SEC Form 10-Q filed by Strong Global Entertainment Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from to
Commission
File Number:
(Exact Name of Registrant as Specified in Its Charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 9, 2024, there were Class A Common Voting Shares, without par value outstanding.
TABLE OF CONTENTS
| i |
PART I. Financial Information
Item 1. Financial Statements
Strong Global Entertainment, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
| June 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (net of credit allowances of $ | ||||||||
| Inventories, net | ||||||||
| Assets of discontinued operations | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Finance lease right-of-use asset | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Payable to Fundamental Global Inc. (Note 14) | ||||||||
| 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 | ||||||||
| Liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Long-term debt, net of current portion | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments, contingencies and concentrations (Note 13) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, par value; shares authorized, issued and outstanding as of June 30, 2024 and December 31, 2023 | ||||||||
| Paid-in-capital related to: | ||||||||
| Class A Common stock, par value; shares authorized, and issued and outstanding as of June 30, 2024 and December 31, 2023, respectively | ||||||||
| Class B Common stock, par value; shares authorized, issued and outstanding as of June 30, 2024 and December 31, 2023 | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 1 |
Strong Global Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2024 and 2023
(In thousands, except per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net product sales | $ | $ | $ | $ | ||||||||||||
| Net service revenues | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Cost of products | ||||||||||||||||
| Cost of services | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling and administrative expenses: | ||||||||||||||||
| Selling | ||||||||||||||||
| Administrative | ||||||||||||||||
| Total selling and administrative expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency transaction loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income, net | ||||||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (benefit) expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income from discontinued operations (Note 3) | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic net (loss) income per share: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Discontinued operations | ||||||||||||||||
| Basic net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted net (loss) income per share: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Discontinued operations | ||||||||||||||||
| Diluted net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted-average shares used in computing net (loss) income per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 2 |
Strong Global Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
Three and Six Months Ended June 30, 2024 and 2023
(In thousands)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Currency translation adjustment: | ||||||||||||||||
| Unrealized net change arising during period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
Strong Global Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
Three and Six Months Ended June 30, 2024 and 2023
(In thousands, except share data)
(Unaudited)
| Class A Common Stock (Shares) | Class B Common Stock (Shares) | Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Vesting of restricted stock units | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Class A Common Stock (Shares) | Class B Common Stock (Shares) | Paid-In Capital | Net Parent Investment | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Cumulative effect of adoption of accounting principle | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net transfer to parent | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2023 | ( | ) | ||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net transfer to parent | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Reclassification of Net parent investment | ( | ) | ||||||||||||||||||||||||||
| Issuance of common stock and Landmark warrant, net of costs | - | |||||||||||||||||||||||||||
| Vesting of restricted stock | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
Strong Global Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2024 and 2023
(In thousands)
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Provision for (recovery of) doubtful accounts | ( | ) | ||||||
| (Benefit from) provision for obsolete inventory | ( | ) | ||||||
| Provision for warranty | ||||||||
| Depreciation and amortization | ||||||||
| Gain on acquisition of ICS assets | ( | ) | ||||||
| Amortization and accretion of operating leases | ||||||||
| 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) provided by operating activities from continuing operations | ( | ) | ||||||
| Net cash used in operating activities from discontinued operations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash used in investing activities from continuing operations | ( | ) | ( | ) | ||||
| Net cash used in investing activities from discontinued operations | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payments on short-term debt | ( | ) | ||||||
| Principal payments on long-term debt | ( | ) | ( | ) | ||||
| Payments of withholding taxes for net share settlement of equity awards | ( | ) | ( | ) | ||||
| Proceeds from initial public offering | ||||||||
| Payments on finance lease obligations | ( | ) | ( | ) | ||||
| Net cash transferred to parent | ( | ) | ||||||
| Net cash used in financing activities from continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by financing activities from discontinued operations | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents from discontinued operations | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash and cash equivalents from continuing operations | ( | ) | ||||||
| Net decrease in cash and cash equivalents from discontinued operations | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents from continuing operations at beginning of period | ||||||||
| Cash and cash equivalents from continuing operations at end of period | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
Strong Global Entertainment, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations
Strong Global Entertainment, Inc. (“Strong Global Entertainment,” or the “Company”) is a leader in the entertainment industry providing mission critical products and services to cinema exhibitors and entertainment venues for over 90 years. The Company is a holding company and conducts business through its wholly-owned operating subsidiaries: Strong/MDI Screen Systems, Inc. (“Strong/MDI”) is a leading premium screen and projection coatings supplier in the world, and Strong Technical Services, Inc. (“STS”) provides comprehensive managed service offerings with 24/7/365 support nationwide to ensure solution uptime and availability.
On May 15, 2023, the Company completed an initial public offering (“IPO”) of its Class A Voting Common Shares without par value (“Common Shares”). The IPO closed on May 18, 2023 and the Company completed its separation (the “Separation”) from Fundamental Global Inc., formerly FG Group Holdings, Inc (“Fundamental Global”). The Company’s Common Shares are listed on the NYSE American under the ticker symbol “SGE.”
On February 29, 2024, FG Financial Group, Inc. (“FG Financial”), and FG Group Holdings completed a merger transaction (the “Merger”). Pursuant to the terms of the Merger Agreement, FG Group Holdings became a wholly owned subsidiary of FG Financial. Following the Merger, FG Financial changed its name to Fundamental Global Inc. (“Fundamental Global”). As a result of the Merger, the Company’s indirect controlling shareholder changed from FG Group Holdings to Fundamental Global.
On May 3, 2024, the Company entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI, FGAC Investors LLC, and CG Investments VII Inc. (together with FGAC Investors LLC, the “Sponsors”), pursuant to which FGAC intends to acquire, directly or indirectly, all of the outstanding shares in the capital of Strong/MDI. As a result of the acquisition, Strong/MDI will become a wholly-owned subsidiary of FGAC. See Note 3 for additional details.
On May 30, 2024, Fundamental Global and the Company entered into a definitive arrangement agreement and plan of arrangement to combine the companies in an all-stock transaction. Upon completion of the arrangement, the stockholders of the Company will receive 1.5 common shares of Fundamental Global for each share of the Company. The transaction is expected to close in the third quarter of 2024, subject to customary closing conditions, including any necessary stockholder approval. Following the closing, the Company will cease to exist, and the Company’s Common Shares will be delisted from NYSE American and deregistered under the Exchange Act.
