based on its actual costs and expenses for those services in the future (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations).
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 as discussed in Note 7.
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. Unless the context indicates otherwise, references to the “Company” include the Company and its majority-owned and controlled domestic and foreign subsidiaries.
| 8 |
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”) had an 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 impact of COVID-19 on inflation and supply chains and the continued economic 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 September 30, 2023,
$
| 9 |
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 September 30, 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 or nine months ended September 30, 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 7 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. Where available, the Company utilizes certain governmental incentives, programs and other structures from states and foreign countries (e.g., refundable tax credits calculated based on the amount of money spent in the particular jurisdiction in connection with the production) to fund its film and television productions and reduce financial risk. Film and television program rights are stated at the lower of amortized cost or estimated fair value.
| 10 |
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. Participation costs represent contingent consideration payable based on the performance of the film or television program to parties associated with the film or television program, including producers, writers, directors or actors and estimated liabilities for participations are accrued based on the ratio of the current period’s revenues to management’s estimated remaining total gross revenues to be earned. 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 materially 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 September 30, 2023 and December 31, 2022.
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Fair values measured on a recurring basis at September 30, 2023 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Fair value method equity holding | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Fair values measured on a recurring basis at December 31, 2022 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Fair value method equity holding | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 $
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 $
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.
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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 to
The following tables disaggregate the Company’s revenue by major source and by operating segment for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Screen system sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Digital equipment sales | ||||||||||||||||||||||||
| Extended warranty sales | ||||||||||||||||||||||||
| Other product sales | ||||||||||||||||||||||||
| Total product sales | ||||||||||||||||||||||||
| Field maintenance and monitoring services | ||||||||||||||||||||||||
| Installation services | ||||||||||||||||||||||||
| Strong Studios services | ||||||||||||||||||||||||
| Other service revenues | ||||||||||||||||||||||||
| Total service revenues | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Screen system sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Digital equipment sales | ||||||||||||||||||||||||
| Extended warranty sales | ||||||||||||||||||||||||
| Other product sales | ||||||||||||||||||||||||
| Total product sales | ||||||||||||||||||||||||
| Field maintenance and monitoring services | ||||||||||||||||||||||||
| Installation services | ||||||||||||||||||||||||
| Strong Studios services | ||||||||||||||||||||||||
| Other service revenues | ||||||||||||||||||||||||
| Total service revenues | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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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.
Strong Studios services
The Company develops and produces original films and television series, as well as acquires third-party rights to content for global multi-platform distribution and recognizes revenue upon the transfer or license of film and television programming rights and related intellectual property.
Timing of revenue recognition
The following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Point in time | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Over time | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Strong Entertainment | Other | Total | Strong Entertainment | Other | Total | |||||||||||||||||||
| Point in time | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Over time | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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At
September 30, 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 $
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):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Dilutive effect of stock options and certain non-vested restricted stock units | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
| Anti-dilutive employee stock-based awards excluded | ||||||||||||||||
Options to purchase and shares of common stock were outstanding as of September 30, 2023 and September 30, 2022, respectively, but were not included in the computation of diluted loss per share as the options’ exercise prices were greater than the average closing price of the common shares for each period.
5. Inventories
Inventories consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Raw materials and components | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
The
inventory balances are net of reserves of approximately $
| Inventory reserve balance at December 31, 2022 | $ | |||
| Inventory write-offs during 2023 | ( | ) | ||
| Provision for inventory reserve during 2023 | ( | ) | ||
| Inventory reserve balance at September 30, 2023 | $ |
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6. Other Current Assets
Other current assets consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Receivable from Safehaven 2022, Inc. | ||||||||
| Costs incurred in connection with Strong Global Entertainment initial public offering | ||||||||
| Unbilled accounts receivable | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
7. Equity Holdings
The following summarizes our equity holdings (dollars in thousands):
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Carrying Amount | Economic Interest | Carrying Amount | Economic Interest | |||||||||||||
| Equity Method Holding | ||||||||||||||||
| FG Financial Holdings, LLC | $ | % | $ | % | ||||||||||||
| Fair Value Method Holding | ||||||||||||||||
| GreenFirst Forest Products Inc. | % | % | ||||||||||||||
| Cost Method Holding | ||||||||||||||||
| Firefly Systems, Inc. | ||||||||||||||||
| Total Equity holdings | $ | $ | ||||||||||||||
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 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.
| 16 |
The
Company has the ability to significantly influence FGF Holdings through its
The
Company recorded an equity method loss related to FGF Holdings of $
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”).
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 million and 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 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.
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8. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Machinery and other equipment | ||||||||
| Office furniture and fixtures | ||||||||
| Construction in progress | ||||||||
| Total Property, plant and equipment, cost | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
9. Acquisition of Unbounded Media Corporation
On September 12, 2023, Strong Global Entertainment acquired all of the outstanding capital stock of Unbounded Media Corporation and its subsidiaries (“Unbounded”), an independent media and creative production company. In connection with the acquisition of Unbounded, Strong Global Entertainment issued million of its Class A Voting Common Shares.
Unbounded develops, creates and produces film, advertising, and branded content for a broad range of clients. In an all-stock transaction, the deal with Unbounded marks the first acquisition in a broader strategy to acquire a portfolio of multi-disciplined content and services companies. Unbounded, in partnership with Strong Studios, also plans to further develop its original IP portfolio, under its Fieldhouse Entertainment division, which currently includes feature films employing Strong Studios’ long form production expertise and industry network.
