S-1/A 1 forms-1a.htm

 

As filed with the United States Securities and Exchange Commission on October 11, 2022.

 

Registration No. 333-264165

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1/A

 

(AMENDMENT NO. 6)

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

Strong Global Entertainment, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

British Columbia, Canada   3861   N/A
(State or Other Jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
Incorporation or Organization)   Classification Code Number)   Identification Number)

 

5960 Fairview Road, Suite 275

Charlotte, NC 28210

(704) 471-6784

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Mark D. Roberson

Chief Executive Officer

5960 Fairview Road, Suite 275

Charlotte, NC 28210

(704) 471-6784

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

 

Mitchell Nussbaum, Esq. Oded Har-Even, Esq.
Janeane R. Ferrari, Esq. Ron Ben-Bassat, Esq.
Loeb & Loeb LLP Angela Gomes, Esq.
345 Park Avenue Sullivan & Worcester LLP
New York, NY 10154 1633 Broadway
Phone: (212) 407-4000 New York, NY 10019
Fax: (212) 407-4990 Phone: (212) 660-3000
  Fax: (212) 660-3001

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED OCTOBER 11, 2022

 

3,000,000 Shares

Class A Common Voting Shares

 

 

Strong Global Entertainment, Inc.

 

 

This is a firm commitment initial public offering of Class A Common Voting Shares (“Class A Shares” or “Common Shares”) of Strong Global Entertainment, Inc., a company incorporated under the Business Corporations Act (British Columbia) (“we”, “us”, “our” or the “Company”). We are selling Common Shares described below. Prior to this offering, there has been no public market for our Common Shares. We anticipate that the initial public offering price of our Common Shares will be $5.00.

 

We have applied to have our Common Shares listed on the New York Stock Exchange American (“NYSE American”) under the symbol “SGE.” No assurance can be given that our application will be approved. We believe that upon completion of the offering contemplated by this prospectus, we will meet the standards for listing on the NYSE American. However, we cannot guarantee that we will be successful in listing our Common Shares on the NYSE American. We will not consummate this offering unless our Common Shares will be listed on the NYSE American.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) and have elected to comply with certain reduced public company reporting requirements. See “Prospectus Summary—Emerging Growth Company Status” for additional information.

 

After the completion of this offering, Ballantyne Strong, Inc., a Delaware corporation (“Ballantyne” or “Parent”), will continue to control a majority of the voting power of our Common Shares eligible to vote in the election of our directors. In addition, Ballantyne will indirectly own all of our issued and outstanding Class B Limited Voting shares (“Class B Shares”) which provide the holders thereof certain board appointment rights. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE American. See “Management— Director Independence and Controlled Company Exception” and “Principal Shareholders.”

 

Investing in our Common Shares involves a high degree of risk. See “Risk Factors” beginning on page 17 of this prospectus for a discussion of the risk that you should consider in connection with an investment in our Common Shares.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.

 

      Per Share       Total  
Initial public offering price   $       $    
Underwriting discounts and commissions(1)   $       $    
Proceeds to us, before expenses   $       $    

 

(1) In addition, we have agreed to reimburse the representative of the underwriters for certain fees and expenses, including a non-accountable expense allowance equal to 1% of the initial public offering price payable to the underwriters. We refer you to “Underwriting” beginning on page 97 for additional information regarding underwriters’ compensation.

 

We have granted a 45-day option to the representative of the underwriters to purchase up to an additional 450,000 Common Shares, or 15% of the total number of Common Shares sold in this offering, solely to cover over-allotments, if any. If the underwriters exercise their option in full, the total underwriting discounts and commissions payable by us will be $1,207,500, and the total proceeds to us, before expenses, will be $16,042,500.

 

The underwriters expect to deliver the Common Shares to purchasers on or about                   , 2022.

 

ThinkEquity

 

The date of this prospectus is                    , 2022.

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

STRONG GLOBAL ENTERTAINMENT, INC.

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
The Offering 12
Summary Historical and Other Combined Financial Data 13
Risk Factors 17
Special Note Regarding Forward-Looking Statements 42
Use of Proceeds 43
Dividend Policy 44
Capitalization 45
Dilution 46
The Separation Transaction 47
Unaudited Pro Forma Condensed Combined Financial Statements 49
Selected Historical and Other Combined Financial Data 53
Management’s Discussion and Analysis of Financial Condition and Results of Operations 56
Business 66
Management 69
Executive and Director Compensation 76
Certain Relationships and Related Party Transactions 82
Principal Shareholders 85
Description of Securities 86
Material U.S. Federal Tax Consequences 89
Certain Canadian Federal Income Tax Consequences to Holders of our Common Shares that are Non-Resident in Canada 94
Shares Eligible for Future Sale 96
Underwriting 97
Legal Matters 105
Experts 105
Where You Can Find More Information 105
Index to Financial Statements F-1

 

Neither the Company nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of the Company. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide to you. We are offering to sell, and seeking offers to buy, Common Shares only under circumstances and in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Common Shares.

 

Unless the context requires otherwise, (a) references to “Strong Global Entertainment,” the “Company,” “we,” “us” and “our” refer to Strong Global Entertainment, Inc., and its consolidated subsidiaries after giving effect to the transactions described under the section titled “The Separation Transaction” (“the “Separation”), and (b) references to “Ballantyne” and “Parent” refer to Ballantyne Strong, Inc., Strong Global Entertainment’s indirect parent, and its consolidated subsidiaries other than Strong Global Entertainment and Strong Global Entertainment’s subsidiaries. Unless the context requires otherwise, statements relating to our history in this prospectus describe the history of Ballantyne’s Strong Entertainment operating segment (the “Entertainment Business”).

 

i

 

 

You may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the Common Shares offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Common Shares in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus or that the information contained by reference to this prospectus is correct as of any time after its date.

 

Until                  , 2022, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

INDUSTRY AND OTHER DATA

 

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. While we believe that the statistical data, market data and other industry data and forecasts are reliable, we have not independently verified the data. Information that is based on estimates, forecasts, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information based on various factors, including those discussed in the section titled “Risk Factors.”

 

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

 

We own or have rights to use a number of registered and common law trademarks, service marks and/or trade names in connection with our business in the United States and/or in certain foreign jurisdictions. Strong Global Entertainment will own these trademarks after completion of the Separation.

 

Solely for convenience, most trademarks, service marks, logos and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. This prospectus contains additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this prospectus are, to our knowledge, the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

ii

 

 

 

PROSPECTUS SUMMARY

 

This summary highlights certain information about us and this offering contained elsewhere in this prospectus, but it is not complete and does not contain all of the information you should consider before investing in our Common Shares. In addition to this summary, you should read this entire prospectus carefully, including the risks of investing in our Common Shares and the other information discussed in the section titled “Risk Factors,” and the financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in the sections titled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

 

You should read the entire prospectus carefully, including the “Risk Factors” beginning on page 17, and our financial statements and the notes to the financial statements included elsewhere in this prospectus, and our management’s discussion and analysis of financial condition and results of operations. As used throughout this prospectus, the terms “Strong Global Entertainment,” the “Company,” “we,” “us,” or “our” refer to Strong Global Entertainment, Inc.

 

We describe in this prospectus the businesses that will be contributed to us by Ballantyne as part of our separation from Ballantyne as if they were our businesses for all historical periods described. Please see the section titled “The Separation Transaction” for a description of the Separation. Our historical and unaudited pro forma financial information included in this prospectus is not necessarily indicative of our future financial condition, results of operations or cash flows, nor does it reflect what our financial condition, results of operations or cash flows would have been as an independent public company during the periods presented. In particular, the historical financial information included in this prospectus is not necessarily indicative of our future results of operations, financial condition or cash flows.

 

General

 

We believe Strong Global Entertainment is positioned to be a leader in the entertainment industry, as Ballantyne has provided mission critical products and services to cinema exhibitors and entertainment venues for over 80 years.

 

We believe that we have cultivated a leadership position built on our exceptional reputation for quality and service in the industry. We manufacture and distribute premium large format projection screens, provide comprehensive managed services, technical support and related products and services primarily to cinema exhibitors, theme parks, educational institutions, and similar venues.

 

As a manufacturer and distributor of projection screens systems, we have contractual relationships to supply projection screens to major cinema exhibitors, including IMAX Corporation (“IMAX”), AMC Entertainment Holdings (“AMC”), and Cinemark Holdings, Inc. (“Cinemark”), and other cinema operators worldwide. In addition to traditional projection screens, we also manufacture and distribute our Eclipse curvilinear screens, which are specially designed for theme parks, immersive exhibitions, as well as simulation applications.

 

We also provide maintenance, repair, installation, network support services and other services to cinema operators, primarily in the United States. Many of our customers choose annual managed service arrangements for maintenance and repair services. We also provide maintenance services to customers on a time and materials basis. Our field service and Network Operations Center (“NOC”) staff work hand in hand to monitor and resolve system and other issues for our customers. Our NOC, staffed by software engineers and systems technicians, operates 24/7/365 and monitors our customers’ networked equipment remotely, often providing proactive solutions to systems’ issues before they cause system failures.

 

We recently launched Strong Studios, Inc. (“Strong Studios”), a Delaware corporation and a wholly owned subsidiary of Strong Technical Services, Inc. (“STS”). The goal in launching Strong Studios is to expand our Entertainment Business to include content creation and production of feature films and series. The launch of Strong Studios is intended to further diversify our revenue streams and increase our addressable markets, while leveraging and expanding our existing relationships in the industry.

 

The coronavirus pandemic (“COVID-19”) and inflationary pressures have been posing and may continue to pose challenges for our business. The COVID-19 global pandemic resulted in a significant impact to our customers and their ability and willingness to purchase our products and services. A significant number of our customers temporarily ceased operations at times during the pandemic, some of which continue to operate under COVID-19 restrictions. As such, we have experienced, and may continue to experience an impact on our results of operations.

 

Key Trends Driving our Markets

 

The following trends positively impact the outlook for the entertainment industry:

 

  Post-COVID-19 Recovery — We believe there is pent-up demand for out-of-home entertainment that will drive favorable trends post-COVID-19 in the cinema exhibition and theme park industries. For example:

 

  IMAX captured its largest share of box office ever in 2021
  Cinemark’s quarterly revenue in Q2 2022 was their highest reported since 2019
  Top Gun: Maverick opened with record breaking $160.5M weekend and is the 5th highest grossing movie in domestic box office history
  The Batman was IMAX’s largest March opening since 2019
  Spider-man ranks #3 of top grossing films domestically of all time
  Spider-man delivered Cinemark’s biggest opening night of all time
  According to CNBC, 2023 is expected to have a much stronger slate of films than 2022, both in terms of number of films and diversity of content

 

The industry-wide reopening post-COVID has resulted in a recovery of our revenue amounts:

 

 

 

-1-

 

 

 

  Blockbuster Studio Releases – According to the Hollywood Reporter, “Box Office Rebound: “Exhibitor Carnage Is in the Past,” as of October 4, 2021, the pace of Hollywood blockbuster movies scheduled for release to cinemas is poised to accelerate and is already creating stronger-than-expected demand trends. This fact, along with the return of exclusive theatrical releases, is encouraging industry analysts who are predicting movie theaters to rebound to near pre-pandemic levels by 2023.

 

 

Box Office Performance Driven by Hollywood Blockbusters

 

  Increasing Trend of Outsourcing in the Cinema Industry — We believe that cinema operators are increasing their use of outsourced services as they seek to reduce internal operating costs and maintain operational flexibility post-COVID-19. In September 2020, we became the exclusive provider of managed services for all of Marcus Theatres’ cinema locations nationwide. These managed services include 24x7x365 monitoring, technical support, and maintenance on all projection and audio equipment across more than 1,100 screens.
     
  Upgrade Cycle from Xenon to Laser Projection — We believe the transition from xenon projection to laser protection in the cinema exhibition industry will accelerate and continue over the next decade. Several exhibitors have publicly discussed plans to upgrade to an all-laser projection strategy, notably Cinemark and IMAX, to further improve the quality of the theatrical experience. In addition, in April 2022, AMC announced an agreement with Cinionic, Inc. to install Barco laser projectors in 3,500 of its U.S. auditoriums through 2026. We expect this upgrade cycle to drive increased demand for screen replacement as well as for our services to de-install, install and upgrade new and existing projection equipment.
     
  Consolidating Industry – The cinema exhibition industry was consolidating via mergers and acquisitions pre-COVID-19. We expect consolidation of the supplier side of the cinema exhibition industry to accelerate post-COVID-19.

 

 

-2-

 

 

 

  Growing Demand for Content and Acceleration of New Streaming Services –
   
   

According to research completed by Purely Streamonomics in June 2021, the global entertainment business continues to grow and evolve, with the following factors contributing to increasingly favorable environment for content.

 

○  Spending for new content continues to rise — The gross cash amount spent producing and licensing new entertainment content (excluding sports) soared by 16.4% in 2020 to reach $220.2 billion.

 

○  Global subscribers to streaming services is up — Since 2019, the number of global customers subscribing to streaming video platforms has grown from 642 million to more than 1.1 billion, a 71% leap. Over the next few years, this rise is expected to continue to 1.6 billion in 2025.

 

○  Spending in Indie content continues to surge – As much as Netflix and the five major Hollywood Studios spend producing their own content, independently made and acquired content accounts for twice as much money globally. In 2020, global indie spending increased by +25.3% YoY and now accounts for 65.5% of the world’s film and TV production activity.

 

○  Budgets are Soaring – In the U.S. average budgets across all new series – scripted, unscripted, daytime and kids – is still on the rise, up 16.5% in 2020.

 

Competitive Strengths

 

We believe the following strength and attributes position Strong Global Entertainment for accelerating growth.