2. Summary of Significant Accounting Policies
Basis of Presentation
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.
These condensed consolidated financial statements are presented in accordance with the requirements of interim financial data and consequently do not include all of the disclosures normally required by GAAP for annual reporting purposes, such as those made in the Company’s audited financial statements Company’s Annual Report on Form 10-K. The results for interim periods are not necessarily indicative of trends or results expected for a full fiscal year.
The condensed consolidated balance sheet as of December 31, 2023, 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.
| 6 |
In May 2023, the Company became a standalone publicly traded company, and its financial statements post-Separation are prepared on a consolidated basis. The combined financial statements for all periods presented prior to the Separation (see below for additional information) are now also referred to as “condensed consolidated financial statements.” In connection with the Separation, the Company’s assets and liabilities were transferred to the Company on a carry-over (historical cost) basis.
The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same 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.
For Periods Prior to the Separation
Prior to the Separation, the Company’s financial statements were derived from the condensed consolidated financial statements and accounting records of Fundamental Global as if Strong Global Entertainment had operated on a stand-alone basis during the periods presented and were prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission. Accordingly, Fundamental Global historically reported the financial position and the related results of operations, cash flows and changes in equity of Strong Global Entertainment as a component of Fundamental Global’s condensed consolidated financial statements.
Prior to the Separation, the historical results of operations included allocations of Fundamental Global’s costs and expenses including Fundamental Global’s corporate function which incurred a variety of expenses including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications.
Prior to the Separation, Strong Global Entertainment did not operate as a stand-alone company. For periods prior to the Separation, the operating results of Strong Global Entertainment have historically been disclosed as a reportable segment within the condensed consolidated financial statements of Fundamental Global enabling identification of directly attributable transactional information, functional departments and headcount. The combined balance sheets were primarily derived by reference to one, or a combination, of Strong Global Entertainment transaction-level information, functional department or headcount. Revenue and Cost of revenue were derived from transactional information specific to Strong Global Entertainment products and services. Directly attributable operating expenses were derived from activities relating to Strong Global Entertainment functional departments and headcount. Certain additional costs, including compensation costs for corporate employees, have been allocated from Fundamental Global. The allocated costs for corporate functions included, but were not limited to, information technology, legal, finance and accounting, human resources, tax, treasury, research and development, sales and marketing activities, shared facilities and other shared services, which are not provided at the Strong Global Entertainment level. These costs were allocated on a basis of revenue, headcount or other measures Strong Global Entertainment has determined as reasonable.
Strong Global Entertainment employees also historically participated in Fundamental Global’s stock-based incentive plans, in the form of restricted stock units (“RSUs”) and stock options issued pursuant to Fundamental Global’s employee stock plan. Stock-based compensation expense has been directly reported by Strong Global Entertainment based on the awards and terms previously granted to Fundamental Global’s employees.
Allocations
for management costs and corporate support services provided to Strong Global Entertainment prior to the Separation totaled $
| 7 |
The operations of the Company are included in the consolidated U.S. federal, and certain state and local and foreign income tax returns filed by Fundamental Global, where applicable. Income tax expense and other income tax related information contained in the financial statements prior to the Separation are presented on a separate return basis as if Strong Global Entertainment had filed its own tax returns.
Use of Management Estimates
The preparation of condensed 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 condensed 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. 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.
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.
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. Management determines the allowance for expected 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 provision
for expected credit losses to be adjusted accordingly. The accounts receivable balances on the condensed consolidated balance sheets
are net of an allowance for expected credit losses of $
Income Taxes
Income taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate at each interim period based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing whether the deferred tax assets are realizable, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
| 8 |
The Company’s uncertain tax positions are evaluated in a two-step process, whereby 1) the Company determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and 2) for those tax positions that meet the more likely than not recognition threshold, the Company would recognize the largest amount of tax benefit that is greater than fifty percent likely to be realized upon ultimate settlement with the related tax authority. The Company accrues interest and penalties related to uncertain tax positions in the condensed consolidated statements of operations as income tax expense.
Stock Compensation Plans
Prior to the Separation, the Company’s employees participated in Fundamental Global’s stock-based compensation plans. Stock-based compensation expense has been allocated to the Company based on the awards and terms previously granted to Fundamental Global’s employees. The Company measures stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options is estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to RSUs is based on the closing fair market value of the underlying common stock on the date of grant.
The Company uses the straight-line amortization method over the vesting period of the awards. The Company has historically issued shares upon exercise of stock options or vesting of restricted stock from new stock issuances. No stock-based compensation cost was capitalized as a part of inventory during the three and six months ended June 30, 2024 and June 30, 2023.
Fair Value of Financial Instruments
Assets and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
| ● | Level 1 – inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities | |
| ● | Level 2 – inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly | |
| ● | Level 3 – inputs to the valuation techniques are unobservable for the assets or liabilities |
The following tables present the Company’s financial assets measured at fair value based upon the level within the fair value hierarchy in which the fair value measurements are classified, as of June 30, 2024 and December 31, 2023.
Fair values measured on a recurring basis at June 30, 2024 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 9 |
Fair values measured on a recurring basis at December 31, 2023 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company’s short-term debt is recorded at historical cost. The carrying values of all other financial assets and liabilities, including accounts receivable, accounts payable, and short-term debt reported in the condensed consolidated balance sheets equal or approximate their fair values due to the short-term nature of these instruments.
All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which include non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment).
Leases
The Company and its subsidiaries lease warehouse and office facilities and equipment under operating and finance leases expiring through 2037.
The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain of the leases contain extension options; however, the Company has not included such options as part of its right-of-use assets and lease liabilities because it does not expect to extend the leases. The Company measures and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company’s estimated incremental borrowing rate for loans with similar collateral and duration.