The following table summarizes the fair values assigned to the net assets acquired and the liabilities assumed as part of the acquisition of Unbounded (in thousands):
| Cash | $ | |||
| Accounts receivable | ||||
| Other current assets | ||||
| Intangible assets | ||||
| Total identifiable assets acquired | ||||
| Accounts payable and accrued expenses | ||||
| Revolving credit facility | ||||
| Total liabilities assumed | ||||
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Net assets acquired | $ |
Strong Global Entertainment is in the process of finalizing the acquisition purchase price and valuations of certain intangible assets; thus, the provisional measurements of intangible assets and goodwill are subject to change. Pro forma results of operations for this acquisition have not been presented because the effects on net revenues and net (loss) income were not material to Strong Global Entertainment’s historical consolidated financial statements.
| 18 |
10. Film and Television Programming Rights, Net
Film and television programming rights, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Television series in development | $ | $ | ||||||
| Films in development | ||||||||
| Total film and programming rights | ||||||||
| Accumulated amortization | ( | ) | ||||||
| Total film and programming rights, net | $ | $ | ||||||
A rollforward of film and television programming rights, net for the nine months ended September 30, 2023, is as follows (in thousands):
| Balance at December 31, 2022 | $ | |||
| Expenditures on in-process projects | ||||
| Acquisition of distribution rights | ||||
| Amortization of film and programming rights | ( | ) | ||
| In process projects assumed in connection with acquisition of Unbounded | ||||
| Adjustment to fair value of warrant issued to Landmark | ( | ) | ||
| Balance at September 30, 2023 | $ |
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, one of which has produced revenue as of September 30, 2023. In connection
with such assignment and purchase, Strong Studios agreed to pay to Landmark approximately $
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 $
During
the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven 2022”) was established to manage the production and financing
of Safehaven. Strong Studios owned
| 19 |
Prior
to acquiring
| Cash | $ | |||
| Television programming rights | ||||
| Other assets | ||||
| Total assets | $ | |||
| Accounts payable and accrued expenses | $ | |||
| Due to Strong Studios | ||||
| Debt | ||||
| Equity | ||||
| Total liabilities and equity | $ |
Effective
June 30, 2023, Safehaven 2022 entered into a purchase agreement (the “Purchase Agreement”) with SMV, to purchase all of SMV’s
right, title and interest in Safehaven. Under the terms of the Purchase Agreement, the purchase price payable to Safehaven 2022 was satisfied
by the payment in full by Ravenwood-Productions, LLC (“Ravenwood”) of the amount due as a minimum guarantee under the Safehaven
AA Distribution Agreement to Bank of Hope. SMV is entitled to receive no further payments in respect of the Safehaven series,
provided that, upon Strong Studios’ receipt of $
Effective June 30, 2023, the Company and Ravenwood entered into a management agreement (the “Management Agreement”), pursuant to which:
| ● | Ravenwood
advanced the amount due to Bank of Hope in respect of the minimum guarantee under the Safehaven AA Distribution Agreement
of approximately $ | |
| ● | Safehaven 2022, Strong Studios and Ravenwood will enter into a sales agent agreement with an agency to represent and sell the Safehaven series. | |
| ● | Each
of Ravenwood and Strong Studios will be paid a management commission of | |
| ● | All
Gross Receipts (as defined by the Management Agreement) shall be distributed according to an agreed waterfall, with the balance to
be paid to the named participants, including Strong Studios which will be paid | |
| ● | Safehaven
2022 conveyed to Ravenwood an undivided |
Safehaven
2022 recognizes revenue and 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. During the quarter ended June 30, 2023, Safehaven
2022 recognized $
| 20 |
11. Goodwill
The following represents a summary of changes in the Company’s carrying amount of goodwill for the nine months ended September 30, 2023 (in thousands):
| Balance as of December 31, 2022 | $ | |||
| Acquisition of Unbounded | ||||
| Foreign currency translation adjustment | ||||
| Balance as of September 30, 2023 | $ |
12. Accrued Expenses
The Company’s accrued expense consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Employee-related | $ | $ | ||||||
| Warranty obligation | ||||||||
| Interest and taxes | ||||||||
| Legal and professional fees | ||||||||
| Accrued participation costs | ||||||||
| Film and television programming rights | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| 21 |
13. Debt
The Company’s short-term debt and long-term debt consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Short-term debt: | ||||||||
| Strong/MDI | $ | $ | ||||||
| Strong/MDI | ||||||||
| Strong/MDI revolving credit facility | ||||||||
| Safehaven 2022 debt | ||||||||
| Insurance note payable | ||||||||
| Total short-term debt | ||||||||
| Less: deferred debt issuance costs, net | ( | ) | ||||||
| Total short-term debt, net of issuance costs | $ | $ | ||||||
| Long-term debt: | ||||||||
| Tenant improvement loan | $ | $ | ||||||
| Unbounded credit facility | ||||||||
| Digital Ignition building loan | ||||||||
| Total long-term debt | $ | $ | ||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Less: deferred debt issuance costs, net | ( | ) | ( | ) | ||||
| Long-term debt, net of current portion and deferred debt issuance costs, net | $ | $ | ||||||
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$
| 22 |
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$
Safehaven Production Debt
Safehaven
2022 entered into a Loan and Security Agreement (“Loan Agreement”) with Bank of Hope to provide interim production
financing for the Safehaven production. The Company is not a borrower or guarantor under the Loan Agreement, and Safehaven
2022 is the sole borrower and guarantor under the Loan Agreement. The maturity date of the Loan Agreement is the earlier of (i) the
date on which payment is accelerated by Bank of Hope due to an event of default or (ii) March 15, 2024. As of June 30, 2023,
Safehaven 2022 had borrowed $
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 $
Unbounded Credit Facility
In
April 2023, Unbounded and Signature Bank entered into a revolving line of credit for up to $
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
$
| 23 |
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 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.
Insurance Debt
The
Company maintains certain commercial insurance policies, including management liability and other policies customarily held by publicly
traded companies. The Company elected to finance a portion of the annual premium, which will be repaid in monthly installments through
January 2024. The finance agreement bears fixed interest of approximately
Contractual Principal Payments
Contractual required principal payments on the Company’s long-term debt at September 30, 2023, are as follows (in thousands):
| Tenant Improvement Loan | Digital Ignition Building Loan | Unbounded Credit Facility | Total | |||||||||||||
| Remainder of 2023 | $ | $ | ||||||||||||||
| 2024 | ||||||||||||||||
| 2025 | ||||||||||||||||
| 2026 | ||||||||||||||||
| 2027 | ||||||||||||||||
| Thereafter | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
14. Leases
The
Company and its subsidiaries lease plant and office facilities and equipment under operating and finance leases
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.
| 24 |
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):
| Lease cost | Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Operating lease cost | ||||||||||||||||
| Short-term lease cost | ||||||||||||||||
| Sublease income | ( | ) | ||||||||||||||
| Net lease cost | $ | $ | $ | $ | ||||||||||||
| Other information | Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flows from finance leases | $ | $ | $ | $ | ||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| Financing cash flows from finance leases | $ | $ | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | $ | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | $ | $ | ||||||||||||
| As of September 30, 2023 | ||||
| Weighted-average remaining lease term - finance leases (years) | ||||
| Weighted-average remaining lease term - operating leases (years) | ||||
| Weighted-average discount rate - finance leases | % | |||
| Weighted-average discount rate - operating leases | % | |||
The following table presents a maturity analysis of the Company’s operating and finance lease liabilities as of September 30, 2023 (in thousands):
| Operating Leases | Finance Leases | |||||||
| Remainder of 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: Amount representing interest | ( | ) | ( | ) | ||||
| Present value of lease payments | ||||||||
| Less: Current maturities | ( | ) | ( | ) | ||||
| Lease obligations, net of current portion | $ | $ | ||||||
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15. Income and Other Taxes
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction in recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence, including recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance should be recorded against all of the Company’s U.S. tax jurisdiction deferred tax assets as of September 30, 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
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 2020 through 2022. 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.