 

 

Partnerships with Industry Leaders — We believe our reputation for superior quality and customer service have made us the go-to screen provider for many of the leading operators in the industry. We provide projection screens and managed services to all of the top cinema operators in North America, including AMC, IMAX, Cinemark, Regal and many other regional cinema operators. We believe that we provide a majority of the large format projection screens used by the major operators in North America, including exclusive supply contracts with AMC and Cinemark, and we believe we also supply IMAX with substantially all of its projection screens globally. There is greater pressure on theaters to differentiate their experience from the at-home experience. We believe the global trend for premium entertainment plays to Strong Global Entertainment’s strengths. The table below includes the top cinema companies in North America, all of which are our customers:

 

Circuits   Screens     Sites     Customer     Exclusive  
AMC Entertainment Holdings, Inc.1     7,850       600       X       X  
Regal Cinemas (Cineworld Group PLC)2     6,851       514       X          
Cinemark Holdings, Inc.1     4,426       323       X       X  
Cinepolis3     4,271       509       X          
Cineplex Entertainment LP4     1,676       164       X          
Marcus Theaters Corp.5     1,064       89       X       X  

 

1) Represents the quantity in the United States as of March 2022, for which we are the exclusive supplier of screen products.
2) Represents the quantity in the United States as of March 2022.
  3) Represents the quantity in the United States and Mexico as of March 2022.
4) Represents the quantity in Canada as of March 2022.
5) Represents the quantity in the United States as of March 2022, for which we are the exclusive provider of technical services.

 

  Innovator in the Industry — We are constantly innovating as exemplified by our new, rapidly growing Eclipse curvilinear screen division which specially designs screens with proprietary coatings for maximum viewer engagement in media-based attractions and immersive projection environments. Recently our screens were used in the much publicized Van Gogh: The Immersive Experience exhibit that wowed audiences with its all-encompassing experience of art, light, sound, movement and imagination. We also recently collaborated with Illuminarium Intermediate (Cayman), LLC in Atlanta, Georgia and plan to assist them in other cities as they expand their sensory cinema business. Eclipse screens are also used in theme parks and military simulation applications.

 

 

-3-

 

 

 

  Turn-Key, Vertically Integrated Partner — We offer a comprehensive turn-key solution for our customers, offering projection and audio equipment, projection screen systems, as well as installation, break/fix on demand and outsourced managed services providing customers with a one-stop shop for their needs.
     
  World-Class and Scalable Manufacturing and Research & Development (“R&D”) — We manufacture our screens in an approximately 80,000 square-foot facility in Joliette, Quebec, Canada (the “Joliette Plant”) that we plan to lease on a long term basis from Strong/MDI (as defined below). The Joliette Plant is unique with two 90-foot-high screen coating towers which allows us to produce and finish large screens to precise specifications. The Joliette Plant also includes polyvinyl chloride (“PVC”) welding operations with programmable automations and areas dedicated to the manufacture of our paints and coatings used on all our screens, as well as dedicated in-house chemists and R&D capabilities. We believe that our quality control procedures, in-house paint and coating capabilities and the quality standards for the products that we manufacture contribute significantly to our reputation for high performance and reliability.
     
  Strong Studios launches with proven management and a portfolio of content and projects - We recently launched Strong Studios with an experienced team and the acquisition of rights to a slate of motion picture and television series from Landmark Studio Group LLC (“Landmark”), a Chicken Soup for the Soul Entertainment, Inc. (Nasdaq: CCSE) (“CSSE”) company. Two new scripted television series titled, Safehaven and Flagrant, are expected to begin production this year. The Company has agreed to sell the distribution rights in those two series to Screen Media Ventures LLC (“SMV”), a CSSE subsidiary, for a total of $9.0 million and will also participate in a share of the profits of each series.

 

Growth Strategy

 

  Increase Our Sales Efforts to Grow Our Customer Base and Increase Our Share of Our Customers’ Businesses — We have expanded our direct sales force to position Strong Global Entertainment to gain market share post-COVID-19. We intend to continue to increase our sales efforts to grow our customer base and increase the share of our existing customer’s businesses.
     
 

Geographic expansion — Although we believe we are a market leader in North America, we also believe we have a significant opportunity to expand our projection screen business and our services in the European and Asian markets. We recently opened a new outsourced screen finishing facility in China and believe that local presence will allow us to better serve our existing customers in the market and potentially to expand our reach. We are also opening an outsourced finishing facility in Belgium and may pursue similar strategies in other markets to better serve our customers and open additional growth opportunities.

     
  Strategic Acquisitions and Industry Partnerships — We believe the cinema equipment and service markets are highly fragmented and that we can materially increase our revenues and scope through selected acquisitions and/or increased strategic partnerships with other players in the industry. Recently, we announced a preferred commercial relationship with Cinionic, Inc., the world’s leading provider of laser cinema solutions, to enhance the services to operators across North America. We believe this relationship enhances our ability to service our valued customers by providing increased access to technology, better training for our technicians and will strengthen our global reach due to closer relationships with their international sales teams.
     
  Diversify Screen Business into Theme Parks and Other Non-Cinema Applications — Non-cinema revenue has grown as a percent of total revenues in our screen manufacturing business, and we expect to continue to expand our Eclipse immersive product line and other products outside the theatrical cinema market. For example, the innovation of immersive art experiences reflects the market opportunity evidenced by the success of the recently launched nationwide tour of Van Gogh; The Immersive Experience, for which Strong Global Entertainment provided the projection screens. We believe Strong Global Entertainment is uniquely positioned to benefit from trends outside the theatrical cinema market. The Company’s Eclipse curvilinear screen division, designs screens with proprietary coatings for maximum viewer engagement in media-based attractions and immersive projection environments. The Eclipse product line has experienced year-over-year growth and accounted for approximately 10% of total revenue during 2021 compared to approximately 5% of total revenue during 2020.
     
  Capitalize on Laser Upgrade Cycle Cinema operators have begun upgrading from Xenon lamp projectors to Laser projectors which we expect will drive additional demand for new screens and managed services. Laser projectors offer better quality than lamp alternatives, require less frequent bulb replacement, and consume up to 80% less energy lowering overall operating costs for the exhibitor.

 

 

-4-

 

 

 

Recent Developments

 

On March 3, 2022, Strong Studios, a wholly-owned subsidiary of STS, acquired, from Landmark, original feature films and television series, and has been assigned third party rights to content for global multiplatform distribution. The transaction entailed the acquisition of certain projects which are in varying stages of development, none of which have, as yet, produced revenue. In connection with such assignment and purchase, Strong Studios agreed to pay to Landmark approximately $1.7 million in four separate payments, $0.3 million of which was paid upon the closing of the transaction. We also have agreed to issue to Landmark no later than 10 days after the consummation of this offering, a warrant to purchase up to 150,000 of our Common Shares of the Company, exercisable for three years beginning six months after the consummation of this offering, at an exercise price equal to the per-share offering price of our Common Shares in this offering (the “Landmark Warrant”). The Landmark Warrant allows for cashless exercise in certain limited circumstances and provides for certain registration rights for such warrant shares.

 

The Company reviewed the acquisition of the projects from Landmark from an accounting perspective and concluded substantially all of the fair value of the gross assets acquired is concentrated in a group of similar identifiable assets. Therefore, the Company determined the transaction was not the acquisition of a business, but instead should be treated as an asset acquisition. Costs of acquiring and producing films and television programs are capitalized when incurred. In connection with the transaction, the Company allocated the $1.7 million acquisition price to the various projects under development based upon the historical costs incurred by Landmark, which the Company believes approximates fair value. The Company also recorded a liability for the $1.4 million of remaining installment payments it will make to Landmark. Finally, the Company also determined the fair value of the Landmark Warrant and allocated an additional $0.4 million to the various projects under development. The Company will recognize the remaining payment obligations due to Landmark when the contingencies are resolved and the amounts become payable.

 

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 projects acquired from Landmark. Strong Studios owns 49% of Safehaven 2022 and the remaining 51% is owned by Unbounded Services, LLC (“Unbounded”). Unbounded will serve as a co-producer on the project and will manage the day to day activities of the project.

 

As part of the Landmark transaction, Strong Studios entered into a distribution agreement with SMV, pursuant to which SMV agreed to purchase the global distribution rights to Safehaven 2022 for $6.5 million upon delivery. This distribution agreement, along with the project’s intellectual property, was assigned to Safehaven 2022 and serves as collateral for the production financing at Safehaven 2022.

 

The Company reviewed its ownership in Safehaven 2022 and concluded that it has significant influence, but not a controlling interest, in Safehaven 2022 based on its ownership being less than 50% along with having one of three representatives on the board. The Company also reviewed whether it otherwise had the power to make decisions that significantly impact the economic performance of Safehaven 2022 and concluded that it did not control the entity and is not the primary beneficiary. Accordingly, the Company will apply the equity method of accounting to its equity holding in Safehaven 2022 and will record its proportionate share of the net income/loss resulting from the equity holding as a single line item captioned “equity method holding income (loss)” on its statement of operations.

 

In September 2022, Strong/MDI announced the introduction of its new HGA ReAct 1.4 Screen. The HGA React 1.4 was specifically developed for the new generation of high-resolution laser projectors.

 

In September 2022, STS introduced its new digital content delivery service. The new service enables STS customers to upload and distribute content from one convenient digital feed rather than downloading content files from multiple file-hosting services.

 

Industry Challenges

 

Recent challenges and negative trends for the industry and the Company include the continuing impact of COVID-19 on the global economy and on cinema and amusement operators, and as detailed below:

 

  Our business and the operations of our customers were severely impacted by the pandemic, and may continue to be impacted in future periods as a result of the pandemic. Although, most cinema operators in the United States are now open and studios have started to accelerate the release of new content to exhibitors, the COVID-19 pandemic and the additional variants may increase the possibility of additional closures or other measures in the future that could negatively impact the industry, and the Company’s business as a result.

 

  In addition, COVID-19 accelerated the adoption of streaming and changes to the theatrical window which may negatively impact the cinema exhibition industry in the future.

 

  We have also seen inflationary pressures and disruptions in our supply chain recently that could impact the availability of certain products we sell to our customers, as well as the cost of materials, labor and freight, which could pose challenges to our ability to maintain or increase margins. For example, certain projector manufacturers are experiencing supply chain constraints, which could impact lead times for delivery of laser projectors to our customers and thereby affect the timing and amount of our revenues.
     
  Certain of the larger exhibitors in the cinema industry carry high levels of debt on their balance sheets resulting from pre-COVID acquisitions. Cineworld Group Plc, the parent company of Regal Cinemas and one of the largest cinema operators, initiated Chapter 11 bankruptcy proceedings on September 7, 2022. to restructure their balance sheet and alleviate their debt burden. Financial stress at our customers in general, and the Cineworld proceedings specifically, could impact our business by reducing overall exhibitor purchasing and payment on accounts receivable.

 

The Separation

 

Currently, we are a wholly-owned subsidiary of Strong/MDI Screen Systems, Inc. (“Strong/MDI”), a company incorporated under the laws of Quebec, Canada, which owns all of our outstanding Common Shares and Class B Shares. Strong/MDI owns all of the outstanding Common Shares of Strong/MDI Screen Systems, Inc., a company incorporated under the laws of British Columbia (“Strong Entertainment Subco”). Strong/MDI is wholly-owned by Ballantyne. Ballantyne also owns all of the outstanding capital stock of STS.

 

 

-5-

 

 

 

Prior to the completion of this offering, we will enter into various agreements that will govern the Separation of the Entertainment Business from Ballantyne and its contribution to us. A summary of these agreements is set forth under the heading “Certain Relationships and Related Party Transactions”. These agreements will take effect immediately prior to the closing of this offering and provide for, among other things, the contribution: (i) from Strong/MDI to Strong Entertainment Subco of assets comprising Strong/MDI’s operating business, except the Joliette Plant and the installment 20-year loan collateralized by the Joliette Plant, pursuant to the Master Asset Purchase Agreement; (ii) from Ballantyne to STS of a limited number of contracts and intellectual property used in the Entertainment Business, pursuant to an asset transfer agreement between Ballantyne and STS (the “Ballantyne Asset Transfer Agreement”); and (iii) of 100% of the outstanding Common Shares of Strong Entertainment Subco and 100% of the outstanding shares of capital stock of STS through certain share transfer agreements between Ballantyne and Strong/MDI and Strong/MDI and us (collectively, the “Share Transfer Agreements”). In addition to the above contributions, Strong/MDI has committed under the Master Asset Purchase Agreement (upon closing of this offering), to lease the Joliette Plant to Strong Entertainment Subco under a long term lease agreement (fifteen (15) year lease, with the option of Strong Entertainment Subco to renew for five (5) consecutive periods of five years each, with a right of first refusal to purchase the Joliette Plant in the event that Strong/MDI wishes to sell the property to a third-party in the future) (the “Joliette Plant Lease”).” For more information regarding the assets and liabilities to be transferred to us, see our unaudited pro forma condensed combined financial statements and the related notes included elsewhere in this prospectus.

 

As a result of the transactions noted above, we will lease the Joliette Plant under a long-term lease, and acquire all of the assets and liabilities related to the screen manufacturing business held by Strong/MDI and/or Ballantyne and all of the shares of STS. In exchange, we will issue to Strong/MDI additional Common Shares and Class B Shares.

 

In addition, in connection with the Separation, effective upon the closing of this offering, we and Ballantyne intend to enter into a management services agreement (the “Management Services Agreement”) that will provide a framework for our ongoing relationship with Ballantyne. For a description of this agreement, see “Certain Relationships and Related Party Transactions—Relationship with Ballantyne—Management Services Agreement.” We refer to the separation transactions, as described in the section titled “The Separation Transaction” as the “Separation.”

 

The diagram below depicts a simplified version of our current organizational structure, together with the governing law of each corporate entity.

 

 

 

-6-

 

 

 

The diagram below depicts a simplified version of our organizational structure immediately following the completion of the Separation and the closing of this offering, together with the governing law of each corporate entity, assuming the underwriters do not exercise their over-allotment option.

 

 

* The percentage calculation does not take into account the restricted stock units (“RSUs”) to be issued to our directors and officers upon the completion of this offering (see “Executive and Director Compensation—Long-Term Incentives—Equity Grants”).