The Company elected to not apply the recognition requirements of Accounting Standards Codification Topic 842, “Leases,” to leases of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases are recognized in operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
The Company elected, as a lessee, for all classes of underlying assets, to not separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
Recent Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will add required disclosures of significant expenses for each reportable segment, as well as certain other disclosures to help investors understand how the chief operating decision maker (“CODM”) evaluates segment expenses and operating results. The new standard will also allow disclosure of multiple measures of segment profitability, if those measures are used to allocate resources and assess performance. The amendments will be effective for public companies for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on our consolidated financial statements.
In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Improvements to Income Tax Disclosures. The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024, with early adoption permitted. The new ASU will not impact amounts recorded in the Company’s financial statements but instead, will require more detailed disclosures in the footnotes to the financial statements. The Company plans to provide the updated disclosures required by the ASU in the periods in which they are effective.
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3. Discontinued Operations
Strong/MDI
On May 3, 2024, the Company entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI, FGAC Investors LLC, and CG Investments VII Inc. (together with FGAC Investors LLC, the “Sponsors”). FGAC’s currently issued and outstanding Class A restricted voting shares (the “Class A Restricted Voting Shares”) and share purchase warrants (the “Warrants”) are listed on the Toronto Stock Exchange (the “TSX”). In addition, FGAC has approximately million Class B shares (the “Class B Shares”) issued and outstanding.
Pursuant
to the Acquisition Agreement, FGAC intends to acquire, directly or indirectly, all of the outstanding shares in the capital of Strong/MDI
(the “MDI Acquisition”). As a result of the MDI Acquisition, Strong/MDI will become a wholly-owned subsidiary of FGAC. The
MDI Acquisition values Strong/MDI at a pre-money valuation of $
Management evaluated the classification of Strong/MDI as a discontinued operation as of June 30, 2024 and determined Strong/MDI is a component of an entity and represented a discontinued operation. Accordingly, Strong/MDI has been included as part of discontinued operations for all periods presented.
In connection with the closing of the MDI Acquisition (the “Closing”), FGAC intends to rename itself Saltire Holdings, Ltd. (“Saltire”). It is a condition of Closing that the common shares of FGA (the “Common Shares”) be listed and the Warrants continue to be listed on the TSX.
The Closing is conditional on, among other things, there being no legal impediments to Closing and all required authorizations, consents and approvals necessary to effect Closing having occurred, or being filed or obtained, as applicable, the Common Shares being conditionally listed for trading on a stock exchange, the approval of the MDI Acquisition by the holders of Class A Restricted Voting Shares at a meeting of shareholders to be held in connection with the MDI Acquisition, receipts having been obtained for both the preliminary and final prospectus and other usual and customary conditions for transactions of this nature. The obligations of the Company at Closing are also conditional on, among other usual and customary conditions for transactions of this nature, (a) the truth and accuracy of FGAC’s representations and warranties, (b) the compliance and/ or performance by FGAC of its covenants under the Acquisition Agreement, and (c) there having been no material adverse change with respect to FGAC. The Closing is also conditional on, among other usual and customary conditions for transactions of this nature, the following conditions of Closing in favour of FGAC: (a) the truth and accuracy of the Company and Strong/MDI’s representations and warranties, (b) the compliance and/or performance by the Company and MDI of their covenants under the Acquisition Agreement, (c) the completion of all required third party authorizations, consents and approvals, and (d) there having been no material adverse change with respect to Strong/MDI or its business and there being no events, facts or circumstances that shall have occurred which would result or which could reasonably be expected to result, individually or in the aggregate, in a material adverse change with respect to Strong/MDI or its business.
It
is anticipated that, upon completion of the MDI Acquisition, on a non-diluted basis and assuming completion of a $
| 11 |
Strong Studios
In March 2022, Strong Studios, Inc. (“Strong Studios”) acquired, from Landmark Studio Group LLC (“Landmark”), the rights to original feature films and television series, and was assigned third party rights to content for global multiplatform distribution. The transaction entailed the acquisition of certain projects which are in varying stages of development. During the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven 2022”) was established to manage the production and financing of the Safehaven television series, one of the in-process projects acquired from Landmark.
In September 2023, the Company acquired all of the outstanding capital stock of Unbounded Media Corporation (“Unbounded”), an independent media and creative production company. Unbounded developed, created and produced film, advertising, and branded content for a broad range of clients. The Company expected Unbounded, in partnership with Strong Studios, would also further develop its original IP portfolio, under its Fieldhouse Entertainment division, which included feature films employing Strong Studios’ long form production expertise and industry network.
As of December 31, 2023, the board of directors of Strong Global Entertainment approved the Company’s plan to exit its content business, including Strong Studios and Unbounded and authorized management to proceed with such plan. The plan is expected to improve the Company’s focus on its core businesses, reduce general and administrative costs, and improve financial performance. The Company may receive proceeds from the disposition of certain parts of the business and could recover development costs incurred in certain of the Strong Studios projects in the future; however, any recovery is highly speculative, and management is not able to estimate the amount, timing or likelihood of recoveries. These estimates may change based on the ultimate disposition of the operations and potential recoveries.
Management evaluated the classification of the content business as a discontinued operation as of December 31, 2023. The content business included employees and operations that were dedicated solely to that portion of the overall business. In addition, the Company’s accounting system and bank accounts were set up in a manner that allowed for the cash flows to be clearly distinguished from the rest of the entity. Management determined its content business is a component of an entity and represented a discontinued operation effective December 31, 2023. Accordingly, the content business has been included as part of discontinued operations for all periods presented. As noted above, management began implementing the exit plan in late December 2023. All employees of the content business were notified of the Company’s plans to exit the business in December and management immediately began working to implement the exit plan.
In connection with the plan to exit the content business, the Company shut down the acquired Unbounded operations effective December 31, 2023.
The Company also entered into a letter of intent during December 2023 and executed a Stock Purchase Agreement effective January 1, 2024 for the sale of the majority of the Strong Studios operations. As a result, the Company has classified the assets and liabilities to reflected as discontinued operations as of December 31, 2023. The assets and liabilities transferred to the purchaser during the first quarter of 2024.
Pursuant
to the Stock Purchase Agreement, the Company transferred the Strong Studios legal entity and all assets and liabilities related to Strong
Studios, except the assets and liabilities related to Safehaven. The Stock Purchase Agreement included a sales price of $
The
Safehaven series, a fully complete and readily marketable project under Strong Studios, was not transferred as part of the sale.