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 $million and $million for the three months ended September 30, 2023 and September 30, 2022, respectively, and $million and $million for the nine months ended September 30, 2023 and September 30, 2022, respectively. Consolidated stock-based compensation expense for the three months and nine months ended September 30, 2023 includes approximately $million and $ million, respectively, related to stock-based compensation at Strong Global Entertainment, pursuant to the equity compensation plans established at the subsidiary level.
The Company’s 2017 Omnibus Equity Compensation Plan (“2017 Plan”) was approved by the Company’s stockholders and provides the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units and other stock- based awards and cash-based awards. Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company. On December 17, 2019, the Company’s stockholders approved the amendment and restatement of the 2017 Plan to (i) increase the number of shares of the Company’s common stock authorized for issuance under the 2017 Plan by shares and (ii) extend the expiration date of the 2017 Plan by approximately two years, until October 27, 2029. As of September 30, 2023, approximately million shares were available for issuance under the amended and restated 2017 Plan.
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Stock Options
The Company granted a total of options during the nine months ended September 30, 2023. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of the grant. The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2023 was $. The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes valuation model with the following weighted average assumptions:
| Expected dividend yield at date of grant | % | |||
| Risk-free interest rate | % | |||
| Expected stock price volatility | % | |||
| Expected life of options (in years) |
| 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 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited | ( | ) | $ | |||||||||||||
| Expired | ||||||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | ||||||||||||||
The aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money options had been exercised and sold on the date indicated.
As of September 30, 2023, stock option awards were non-vested. Unrecognized compensation cost related to non-vested stock options was approximately $ million, which is expected to be recognized over a weighted average period of years.
Restricted Stock Units
Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||
| Non-vested at December 31, 2022 | $ | |||||||
| Granted | $ | |||||||
| Shares vested | ( | ) | ||||||
| Shares forfeited | ||||||||
| Non-vested at September 30, 2023 | $ | |||||||
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As of September 30, 2023, the total unrecognized compensation cost related to non-vested restricted stock unit awards was approximately $ million, which is expected to be recognized over a weighted average period of years.
17. 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 September 30, 2023, the Company has a loss contingency reserve of approximately $
Gain contingency
The Company has carried key man life insurance covering one of its employees
for several years. The covered employee passed away during the third quarter of 2023. The company completed and filed a $
Concentrations
The
Company’s top ten customers accounted for approximately
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.
18. Business Segment Information
The Company conducts its operations primarily through its Strong Entertainment business segment which manufactures and distributes premium large format projection screens and provides technical support services and other related products and services to the cinema exhibition industry, theme parks, schools, museums and other entertainment-related markets. Strong Entertainment also distributes and supports third party products, including digital projectors, servers, library management systems, menu boards and sound systems. Strong Studios, which is part of the Strong Entertainment operating segment, develops and produces original feature films and television series. The Company’s operating segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance.
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Summary by Business Segments
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Net revenues | ||||||||||||||||
| Strong Entertainment | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Strong Entertainment | ||||||||||||||||
| Other | ||||||||||||||||
| Total gross profit | ||||||||||||||||
| Operating income (loss) | ||||||||||||||||
| Strong Entertainment | ||||||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total segment operating income | ||||||||||||||||
| Unallocated administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes and equity method holding loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| (In thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Identifiable assets | ||||||||
| Strong Entertainment | $ | $ | ||||||
| Corporate assets | ||||||||
| Total | $ | $ | ||||||
Summary by Geographical Area
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net revenues | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| China | ||||||||||||||||
| Mexico | ||||||||||||||||
| Latin America | ||||||||||||||||
| Europe | ||||||||||||||||
| Asia (excluding China) | ||||||||||||||||
| Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| (In thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Identifiable assets | ||||||||
| United States | $ | $ | ||||||
| Canada | ||||||||
| Total | $ | $ | ||||||
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.
19. Subsequent Event
On
November 3, 2023, Strong Global Entertainment entered into an asset purchase agreement with Innovative Cinema Solutions, LLC (“ICS”),
a full-service provider of technical services and solutions to national cinema chains. The operations of ICS will be rolled into Strong
Global Entertainment’s wholly owned subsidiary, Strong Technical Services, Inc., which provides comprehensive managed service offerings
with 24/7/365 support nationwide to ensure solution uptime and availability. The purchase price included $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. In addition to historical information, this Quarterly Report on Form 10–Q, including management’s discussion and analysis, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical are forward-looking and reflect expectations for future Company performance. Forward-looking statements may be identified by the use of words such as “may,” “will,” “forecast,” “estimate,” “project,” “intend,” “plan,” “expect,” “should,” “believe” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions and speak only as of the date on which it is made. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties, including but not limited to those discussed in the “Risk Factors” section contained in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and the following risks and uncertainties: the Company’s ability to maintain and expand its revenue streams to compensate for the lower demand for certain of the Company’s digital cinema products and services; potential interruptions of supplier relationships or higher prices charged by suppliers; the Company’s ability to successfully compete and introduce enhancements and new features that achieve market acceptance and that keep pace with technological developments; the Company’s ability to successfully execute its capital allocation strategy or achieve the returns it expects from these holdings; the Company’s ability to maintain its brand and reputation and retain or replace its significant customers; challenges associated with the Company’s long sales cycles; the impact of a challenging global economic environment or a downturn in the markets; the effects of economic, public health, and political conditions that impact business and consumer confidence and spending, including rising interest rates, periods of heightened inflation and market instability, the outbreak of any highly infectious or contagious diseases, such as COVID-19 and its variants or other health epidemics or pandemics, and armed conflicts, such as the ongoing military conflict in Ukraine and related sanctions; economic and political risks of selling products in foreign countries (including tariffs); risks of non-compliance with U.S. and foreign laws and regulations, potential sales tax collections and claims for uncollected amounts; cybersecurity risks and risks of damage and interruptions of information technology systems; the Company’s ability to retain key members of management and successfully integrate new executives; the Company’s ability to complete acquisitions, strategic investments, entry into new lines of business, divestitures, mergers or other transactions on acceptable terms, or at all; the impact of economic, public health and political conditions on the companies in which the Company holds equity stakes; the Company’s ability to utilize or assert its intellectual property rights, the impact of natural disasters and other catastrophic events, whether natural, man-made, or otherwise (such as the outbreak of any highly infectious or contagious diseases, or armed conflict); the adequacy of the Company’s insurance; the impact of having a controlling stockholder and vulnerability to fluctuation in the Company’s stock price. Given the risks and uncertainties, readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results which may not occur as anticipated. Many of the risks listed above have been, and may further be, exacerbated by the impact of economic, public health (such as a resurgence of the COVID-19 pandemic) and political conditions (such as the military conflict in Ukraine) that impact consumer confidence and spending, particularly in the cinema, entertainment, and other industries in which the Company and the companies in which the Company holds an equity stake operate, and the worsening economic environment. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described herein, as well as others not now anticipated. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except where required by law, the Company assumes no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.