 

Controlled Company

 

Immediately following the completion of this offering, we expect that Ballantyne will control approximately 66.7% of our outstanding Common Shares (or approximately 63.5% if the representative of the underwriters exercises its over-allotment option in full), which percentage calculation does not take into account the RSUs to be issued to our directors and officers upon the completion of this offering (see “Executive and Director Compensation—Long-Term Incentives—Equity Grants”), and 100% of our Class B Shares. Accordingly, we will be considered a “controlled company” under the NYSE American rules. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including the requirement to have a board comprised of a majority of independent directors. We do not intend to take advantage of these exemptions following the completion of this offering, but may do so. See “Management— Director Independence and Controlled Company Exception.”

 

Emerging Growth Company Status

 

We are an “emerging growth company” within the meaning of the JOBS Act. For as long as we are an emerging growth company, we will not be required to comply with certain requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions until we are no longer an emerging growth company. We may remain an emerging growth company for up to five years, although we will lose that status as of the last day of the fiscal year in which we have more than $1.07 billion of revenues, have more than $700 million in market value of our Common Shares held by non-affiliates (assessed as of the most recently completed second quarter), or if we issue more than $1.0 billion of non-convertible debt over a three-year period.

 

 

-7-

 

 

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have irrevocably elected not to avail ourselves of this exemption and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

 

Implications of Being a Smaller Reporting Company

 

Additionally, we are a “smaller reporting company” as defined in Rule 10(f)(1) of Regulation S-K of the Securities Act (“Regulation S-K”). Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our Common Shares held by non-affiliates equals or exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues equaled or exceeded $100 million during such completed fiscal year and the market value of our Common Shares held by non-affiliates equals or exceeds $700 million as of the end of that year’s second fiscal quarter.

 

Corporate Information

 

We were incorporated on November 9, 2021, under the Business Corporations Act (British Columbia) (the “BCBCA”). Our principal executive offices are located at 5960 Fairview Road, Suite 275, Charlotte, NC 28210, and our telephone number is (704) 471-6784. The Company’s website address is www.strong-entertainment.com. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our Common Shares.

 

 

-8-

 

 

 

Summary Risk Factors

 

We face numerous risks that could materially affect our business, financial condition, results of operations, and cash flows. Many of the risks summarized below and described herein historically relate to our operations as part of Ballantyne. Following the Separation, these risks will apply to us and our business going forward. Our management believes that the most significant of these risks include the following:

 

  The COVID-19 pandemic and ensuing governmental responses have negatively impacted, and could further materially adversely affect, our business, financial condition, results of operations and cash flows.
     
  Our operating results could be materially harmed if we are unable to accurately forecast demand for our products and services and adequately manage our inventory.
     
  If we are unable to maintain our brand and reputation, our business, results of operations and prospects could be materially harmed.
     
  The risk of non-compliance with U.S. and foreign laws and regulations applicable to our international operations could have a significant impact on our financial condition, results of operations and strategic objectives.
     
  We may fail to achieve the expected benefits of the Separation, including enhancing strategic and management focus, providing a distinct investment identity and allowing us to efficiently allocate resources and capital.
     
  Any failure to maintain the security of information relating to our customers, employees and suppliers, whether as a result of cybersecurity attacks or otherwise, could expose us to litigation, government enforcement actions and costly response measures, and could disrupt our operations and adversely affect our business and reputation.
     
  Any potential future acquisitions, strategic investments, entry into new lines of business, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business.
     
  Failure to effectively utilize or successfully assert intellectual property rights could negatively impact us.
     
  Natural disasters and other catastrophic events beyond our control could adversely affect our business operations and financial performance.
     
  We are a holding company with no operations of our own.
     
  We have no history of operating as an independent company, and our historical and unaudited pro forma financial information is not necessarily representative of the results that we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.
     
  Ballantyne may fail to perform under various transaction agreements that will be executed as part of the Separation or it may fail to have necessary systems and services in place when certain of the transaction agreements expire.
     
  Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Separation.

 

 

-9-

 

 

 

  If Ballantyne sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on our Common Shares and we may become subject to the control of a presently unknown third party.
     
  Some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in Ballantyne, and some of our officers and directors may have actual or potential conflicts of interest because they also serve as officers and directors of Ballantyne.
     
  We need to make certain capital investments to bring the Joliette Plant into compliance with applicable environmental standards and certain building codes, which if not done properly or quickly enough could result in financial penalties and potential interruptions in production.
     
  We have agreed to indemnify Ballantyne 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 Ballantyne for all expenses (including legal fees) related to the defense of such claims.
     
  There may not be an active, liquid trading market for our Common Shares.
     
  We will be a “controlled company” within the meaning of the rules of the NYSE American and, as a result, will qualify for exemptions from certain corporate governance requirements. While we do not intend to avail ourselves of these exemptions, we may do so, and, accordingly, you may not have the same protections afforded to shareholders of companies that are subject to such requirements.
     
  Our share price may fluctuate significantly, and you may not be able to resell your Common Shares at or above the initial public offering price.
     
  Our Board can, without shareholder approval, cause preferred shares to be issued on terms that adversely affect common shareholders or which could be used to resist a potential take-over of us.
     
  The special rights and restrictions attached to the Class B Shares, including the transfer restrictions and right to nominate or elect fifty percent (50%) or a majority of our board could impede or discourage an acquisition attempt or other transaction that some, or a majority, of shareholders might believe to be in its best interests or in which a shareholder might receive a premium for the Company’s Common Shares over the market price of the Common Shares. Such a right will also limit the right of holders of our Common Shares to nominate or elect directors to our board.
     
  The future sales by Ballantyne or others of our Common Shares, or the perception that such sales may occur, could depress the price of our Common Shares.

 

 

-10-

 

 

 

  We are governed by the corporate laws of British Columbia, Canada, which in some cases have a different effect on the rights of shareholders than the corporate laws of the United States.
     
  Provisions in our Articles, Canadian law and certain restrictive covenants applicable to us could make an acquisition of us, which may be beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to replace or remove our current management and/or limit the market price of our Common Shares.
     
  Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
     
 

We are entering a new line of business with the launch of Strong Studios, which could require additional capital and increase the volatility of our reported revenues and results of operations.

     
  We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Common Shares less attractive to investors.
     
  Canada does not have a system of exchange controls, and control of the Company by “non-Canadians” may be subject to review and further government action.
     
  We do not know whether an active market for our Common Shares will be sustained or what the market price of our Common Shares will be and as a result it may be difficult for investors to sell their Common Shares.
     
  The market price of our Common Shares may fluctuate significantly, which could result in substantial losses by our investors.
     
  Our management will have broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree or which do not produce beneficial results.

 

For further discussion of these and other risks, see “Risk Factors” beginning on page 17.

 

 

-11-

 

 

 

The Offering

 

Common Shares offered by us   3,000,000 Common Shares
     
Common Shares outstanding prior to this offering   6,000,000 Common Shares
     
Common Shares to be outstanding after this offering   9,000,000 Common Shares
     
Option to purchase additional Common Shares   We have granted the representative of the underwriters a 45-day option to purchase up to 450,000 additional Common Shares from us at the public offering price, less underwriting discounts and commissions.
     
Use of proceeds   We estimate the net proceeds to us in this offering will be approximately $11.8 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. This assumes an initial public offering price of $5.00 per share; and assumes no exercise of the underwriters’ over-allotment option to purchase additional Common Shares. We plan to use the proceeds of the offering for general corporate purposes, which may include (i) working capital, (ii) capital expenditures, including those related to bringing the Joliette Plant (which we expect to be leased to us post-Separation pursuant to the Joliette Plant Lease) into compliance with certain codes and environmental permits, and a potential expansion of the Joliette Plant, (iii) operational purposes, including working capital to accelerate growth in our new content business and expand our cinema screen and services offerings and (iv) potential acquisitions in complementary businesses. While we do not currently have any agreement with respect to an acquisition, we intend to evaluate potential opportunities and could use proceeds of the offering to invest in one or more complementary businesses. The principal reasons for this offering are to increase our working capital, create a public market for our Common Shares, improve our ability to access the capital markets in the future, and to provide capital for general corporate purposes. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.
     
Dividend policy   We do not anticipate declaring or paying any cash dividends to holders of our Common Shares in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business. See “Dividend Policy.”
     
Risk factors   Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 17 and the other information in this prospectus for a discussion of the factors you should consider carefully before you decide to invest in our Common Shares.
     

Proposed NYSE American trading symbol
  We have applied to have our Common Shares listed on the NYSE American under the symbol “SGE.” No assurance can be given that our application will be approved.
     
Transfer Agent and Registrar   The transfer agent and registrar for our Common Shares is Broadridge Corporate Issuer Solutions, Inc.
     
Lock-up Agreements   We have agreed with the representative that, without the prior written consent of the representative, subject to certain exceptions, our directors and executive officers, for a period of twelve (12) months, and we and any other holder of our outstanding Common Shares, for a period of twelve (12) months, will not in either case, following the date of this prospectus, offer or contract to sell any of our Common Shares. See “Underwriting.

 

Unless otherwise indicated, all information in this prospectus, including information regarding the number of Common Shares outstanding:

 

  assumes an initial public offering price of $5.00 per share;
  assumes no exercise of the underwriters’ over-allotment option to purchase additional Common Shares, if any;
  assumes no exercise of representative’s warrants to be issued upon consummation of this offering, which would be for a maximum of 150,000 shares underlying such representative’s warrants assuming a total of 3,000,000 shares are issued in this offering and no exercise of the underwriters’ over-allotment option, at an exercise price equal to 125% of the initial offering price;
  gives effect to the Separation and related transactions;
  assumes no issuance or exercise of the Landmark Warrant, which is to be issued within 10 days of the closing of this offering, and which exercise would be for a maximum of 150,000 shares underlying such Landmark Warrant at an exercise price equal to the initial offering price;
  excludes an aggregate 2,000,000 Common Shares reserved for issuance under our 2022 Share Compensation Plan that we adopted in connection with this offering, which includes the Common Shares underlying (i) the aggregate of 160,000 RSUs to be issued to our officers upon completion of this offering, with the weighted average grant date fair value of $5.00 per share, the assumed initial public offering price, one-half of which will vest immediately, and one-half of which will vest in one-third annual installments, beginning on the first anniversary of the grant date, subject to continued employment, (ii) the aggregate of 94,000 RSUs to be issued to our non-officer employees with the weighted average grant date fair value of $5.00 per share, the assumed initial public offering price, with the RSUs vesting in three annual installments, beginning on the first anniversary of the grant date, subject to continued employment, (iii) the aggregate of 156,000 stock options to be issued to our non-officer employees with the exercise price of $5.00 per share, the assumed initial public offering price, with the stock options vesting in five annual installments, beginning on the first anniversary of the grant date, subject to continued employment, (iv) the aggregate of 90,000 RSUs to be issued to our directors upon completion of this offering, all of which will vest immediately and (v) the aggregate of 20,000 RSUs with an aggregated value of $100,000 and the weighted average grant date fair value of $5.00 per share, the assumed initial public offering price, to be issued to the four non-employee directors upon completion of this offering, all of which will vest on the anniversary of the grant date, subject to continued service. See “Executive and Director Compensation—Long-Term Incentives—Equity Grants”.

 

 

-12-

 

 

 

SUMMARY HISTORICAL AND OTHER COMBINED FINANCIAL DATA

 

The summary historical condensed combined statements of income of Strong Global Entertainment for the years ended December 31, 2021 and December 31, 2020 have been derived from the audited combined financial statements of Strong Global Entertainment included elsewhere in this prospectus. The selected historical condensed combined statement of income of Strong Global Entertainment for the year ended December 31, 2019 has been derived from the audited combined financial statements of Strong Global Entertainment not included elsewhere in this prospectus. The summary historical condensed combined statements of operations of Strong Global Entertainment for the six months ended June 30, 2022 and June 30, 2021 and the related summary historical condensed combined balance sheet as of June 30, 2022 have been derived from the unaudited combined financial statements of Strong Global Entertainment included elsewhere in this prospectus. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements.

 

Our historical results are not necessarily indicative of our results in any future period. To ensure a full understanding of the summary financial data, the information presented below should be reviewed in combination with the audited combined financial statements and the related notes thereto included elsewhere in this prospectus.

 

This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Strong Global Entertainment” and the financial statements of Strong Global Entertainment and the notes thereto included elsewhere in this prospectus.

 

Our historical combined financial statements, which are discussed below, are prepared on a stand-alone basis in accordance with U.S. generally accepted accounting principles (“GAAP”) and are derived from Ballantyne’s 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 Ballantyne. Our combined results are not necessarily indicative of our future performance and do not reflect what our financial performance would have been had we been a stand-alone public company during the periods presented.

 

Ballantyne currently provides certain services to us, and costs associated with these functions have been allocated to us. The allocations include costs related to corporate services, such as 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 Ballantyne. These allocations are reflected within operating expenses in our combined statements of income. 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 offering or of the costs we will incur in the future.

 

Following the completion of this offering, we expect Ballantyne to continue to provide certain services to us and we expect to provide certain services to Ballantyne pursuant to the Management Services Agreement. See the section titled “Certain Relationships and Related Party Transactions—Relationship with Ballantyne – Management Services Agreement”. Pursuant to the Management Services Agreement, we will charge Ballantyne a fee based on our actual costs for providing those services to Ballantyne (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations). In turn, Ballantyne will also charge us a fee that is based on its actual costs for providing those services to us in the future (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations). In addition, we expect the Joliette Plant will be leased to us post-Separation pursuant to the Joliette Plant Lease to be entered into as part of the Separation between Strong Entertainment Subco and Strong/MDI, which will result in additional expense in the future.

 

Following the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We will be required to establish procedures and practices as a stand-alone public company in order to comply with our obligations under the Exchange Act and related rules and regulations. As a result, we will incur additional costs, including audit, investor relations, stock administration and regulatory compliance costs. These additional costs will differ from the costs that were historically allocated to us from Ballantyne.