The Safehaven series was completed in mid-2023, and the Company and the other investors in the series began marketing the project
for sale during the second half of 2023. The parties were involved in a dispute relating to the financial management of the project.
As a result of the dispute and the impact on the Company’s ability to predict any future revenue participation from the sale/license
of the series, the carrying value of the assets and liabilities was adjusted to $
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The major classes of assets and liabilities included as part of discontinued operations are as follows (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Strong/MDI | Strong Studios | Total | Strong/MDI | Strong Studios | Total | |||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||||||
| Inventories | ||||||||||||||||||||||||
| Other current assets | ||||||||||||||||||||||||
| Property, plant and equipment, net | ||||||||||||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||||||||||||
| Goodwill and intangible assets | ||||||||||||||||||||||||
| Film & TV programming rights | ||||||||||||||||||||||||
| Total assets of discontinued operations | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Deferred revenue and customer deposits | ||||||||||||||||||||||||
| Short-term debt | ||||||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||||||
| Operating lease obligations | ||||||||||||||||||||||||
| Deferred income tax liabilities, net | ||||||||||||||||||||||||
| Total liabilities of discontinued operations | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The major line items constituting the net loss from discontinued operations are as follows (in thousands):
| Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |||||||||||||||||||||||
| Strong/MDI | Strong Studios | Total | Strong/MDI | Strong Studios | Total | |||||||||||||||||||
| Net revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||||||||||
| Selling and administrative expenses | ||||||||||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||||||||||
| Income (loss) from discontinued operations before taxes | ( | ) | ||||||||||||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) from discontinued operations | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||
| Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |||||||||||||||||||||||
| Strong/MDI | Strong Studios | Total | Strong/MDI | Strong Studios | Total | |||||||||||||||||||
| Net revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||||||||||
| Selling and administrative expenses | ||||||||||||||||||||||||
| Loss (gain) on disposal of assets | ( | ) | ( | ) | ||||||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||||||||||
| Income (loss) from discontinued operations before taxes | ( | ) | ||||||||||||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) from discontinued operations | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||
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4. Revenue
The Company accounts for revenue using the following steps:
| ● | Identify the contract, or contracts, with a customer; | |
| ● | Identify the performance obligations in the contract; | |
| ● | Determine the transaction price; | |
| ● | Allocate the transaction price to the identified performance obligations; and | |
| ● | Recognize revenue when, or as, the Company satisfies the performance obligations. |
The Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine whether they are distinct, whether the items have value on a standalone basis, and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin approach. Management estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement.
As discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company typically does not have any material extended payment terms, as payment is due at or shortly after the time of the sale. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients, or receives cash, in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.
The Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. The Company did not have any deferred contract costs as of June 30, 2024 or December 31, 2023.
| 14 |
The following tables disaggregate the Company’s revenue by major source for the three and six months ended June 30, 2024 and 2023 (in thousands):
Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |||||||||||||
| Screen system sales | $ | $ | $ | $ | ||||||||||||
| Digital equipment sales | ||||||||||||||||
| Extended warranty sales | ||||||||||||||||
| Other product sales | ||||||||||||||||
| Total product sales | ||||||||||||||||
| Field maintenance and monitoring services | ||||||||||||||||
| Installation services | ||||||||||||||||
| Other service revenues | ||||||||||||||||
| Total service revenues | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 delivery to the customer. 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, management believes that the use of the percentage-of-completion method is appropriate as management 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. The Company typically records revenue for drop-shipment orders on a gross basis as the Company (i) is responsible for fulfilling the order, (ii) has inventory risk, (iii) would be the recipient of any returned items and (iv) has discretion over pricing. 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. 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 customers and recognizes revenue upon completion of the installations.
| 15 |
Extended warranty sales
The Company sells extended warranties to its customers. Typically, the Company is the primary obligor, and revenue is recognized on a gross basis ratably over the term of the extended warranty.
Timing of revenue recognition
The following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three and six months ended June 30, 2024 and 2023 (in thousands):
Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |||||||||||||
| Point in time | $ | $ | $ | $ | ||||||||||||
| Over time | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
At
June 30, 2024, the unearned revenue amount associated with maintenance and monitoring services and extended warranty sales in which the
Company is the primary obligor was $
The following tables summarize the Company’s revenue by geographic area for the three and six months ended June 30, 2024 and 2023 (in thousands):
Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| Europe | ||||||||||||||||
| Asia | ||||||||||||||||
| Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Basic net income per share has been computed on the basis of the weighted average number of shares of common stock outstanding. In periods when the Company reported a net loss from continuing operations, there were no differences between average shares used to compute basic and diluted loss per share as inclusion of stock options and restricted stock units would have been anti-dilutive in those periods. The weighted average number of shares outstanding for the basic and diluted net income per share for the periods prior to the completion of the IPO is based on the number of shares of the Company’s common stock outstanding on May 15, 2023, the effective date of the registration statement relating to the IPO. The following table summarizes the weighted average shares used to compute basic and diluted net loss per share (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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 | ||||||||||||||||
| 16 |
6. Inventories
Inventories consisted of the following (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||
| Raw materials and components | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
The
inventory balances are net of reserves of approximately $
| Inventory reserve balance at December 31, 2023 | $ | |||
| Inventory write-offs during 2024 | ||||
| Benefit from inventory reserve during 2024 | ( | ) | ||
| Inventory reserve balance at June 30, 2024 | $ |
7. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following as of June 30, 2024 and December 31, 2023 (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||
| Buildings and improvements | $ | $ | ||||||
| Machinery and other equipment | ||||||||
| Office furniture and fixtures | ||||||||
| Total properties, cost | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
| 17 |
8. Accrued Expenses
Accrued expenses consisted of the following as of June 30, 2024 and December 31, 2023 (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||
| Employee-related | $ | $ | ||||||
| Warranty obligation | ||||||||
| Interest and taxes | ||||||||
| Legal and professional fees | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
9. Debt
Short-term debt and long-term debt consisted of the following as of June 30, 2024 and December 31, 2023 (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||
| Short-term debt: | ||||||||
| Revolving credit facility | $ | $ | ||||||
| Insurance debt | ||||||||
| Total short-term debt | $ | $ | ||||||
| Long-term debt: | ||||||||
| Tenant improvement loan | $ | $ | ||||||
| ICS promissory note | ||||||||
| Total long-term debt | $ | $ | ||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Long-term debt, net of current portion | $ | $ | ||||||
Installment Loans and Revolving Credit Facility
In
January 2023, Strong/MDI and Canadian Imperial Bank of Commerce (“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$
| 18 |
On
January 19, 2024, the Company entered into a new demand credit agreement with CIBC. The agreement consists of a demand operating credit
and a business credit card facility. Under the demand operating credit, with certain conditions, the credit limit is the lesser of (a)
CAD$
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 $
ICS Promissory Note
STS
issued a $
Contractual Principal Payments
Contractual required principal payments on the Company’s long-term debt at June 30, 2024, are as follows (in thousands):
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ |
| 19 |
10. Leases
The following tables present the Company’s lease costs and other lease information (dollars in thousands):
| Lease cost | Three Months Ended | Six Months Ended | ||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Operating lease cost | ||||||||||||||||
| Net lease cost | $ | $ | $ | $ | ||||||||||||
| Other information | Three Months Ended | Six Months Ended | ||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
As of June 30, 2024 | ||||
| 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 June 30, 2024 (in thousands):
| Operating Leases | Finance Leases | |||||||
| Remainder of 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Total lease payments | ||||||||
| Less: Amount representing interest | ( | ) | ( | ) | ||||
| Present value of lease payments | ||||||||
| Less: Current maturities | ( | ) | ( | ) | ||||
| Lease obligations, net of current portion | $ | $ | ||||||
11. 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 June 30, 2024 and December 31, 2023.