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Overview
FG Group Holdings Inc. (“FG Group Holdings”, the “Company”, “we”, “our”, and “us”) is a holding company with business operations in the entertainment industry and holdings in public and privately held companies. Our Strong Entertainment segment includes one of the largest manufacturers of premium projection screens and customized screen support systems, and we also distribute other products and provide technical support services to the cinema, amusement park and other markets. We are focused on improving our operating performance as the United States and other countries recover from COVID-19 related business disruptions. We plan to manage the Strong Entertainment business segment to grow market share and organic revenue and improve operating results, with the intent of expanding the ultimate valuation of the business.
In May 2023, we separated our Strong Entertainment operating business from the Company pursuant to an initial public offering to support the growth plans for that line of business. Following the separation, we continue to be the majority shareholder of Strong Global Entertainment, and this discussion and analysis is prepared on a consolidated basis.
On September 12, 2023, Strong Global Entertainment acquired all of the outstanding capital stock of Unbounded Media Corporation (“Unbounded”), an independent media and creative production company. Unbounded develops, creates and produces film, advertising, and branded content for a broad range of clients. In an all-stock transaction, the deal with Unbounded marks the first acquisition in a broader strategy to acquire a portfolio of multi-disciplined content and services companies. Unbounded, in partnership with Strong Studios, will also further develop its original IP portfolio, under its Fieldhouse Entertainment division, which currently includes feature films employing Strong Studios’ long form production expertise and industry network.
On November 3, 2023, Strong Global Entertainment entered into an asset purchase agreement with Innovative Cinema Solutions, LLC (“ICS”), a full-service provider of technical services and solutions to national cinema chains.
In addition, we use our facility in Alpharetta, Georgia for our Digital Ignition technology incubator and co-working facility. Results of those operations are included within “Other” in our results of operations. We also continue to evaluate capital allocation opportunities to invest in other public or private companies, real estate or acquire other businesses, which may be within or outside of the Company’s existing markets.
Impact of COVID-19 Pandemic
The coronavirus pandemic (“COVID-19”) had an unprecedented impact to consumer behaviors and our customers, particularly our customers’ ability and willingness to purchase our products and services. The Company believes that as consumers have made progress in resuming pre-COVID-19 behaviors, 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 impact of COVID-19 on inflation and supply chains and the continued economic 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. Our results of operations in future periods may continue to be adversely impacted by inflationary pressures and global supply chain issues, and other negative effects on global economic conditions.
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Results of Operations
The following table sets forth our operating results for the periods indicated (dollars in thousands):
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Net revenues | $ | 11,094 | $ | 10,274 | $ | 820 | 8.0 | % | ||||||||
| Cost of revenues | 7,988 | 7,534 | 454 | 6.0 | % | |||||||||||
| Gross profit | 3,106 | 2,740 | 366 | 13.4 | % | |||||||||||
| Gross profit percentage | 28.0 | % | 26.7 | % | ||||||||||||
| Selling and administrative expenses | 3,848 | 3,032 | 816 | 26.9 | % | |||||||||||
| Loss from operations | (742 | ) | (292 | ) | (450 | ) | 154.1 | % | ||||||||
| Other expense | (1,016 | ) | (864 | ) | (152 | ) | 17.6 | % | ||||||||
| Loss before income taxes and equity method holding loss | (1,758 | ) | (1,156 | ) | (602 | ) | 52.1 | % | ||||||||
| Income tax benefit (expense) | 101 | (245 | ) | 346 | (141.2 | )% | ||||||||||
| Equity method holding loss | (1,668 | ) | (798 | ) | (870 | ) | 109.0 | % | ||||||||
| Net loss | (3,325 | ) | (2,199 | ) | (1,126 | ) | 51.2 | % | ||||||||
| Net loss attributable to non-controlling interest | (4 | ) | - | (4 | ) | N/M | ||||||||||
| Net loss attributable to FG Group Holdings | $ | (3,321 | ) | $ | (2,199 | ) | $ | (1,122 | ) | 51.0 | % | |||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Net revenues | $ | 39,226 | $ | 29,442 | $ | 9,784 | 33.2 | % | ||||||||
| Cost of revenues | 26,193 | 21,772 | 4,421 | 20.3 | % | |||||||||||
| Gross profit | 13,033 | 7,670 | 5,363 | 69.9 | % | |||||||||||
| Gross profit percentage | 33.2 | % | 26.1 | % | ||||||||||||
| Selling and administrative expenses | 15,325 | 9,610 | 5,715 | 59.5 | % | |||||||||||
| Gain on disposal of assets | 6 | - | 6 | 100.0 | % | |||||||||||
| Loss from operations | (2,286 | ) | (1,940 | ) | (346 | ) | 17.8 | % | ||||||||
| Other (expense) income | (6,102 | ) | (3,788 | ) | (2,314 | ) | 61.1 | % | ||||||||
| Loss before income taxes and equity method holding loss | (8,388 | ) | (5,728 | ) | (2,660 | ) | 46.4 | % | ||||||||
| Income tax benefit (expense) | 45 | (292 | ) | 337 | (115.4 | )% | ||||||||||
| Equity method holding loss | (4,362 | ) | (2,578 | ) | (1,784 | ) | 69.2 | % | ||||||||
| Net loss | (12,705 | ) | (8,598 | ) | (4,107 | ) | 47.8 | % | ||||||||
| Net loss attributable to non-controlling interest | (122 | ) | - | (122 | ) | N/M | ||||||||||
| Net loss attributable to FG Group Holdings | $ | (12,583 | ) | $ | (8,598 | ) | $ | (3,985 | ) | 46.3 | % | |||||
| 32 |
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022
Revenues
Net revenues during the quarter ended September 30, 2023 was $11.1 million compared to $10.3 million during the quarter ended September 30, 2022.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 10,920 | $ | 9,904 | $ | 1,016 | 10.3 | % | ||||||||
| Other | 174 | 370 | (196 | ) | (53.0 | )% | ||||||||||
| Total net revenues | $ | 11,094 | $ | 10,274 | $ | 820 | 8.0 | % | ||||||||
Strong Entertainment
Revenue from Strong Entertainment increased 10.3% to $10.9 million in the third quarter of 2023 from $9.9 million in the third quarter of 2022. The increase from the prior year was due to $0.3 million of higher revenue from product sales and a $0.7 million increase in service revenue.