 

 

-13-

 

 

 

   

Six Months Ended

June 30,

   

Years Ended

December 31,

 
    2022     2021     2021     2020     2019  
Statement of Income Data:                              
Net product sales   $ 14,386     $ 7,726     $ 19,631     $ 15,987     $ 26,448  
Net service revenues     4,157       2,659       6,341       4,833       10,921  
Total net revenues     18,543       10,385       25,972       20,820       37,369  
Cost of products sold     10,692       5,207       14,078       10,980       16,369  
Cost of services     3,547       1,818       4,526       5,193       8,842  
Total cost of revenues     14,239       7,025       18,604       16,173       25,211  
Gross profit     4,304       3,360       7,368       4,647       12,158  
Selling and administrative expenses:                                        
Selling     1,225       744       1,781       1,656       2,080  
Administrative     2,770       1,961       4,387       4,312       4,700  
Total selling and administrative expenses     3,995       2,705       6,168       5,968       6,780  
Loss on disposal of assets     -       -       -       (33 )     (69 )
Income (loss) from operations     309       655       1,200       (1,354 )     5,309  
Other income (expense):                                        
Interest income     2       -       -       -       -  
Interest expense     (53 )     (60 )     (107 )     (112 )     (139 )
Fair value adjustment to notes receivable     -       -       -       -       (2,857 )
Foreign transaction income (loss)     128       (218     (65 )     (292 )     (288 )
Other income, net     4       164       153       3,129       1,732  
Total other income (expense)     81       (114     (19 )     2,725       (1,552 )
Income before income taxes     390       541       1,181       1,371       3,757  
Income tax (expense) benefit     (184 )     (277 )     (360 )     74       (1,864 )
Net income   $ 206     $ 264     $ 821     $ 1,445     $ 1,893  

 

    June 30, 2022  
    Actual     Pro Forma As Adjusted(1)  
Balance Sheet Data:                
Assets:                
Cash and cash equivalents   $ 2,966     $ 14,743  
Accounts receivable, net     5,701       5,701  
Inventories, net     3,834       3,834  
Property, plant and equipment, net     5,055       1,601  
Liabilities and equity:                
Accounts payable, accrued expenses and other current liabilities   $ 9,517     $ 9,153  
Short and long-term debt     2,973       451  
Lease obligations     329       4,905  
Total equity     9,600       20,809  

 

(1) The pro forma as adjusted balance sheet data in the table above reflects (i) the Separation and (ii) the sale and issuance by us of our Common Shares in this offering, based upon the receipt of an estimated of $11.8 million of net proceeds therefrom, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. This assumes no exercise of the underwriters’ over-allotment option to purchase additional Common Shares.

 

-14-

 

 

   

Six Months Ended

June 30,

   

Years Ended

December 31,

 
    2022     2021     2021     2020     2019  
Statement of Cash Flow Data:                                        
Net cash (used in) provided by operating activities   $ (2,022   $ 1,468     $ 4,831     $ 4,023     $ 4,185  
Net cash used in investing activities     (516 )     (54 )     (394 )     (467 )     (1,597 )
Net cash provided by (used in) financing activities     898       (1,282 )     (3,334 )     (3,353 )     (2,561 )
Other Supplemental Metrics:                                        
Gross margin     23.2 %     32.4 %     28.4 %     22.3 %     32.5 %
EBITDA(1)   $ 808     $ 1,072     $ 2,194     $ 2,353     $ 4,792  
Adjusted EBITDA(1)     752       200       725       (119 )     6,984  

 

(1) Use of Non-GAAP Measures

 

We have prepared our combined financial statements in accordance with United States 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 to exclude income taxes, interest, and depreciation and amortization, Adjusted EBITDA also excludes, share-based compensation, fair value adjustments, severance, foreign currency transaction gains (losses), 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 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.

 

-15-

 

 

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 presents a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:

 

EBITDA and Adjusted EBITDA Data (unaudited):

 

   

Six Months Ended

June 30,

   

Years Ended

December 31,

 
    2022     2021     2021     2020     2019  
                               
Net income   $ 206     $ 264     $ 821     $ 1,445     $ 1,893  
Interest expense, net     51       60       107       112       139  
Income tax expense (benefit)     184       277       360       (74 )     1,864  
Depreciation and amortization     367       471       906       870       896  
EBITDA     808       1,072       2,194       2,353       4,792  
Stock-based compensation     72       92       175       232       213  
Loss on disposal of assets and impairment charges     -       -       -       33       69  
Foreign currency transaction (gain) loss     (128     218       65       292       288  
Gain on property and casualty and business interruption insurance recoveries     -       (148 )     (148 )     (3,107 )     (1,235 )
Employee retention credit     -       (1,049     (1,576 )     -       -  
Fair value adjustment to notes receivable     -       -       -       -       2,857  
Severance and other     -       15       15       78       -  
Adjusted EBITDA   $ 752     $ 200     $ 725     $ (119 )   $ 6,984  

 

-16-

 

 

RISK FACTORS

 

An investment in our Common Shares involves a high degree of risk. You should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, for information regarding the risks associated with our business and ownership of our Common Shares. If any of the following risks actually occur, our business, financial condition, results of operations, and cash flows could suffer significantly. In any of these cases, the market price of our Common Shares could decline.

 

The risks described below that relate to the prior operations, business activities, and history of the Entertainment Business relate to those operations as part of Ballantyne, and not to our operations as an independent business. However, following the Separation, our management believes that the risks described below will continue to apply to us as an independent business.

 

Risks Related to Our Business

 

The COVID-19 pandemic and ensuing governmental responses have negatively impacted, and could further materially adversely affect, our business, financial condition, results of operations and cash flows.

 

The COVID-19 pandemic has had, and may continue to have, a widespread and detrimental effect on the global economy particularly in the United States, and actions by public health and governmental authorities, businesses, other organizations and individuals to address the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations and shutdowns. The COVID-19 pandemic and ensuing governmental responses have materially negatively impacted, and could further materially adversely affect, our business, financial condition, results of operations and cash flows. The ultimate impact of the COVID-19 pandemic on our business and results of operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the COVID-19 pandemic, including variants thereof and any repeat or cyclical outbreaks, and any additional preventative and protective actions that governments, or we or our customers, may direct, which may result in an extended period of continued business disruption and reduced operations. For instance, some areas of the United States have experienced surges in COVID-19 cases and new variants of COVID-19, which has, in some cases, led to the closure of recently re-opened businesses and further postponed opening other businesses, including movie theaters. Any resulting financial impact cannot be reasonably estimated at this time, but we expect it will continue to have a material impact on our business, financial condition and results of operations.

 

The repercussions of the COVID-19 global pandemic resulted in a significant impact to our customers, specifically those in the entertainment and advertising industries, and their ability and willingness to purchase our products and services, which continues to negatively impact us. A significant number of our customers temporarily ceased operations during the pandemic, some of which continue to be suspended; as such, we have experienced, and anticipate that we will continue to experience at least until our customers have resumed normal operations, a significant decline in our results of operations. For instance, during this time, many movie theaters and other entertainment centers were forced to close or curtail their hours and, correspondingly, have terminated or deferred their non-essential capital expenditures. While some movie theaters and chains have begun to re-open, or announced plans to re-open in the near future, theater operators may continue to experience reduced revenues for an extended period due to, among other things, consumer concerns over safety and social distancing, depressed consumer sentiment due to adverse economic conditions, including job losses, capacity restrictions, and postponed release dates, shortened “release windows” between the release of motion pictures in theaters and an alternative delivery method, or the release of motion pictures directly to alternative delivery methods, bypassing the theater entirely, for certain movies, and continued COVID-19 outbreaks could cause these theaters to suspend operations again. The COVID-19 pandemic has also adversely affected film production and may adversely affect the pipeline of feature films available in the short- or long-term. In addition to decreased business spending by our customers and prospective customers and reduced demand for our products, lower renewal rates by our customers, increased customer losses/churn, increased challenges in or cost of acquiring new customers and increased risk in collectability of accounts receivable may have a material adverse effect on our business and results of operations. We have also experienced other negative impacts; among other actions, we were required to temporarily close our screen manufacturing facility in Canada due to the governmental response to COVID-19, which we were able to re-open on May 11, 2020, and have experienced lower revenues from field services and a reduction in non-recurring time and materials-based services. The completion of our outsourced screen finishing facility in China by a third party was also delayed by the COVID-19 pandemic. We may also experience one or more of the following conditions that could have a material adverse impact on our business operations and financial condition: adverse effects on our strategic partners’ businesses or on the businesses of companies in which we hold investments; impairment charges; extreme currency exchange-rate fluctuations; inability to recover costs from insurance carriers; and business continuity concerns for us, our customers and our third-party vendors.

 

-17-

 

 

In response to uncertainties associated with the COVID-19 pandemic, we have taken significant steps to preserve cash and remain in a strong competitive position when the current crisis subsides by eliminating non-essential costs, reducing employee hours and deferring all non-essential capital expenditures to minimum levels. Among other mitigating actions, we implemented targeted furloughs, temporarily curtailed our service and distribution activities in the United States and temporarily reduced compensation of our executive officers and certain other employees, and Ballantyne’s board of directors waived its cash compensation for 2020. We have also implemented remote work policies for many employees, and the resources available to such employees may not enable them to maintain the same level of productivity and efficiency. In addition, these and other employees may face additional demands on their time, such as increased responsibilities resulting from school and childcare closures or illness of family members. Our increased reliance on remote access to our information systems also increases our exposures to potential cybersecurity breaches. We cannot provide any assurance that these actions, or any other mitigating actions we may take, will help mitigate the impact of the COVID-19 pandemic on us.

 

We cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to the unprecedented nature of the disruption to our operations and the unpredictability of the COVID-19 global pandemic. As a consequence, our estimates of the duration of the pandemic and the severity of the impact on our future earnings and cash flows could change and have a material impact on our financial condition and results of operations. Furthermore, we applied for and received wage subsidies, and are in the process of reviewing tax credits and other financial support under the newly enacted COVID-19 relief legislation in the U.S. and Canada. However, the legislation and guidance from the authorities continues to evolve; as such, the amount and timing of support, if any, that we could receive is not determinable at this time, and there can be no guarantees that we will receive financial support through these programs. In addition, certain government benefits that we seek to access have not previously been administered on the present scale or at all. Government or third-party program administrators may be unable to cope with the volume of applications in the near term, and any benefits we receive may not be as extensive as we currently estimate, may impose additional conditions and restrictions on our operations or may otherwise provide less relief than we contemplate. In the event of a sustained market deterioration, and continued declines in net sales, including the impact of such events on the borrowing base under the Strong/MDI credit facilities, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. We cannot provide any assurance that we will be able to obtain additional sources of financing or liquidity on acceptable terms, or at all.

 

The ultimate duration and impact of the COVID-19 pandemic on our business, financial condition, results of operations, and cash flows is dependent on future developments, the duration of the pandemic, including repeat or cyclical outbreaks, new and potentially more contagious variants, additional “waves” and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time due to the daily evolution of the COVID-19 pandemic and the global responses to curb its spread. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable. However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include a global recession, and that, as result of such effects, we may continue to be adversely affected even after the COVID-19 pandemic has subsided.

 

We have no assurance of future business from any of our customers.

 

We estimate future revenue associated with customers and customer prospects for purposes of financial planning and measurement of our sales pipeline, but we have limited contractual assurance of future business from our customers. While we do have arrangements with some of our customers, customers are not required to purchase any minimum amounts, and could stop doing business with us. Some customers maintain simultaneous relationships with our competitors, and could shift more of their business away from us if they choose to do so in the future.

 

-18-

 

 

There is no guarantee that we will be able to service and retain or renew existing agreements, maintain relationships with any of our customers or business partners on acceptable terms or at all, or collect amounts owed to us from insolvent customers or business partners. The loss of any of our large customers could have a material adverse impact on our business.

 

Our operating results could be materially harmed if we are unable to accurately forecast demand for our products and services and adequately manage our inventory.

 

To ensure adequate inventory supply, we forecast inventory needs, place orders and plan personnel levels based on estimates of future demand. Our ability to accurately forecast demand for our products and services is limited and could be affected by many factors, including an increase or decrease in customer demand for our products and services or for products and services of our competitors, product and service introductions by competitors, unanticipated changes in general market conditions, effects of the COVID-19 pandemic and the weakening of economic conditions or consumer confidence in future economic conditions. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale. Conversely, if we underestimate customer demand for our products and services, we may not be able to deliver products to meet requirements, and this could result in damage to our brand and customer relationships and adversely affect our revenue and operating results.

 

Interruptions of, or higher prices of, components from our suppliers may affect our results of operations and financial performance.

 

A portion of our revenues are dependent on the distribution of products supplied by various key suppliers. If we fail to maintain satisfactory relationships with our suppliers, or if our suppliers experience significant financial difficulties, we could experience difficulty in obtaining needed goods and services. Some suppliers could also decide to reduce inventories or raise prices to increase cash flow. The loss of any one or more of our suppliers could have an adverse effect on our business, and we may be unable to secure alternative manufacturing arrangements. Even if we are able to obtain alternative manufacturing arrangements, such arrangements may not be on terms similar to our current arrangements or we may be forced to accept less favorable terms in order to secure a supplier as quickly as possible so as to minimize the impact on our business operations. In addition, any required changes in our suppliers could cause delays in our operations and increase our production costs and new suppliers may not be able to meet our production demands as to volume, quality or timeliness.

 

-19-

 

 

The markets for our products and services are highly competitive and if market share is lost, we may be unable to lower our cost structure quickly enough to offset the loss of revenue.

 

The domestic and international markets for our product lines are highly competitive, evolving and subject to rapid technological and other changes. We expect the intensity of competition in each of these areas to continue in the future for a number of reasons including:

 

  Certain of the competitors for our digital equipment have longer operating histories and greater financial, technical, marketing and other resources than we do, which, among other things, may permit them to adopt aggressive pricing policies. As a result, we may suffer from pricing pressures that could adversely affect our ability to generate revenues and our results of operations. Some of our competitors also have greater name and brand recognition and a larger customer base than us.
     
  Some of our competitors are manufacturing their own digital equipment while we employ a distribution business model through our distribution agreements with NEC Display Solutions of America, Inc. (“NEC”), Barco, Inc. (“Barco”) and certain other suppliers. As a result, we may suffer from pricing pressures that could adversely affect our ability to generate revenues.
     
  Suppliers could decide to utilize their current sales force to supply their products directly to customers rather than utilizing channels.