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.
| 20 |
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 $
The Company’s 2023 Share Compensation Plan (the “Plan”) was approved by 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. As of June 30, 2023, approximately million shares were available for issuance under the Plan.
Stock Options
Number of Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at June 30, 2024 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2024 | $ | $ | ||||||||||||||
The aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money options had been exercised and sold on the date indicated.
As of June 30, 2024, stock option awards have not vested. Unrecognized compensation cost related to non-vested stock options was approximately $ million, which is expected to be recognized over a weighted average period of years.
Restricted Stock Units
The Company estimates the fair value of restricted stock awards based upon the closing price of the underlying common stock on the date of grant. The following table summarizes restricted stock unit activity for the six months ended June 30, 2024:
Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||
| Non-vested at December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Shares vested | ( | ) | ||||||
| Shares forfeited | ( | ) | ||||||
| Non-vested at June 30, 2024 | $ | |||||||
As of June 30, 2024, 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.
13. 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.
| 21 |
Fundamental
Global is named as a defendant 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 Fundamental Global. In Fundamental
Global’s experience, a large percentage of these types of claims have never been substantiated and have been dismissed by the courts.
Fundamental Global has not suffered any adverse verdict in a trial court proceeding related to asbestos claims and intends to continue
to defend these lawsuits. Under the Fundamental Global Asset Purchase Agreement, the Company agreed to indemnify Fundamental Global for
future losses, if any related to current product liability or personal injury claims arising out of products sold or distributed in the
U.S. by the operations of the businesses being transferred to the Company in the Separation, in an aggregate amount not to exceed $
On April 29, 2024, Ravenwood-Productions LLC (“Ravenwood”) and Kevin V. Duncan (“Duncan” and, together with Ravenwood, the “Plaintiffs”) filed a civil complaint (the “Complaint”) against the Company, certain affiliated entities, and certain current and former employees, officers and directors of the Company (collectively, the “Defendants”) in the United States District Court for the Central District of California. The Complaint claimed seven causes of action, each claim against some, or all, of the Defendants. In July 2024, the Company entered into an agreement resulting in the settlement and dismissal of the Complaint. In connection with the settlement and dismissal, the Company did not make any cash payments to the Plaintiffs. In addition, the Company maintained a right to receive distributions to recover our investment and to participate in series profits (if any).
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.
14. Related Party Transactions
Related Party Transactions
In connection with the IPO, the Company and Fundamental Global entered into a management services agreement that provides a framework for our ongoing relationship with Fundamental Global. Fundamental Global and its subsidiaries and we and our subsidiaries, provide each other certain services which include information technology, legal, finance and accounting, human resources, tax, treasury, and other services. Pursuant to the Management Services Agreement, the charges for these services are generally based on their actual cost basis.
Strong/MDI
manufactures its screens in an approximately
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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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 this Annual Report on Form 10-K for the year ended December 31, 2023, and the following risks and uncertainties: the Company’s ability to maintain and expand its revenue streams to compensate for the lower demand for the Company’s digital cinema products and installation services; potential interruptions of supplier relationships or higher prices charged by suppliers; the Company’s ability to successfully compete and introduce enhancements and new features that achieve market acceptance and that keep pace with technological developments; the Company’s ability to 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); and the adequacy of the Company’s insurance. 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
Strong Global Entertainment, Inc. (“Strong Global Entertainment,” the “Company,” “we,” “our,” and “us”) is a leader in the entertainment industry, providing mission critical products and services to cinema exhibitors and entertainment venues for over 90 years. The Company manufactures and distributes premium large format projection screens, provides comprehensive managed services, technical support and related products and services primarily to cinema exhibitors, theme parks, educational institutions, and similar venues. In addition to traditional projection screens, the Company manufactures and distributes its Eclipse curvilinear screens, which are specially designed for theme parks, immersive exhibitions, as well as simulation applications. It also provides maintenance, repair, installation, network support services and other services to cinema operators, primarily in the United States.
We plan to grow market share and organic revenue and improve operating results, with the intent of expanding the ultimate valuation of the business. In addition, we may acquire other businesses, which may be within or outside of our existing markets.
On May 3, 2024, we entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI, FGAC Investors LLC, and CG Investments VII Inc. (together with FGAC Investors LLC, the “Sponsors”), pursuant to which FGAC intends to acquire, directly or indirectly, all of the outstanding shares in the capital of Strong/MDI. As a result of the acquisition, Strong/MDI will become a wholly-owned subsidiary of FGAC. As a result, we have presented the operating results of Strong/MDI as discontinued operations for all periods presented. See Note 3 for additional details.