The increase in revenue from products was primarily due to a 16% increase in sales of screen systems as the upgrade to laser projection continues across the industry, as well as higher revenue from our Eclipse product line as a result of new projects, partially offset by a slight decline in the sale of digital equipment. We expect the upgrades from xenon to laser to accelerate throughout 2023 and continue for at least the next several years.
On the cinema services side, the primary driver of the revenue increase was from installation services and field maintenance and monitoring services, both of which were up $0.3 million from the third quarter in the prior year as we have increased the scope of our offerings to better support our customers and to increase market share in cinema services, including cinema screen installation work performed for certain of our customers.
Other
The decrease in other revenue primarily related to the expiration of the agreement covering support services provided to Firefly, which expired at the end of 2022.
Gross Profit
Consolidated gross profit was $3.1 million compared to $2.7 million during the quarter ended September 30, 2022. As a percentage of revenue, gross profit was 28.0% and 26.7% for the quarters ended September 30, 2023 and September 30, 2022, respectively.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 2,822 | $ | 2,371 | $ | 451 | 19.0 | % | ||||||||
| Other | 284 | 369 | (85 | ) | (23.0 | )% | ||||||||||
| Total gross profit | $ | 3,106 | $ | 2,740 | $ | 366 | 13.4 | % | ||||||||
Strong Entertainment
Gross profit in the Strong Entertainment segment was $2.8 million or 25.8% of revenues in the third quarter of 2023 compared to $2.4 million or 23.9% in the third quarter of 2022.
Gross profit from product sales was $2.2 million or 27.3% of revenues for the third quarter of 2023 compared to $2.1 million or 27.9% of revenues for the third quarter of 2022.
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Gross profit from service revenue was $0.6 million or 21.8% of revenues for the third quarter of 2023 compared to $0.2 million or 10.0% of revenues for the third quarter of 2022. Gross profit percentage increased from the prior year due to higher overall gross margin from cinema services. Gross margin on our installation services also improved from the prior year as we benefited from the transition from third-party screen installation costs with internal labor.
Other
Other gross profit decreased primarily related to the expiration of the agreement covering support services provided to Firefly, which expired at the end of 2022.
Loss From Operations
Consolidated loss from operations was $0.7 million during the quarter ended September 30, 2023, compared to $0.3 million during the quarter ended September 30, 2022.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 183 | $ | 732 | $ | (549 | ) | (75.0 | )% | |||||||
| Other | (102 | ) | (34 | ) | (68 | ) | 200.0 | % | ||||||||
| Total segment operating income | 81 | 698 | (617 | ) | (88.4 | )% | ||||||||||
| Unallocated administrative expenses | (823 | ) | (990 | ) | 167 | (16.9 | )% | |||||||||
| Total loss from operations | $ | (742 | ) | $ | (292 | ) | $ | (450 | ) | 154.1 | % | |||||
The Strong Entertainment segment generated operating income of $0.2 million in the third quarter of 2023 compared to operating income of $0.7 million during the third quarter of 2022. The increase in gross profit was partially offset by higher selling and administrative expenses, including marketing and travel and entertainment expenses, as revenue and business activity increased. Strong Entertainment also incurred higher general and administrative expenses in connection with operating as an independent public company following the IPO in May 2023.
Unallocated administrative expenses were $0.8 million in the third quarter 2023 compared to $1.0 million during the third quarter of 2022. The decrease was primarily due to lower overhead costs after the spinout IPO of Strong Global Entertainment, which was partially offset by an increase in stock-based compensation.
Other Financial Items
Total other expense of $1.0 million during the third quarter of 2023 primarily consisted of a $1.0 million unrealized loss on equity holdings and $0.2 million of interest expense, partially offset by $0.1 million of foreign currency transaction adjustments. Total other expense of $0.9 million during the third quarter of 2022 primarily consisted of a $1.3 million unrealized loss on equity holdings and $0.1 million of interest expense, partially offset by $0.5 million of foreign currency transaction adjustments.
Income tax benefit was $0.1 million during the third quarter of 2023 compared to income tax expense of $0.2 million during the third quarter of 2022. Our income tax benefit/expense during the third quarter of 2023 and 2022 consisted primarily of current and deferred income tax on foreign earnings, which includes the unrealized loss on equity holdings.
We recorded a loss on our FGF Holdings equity method holding of $1.7 million during the third quarter of 2023 compared to $0.8 million during the third quarter of 2022.
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As a result of the items outlined above, we generated a net loss attributable to FG Group Holdings of $3.3 million, or $0.17 per basic and diluted share, in the third quarter of 2023, compared to $2.2 million, or $0.11 per basic and diluted share, in the third quarter of 2022.