 

In addition, we face competition for consumer attention from other forms of entertainment, including streaming services and other forms of entertainment that may impact the cinema industry. Other forms of entertainment may be more attractive to consumers than those utilizing our technologies, which could harm our business, prospects and operating results.

 

For these and other reasons, we must continue to enhance our technologies and our existing products and services and introduce new, high-quality technologies, products and services to meet the wide variety of competitive pressures that we face. If we are unable to compete successfully, our business, prospects and results of operations will be materially adversely impacted.

 

-20-

 

 

We depend in part on distributors, dealers and resellers to sell and market our products and services, and our failure to maintain and further develop our sales channels could harm our business.

 

In addition to our in-house sales force, we sell some of our products and services through distributors, dealers and resellers. As we do not have long-term contracts and these agreements may be cancelled at any time, any changes to our current mix of distributors could adversely affect our gross margin and could negatively affect both our brand image and our reputation. If our distributors, dealers and resellers are not successful in selling our products, our revenue would decrease. Specifically, the shutdowns of local and state economies as a result of the COVID-19 pandemic have and may continue in the future to adversely affect the operations of our dealers and resellers. In addition, our success in expanding and entering into new markets internationally will depend on our ability to establish relationships with new distributors. If we do not maintain our relationship with existing distributors or develop relationships with new distributors, dealers and resellers, our ability to grow our business and sell our products and services could be adversely affected and our business may be harmed.

 

Certain of our officers and directors are engaged in other activities and may not devote sufficient time to our affairs, which may affect our ability to conduct operations and generate revenues.

 

Certain of our officers and directors have existing responsibilities to provide management and services to other entities including Ballantyne. For example, Mark D. Roberson, our Chief Executive Officer and director, Todd R. Major, our Chief Financial Officer, Secretary and Treasurer, and D. Kyle Cerminara, our Chairman, also have responsibilities as Ballantyne’s Chief Executive Officer, Chief Financial Officer and Chairman, respectively. While post-Separation, the majority of Ballantyne’s operating business will have moved to the Company, Messrs. Roberson and Major will continue to act as officers of Ballantyne, with corresponding responsibilities, and will therefore still spend some of their time on the business of Ballantyne. However, post-Separation, we expect Messrs. Roberson and Major to each spend a majority, but not all, of their time on the business of our Company. As a result, demands for the time and resources from our Company and other entities, including Ballantyne, may conflict from time to time. Because we rely primarily on each of our officers and directors to manage our company, our officers’ and directors’ limited devotion of time and resources to our business may negatively impact the operation of our business.

 

If we are unable to maintain our brand and reputation, our business, results of operations and prospects could be materially harmed.

 

Our business, results of operations and prospects depend, in part, on maintaining and strengthening our brand and reputation for providing high quality products and services. Reputational value is based in large part on perceptions. Although reputations may take decades to build, any negative incidents can quickly erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation. If problems with our products cause operational disruption or other difficulties, or there are delays or other issues with the delivery of our products or services, our brand and reputation could be diminished. Damage to our reputation could also arise from actual or perceived legal violations, product safety issues, data security breaches, actual or perceived poor employee relations, actual or perceived poor service, actual or perceived poor privacy practices, operational or sustainability issues, actual or perceived ethical issues or other events within or outside of our control that generate negative publicity with respect to us. Any event that has the potential to negatively impact our reputation could lead to lost sales, loss of new opportunities and retention and recruiting difficulties. Further, we are a newly formed company, and we have no history of operating as an independent company, and our brand and reputation may be aligned with that of Ballantyne, which means that any harm to Ballantyne’s brand may harm our brand, and similarly, it may take time to promote our brand and reputation as a separate independent company. If we fail to promote and maintain our brand and reputation successfully, our business, results of operations and prospects could be materially harmed.

 

-21-

 

 

Our operating margins may decline as a result of increasing product costs.

 

Our business is subject to pressure on pricing and costs caused by many factors, including supply chain disruption, intense competition, the cost of components used in our products, labor costs, constrained sourcing capacity, inflationary pressure, pressure from customers to reduce the prices we charge for our products and services, and changes in consumer demand. While inflation has been relatively low in recent years, it began to increase in the second half of 2021. Factors including global supply chain disruptions have resulted in shortages in labor, materials and services. Such shortages have resulted in cost increases, particularly for labor, and could continue to increase. Costs for the raw materials used in the manufacture of our products are affected by, among other things, energy prices, demand, fluctuations in commodity prices and currency, shipping costs and other factors that are generally unpredictable and beyond our control such as the escalating military conflict between Russia and Ukraine. Increases in the cost of raw materials used to manufacture our products or in the cost of labor and other costs of doing business internationally could have an adverse effect on, among other things, the cost of our products, gross margins, operating results, financial condition, and cash flows.

 

Changes in general economic conditions, geopolitical conditions, domestic and foreign trade policies, monetary policies and other factors beyond our control may adversely impact our business and operating results.

 

Our operations and performance may depend on global, regional, economic and geopolitical conditions. Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from North American and European leaders. These events are currently escalating and creating increasingly volatile global economic conditions. Resulting changes in North American trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” A trade war could result in increased costs for raw materials that we use in our manufacturing and could otherwise limit our ability to sell our products abroad. These increased costs would have a negative effect on our financial condition and profitability. Furthermore, the military conflict between Russia and Ukraine may increase the likelihood of supply interruptions and further hinder our ability to find the materials we need to make our products. If the conflict between Russia and Ukraine continues for a long period of time, or if other countries become further involved in the conflict, we could face significant adverse effects to our business and financial condition.

 

Our sales cycle can be long and timing of orders and shipments unpredictable, particularly with respect to large enterprises, which could harm our business and operating results.

 

The timing of our sales is difficult to predict, and customers typically order screen and other distribution products with limited advance notice which impacts our ability to forecast revenue and manage operations. For our managed service offerings, the sales cycle can be long and involve educating and achieving buy-in from multiple parts of a customer organization. As a result the length and variable nature of customer ordering patterns and timing could materially adversely impact our business and results of operations.

 

We are substantially dependent upon significant customers who could cease purchasing our products at any time.

 

Our top ten customers accounted for approximately 48% and 54% of combined net revenues during the six months ended June 30, 2022 and June 30, 2021, respectively, and accounted for 39% of net revenues during 2021. Trade accounts receivable from these customers represented 53% and 29% of net receivables at June 30, 2022 and December 31, 2021, respectively. None of our customers accounted for more than 10% of our combined net revenues during the six months ended June 30, 2022, and one customer accounted for more than 10% of our net combined receivables as of June 30, 2022. One of our customers accounted for more than 10% of our combined net revenues during the six months ended June 30, 2021. None of our customers accounted for more than 10% of both our combined net revenues during 2021 and our net combined receivables as of December 31, 2021. While we believe our relationships with such customers are stable, most arrangements with these customers are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from our significant customers could have a material adverse effect on our business, financial condition and results of operations. We could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which we sell our products.

 

Several larger operators in the cinema industry carry high levels of balance sheet leverage arising from pre-COVID acquisitions. Cineworld Group Plc, the parent company of Regal Cinemas and one of the largest cinema operators, filed for Chapter 11 bankruptcy on September 7, 2022 to restructure their balance sheet and alleviate their debt burden. As of June 30, 2022, the Company had $0.2 million in accounts receivable related to products and services sold to Regal Cinemas. The bankruptcy filing is expected to negatively impact the collectability of our accounts receivable and could also negatively impact our revenue in future periods.

 

Financial instruments that potentially expose us to a concentration of credit risk principally consist of accounts receivable. We sell products to a large number of customers in many different geographic regions. To minimize credit concentration risk, we perform ongoing credit evaluations of our customers’ financial condition or use letters of credit.

 

-22-

 

 

Our business is subject to the economic and political risks of selling products in foreign countries.

 

Sales outside the United States accounted for 18% of combined sales in the fiscal year ended December 31, 2021. We expect that international sales will continue to be important to our business for the foreseeable future. Foreign sales are subject to general political and economic risks, including the adverse impact of changes to international trade and tariff policies, including in the U.S. and China, which have created uncertainty regarding international trade, unanticipated or unfavorable circumstances arising from host country laws or regulations, unfavorable changes in U.S. policies on international trade and investment, the imposition of governmental economic sanctions on countries in which we do business, quotas, capital controls or other trade barriers, whether adopted by individual governments or addressed by regional trade blocks, threats of war, terrorism or governmental instability, currency controls, fluctuating exchange rates with respect to sales not denominated in U.S. dollars, changes in import/export regulations, tariffs and freight rates, potential negative consequences from changes to taxation policies, restrictions on the transfer of funds into or out of a country and the disruption of operations from labor, political and other disturbances, such as the impact of the coronavirus and other public health epidemics or pandemics. Government policies on international trade and investment can affect the demand for our products, impact the competitive position of our products or prevent us from being able to sell or manufacture products in certain countries. The implementation of more restrictive trade policies, such as higher tariffs or new barriers to entry, in countries in which we sell large quantities of products and services could negatively impact our business, financial condition and results of operations. For example, a government’s adoption of “buy national” policies or retaliation by another government against such policies could have a negative impact on our results of operations. If we were unable to navigate the foreign regulatory environment, or if we were unable to enforce our contract rights in foreign countries, our business could be adversely impacted. Any of these events could reduce our sales, limit the prices at which we can sell our products, interrupt our supply chain or otherwise have an adverse effect on our operating performance.

 

In addition, a portion of our foreign sales are denominated in foreign currencies and amounted to approximately $1.5 million in 2021. To the extent that orders are denominated in foreign currencies, our reported sales and earnings are subject to foreign exchange fluctuations. In addition, there can be no assurance that our remaining international customers will continue to accept orders denominated in U.S. dollars. For those sales which are denominated in U.S. dollars, a weakening in the value of foreign currencies relative to the U.S. dollar could have a material adverse impact on us by increasing the effective price of our products in international markets. Certain areas of the world are also more cost conscious than the U.S. market and there are instances where our products are priced higher than local manufacturers. We are also exposed to foreign currency fluctuations between the Canadian and U.S. dollar due to our screen manufacturing facility in Canada where a majority of its sales are denominated in the U.S. dollar while its expenses are denominated in Canadian currency. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates.

 

Any of these factors could adversely affect our foreign activities and our business, financial condition and results of operations.

 

The risk of non-compliance with U.S. and foreign laws and regulations applicable to our international operations could have a significant impact on our financial condition, results of operations and strategic objectives.

 

Our global operations subject us to regulation by U.S. federal and state laws and multiple foreign laws, regulations and policies, which could result in conflicting legal requirements. These laws and regulations are complex, change frequently, have tended to become more stringent over time and increase our cost of doing business. These laws and regulations include import and export control, environmental, health and safety regulations, data privacy requirements, international labor laws and work councils and anti-corruption and bribery laws such as the U.S. Foreign Corrupt Practices Act, the U.N. Convention Against Bribery and local laws prohibiting corrupt payments to government officials. We are subject to the risk that we, our employees, our affiliated entities, contractors, agents or their respective officers, directors, employees and agents may take action determined to be in violation of any of these laws. An actual or alleged violation could result in substantial fines, sanctions, civil or criminal penalties, debarment from government contracts, curtailment of operations in certain jurisdictions, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our financial condition, results of operations and strategic objectives.

 

-23-

 

 

In addition, we are subject to Canadian and foreign anti-corruption laws and regulations such as the Canadian Corruption of Foreign Public Officials Act. In general, these laws prohibit a company and its employees and intermediaries from bribing or making other prohibited payments to foreign officials or other persons to obtain or retain business or gain some other business advantage. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted. Failure by us or our predecessors to comply with the applicable legislation and other similar foreign laws could expose us and our senior management to civil and/or criminal penalties, other sanctions and remedial measures, legal expenses and reputational damage, all of which could materially and adversely affect our business, financial condition and results of operations. Likewise, any investigation of any alleged violations of the applicable anti-corruption legislation by Canadian or foreign authorities could also have an adverse impact on our business, financial condition and results of operations.

 

A reversal of the U.S. economic recovery and a return to volatile or recessionary conditions in the United States or abroad could adversely affect our business or our access to capital markets in a material manner.

 

Worsening economic and market conditions, downside shocks, or a return to recessionary economic conditions could serve to reduce demand for our products and adversely affect our operating results. These economic conditions may also impact the financial condition of one or more of our key suppliers, which could affect our ability to secure products to meet our customers’ demand. In addition, a downturn in the cinema market could impact the valuation and collectability of certain receivables held by us. Our results of operations and the implementation of our business strategy could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the current outbreak of COVID-19 and variants thereof. The most recent global financial crisis caused by the coronavirus resulted in extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business and could have a material adverse effect on us. We could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which we sell our products.

 

We rely extensively on our information technology systems and are vulnerable to damage and interruption.

 

We rely on our information technology systems and infrastructure to process transactions, summarize results and manage our business, including maintaining client and supplier information. Additionally, we utilize third parties, including cloud providers, to store, transfer and process data. From time to time, we experience cyber-attacks on our information technology systems. Our information technology systems, as well as the systems of our customers, suppliers and other partners, whose systems we do not control, are vulnerable to outages and an increasing risk of continually evolving deliberate intrusions to gain access to company sensitive information. Likewise, data security incidents and breaches by employees and others with or without permitted access to our systems pose a risk that sensitive data may be exposed to unauthorized persons or to the public. A cyber-attack or other significant disruption involving our information technology systems, or those of our customers, suppliers and other partners, could also result in disruptions in critical systems, corruption or loss of data and theft of data, funds or intellectual property. We may be unable to prevent outages or security breaches in our systems. We remain potentially vulnerable to additional known or yet unknown threats as, in some instances, we, our suppliers and our other partners may be unaware of an incident or its magnitude and effects. We also face the risk that we expose our customers or partners to cybersecurity attacks. Any or all of the foregoing could adversely affect our results of operations and cash flows, as well as our business reputation.

 

Any failure to maintain the security of information relating to our customers, employees and suppliers, whether as a result of cybersecurity attacks or otherwise, could expose us to litigation, government enforcement actions and costly response measures, and could disrupt our operations and adversely affect our business and reputation.