On May 30, 2024, Fundamental Global and the Company entered into a definitive arrangement agreement and plan of arrangement to combine the companies in an all-stock transaction. Upon completion of the arrangement, our stockholders will receive 1.5 common shares of Fundamental Global for each share of Strong Global Entertainment. The transaction is expected to close in the third quarter of 2024, subject to customary closing conditions, including any necessary stockholder approval. Following the closing, the Company will cease to exist, and our Common Shares will be delisted from NYSE American and deregistered under the Exchange Act.
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 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. 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
Strong Studios and Strong/MDI, Inc are presented as discounted operations in the accompanying condensed consolidated financial statements. Management’s discussion and analysis of financial condition and results of operations that follows reflects the continuing operations of the Company.
The following tables set forth our operating results for the periods indicated:
| Three Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Net revenues | $ | 8,121 | $ | 6,843 | $ | 1,278 | 18.7 | % | ||||||||
| Cost of revenues | 6,597 | 5,882 | 715 | 12.2 | % | |||||||||||
| Gross profit | 1,524 | 961 | 563 | 58.6 | % | |||||||||||
| Gross profit percentage | 18.8 | % | 14.0 | % | ||||||||||||
| Selling and administrative expenses | 2,235 | 2,533 | (298 | ) | (11.8 | )% | ||||||||||
| Loss from operations | (711 | ) | (1,572 | ) | 861 | (54.8 | )% | |||||||||
| Other expense, net | (25 | ) | (16 | ) | (9 | ) | 56.3 | % | ||||||||
| Loss before income taxes | (736 | ) | (1,588 | ) | 852 | (53.7 | )% | |||||||||
| Income tax expense | (6 | ) | 279 | (285 | ) | (102.2 | )% | |||||||||
| Net loss from continuing operations | $ | (742 | ) | $ | (1,309 | ) | $ | 567 | (43.3 | )% | ||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Net revenues | $ | 15,804 | $ | 13,360 | $ | 2,444 | 18.3 | % | ||||||||
| Cost of revenues | 12,973 | 11,380 | 1,593 | 14.0 | % | |||||||||||
| Gross profit | 2,831 | 1,980 | 851 | 43.0 | % | |||||||||||
| Gross profit percentage | 17.9 | % | 14.8 | % | ||||||||||||
| Selling and administrative expenses | 4,243 | 3,609 | 634 | 17.6 | % | |||||||||||
| Loss from operations | (1,412 | ) | (1,629 | ) | 217 | (13.3 | )% | |||||||||
| Other expense, net | (32 | ) | (24 | ) | (8 | ) | 33.3 | % | ||||||||
| Loss before income taxes | (1,444 | ) | (1,653 | ) | 209 | (12.6 | )% | |||||||||
| Income tax expense | (6 | ) | (81 | ) | 75 | (92.6 | )% | |||||||||
| Loss from continuing operations | $ | (1,450 | ) | $ | (1,734 | ) | $ | 284 | (16.4 | )% | ||||||
Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023
Revenues
Revenue increased 18.7% to $8.1 million in the second quarter of 2024 from $6.8 million in the second quarter of 2023. The increase from the prior year was due to $1.0 million of higher revenue from product sales and a $0.3 million increase in service revenue.
The increase in revenue from products was primarily due to $1.7 million of revenue as a result of the acquisition of the net assets of Innovative Cinema Solutions, LLC (“ICS”) in late 2023, partially offset by a decrease in other digital equipment sales.
The increase in revenue from services was primarily due to an increase in installation and warehouse services, which were up $0.2 million and $0.1 million, respectively, from the second 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.
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Gross Profit
Gross profit was $1.5 million or 18.8% of revenues in the second quarter of 2024 compared to $1.0 million or 14.0% in the second quarter of 2023.
Gross profit from product sales was $0.8 million or 16.9% of revenues for the second quarter of 2024 compared to $0.3 million or 6.6% of revenues for the second quarter of 2023. The increase in gross profit from product sales resulted from higher margins on digital equipment, primarily as a result of the ICS acquisition.
Gross profit from service revenue was $0.7 million or 21.4% of revenues for the second quarter of 2024 compared to $0.7 million or 23.3% of revenues for the second quarter of 2023. Gross profit percentage decreased from the prior year primarily due to changes in sales mix, as lower margins on installation services were partially offset by an increase in warehouse service margins.
Loss from Operations
Loss from operations was $0.7 million in the second quarter of 2024 compared to $1.6 million during the second quarter of 2023. Loss from operations improved during the current year as a result of the increase in gross profit and an overall reduction in administrative expenses, which was partially offset by an increase in selling expenses.
Administrative expenses were higher in the second quarter for 2023 largely due to one-time costs incurred upon the completion of the IPO in May 2023 which did not repeat in the current period. That reduction in administrative expenses was partially offset by higher general and administrative expenses in connection with operating as an independent public company following the Separation in May 2023 and increased legal and professional expenses in the current period incurred in connection with the pending sale of Strong/MDI and merger with Fundamental Global. The increase in selling expenses was primarily due to additional headcount, higher sales commissions and higher levels of sales and marketing activities including the acquisition of ICS.
Other Financial Items
Total other expense of $25,000 and $16,000 during the second quarter of 2024 and 2023, respectively, primarily consisted of interest expense.
Income tax expense was $6,000 during the second quarter of 2024 compared to an income tax benefit of $0.3 million during the second quarter of 2023.
Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023
Revenues
Revenue increased 18.3% to $15.8 million in the first half of 2024 from $13.4 million in the first half of 2023. The increase from the prior year was due to $1.9 million of higher revenue from product sales and a $0.6 million increase in service revenue.
The increase in revenue from products was primarily due to $3.3 million of revenue as a result of the acquisition of the net assets of ICS in late 2023, partially offset by a decrease in other digital equipment sales.
The increase in revenue from services was primarily due to an increase in installation and warehouse services, which were each up $0.3 million from the first half of 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.
Gross Profit
Gross profit was $2.8 million or 17.9% of revenues in the first half of 2024 compared to $2.0 million or 14.8% in the first half of 2023.
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Gross profit from product sales was $1.5 million or 16.4% of revenues for the first half of 2024 compared to $0.7 million or 9.1% of revenues for the first half of 2023. The increase in gross profit from product sales resulted from higher margins on digital equipment, primarily as a result of the ICS acquisition.