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
Revenues
Net revenues during the nine months ended September 30, 2023 was $39.2 million compared to $29.4 million during the nine months ended September 30, 2022.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 38,709 | $ | 28,446 | $ | 10,263 | 36.1 | % | ||||||||
| Other | 517 | 996 | (479 | ) | (48.1 | )% | ||||||||||
| Total net revenues | $ | 39,226 | $ | 29,442 | $ | 9,784 | 33.2 | % | ||||||||
Strong Entertainment
Revenue from Strong Entertainment increased 36.1% to $38.7 million in the first nine months of 2023 from $28.4 million in the first nine months of 2022. The increase from the prior year was due to $1.5 million of higher revenue from product sales and $8.7 million increase in service revenue, which included $6.4 million from the sale of an ownership stake in the Safehaven series. The revenue recognized in connection with Strong Studios’ projects will vary from period to period and will depend on the timing of the monetization of the projects. Excluding the revenue related to Safehaven, total revenue during the first nine months of 2023 increased 13.7% over the prior year, and service revenue increased 36.9%.
The increase in revenue from products was primarily due to a $0.8 million of higher sales of traditional cinema screens and a $0.7 million increase in the sale of digital equipment. We expect the upgrades from xenon to laser to accelerate throughout 2023 and continue for at least the next several years.
On the cinema services side, the primary driver of the revenue increase was from installation services, which increased $1.3 million from the prior year as we have increased the scope of our offerings to better support our customers and to increase market share in cinema services, including cinema screen installation work performed for certain of our customers.
Other
The decrease in other revenue primarily related to the expiration of the agreement covering support services provided to Firefly, which expired at the end of 2022.
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Gross Profit
Consolidated gross profit was $13.0 million during the nine months ended September 30, 2023 compared to $7.7 million during the nine months ended September 30, 2022. As a percentage of revenue, gross profit was 33.2% and 26.1% for the nine months ended September 30, 2023 and September 30, 2022, respectively.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 12,351 | $ | 6,674 | $ | 5,677 | 85.1 | % | ||||||||
| Other | 682 | 996 | (314 | ) | (31.5 | )% | ||||||||||
| Total gross profit | $ | 13,033 | $ | 7,670 | $ | 5,363 | 69.9 | % | ||||||||
Strong Entertainment
Gross profit was $12.4 million or 31.9% of revenues in the first nine months of 2023 compared to $6.7 million or 23.5% in the first nine months of 2022. Gross profit during the first nine months of 2023 included approximately $4.4 million from the sale of an ownership stake in Safehaven. Gross profit generated from Strong Studios’ projects will vary from period to period and will depend on the timing of the monetization of the projects. Excluding the gross profit related to Safehaven, total gross profit during the first nine months of 2023 would have been 25.1% of revenue.
Gross profit from product sales was $6.0 million or 25.5% of revenues for the first nine months of 2023 compared to $5.8 million or 26.5% of revenues for the first nine months of 2022. The slight decrease in gross profit percentage from product sales resulted primarily from product mix as revenue from the sale of lower margin digital equipment grew at a slightly faster rate than our higher margin traditional cinema screens.
Gross profit from service revenue was $6.3 million or 41.9% of revenues for the first nine months of 2023 compared to $0.8 million or 13.1% of revenues for the first nine months of 2022. Gross profit percentage increased from the prior year due to the sale of an ownership stake in the Safehaven series. Excluding the gross profit related to Safehaven, gross profit from service revenue during the first nine months of 2023 would have been 22.0% of revenue. We expect margins on installation services to continue to improve as we continue to onboard and utilize our internal installation team.
Other
Other gross profit decreased primarily related to the expiration of the agreement covering support services provided to Firefly, which expired at the end of 2022.
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Loss From Operations
Consolidated loss from operations for the first nine months of 2023 was $2.3 million, compared to $1.9 million during the nine months ended September 30, 2022.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Strong Entertainment | $ | 1,112 | $ | 1,522 | $ | (410 | ) | (26.9 | )% | |||||||
| Other | (376 | ) | (204 | ) | (172 | ) | 84.3 | % | ||||||||
| Total segment operating income | 736 | 1,318 | (582 | ) | (44.2 | )% | ||||||||||
| Unallocated administrative expenses | (3,022 | ) | (3,258 | ) | 236 | (7.2 | )% | |||||||||
| Total loss from operations | $ | (2,286 | ) | $ | (1,940 | ) | $ | (346 | ) | 17.8 | % | |||||
The Strong Entertainment segment generated operating income of $1.1 million in the first nine months of 2023 compared to operating income of $1.5 million during the first nine months of 2022. We recorded approximately $1.2 million of costs in connection with the completion of the Strong Global Entertainment IPO and $3.4 million of production participation costs in connection with the sale of an ownership stake in the Safehaven series. In addition, selling and administrative expenses, marketing and travel and entertainment expenses were higher during the first nine months of 2023 as revenue and business activity increased, including the addition of Strong Studios, in the current period as compared to the prior year, and operating as a publicly traded company, which was offset by an increase in gross profit.
Unallocated administrative expenses were $3.0 million compared to $3.3 million during the nine months ended September 30, 2022. The decrease was primarily due to lower overhead costs after the spinout IPO of Strong Global Entertainment.
Other Financial Items
Total other expense of $6.1 million during the nine months of 2023 primarily consisted of a $5.5 million unrealized loss on equity holdings, $0.2 million of foreign currency transaction adjustments and $0.4 million of interest expense. Total other expense of $3.8 million during the first nine months of 2022 primarily consisted of a $3.8 million unrealized loss on equity holdings, a $0.2 million adjustment to the carrying value of the SageNet Promissory Note in connection with a prepayment, and $0.2 million of interest expense, and $0.4 million of foreign currency transaction adjustments.
Income tax benefit was $45 thousand during the nine months of 2023 compared to income tax expense of $0.3 million during the nine months of 2022. Our income tax benefit/expense during the nine months of 2023 and 2022 consisted primarily of current and deferred income tax on foreign earnings, which includes the unrealized (loss) gain on equity holdings.
We recorded a loss on our FGF Holdings equity method holding of $4.4 million during the first nine months of 2023 compared to $2.6 million during the first nine months of 2022.
As a result of the items outlined above, we generated a net loss attributable to FG Group Holdings of $12.6 million, or $0.64 per basic and diluted share, in the first nine months of 2023, compared to $8.6 million, or $0.45 per basic and diluted share, in the first nine months of 2022.