 

In connection with the sales and marketing of our products and services, we may from time to time transmit confidential information. We also have access to, collect or maintain private or confidential information regarding our customers, employees, and suppliers, as well as our business. We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our information technology networks and related systems. These risks include operational interruption, private data exposure and damage to our relationship with our customers, among others. Cyber-attacks are rapidly evolving and becoming increasingly sophisticated. It is possible that computer hackers and others might compromise our security measures, or the security measures of those parties that we do business with now or in the future, and obtain the personal information of our customers, employees and suppliers or our business information. A security breach of any kind, including physical or electronic break-ins, computer viruses and attacks by hackers, employees or others, could expose us to risks of data loss, litigation, government enforcement actions, regulatory penalties and costly response measures, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation, which could cause us to lose market share and have an adverse effect on our results of operations.

 

-24-

 

 

If we fail to retain key members of management, or successfully integrate new executives, our business may be materially harmed.

 

Our future success depends, in substantial part, on the efforts and abilities of our current management team. If certain of these individuals were to leave unexpectedly, we could experience substantial loss of institutional knowledge, face difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. Our loss of services of any of our senior executives, or any failure to effectively integrate new management into our business processes, controls, systems and culture, could have a material adverse effect on us.

 

Any potential future acquisitions, strategic investments, entry into new lines of business, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business.

 

Our long-term strategy may include identifying and acquiring, investing in or merging with suitable candidates on acceptable terms, entry into new lines of business and markets or divesting of certain business lines or activities. In particular, over time, we may acquire, make investments in or merge with providers of product offerings that complement our business or may terminate such activities. Mergers, acquisitions, divestitures and entries into new lines of business include a number of risks and present financial, managerial and operational challenges, including but not limited to:

 

  diversion of management attention from running our existing business;
     
  possible material weaknesses in internal control over financial reporting;
     
  increased expenses including legal, administrative and compensation expenses related to newly hired or terminated employees;
     
  increased costs to integrate, develop or, in the case of a divestiture, separate the technology, personnel, customer base and business practices of the acquired, new or divested business or assets;
     
  potential exposure to material liabilities not discovered in the due diligence process;
     
  potential adverse effects on reported results of operations due to possible write-down of goodwill and other intangible assets associated with acquisitions;
     
  potential damage to customer relationships or loss of synergies in the case of divestitures; and
     
  unavailability of acquisition financing or inability to obtain such financing on reasonable terms.

 

Any acquired business, technology, service or product or entry into a new line of business could significantly under-perform relative to our expectations, and may not achieve the benefits we expect. For all these reasons, our pursuit of an acquisition, investment, new line of business, divestiture, merger or joint venture could cause our actual results to differ materially from those anticipated.

 

Failure to effectively utilize or successfully assert intellectual property rights could negatively impact us.

 

We own or otherwise have rights to various trademarks and trade names used in conjunction with the sale of our products, the most significant of which is Strong®. We rely on trademark laws to protect these intellectual property rights. We cannot assure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license from others, intellectual property rights necessary to support new product introductions. Our intellectual property rights, and any additional rights we may obtain in the future, may be invalidated, circumvented or challenged in the future. Our failure to perfect or successfully assert intellectual property rights could harm our competitive position and could negatively impact us.

 

-25-

 

 

Natural disasters and other catastrophic events beyond our control could adversely affect our business operations and financial performance.

 

The occurrence of one or more natural disasters, such as fires, hurricanes, tornados, tsunamis, floods and earthquakes; geo-political events, such as civil unrest in a country in which our suppliers are located or terrorist or military activities disrupting transportation, communication or utility systems; or other highly disruptive events, such as nuclear accidents, public health epidemics or pandemics, such as the ongoing COVID-19 pandemic, the impact of which is uncertain and which, if it persists for an extended period of time, could disrupt our global supply chain and result in significant expenses or delays outside of our control, unusual weather conditions or cyber-attacks, could adversely affect our operations and financial performance. For example, the COVID-19 pandemic has impacted and could further impact our operations, customers and suppliers as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak. In addition, temporary cinema closures in domestic and foreign markets and delays to movie release schedules may potentially negatively impact our customers’ operations and timing of orders. Further, adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment could harm our business. In the event of a major disruption caused by the outbreak of epidemics or pandemic diseases such as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment of our business operations. Such events could result, among other things, in operational disruptions, physical damage to or destruction or disruption of one or more of our properties or properties used by third parties in connection with the supply of products or services to us, the lack of an adequate workforce in parts or all of our operations and communications and transportation disruptions. We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business. These factors could also cause consumer confidence and spending to decrease or result in increased volatility in the United States and global financial markets and economy. Such occurrences could have a material adverse effect on us and could also have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage.

 

The insurance that we maintain may not fully cover all potential exposures.

 

We maintain property, business interruption and casualty insurance but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We are potentially at risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.

 

We are a holding company with no operations of our own.

 

We are a holding company, and our ability to operate is dependent upon the earnings from the business conducted by our subsidiaries that operate the centers. The effect of this structure is that we depend on the earnings of our subsidiaries, and the distribution or payment to us of a portion of these earnings to meet our obligations, including those under any of our debt obligations. The distributions of those earnings or advances or other distributions of funds by these entities to us, all of which are contingent upon our subsidiaries’ earnings, are subject to various business considerations. In addition, distributions by our subsidiaries could be subject to statutory restrictions, including state laws requiring that such subsidiaries be solvent, or contractual restrictions. Some of our subsidiaries may become subject to agreements that restrict the sale of assets and significantly restrict or prohibit the payment of dividends or the making of distributions, loans or other payments to shareholders, partners or members.

 

We are entering a new line of business which could require additional capital.

 

The production, acquisition and distribution of feature films and series content requires substantial capital. We intend to mitigate risks by pre-selling rights to content and utilizing tax credit incentives in most cases to offset production costs. However, a significant amount of time may elapse between our expenditure of funds and the receipt of revenues after release or distribution of such content. Although we intend to reduce the risks of production exposure through pre-sale of rights, tax credit programs, government and industry programs, co-financiers and other sources, we cannot assure you that we will successfully implement these arrangements or that we will not be subject to substantial financial risks relating to the production, acquisition and distribution of content. Additionally, the production, completion and distribution of motion picture and television content can be subject to a number of uncertainties, including delays and increased expenditures due to disruptions or events beyond our control. As a result, if production incurs substantial budget overruns, we may have to seek additional financing or fund the overrun ourselves. We cannot make assurances regarding the availability of such additional financing on terms acceptable to us, or that we will recoup these costs. For instance, increased costs or budget overruns incurred with respect to a particular film may prevent a picture from being completed or released or may result in a delayed release and the postponement to a potentially less favorable date, all of which could cause a decline in performance, and, thus, the overall financial success of such film. Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.

 

-26-

 

 

We may incur significant write-offs if our projects do not perform well enough to recoup costs.

 

We will be required to amortize content capitalized production costs over the expected revenue streams as we recognize revenue from films or other projects. The amount of production costs that will be amortized each quarter depends on, among other things, how much future revenue we expect to receive from each project. Unamortized production costs will be evaluated for impairment each reporting period on a project-by-project basis. If estimated remaining revenue is not sufficient to recover the unamortized production costs, including because of delayed theatrical distribution of films as a result of the COVID-19 global pandemic and its effects, those costs would be written down to fair value. In any given quarter, if we lower our previous forecast with respect to total anticipated revenue from any film or other project, we may be required to accelerate amortization or record impairment charges with respect to the unamortized costs, even if we previously recorded impairment charges for such film or other project. Such impairment charges could adversely impact our business, operating results and financial condition.

 

Our revenues and results of operations may fluctuate significantly from period to period.

 

Our revenues and results of operations can vary based on the timing of shipments of our cinema products particularly with regard to the timing of cinema screen shipments and timing of customer orders and shipments of projection equipment. With the launch of Strong Studios, those fluctuations could increase on a quarter-to-quarter basis as timing of revenue and amortization of production costs will depend on timing delivery of content, among other factors. The degree of commercial success of content that we sell, license or distribute, which cannot be predicted with certainty may cause our revenue and earnings results to fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future periods.

 

Risks Related to the Separation

 

We may not realize the anticipated benefits from the Separation, and the Separation could harm our business.

 

We have historically operated as a business segment of Ballantyne. We may not be able to achieve the full strategic and financial benefits expected to result from the Separation, or such benefits may be delayed or not occur at all. The Separation is expected to enhance strategic and management focus, provide a distinct investment identity and allow us to efficiently allocate resources and deploy capital. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

 

  the Separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business;
     
  following the Separation, we may be more susceptible to economic downturns and other adverse events than if we were still a part of Ballantyne;
     
  following the Separation, our business will be less diversified than Ballantyne’s business prior to the Separation; and
     
  the other actions required to separate the respective businesses could disrupt our operations.

 

-27-

 

 

If we fail to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, our business could be harmed.

 

The services that Ballantyne will provide to us post-Separation, pursuant to the Management Services Agreement, may not be sufficient to meet our needs, which may result in increased costs and otherwise adversely affect our business.

 

Pursuant to the Management Services Agreement, we and Ballantyne expect to continue to provide certain services to each other, which could include information technology, legal, finance and accounting, human resources, tax, treasury, and other services in exchange for the fees specified in the Management Services Agreement between us and Ballantyne (calculated on the basis of cost and expenses, with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations). Ballantyne is not obligated to provide these services in a manner that differs from the nature of the services provided to the Strong Entertainment operating segment during the period prior to the Separation, and thus we may not be able to modify these services in a manner desirable to us as a stand-alone public company. Further, if we no longer receive these services from Ballantyne due to the termination of the Management Services Agreement or otherwise, we may not be able to perform these services ourselves and/or find appropriate third party arrangements at a reasonable cost (and any such costs may be higher than those charged by Ballantyne). See the section titled “Certain Relationships and Related Party Transactions-Relationship with Ballantyne.”

 

We have no history of operating as an independent company, and our historical and unaudited pro forma financial information is not necessarily representative of the results that we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

 

Our historical and unaudited pro forma financial information included in this prospectus is not necessarily indicative of our future financial condition, results of operations or cash flows, nor does it reflect what our financial condition, results of operations or cash flows would have been as an independent public company during the periods presented. In particular, the historical financial information included in this prospectus is not necessarily indicative of our future results of operations, financial condition or cash flows primarily because of the following factors:

 

  Prior to the Separation, our business has been operated by Ballantyne as part of its broader corporate organization, rather than as an independent company; Ballantyne or one of its affiliates provide support for various corporate functions for us, such as information technology, compensation and benefits, human resources, engineering, finance and internal audit.
     
  Our historical financial results reflect the direct, indirect and allocated costs for such services historically provided by Ballantyne. Our historical financial information does not reflect our obligations under the Management Services Agreement we will enter into with Ballantyne in connection with the Separation. At the termination of the Management Services Agreement, we will need to perform these functions ourselves or hire third parties to perform these functions on our behalf, and these costs may differ significantly from the comparable expenses we have incurred in the past.
     
  Our working capital requirements and capital expenditures historically have been satisfied as part of Ballantyne’s corporate-wide cash management and centralized funding programs, and our cost of debt and other capital may significantly differ from the historical amounts reflected in our historical financial statements.
     
  Currently, our business is integrated with that of Ballantyne and we benefit from Ballantyne’s size and scale in costs, employees and vendor and customer relationships. Thus, costs we will incur as an independent company may significantly exceed comparable costs we would have incurred as part of Ballantyne.

 

We based the pro forma adjustments included in this prospectus on available information and assumptions that we believe are reasonable; actual results, however, may vary. In addition, our unaudited pro forma financial information included in this prospectus may not give effect to various ongoing additional costs we may incur in connection with being an independent public company. Accordingly, our unaudited pro forma financial statements do not reflect what business, financial condition, results of operations, and cash flows would have been as an independent public company and are not necessarily indicative of our future financial condition or future results of operations.

 

Please refer to “Unaudited Pro Forma Condensed Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited historical financial statements and the notes to those statements included elsewhere in this prospectus.

 

-28-

 

 

Ballantyne may fail to perform under various transaction agreements that will be executed as part of the Separation or it may fail to have necessary systems and services in place when certain of the transaction agreements expire.

 

In connection with the Separation, we, through Strong Entertainment Subco or STS, will enter into a Master Asset Purchase Agreement, Confirmatory of Ownership Assignment of Intellectual Property between Strong/MDI Screen Systems, Inc., a company existing under the laws of Quebec and Strong/MDI Screen Systems Inc., a company incorporated under the laws of British Columbia (the “IP Assignment Agreement”), the Ballantyne Asset Transfer Agreement, Patent Assignment between Ballantyne Strong, Inc., and Strong Technical Services, Inc. (the “Ballantyne IP Assignment Agreement”), the Joliette Plant Lease and the Share Transfer Agreements with Ballantyne and/or Strong/MDI. The Master Asset Purchase Agreement, the Ballantyne Asset Transfer Agreement and the Joliette Plant Lease will determine the allocation of assets and liabilities (including by means of licensing) between the companies following the Separation and will include any necessary indemnifications related to liabilities and obligations. If Strong/MDI and/or Ballantyne are unable to satisfy their respective obligations under these agreements, we could incur operational difficulties or losses, which may not be adequately indemnified under those agreements. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once these transaction agreements expire or terminate, we may not be able to operate our business effectively and our profitability may decline.

 

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Separation.

 

Our financial results previously were included within the consolidated results of Ballantyne, and its reporting and control systems were appropriate for subsidiaries of a public company. We may need to upgrade our systems, including duplicating computer hardware infrastructure, implement additional financial and management controls, reporting systems and procedures, and hire additional accounting, finance and information technology staff. If we are unable to do this in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired and our business could be harmed.

 

Until completion of the Separation, Ballantyne will control the direction of our business, and post-Separation, Ballantyne will continue to indirectly control the direction of our business, as their concentrated ownership of our Common Shares and Class B Shares will prevent you and other shareholders from influencing significant decisions.