Gross profit from service revenue was $1.3 million or 20.2% of revenues for the first half of 2024 compared to $1.3 million or 22.3% of revenues for the first half of 2023. Gross profit percentage decreased from the prior year primarily due to sales mix, as lower margins on installation services were partially offset by an increase in warehouse service margins.
Loss from Operations
Loss from operations was $1.4 million in the first half of 2024 compared to $1.6 million during the first half of 2023. Loss from operations improved during the current year as a result of the increase in gross profit, partially offset by an increase in selling and administrative expenses.
Administrative expenses increased year-over-year due to legal and professional expenses incurred in connection with the sale of Strong/MDI and the merger with Fundamental Global, and we incurred higher general and administrative expenses in connection with operating as an independent public company following the Separation in May 2023. These increases were partially offset by the recognition of certain one-time costs during the first half of 2023 incurred upon the completion of the IPO. The increase in selling expenses was primarily due to additional headcount, higher sales commissions and higher levels of sales and marketing activities, including the acquisition of ICS.
Other Financial Items
Total other expense of $32,000 and $24,000 during the first half of 2024 and 2023, respectively, primarily consisted of interest expense.
Income tax expense was $6,000 during the first half of 2024, compared to $0.1 million during the first half of 2023.
Liquidity and Capital Resources
During the past several years, we have primarily met our working capital and capital resource needs from operating cash flows and credit facilities, as well as our initial public offering. Our primary cash requirements involve operating expenses, working capital, capital expenditures, and other general corporate activities. We ended the second quarter of 2024 with total cash and cash equivalents of $3.5 million compared to $4.8 million as of December 31, 2023.
We believe that our existing sources of liquidity, including cash and cash equivalents, operating cash flow, credit facilities, 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, 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. 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 Class A Voting Common Shares without par value (“Common Shares”) 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 9 to the consolidated financial statements included in this Quarterly Report on Form 10-Q, for a description of our debt as of June 30, 2024.
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Debt
Installment Loans & Revolving Credit Facility
On January 19, 2024, we entered into a new demand credit agreement with CIBC. The agreement consists of a demand operating credit and a business credit card facility. Under the demand operating credit, with certain conditions, the credit limit is the lesser of (a) CAD$6.0 million or (b) the sum of (i) 80% of Receivable Value, which includes all North American accounts receivable of Strong/MDI and STS, and (ii) 50% of Inventory Value, but in no event may the amount in this clause (ii) exceed $1.5 million, minus (iii) all Priority Claims. As of June 30, 2024, there was CAD$4.0 million, or approximately $2.9 million, of principal outstanding on the revolving credit facility, which bears variable interest at 8.2%. We were in compliance with our debt covenants as of June 30, 2024. We have classified the principal outstanding on the revolving credit facility as part of discontinued operations since the outstanding balance will be transferred as part of the sale of Strong/MDI.
Cash Flows from Operating Activities
Net cash used in operating activities from continuing operations was $1.0 million during the first half of 2024 compared to net cash provided by operating activities from continuing operations of $1.6 million during the first half of 2023. Cash from operations decreased in comparison to the prior year period as improvements in results of operations from continuing operations were offset by changes in working capital from the prior year.
Cash Flows from Investing Activities
Net cash used in investing activities from continuing operations was $20,000 and $0.1 million during the first half of 2024 and 2023, respectively, which consisted entirely of capital expenditures
Cash Flows from Financing Activities
Net cash used in financing activities from continuing operations was $0.3 million during the first half of 2024, which consisted of principal payments on debt and finance leases. Net cash used in financing activities from continuing operations was $0.1 million during the first half of 2023, which consisted of $2.3 million transferred to FG Group Holdings, $0.1 million of withholding taxes paid on the net settlement of RSUs vesting, and $0.1 million of principal payments on debt and finance leases, partially offset by net proceeds of our IPO of $2.4 million.
Use of Non-GAAP Measures
We prepare our condensed 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, 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.
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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.
The following table sets forth reconciliations of net income under GAAP to EBITDA and Adjusted EBITDA (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net loss | $ | (592 | ) | $ | (416 | ) | $ | (665 | ) | $ | (40 | ) | ||||
| Net income from discontinued operations | (150 | ) | (893 | ) | (785 | ) | (1,694 | ) | ||||||||
| Net loss from continuing operations | (742 | ) | (1,309 | ) | (1,450 | ) | (1,734 | ) | ||||||||
| Interest expense, net | 21 | 17 | 55 | 31 | ||||||||||||
| Income tax (benefit) expense | 6 | (279 | ) | 6 | 81 | |||||||||||
| Depreciation and amortization | 104 | 67 | 207 | 126 | ||||||||||||
| EBITDA | (611 | ) | (1,504 | ) | (1,182 | ) | (1,496 | ) | ||||||||
| Stock-based compensation expense | 73 | 748 | 147 | 766 | ||||||||||||
| Transaction expenses | 370 | - | 370 | - | ||||||||||||
| IPO expenses | - | 475 | - | 475 | ||||||||||||
| Adjust gain on purchase of ICS | 5 | - | (17 | ) | - | |||||||||||
| Foreign currency transaction loss (gain) | 6 | - | 5 | (528 | ) | |||||||||||
| Adjusted EBITDA | $ | (157 | ) | $ | (281 | ) | $ | (677 | ) | $ | (783 | ) | ||||
Hedging and Trading Activities
Our primary exposure to foreign currency fluctuations pertains to our subsidiary in Canada. In certain instances, we may enter into a foreign exchange contract to manage a portion of this risk. We do not have any trading activities that include non-exchange traded contracts at fair value.
Seasonality
Generally, our revenue and earnings fluctuate moderately from quarter to quarter. As we increase our sales in our current markets, and as we expand into new markets in different geographies, it is possible we may experience different seasonality patterns in our business. As a result, the results of operations for the three and six months ended June 30, 2024 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 included in this Quarterly Report on Form 10-Q for a description of recently issued accounting pronouncements.
Critical Accounting Policies and Estimates
In preparing our condensed 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.