Liquidity and Capital Resources
We ended the third quarter of 2023 with total cash and cash equivalents of $3.5 million compared to $3.8 million as of December 31, 2022. Of the $3.5 million as of September 30, 2023, $1.6 million was held in Canada by Strong Global Entertainment. Strong/MDI makes intercompany loans to the U.S. parent company which do not trigger Canadian withholding taxes if they meet certain requirements. As of September 30, 2023, the parent company had outstanding intercompany loans from Strong/MDI of approximately $38.6 million. In the event those loans are not repaid, or are recharacterized as dividends to the U.S. parent company, we would be required to pay 5% Canadian withholding taxes, which have been fully accrued as of September 30, 2023.
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On June 7, 2021, Strong/MDI entered into a demand credit agreement (the “2021 Credit Agreement”) with CIBC, 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 CDN$2.0 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$5.1 million and a 5-year installment loan for up to CDN$0.5 million. These borrowings were due on demand by the lender. 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. These borrowings are due on demand by the lender and total $4.5 million as of September 30, 2023. Although the borrowings are due on demand, the lender has not informed us of any plans to do so. If the lender does notify us of their intention to exercise their ability to demand repayment, we expect we will be able to obtain replacement financing arrangements with a different lender. 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 IPO of Strong Global Entertainment.
We believe that our existing sources of liquidity, including cash and cash equivalents, operating cash flow, credit facilities, proceeds from equity holdings, real estate, receivables and other assets will be sufficient to meet our projected capital needs for at least the next twelve months. However, our ability to continue to meet our cash requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flow from operations, performance of our equity holdings, our ability to manage costs and working capital successfully, any unforeseen disruptions of cinemas, theme parks and other entertainment venues (such as those experienced with COVID-19), and the continued availability of financing, if needed. In addition, following the separation and IPO of Strong Global Entertainment, treasury and liquidity management are managed separately, and the costs of operating separate public companies will likely increase from historical levels. We cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to the variability and unpredictability of the current economic environment. In the event of a sustained market deterioration or declines in net sales or other events, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. We may, depending on a variety of factors, including market conditions for capital raises, the trading price of our common stock and opportunities for uses of any proceeds, engage in additional public or private offerings of equity or debt securities to increase our capital resources. However, financial and economic conditions could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all, and we cannot provide any assurance that we will be able to obtain any additional sources of financing or liquidity on acceptable terms, or at all. See Note 13 to the condensed consolidated financial statements for a description of our debt as of September 30, 2023.
Cash Flows from Operating Activities
Net cash used in operating activities was $3.4 million during the nine months ended September 30, 2023 and $2.8 million during the nine months ended September 30, 2022. Cash used in operating activities increased primarily due to higher utilization of working capital, including increases in accounts receivable and higher payments to our vendors and for other accrued expenses.
Cash Flows from Investing Activities
Net cash provided by investing activities was $0.6 million during the nine months ended September 30, 2023, which consisted of $0.2 million of proceeds from the sale of equity securities, offset by $0.3 million of capital expenditures and a $0.5 million outflow related to the acquisition of film and television programming rights. Net cash used in investing activities from continuing operations was $1.0 million during the nine months ended September 30, 2022, which consisted of a $2.0 million purchase of common stock of FGF, $0.9 million of capital expenditures and $0.4 million outflow related to the acquisition of film and television programming rights, partially offset by the $2.3 million receipt of the SageNet Promissory Note.
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Cash Flows from Financing Activities
Net cash provided by financing activities was $3.6 million during the nine months ended September 30, 2023, which primarily consisted of $2.4 million of net proceeds from the Strong Global Entertainment IPO and $2.3 million of net borrowings under the CIBC revolving line of credit, partially offset by principal payments on short-term and long-term debt and finance lease obligations. Net cash used in financing activities was $0.6 million during the nine months ended September 30, 2022, which primarily consisted of principal payments on short-term and long-term debt.
Use of Non-GAAP Measures
We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”). In addition to disclosing financial results prepared in accordance with GAAP, we disclose information regarding Adjusted EBITDA, which differs from the term EBITDA as it is commonly used. In addition to adjusting net income (loss) to exclude income taxes, interest, and depreciation and amortization, Adjusted EBITDA also excludes share-based compensation, impairment charges, equity method income (loss), fair value adjustments, severance, foreign currency transaction gains (losses), transactional gains and expenses, gains on insurance recoveries and other cash and non-cash charges and gains.
EBITDA and Adjusted EBITDA are not measures of performance defined in accordance with GAAP. However, Adjusted EBITDA is used internally in planning and evaluating our operating performance. Accordingly, management believes that disclosure of these metrics offers investors, bankers and other stakeholders an additional view of our operations that, when coupled with the GAAP results, provides a more complete understanding of our financial results.
EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (loss) or to net cash from operating activities as measures of operating results or liquidity. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies, and the measures exclude financial information that some may consider important in evaluating our performance.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.