 

Immediately following the completion of this offering, Ballantyne will control approximately 66.7% of our outstanding Common Shares (or 63.5% if the underwriters exercise their option to purchase additional Common Shares in full) and 100% of the outstanding Class B Shares, which will entitle Ballantyne, or an entity controlled by Ballantyne, to nominate and elect at least 50% of our board, until such Class B Shares are redeemed. As long as Ballantyne beneficially controls a majority of the voting power of our outstanding Common Shares with respect to a particular matter, or Ballantyne directly or indirectly holds any number of Class B Shares, it will generally be able to determine the outcome of all corporate actions requiring shareholder approval, including by the election and removal of at least 50% of our directors. Even if Ballantyne were to control less than a majority of the voting power of our outstanding Common Shares and ceased to hold any Class B Shares, it may be able to influence the outcome of such corporate actions so long as it owns a significant portion of our Common Shares. If Ballantyne does not complete the Separation or otherwise dispose of its Common Shares, it could remain our controlling shareholder for an extended period of time or indefinitely.

 

Ballantyne’s interests may not be the same as, or may conflict with, the interests of our other shareholders. Investors in this offering will not be able to affect the outcome of any shareholder vote while Ballantyne controls the majority of the voting power of our outstanding Common Shares. As a result, Ballantyne may be able to control, directly or indirectly and subject to applicable law, all matters affecting us, including:

 

  any determination with respect to our business direction and policies, including the appointment and removal of directors;
     
  any determinations with respect to mergers, business combinations or dispositions of assets;
     
  our financing and dividend policy, and the payment of dividends on our Common Shares, if any;
     
  compensation and benefit programs and other human resources policy decisions;
     
  changes to any other agreements that may adversely affect us; and
     
  determinations with respect to our tax returns.

 

-29-

 

 

Because Ballantyne’s interests may differ from ours or from those of our other shareholders, actions that Ballantyne takes with respect to us, as our controlling shareholder, may not be favorable to us or our other shareholders.

 

If Ballantyne sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on our Common Shares and we may become subject to the control of a presently unknown third party.

 

Following the completion of this offering, Ballantyne will continue to control a significant equity interest in our company. Ballantyne will have the ability, should it choose to do so, to sell some or all of our Common Shares it owns in a privately-negotiated transaction, which, if sufficient in size, could result in a change of control of our company.

 

The ability of Ballantyne to privately sell the Common Shares it owns, with no requirement for a concurrent offer to be made to acquire all of the Common Shares that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your Common Shares that may otherwise accrue to Ballantyne on its private sale of our Common Shares. Additionally, if Ballantyne privately sells its significant equity interests in our company, we may become subject to the control of a presently unknown third party. Such third party may have interests that conflict with those of other shareholders.

 

Some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in Ballantyne, and some of our directors may have actual or potential conflicts of interest because they also serve as officers of Ballantyne.

 

Because of their current or former positions with Ballantyne, some of our executive officers and directors may own Ballantyne Common Shares or have options to acquire Ballantyne Common Shares, and the individual holdings may be significant for some of these individuals compared to their total assets. In addition, following the Separation, certain of officers and directors will also continue to serve as officers and directors of Ballantyne. Although all transactions with related parties after this offering will be approved by a committee of non-Ballantyne-affiliated directors, this ownership or service may create the appearance of conflicts of interest when the Ballantyne-affiliated officers and/or directors are faced with decisions that could have different implications for Ballantyne or us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between Ballantyne and us regarding the terms of the agreements governing the Separation and the relationship thereafter between the companies, including the Management Services Agreement.

 

The IRS may not agree with the position that we should be treated as a foreign corporation for U.S. federal income tax as a result of the Separation.

 

Although we are incorporated under the laws of Canada, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to section 7874 of the Code. For U.S. federal income tax purposes, a corporation is generally considered a tax resident in the jurisdiction of its organization or incorporation. Because we are incorporated under the laws of Canada, we would generally be classified as a foreign corporation (and, therefore, a non-U.S. tax resident) for U.S. federal income tax purposes. Section 7874 provides an exception pursuant to which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes. These rules are complex and require analysis of all relevant facts and circumstances, and there is limited guidance and significant uncertainties as to their application. If it were determined that we should be taxed as a U.S. corporation for U.S. federal income tax purposes under section 7874, we would be liable for U.S. federal income tax on our income like any other U.S. corporation and certain distributions made by us to non-U.S. holders of our Common Shares would be subject to U.S. withholding tax. Taxation as a U.S. corporation could have a material adverse effect on our financial position and results from operations.

 

Section 7874 is currently expected to apply to the Separation in a manner such that we should not be treated as a U.S. corporation for U.S. federal income tax purposes. However, holders are cautioned that the application of section 7874 to us is extremely complex and the applicable Treasury Regulations are subject to significant uncertainty and there is limited guidance regarding their application. Moreover, the application of section 7874 to the facts and circumstances of the Separation are uncertain. In addition, there could be a future change in law under section 7874 of the Code, the Treasury Regulations promulgated thereunder or otherwise that could have an effect on the application of section 7874 to us. No IRS ruling has been requested or will be obtained regarding the U.S. federal income tax consequences of the Separation or any other matter described in this prospectus/proxy statement. There can be no assurance that the IRS will not challenge the U.S. federal income tax treatment described above or that, if challenged, such treatment will be sustained by a court.

 

-30-

 

 

We potentially could have received better terms from unaffiliated third parties than the terms we received in our agreements with Ballantyne.

 

The agreements we entered into with Ballantyne in connection with the Separation were negotiated while we were still part of Ballantyne’s business. See “Certain Relationships and Related Party Transactions—Relationship with Ballantyne.” Accordingly, during the period in which the terms of those agreements will have been negotiated, we did not have an independent board of directors (the “Board of Directors”) or a management team independent of Ballantyne. The terms of the agreements negotiated in the context of the Separation relate to, among other things, the allocation of assets, intellectual property, liabilities, rights and other obligations between Ballantyne and us, and arm’s-length negotiations between Ballantyne and an unaffiliated third party in another form of transaction, such as a buyer in a sale of a business, may have resulted in more favorable terms to the unaffiliated third party.

 

Because we will lease, instead of own, the Joliette Plant where we manufacture all of our screens, it is possible that Strong/MDI as landlord may terminate the lease which would negatively impact our production.

 

We manufacture our screens in the Joliette Plant, an approximately 80,000 square-foot facility near Montreal, Quebec, Canada. Strong/MDI, our major shareholder after this offering, will continue to own this facility. We plan to lease it through Strong Entertainment Subco, our subsidiary post-Separation. While we plan to enter into the Joliette Plant Lease, which will be a fifteen (15) year lease for the Joliette Plant (with the option of Strong Entertainment Subco to renew for five (5) consecutive periods of five years each, and a right of first refusal to purchase the Joliette Plant in the event that Strong/MDI wishes to sell the property to a third-party in the future) with Strong/MDI, it is possible that Strong/MDI may terminate the lease under certain limited circumstances, and therefore interrupt our screen production. In addition, we plan to use part of the proceeds from this offering to improve and expand the Joliette Plant, because it is our only manufacturing facility in North America. Compared to the ownership, the rental relationship may not provide us enough protection on our interests and investments in this facility.

 

Government agencies in Canada have notified Strong/MDI that certain modifications are required to be made to the Joliette Plant in order to meet safety and emissions standards.

 

Strong/MDI has been informed by certain government agencies in Canada, including but not limited to, the Joliette Fire Department and the Quebec Ministry of the Environment, that certain aspects of the Joliette Plant must be modified to fully comply with safety and emissions standards. Strong/MDI has implemented changes to address some, but not all, of the identified requirements.

 

The required modifications include installing new air evaluator and exhaust chimneys as well as modifying the walls and doors in the paint and coatings area to achieve a 2-hour fire resistance standard. In addition, it was required that we modify certain mezzanine areas to reduce their size and upgrade construction to non-combustible materials, add an additional exterior access, and purchase spill resistant pallets. We estimate that if we were to proceed with implementing the remaining identified requirements, the cost would be approximately CAD$0.3 million to CAD$0.5 million (approximately US$0.2 million to US$0.4 million) if undertaken on their own and not as part of a broader plant improvement initiative. Our intention is to address the remaining requirements as one component of an expansion and reorganization of certain areas of the Joliette Plant. We believe the project would improve production flow in the plant, accommodate growth of the Eclipse product line in addition to addressing the requirements. We estimate that the cost of an expansion and reorganization of the Joliette Plant, which includes the estimated costs to remedy the remaining required modifications, would be approximately CAD$1.0 million to CAD$1.5 million (approximately US$0.8 million to US$1.2 million), depending on the final scope of the expansion as well as fluctuations in construction materials and other costs. If we fail to address the requirements, it could be possible that we could incur penalties or production could be interrupted. The expansion could cost more or take longer than our expectations and could result in production disruptions in the facility during the construction process.

 

-31-

 

 

We have agreed to indemnify Ballantyne for future losses, if any, related to current litigation related to the operation businesses being transferred to us in the Separation.

 

Pursuant to the terms of the Ballantyne Asset Purchase Agreement, we have agreed to indemnify Ballantyne 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 Ballantyne for all expenses (including legal fees) related to the defense of such claims. There can be no assurance that we will have sufficient capital to pay the full amount of such aggregate liabilities or losses.

 

Risks Related to this Offering and Ownership of Our Common Shares

 

There may not be an active, liquid trading market for our Common Shares.

 

Prior to this offering, there has been no public market for our Common Shares. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the NYSE American or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any of our Common Shares that you purchase. The initial public offering price of our Common Shares is, or will be, determined by negotiation between us and the underwriters and may not be indicative of prices that will prevail following the completion of this offering. The market price of Common Shares may decline below the initial public offering price, and you may not be able to resell your Common Shares at or above the initial public offering price.

 

Our share price may fluctuate significantly, and you may not be able to resell your Common Shares at or above the initial public offering price.

 

The trading price of our Common Shares is likely to be volatile and subject to wide price fluctuations in response to various factors, including:

 

  market conditions in the broader stock market in general, or in our industry in particular;
     
  actual or anticipated fluctuations in our quarterly financial and results of operations;
     
  introduction of new products and services by us or our competitors;
     
  issuance of new or changed securities analysts’ reports or recommendations;
     
  sales of large blocks of our Common Shares;
     
  additions or departures of key personnel;
     
  regulatory developments;
     
  litigation and governmental investigations;
     
  economic and political conditions or events; and
     
  changes in investor perception of our market positions based on third-party information.

 

-32-

 

 

These and other factors may cause the market price and demand for our Common Shares to fluctuate substantially, which may limit or prevent investors from readily selling their Common Shares and may otherwise negatively affect the liquidity of our Common Shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the shares. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

 

The trading market for our Common Shares will also be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

 

We will be a “controlled company” within the meaning of the rules of the NYSE American and, as a result, will qualify for exemptions from certain corporate governance requirements. While we do not intend to avail ourselves of these exemptions, we may do so, and, accordingly, you may not have the same protections afforded to shareholders of companies that are subject to such requirements.

 

Upon completion of this offering, Ballantyne will continue to control indirectly a majority of the voting power of our outstanding Common Shares and all of our Class B Shares, which will indirectly entitle Ballantyne to elect fifty percent (50%) of our board (or a majority, where our board is set at an odd number), until such Class B Shares are redeemed. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE American. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

  the requirement that a majority of the Board of Directors consist of independent directors;
     
  the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
     
  the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

 

While Ballantyne indirectly controls a majority of the voting power of our outstanding Common Shares and all of our Class B Shares, we may not have a majority of independent directors or our nominating and corporate governance and compensation committees may not consist entirely of independent directors. While we do not intend to avail ourselves of these exemptions, we may do so, and, accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE American.

 

Future sales by Ballantyne or others of our Common Shares, or the perception that the Separation or such sales may occur, could depress the price of our Common Shares.

 

Immediately following the completion of this offering, Ballantyne will own indirectly approximately 66.7% of our outstanding Common Shares (or 63.5% if the underwriters exercise their option to purchase additional Common Shares in full), which percentage calculation does not take into account the RSUs to be issued to our directors and officers upon the completion of this offering (see “Executive and Director Compensation—Long-Term Incentives—Equity Grants”). Subject to the restrictions described in the paragraph below, future sales of these Common Shares in the public market will be subject to the volume and other restrictions of Rule 144 under the Securities Act, for so long as Ballantyne is deemed to be our affiliate, unless the Common Shares to be sold are registered with the Securities and Exchange Commission (the “SEC”). We are unable to predict with certainty whether or when Ballantyne will sell a substantial number of Common Shares to the extent it retains Common Shares following the Separation. The sale by Ballantyne of a substantial number of Common Shares after this offering, or a perception that such sales could occur, could significantly reduce the market price of our Common Shares.

 

Pursuant to lock-up agreements, our directors and officers have agreed, for a period of twelve (12) months from the date of this offering, and any other holder of our outstanding Common Shares has agreed, for a period of twelve (12) months from the date of this offering, subject to limited exceptions, without the prior written consent of the representative of the underwriters, that they will not offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any of our securities. In addition, pursuant to the Underwriting Agreement (as defined below), we and any of our successors have agreed, for a period of twelve (12) months from the date of the Underwriting Agreement, that each will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock; (ii) file or caused to be filed any registration statement with the SEC relating to the offering of any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock; (iii) complete any offering of our debt securities, other than entering into a line of credit with a traditional bank; or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our capital stock, whether any such transaction described in clause (i), (ii), (iii) or (iv) above is to be settled by delivery of shares of our capital stock or such other securities, in cash or otherwise. The representative of the underwriters may, in its sole discretion and at any time without notice, release all or any portion of the Common Shares subject to the lock-up. See “Underwriting.”

 

-33-

 

 

Immediately upon this offering, we intend to file a registration statement registering under the Securities Act the Common Shares reserved for issuance under our Plan. If equity securities granted under our Plan are sold or it is perceived that they will be sold in the public market, the trading price of our Common Shares could decline substantially. These sales also could impede our ability to raise future capital.

 

We are governed by the corporate laws of British Columbia, Canada, which in some cases have a different effect on the rights of shareholders than the corporate laws of the United States.