Revenue Recognition
The Company accounts for revenue using the following steps:
| ● | Identify the contract, or contracts, with a customer; | |
| ● | Identify the performance obligations in the contract; | |
| ● | Determine the transaction price; | |
| ● | Allocate the transaction price to the identified performance obligations; and | |
| ● | Recognize revenue when, or as, the Company satisfies the performance obligations. |
We combine 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 the separate units of accounting, 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. We estimate the amount of total contract consideration we expect to receive for variable arrangements by determining the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide and the contractual pricing based on those quantities. We only include some or 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. We consider the sensitivity of the estimate, our relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement.
As discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. We typically do 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.
We recognize 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 we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients, or receive cash, in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when we have satisfied the related performance obligation.
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We defer costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. We did not have any deferred contract costs as of June 30, 2024 or December 31, 2023.
Cost Allocations
Our historical combined financial statements for periods prior to the IPO were prepared on a stand-alone basis in accordance with U.S. GAAP and are derived from Fundamental Global’s condensed consolidated financial statements and accounting records using the historical results of operations and assets and liabilities attributed to our operations and include allocations of expenses from Fundamental Global. Fundamental Global continues to provide certain services to us, and costs associated with these functions have been allocated to us in such prior period financial statements. The allocations include costs related to corporate services, such as executive management, information technology, legal, finance and accounting, human resources, tax, treasury, and other services. These costs were allocated on a basis of revenue, headcount or other measures we have determined as reasonable. Stock-based compensation includes expense attributable to our employees are also allocated from Fundamental Global. These allocations are reflected within operating expenses in our condensed consolidated statements of operations. Management believes the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to, or the benefit received by, us during the periods presented. However, these allocations may not necessarily be indicative of the actual expenses we would have incurred as an independent company during the periods prior to the IPO or of the additional costs we incur as a stand-alone company.
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 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 Exchange Act 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 (the “SEC”)’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. Fundamental Global is named as a defendant 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 Fundamental Global. In Fundamental Global’s experience, a large percentage of these types of claims have never been substantiated and have been dismissed by the courts. Fundamental Global has not suffered any adverse verdict in a trial court proceeding related to asbestos claims and intends to continue to defend these lawsuits. Under the Fundamental Global Asset Purchase Agreement, we agreed to indemnify Fundamental Global for future losses, if any related to current product liability or personal injury claims arising out of products sold or distributed in the U.S. by the operations of the businesses being transferred to us in the Separation, in an aggregate amount not to exceed $250,000 per year, as well as to indemnify Fundamental Global for all expenses (including legal fees) related to the defense of such claims. As of June 30, 2024, we have a loss contingency reserve of approximately $0.2 million, of which $0.1 million represents future payments on a settled case and the remaining $0.1 million represents our estimate of our potential losses related to the settlement of open cases. When appropriate, Fundamental Global may settle additional claims in the future. We do not expect the resolution of these cases to have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.
On April 29, 2024, Ravenwood-Productions LLC (“Ravenwood”) and Kevin V. Duncan (“Duncan” and, together with Ravenwood, the “Plaintiffs”) filed a civil complaint (the “Complaint”) against the Company, certain affiliated entities, and certain current and former employees, officers and directors of the Company (collectively, the “Defendants”) in the United States District Court for the Central District of California. The Complaint claims seven causes of action, each claim against some, or all, of the Defendants. In July 2024, we entered into an agreement resulting in the settlement and dismissal of the Complaint. In connection with the settlement and dismissal, we did not make any cash payments to the Plaintiffs. In addition, we maintained a right to receive distributions to recover our investment and to participate in series profits (if any).
Item 1A. Risk Factors
Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 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
The following table presents information with respect to purchases of common stock we made during the quarter ended June 30, 2024. The table reflects shares withheld from employees to satisfy certain tax obligations due in connection with grants of stock under the 2023 Share Compensation Plan (the “Plan”). The Plan provides for the withholding of shares to satisfy tax obligations. It does not specify a maximum number of shares that can be withheld for this purpose. The shares of common stock withheld to satisfy tax withholding obligations may be deemed to be “issuer purchases” of shares that are required to be disclosed pursuant to this Item.
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| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | The Maximum Number of Shares That May Still be Purchased Under the Plans or Programs | ||||||||||||
| April 2024 | - | $ | - | - | - | |||||||||||
| May 2024 | 3,350 | 1.75 | 3,350 | - | ||||||||||||
| June 2024 | - | - | - | - | ||||||||||||
| Quarter Ended June 30, 2024 | 3,350 | $ | 1.75 | 3,350 | - | |||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Incorporated by Reference | ||||||||||
| Exhibit
Number |
Document Description | Form | Exhibit | Filing Date |
Filed
Herewith | |||||
| 2.1*† | Arrangement Agreement, including a Plan of Arrangement, by and between FG Holdings Quebec Inc., Strong Global Entertainment, Inc. and 1483530 B.C. LTD, dated May 31, 2024 | 8-K | 2.1 | June 3, 2024 | ||||||
| 10.1* | Acquisition Agreement by and among FG Acquisition Corp., Strong Global Entertainment, Inc., Strong/MDI Screen Systems, Inc., FGAC Investors LLC and CG Investments VII Inc., dated May 3, 2024 | 8-K | 10.1 | May 7, 2024 | ||||||
| 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 Strong Global Entertainment, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, 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) Income(unaudited); (iv) the Condensed Consolidated Statements of Stockholders’ Equity (unaudited); (v) the Condensed Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Condensed Consolidated Financial Statements (unaudited). | X | ||||||||
| 104 | XBRL Cover Page Interactive Data File (embedded within the Inline XBRL document). | X | ||||||||
* Certain terms have been omitted pursuant to Item 601(b)(2)(ii) of Regulation S-K. The Registrant hereby undertakes to furnish copies of any of the terms upon request by the SEC.
† 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.
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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.
| STRONG GLOBAL ENTERTAINMENT, INC. | ||||
| By: | /s/ MARK D. ROBERSON | By: | /s/ TODD R. MAJOR | |
| Mark D. Roberson | Todd R. Major | |||
| Chief Executive Officer | Chief Financial Officer | |||
| (Principal Executive Officer) | (Principal Financial Officer and | |||
| Principal Accounting Officer) | ||||
| Date: | August 14, 2024 | Date: | August 14, 2024 | |
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