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The following table sets forth reconciliations of net (loss) income under GAAP to EBITDA and Adjusted EBITDA (in thousands):
| Quarters Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Strong Entertainment | Corporate and Other | Consolidated | Strong Entertainment | Corporate and Other | Consolidated | |||||||||||||||||||
| Net income (loss) | $ | 34 | $ | (3,359 | ) | $ | (3,325 | ) | $ | 315 | $ | (2,514 | ) | $ | (2,199 | ) | ||||||||
| Interest expense, net | 88 | 95 | 183 | 33 | 58 | 91 | ||||||||||||||||||
| Income tax expense (benefit) | 205 | (306 | ) | (101 | ) | 202 | 43 | 245 | ||||||||||||||||
| Depreciation and amortization | 129 | 163 | 292 | 153 | 183 | 336 | ||||||||||||||||||
| EBITDA | 456 | (3,407 | ) | (2,951 | ) | 703 | (2,230 | ) | (1,527 | ) | ||||||||||||||
| Stock-based compensation expense | 124 | 254 | 378 | - | 142 | 142 | ||||||||||||||||||
| Equity method holding loss | - | 1,668 | 1,668 | - | 798 | 798 | ||||||||||||||||||
| Unrealized loss on equity holdings | - | 976 | 976 | 631 | 670 | 1,301 | ||||||||||||||||||
| Foreign currency transaction (income) loss | (126 | ) | 2 | (124 | ) | (517 | ) | - | (517 | ) | ||||||||||||||
| Transaction related expenses | 42 | - | 42 | - | - | - | ||||||||||||||||||
| Severance and other | 7 | - | 7 | - | - | - | ||||||||||||||||||
| Adjusted EBITDA | $ | 503 | $ | (507 | ) | $ | (4 | ) | $ | 817 | $ | (620 | ) | $ | 197 | |||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Strong Entertainment | Corporate and Other | Consolidated | Strong Entertainment | Corporate and Other | Consolidated | |||||||||||||||||||
| Net income (loss) | $ | 156 | $ | (12,861 | ) | $ | (12,705 | ) | $ | (322 | ) | $ | (8,276 | ) | $ | (8,598 | ) | |||||||
| Interest expense, net | (983 | ) | 1,416 | 433 | 85 | 146 | 231 | |||||||||||||||||
| Income tax expense | 318 | (363 | ) | (45 | ) | 242 | 50 | 292 | ||||||||||||||||
| Depreciation and amortization | 2,438 | 376 | 2,814 | 521 | 517 | 1,038 | ||||||||||||||||||
| EBITDA | 1,929 | (11,432 | ) | (9,503 | ) | 526 | (7,563 | ) | (7,037 | ) | ||||||||||||||
| Stock-based compensation expense | 839 | 351 | 1,190 | - | 511 | 511 | ||||||||||||||||||
| Equity method holding loss | - | 4,362 | 4,362 | - | 2,578 | 2,578 | ||||||||||||||||||
| Unrealized loss on equity holdings | 1,191 | 4,323 | 5,514 | 1,695 | 2,057 | 3,752 | ||||||||||||||||||
| IPO related expenses | 475 | - | 475 | - | - | - | ||||||||||||||||||
| Gain on disposal of assets | (1 | ) | (5 | ) | (6 | ) | - | - | - | |||||||||||||||
| Transaction related expenses | 42 | - | 42 | - | - | - | ||||||||||||||||||
| Foreign currency transaction loss (income) | 183 | - | 183 | (383 | ) | 1 | (382 | ) | ||||||||||||||||
| Severance and other | 7 | - | 7 | - | 222 | 222 | ||||||||||||||||||
| Adjusted EBITDA | $ | 4,665 | $ | (2,401 | ) | $ | 2,264 | $ | 1,838 | $ | (2,194 | ) | $ | (356 | ) | |||||||||
Hedging and Trading Activities
Our primary exposure to foreign currency fluctuations pertains to our subsidiary in Canada. In certain instances, we may enter into a foreign exchange contract to manage a portion of this risk. We do not have any trading activities that include non-exchange traded contracts at fair value.
Seasonality
Generally, our revenue and earnings fluctuate moderately from quarter to quarter. As we increase our sales in our current markets, and as we expand into new markets in different geographies, it is possible we may experience different seasonality patterns in our business. As a result, the results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for an entire fiscal year.
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Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to the condensed consolidated financial statements for a description of recently issued accounting pronouncements.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.
Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for our year ended December 31, 2022. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes in our critical accounting policies during the three months ended September 30, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable as we are a “smaller reporting company” as defined by Item 229.10(f)(1) of Regulation S-K.
Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer and principal accounting officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in § 240.13a-15(e) or 240.15d-15(e) of Regulation S-K) were effective at ensuring that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (as amended) is (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.
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PART II. Other Information
Item 1. Legal Proceedings
In the ordinary course of our business operations, we are involved, from time to time, in certain legal disputes. We and certain of our subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of commercial lighting products containing wiring that may have contained asbestos. Each case names dozens of corporate defendants in addition to us. In our experience, a large percentage of these types of claims have never been substantiated and have been dismissed by the courts. We have not suffered any adverse verdict in a trial court proceeding related to asbestos claims and intend to continue to defend these lawsuits. As of September 30, 2023, the Company has a loss contingency reserve of approximately $0.3 million, which represents our estimate of our potential losses related to the settlement of open cases. During 2022 and the first nine months of 2023, we settled three cases, which resulted in payments totaling $53 thousand. When appropriate, we may settle additional claims in the future. We do not expect the resolution of these cases to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Item 1A. Risk Factors
Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 includes a detailed discussion of the Company’s risk factors. As of the date of this filing there have been no material changes to the risk factors as previously disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 20, 2015, we announced that our Board of Directors adopted a stock repurchase program authorizing the repurchase of up to 700,000 shares of our outstanding Common Stock pursuant to a plan adopted under Rule 10b5-1 of the Securities Exchange Act of 1934 (as amended). The repurchase program has no expiration date. The following table provides information about purchases made by us of our common stock for each month included in the quarter ended September 30, 2023:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | The Maximum Number of Shares That May Still be Purchased Under the Plans or Programs | ||||||||||||
| July 2023 | - | $ | - | - | 636,931 | |||||||||||
| August 2023 | - | - | - | 636,931 | ||||||||||||
| September 2023 | - | - | - | 636,931 | ||||||||||||
| Quarter Ended September 30, 2023 | - | $ | - | $ | - | 636,931 | ||||||||||
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Item 6. Exhibits
| Incorporated by Reference | ||||||||||
| Exhibit
Number |
Document Description | Form | Exhibit | Filing Date |
Filed
Herewith | |||||
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer. | X | ||||||||
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer. | X | ||||||||
| 32.1** | 18 U.S.C. Section 1350 Certification of Chief Executive Officer. | X | ||||||||
| 32.2** | 18 U.S.C. Section 1350 Certification of Chief Financial Officer. | X | ||||||||
| 101 | The following materials from FG Group Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (unaudited); (ii) the Condensed Consolidated Statements of Operations (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Loss (unaudited); (iv) the Condensed Consolidated Statements of Stockholders’ Equity (unaudited); (v) the Condensed Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Consolidated Financial Statements (unaudited). | X | ||||||||
| 104 | XBRL Cover Page Interactive Data File (embedded within the Inline XBRL document). | X | ||||||||
| + | Indicates management contract or compensatory plan. |
| † | Exhibits and schedules to this Exhibit have been omitted pursuant to Regulation S-K Item 601(a)(5). The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FG GROUP HOLDINGS INC. | ||||
| By: | /s/ MARK D. ROBERSON |
By: | /s/ TODD R. MAJOR |
|
Mark D. Roberson Chief Executive Officer (Principal Executive Officer) |
Todd
R. Major (Principal Financial Officer and Principal Accounting Officer) |
|||
| Date: | November 13, 2023 | Date: | November 13, 2023 | |
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