 

We are governed by the BCBCA, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our Articles, as amended, have the effect of delaying, deferring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to pay for our Common Shares. The material differences between the BCBCA and Delaware General Corporation Law that may have the greatest such effect include, but are not limited to, the following: (i) for certain corporate transactions (such as amalgamations, arrangements or amendments to our Articles) the BCBCA generally requires the voting threshold to be a special resolution approved by 66 2/3% of shareholders, or as set out in the Articles, as amended, as applicable, whereas Delaware General Corporation Law generally only requires a majority vote; and (ii) under the BCBCA holders of an aggregate of 5% or more of our Common Shares can requisition a special meeting of shareholders, whereas such right does not exist under the Delaware General Corporation Law. We cannot predict whether investors will find our company and our Common Shares less attractive because of these material differences or because we are governed by the BCBCA. If some investors find our Common Shares less attractive as a result, there may be a less active trading market for our Common Shares and our share price may be more volatile.

 

Provisions in our Articles, as amended, Canadian law and certain restrictive covenants applicable to us could make an acquisition of us, which may be beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to replace or remove our current management and/or limit the market price of our Common Shares.

 

Provisions in our Articles, as amended, currently in effect, as well as certain provisions under the BCBCA and applicable Canadian laws may discourage, delay or prevent a merger, acquisition or other change in control of us that shareholders may consider favorable, including transactions in which they might otherwise receive a premium for their Common Shares. For instance, our Articles, as amended, contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders’ meetings.

 

-34-

 

 

Because we are a corporation incorporated under the laws of British Columbia, it may be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal securities laws of the United States. Similarly, it may be difficult for Canadian Investors to enforce civil liabilities against our directors and officers residing outside Canada.

 

We are a corporation incorporated under the laws of British Columbia that maintains a principal executive office in the United States, and a substantial portion of our assets are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon us, or to realize in the United States upon judgements of courts of the United States predicated upon civil liabilities under the Securities Act. Investors should not assume that Canadian courts: (i) would enforce judgements of U.S. courts obtained in actions against us predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or blue sky laws of any state within the United States or (ii) would enforce, in original actions, liabilities against us predicated upon the U.S. federal securities laws or any such state securities or blue sky laws.

 

Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

 

Prior to the Separation, we were a business segment of Ballantyne, and Ballantyne is subject to Section 404 of the Sarbanes-Oxley Act. However, upon completion of this offering, we will not be required to comply with all SEC rules that implement Section 404 of the Sarbanes-Oxley Act and therefore will not be required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Section 404(a) of the Sarbanes-Oxley Act, or Section 404(a), requires that beginning with our second annual report following our initial public offering, management assess and report annually on the effectiveness of our internal control over financial reporting and identify any material weaknesses in our internal control over financial reporting. Although Section 404(b) of the Sarbanes-Oxley Act, or Section 404(b), requires our independent registered public accounting firm to issue an annual report that addresses the effectiveness of our internal control over financial reporting, we have opted to rely on the exemptions provided in the JOBS Act, and consequently will not be required to comply with SEC rules that implement Section 404(b) until such time as we are no longer an “emerging growth company.” We expect our first Section 404(a) assessment will take place for our annual report for the fiscal year ending December 31, 2023, and we will not be required to comply with Section 404(b) rules until we cease to be an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until December 31, 2027, although if our total annual gross revenues are $1.07 billion or more, we would cease to be an “emerging growth company” as of December 31st of that year.

 

-35-

 

 

In order to comply with these rules, we expect to incur additional expenses and devote increased management effort toward ensuring compliance. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

 

In the future, if we fail to complete the annual Section 404 evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. When evaluating our internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting, and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. Our remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting in the future. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows. Any of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our company, which could have a negative impact on our share price.

 

-36-

 

 

The obligations associated with being a public company will require significant resources and management attention.

 

Currently, we are not directly subject to the reporting and other requirements of the Exchange Act. Following the closing of this offering of which this prospectus forms a part, we will be directly subject to such reporting and other obligations under the Exchange Act and the rules of the NYSE American. As an independent public company, we are required to, among other things:

 

  prepare and distribute periodic reports, proxy statements and other shareholder communications in compliance with the federal securities laws and NYSE American rules;
     
  have our own Board of Directors and committees thereof, which comply with federal securities laws and NYSE American rules;
     
  maintain an internal audit function;
     
  institute our own financial reporting and disclosure compliance functions;
     
  establish an investor relations function;
     
  establish internal policies, including those relating to trading in our securities and disclosure controls and procedures; and
     
  comply with the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board and the NYSE American.

 

These reporting and other obligations will place significant demands on our management and our administrative and operational resources, including accounting resources, and we expect to face increased legal, accounting, administrative and other costs and expenses relating to these demands that we had not incurred as a segment of Ballantyne. Certain of these functions will be provided by Ballantyne pursuant to the Management Services Agreement. See “Certain Relationships and Related Party Transactions—Relationship with Ballantyne—Management Services Agreement.” Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have an adverse effect on our business, financial condition, results of operations and cash flows.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Common Shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our Common Shares less attractive if we rely on these exemptions. If some investors find our Common Shares less attractive as a result, there may be a less active trading market for our Common Shares and our share price may be more volatile.

 

Risks Related to the Offering

 

New investors in our Common Shares will experience immediate and substantial book value dilution after this offering.

 

The initial public offering price of our Common Shares will be substantially higher than the pro forma net tangible book value per share of the outstanding Common Shares immediately after the offering. Based on an assumed initial public offering price of $5.00 per share and our net tangible book value as of, June 30, 2022, if you purchase our Common Shares in this offering you will pay more for your Common Shares than the amounts paid by our existing shareholders for their Common Shares and you will suffer immediate dilution of $2.95 per share in pro forma net tangible book value.

 

As a result of this dilution, investors purchasing Common Shares in this offering may receive significantly less than the full purchase price that they paid for the Common Shares purchased in this offering in the event of a liquidation. See “Dilution.”

 

-37-

 

 

Canada does not have a system of exchange controls, and control of the Company by “non-Canadians” may be subject to review and further government action.

 

Canada has no system of exchange controls. There are no Canadian governmental laws, decrees, or regulations relating to restrictions on the repatriation of capital or earnings of the Company to non-resident investors. There are no laws in Canada or exchange control restrictions affecting the remittance of dividends, profits, interest, royalties and other payments by the Company to non-resident holders of the Common Shares, except as discussed below under “Certain Canadian Federal Income Tax Consequences to Holders of our Common Shares that are Non-Resident in Canada”.

 

There are no limitations under the laws of Canada or in the organizing documents of the Company on the right of foreigners to hold or vote securities of the Company, except that the Investment Canada Act may require that a “non-Canadian” not acquire “control” of the Company without prior review and approval by the Minister of Innovation, Science and Economic Development. The acquisition of one-third or more of the voting shares of the Company would give rise a rebuttable presumption of the acquisition of control, and the acquisition of more than fifty percent of the voting shares of the Company would be deemed to be an acquisition of control. In addition, the Investment Canada Act provides the Canadian government with broad discretionary powers in relation to national security to review and potentially prohibit, condition or require the divestiture of, any investment in the Company by a non-Canadian, including non-control level investments. “Non-Canadian” generally means an individual who is neither a Canadian citizen nor a permanent resident of Canada within the meaning of the Immigration and Refugee Protection Act (Canada) who has been ordinarily resident in Canada for not more than one year after the time at which he or she first became eligible to apply for Canadian citizenship, or a corporation, partnership, trust or joint venture that is ultimately controlled by non-Canadians.

 

We do not know whether an active market for our Common Shares will be sustained or what the market price of our Common Shares will be and as a result it may be difficult for investors to sell their Common Shares.

 

Prior to our listing on the NYSE American, there was no trading market for our Common Shares. Additionally, an active trading market for our Common Shares may not emerge and may not be sustainable. It may be difficult for investors to sell their Common Shares without depressing the market price for the Common Shares or at all. As a result of these and other factors, investors may not be able to sell their Common Shares at or above the offering price or at all. Further, an inactive market may also impair our ability to raise capital by selling Common Shares and may impair our ability to enter into strategic partnerships or acquire companies or products by using our Common Shares as consideration. If an active market for our Common Shares does not develop or is not sustained, it may be difficult to sell your Common Shares.

 

-38-

 

 

We do not intend to pay cash dividends.

 

We do not intend to declare or pay any cash dividends in the near term and plan to retain all available funds to finance the growth of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors in accordance with applicable law and will be dependent upon then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors considers relevant.

 

We are applying for listing of our Common Shares on NYSE American. We can provide no assurance that our Common Shares will qualify to be listed, and if listed, that our Common Shares will continue to meet NYSE American listing requirements. If we fail to comply with the continuing listing standards of NYSE American, our securities could be delisted.

 

We anticipate that our Common Shares will be eligible to be listed on NYSE American following this offering. However, we can provide no assurance that our application will be approved, and that an active trading market for our Common Shares will develop and continue. If, after listing, we fail to satisfy the continued listing requirements of NYSE American, such as the corporate governance requirements or the minimum closing bid price requirement, NYSE American may take steps to delist our Common Shares. Such a delisting would likely have a negative effect on the price of our Common Shares and would impair your ability to sell or purchase our Common Shares when you wish to do so. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our Common Shares to become listed again, stabilize the market price or improve the liquidity of our Common Shares, prevent our Common Shares from dropping below the NYSE American minimum bid price requirement or prevent future noncompliance with NYSE American’s listing requirements.

 

Our Board can, without shareholder approval, cause preferred shares to be issued on terms that adversely affect common shareholders or which could be used to resist a potential take-over of us.

 

Under our Notice of Articles, as amended, our Board is authorized to issue up to 150,000,000 preferred shares in one or more series, none of which were issued and outstanding as of the date of this prospectus. Also, our Board, without shareholder approval, will have the authority to determine the rights, preferences, privileges and restrictions, including voting rights, of those shares. If the Board causes preferred shares to be issued, the rights of the holders of our Common Shares could be adversely affected. The Board’s ability to determine the terms of preferred shares and to cause its issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting shares. Preferred shares issued by the Board could include voting rights which could shift the ability to control us to the holders of the preferred shares. Preferred shares could also have conversion rights into Common Shares at a discount to the market price of the Common Shares which could negatively affect the market for our Common Shares. In addition, preferred shares would have preference in the event of liquidation of us, the payment of dividends and other rights superior to the Common Shares. We have no current plans to issue any preferred shares.

 

The Class B Shares contain terms that could adversely affect common shareholders or which could be used to resist a potential take-over of us.

 

Under our Notice of Articles, as amended, our Board is authorized to issue up to 100 Class B Shares, 100 of which will be issued and outstanding as of the date of the Separation. The Class B Shares could have the effect of making it more difficult for a third party to acquire a majority of our outstanding Common Shares. The Class B Shares include voting rights to elect fifty percent (50%) of our board (or a majority, where our board is set at an odd number) which has the effect of limiting the common share voting rights with respect to election of the Board.

 

-39-

 

 

The market price of our Common Shares may fluctuate significantly, which could result in substantial losses by our investors.

 

The market price of our Common Shares may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:

 

  Announcements of technological innovations, new products or product enhancements by us or others;
     
  Announcements by us of significant strategic partnerships, out-licensing, in-licensing, joint ventures, acquisitions or capital commitments;
     
  Success of research and development projects;
     
  Developments concerning intellectual property rights or regulatory approvals;
     
  Variations in our and our competitors’ results of operations;
     
  Changes in earnings estimates or recommendations by securities analysts, if our Common Shares are covered by analysts;
     
  Changes in government regulations or patent decisions;
     
  Future issuances of Common Shares or other securities;
     
  The addition or departure of key personnel;
     
  Announcements by us or our competitors of acquisitions, investments or strategic alliances;
     
  General market conditions, including the volatility of market prices for shares of technology companies generally, and other factors, including factors unrelated to our operating performance; and
     
  The other factors described in this “Risk Factors” section.

 

These factors and any corresponding price fluctuations may materially and adversely affect the market price of our Common Shares and result in substantial losses by our investors.

 

Further, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations in the past. Continued market fluctuations could result in extreme volatility in the price of our Common Shares, which could cause a decline in the value of our Common Shares. Price volatility of our Common Shares might be worse if the trading volume of our Common Shares is low. In the past, following periods of market volatility, shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and attention of management from our business, even if we are successful. Future sales of our Common Shares could also reduce the market price of such shares.

 

Moreover, the liquidity of our Common Shares is limited, not only in terms of the number of shares that can be bought and sold at a given price, but by delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us, if any. These factors may result in lower prices for our Common Shares than might otherwise be obtained and could also result in a larger spread between the bid and ask prices for our Common Shares. In addition, without a large float, our Common Shares are less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our Common Shares may be more volatile. In the absence of an active public trading market, an investor may be unable to liquidate its investment in our Common Shares. Trading of a relatively small volume of our Common Shares may have a greater impact on the trading price of our Common Shares than would be the case if our public float were larger. We cannot predict the prices at which our Common Shares will trade in the future.

 

Raising additional capital by issuing securities may cause dilution to existing shareholders and/or have other adverse effects on our operations.

 

We may need to raise future capital to implement our business strategies. We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity, convertible debt securities or other equity-based derivative securities, your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Any additional indebtedness we incur would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our Common Shares to decline and existing shareholders may not agree with our financing plans or the terms of such financings. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, or our products, or grant licenses on terms unfavorable to us. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

-40-

 

 

Our management will have broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree or which do not produce beneficial results.

 

We plan to use the proceeds of the offering for general corporate purposes, which may include working capital, capital expenditures, including improvements to the Joliette Plant (which we expect to be leased to us post-Separation pursuant to the Joliette Plant Lease to be entered into as part of the Separation between Strong Entertainment Subco and Strong/MDI), operational purposes and potential acquisitions in complementary businesses. While we do not currently have any agreement with respect to an acquisition, we intend to evaluate potential opportunities and could use proceeds of the offering to invest in one or more complementary businesses. The principal reasons for this offering are to increase our working capital, create a public market for our Common Shares, improve our ability to access the capital markets in the future, and to provide capital for general corporate purposes. The principal reasons for this offering are to increase our working capital, create a public market for our Common Shares, improve our ability to access the capital markets in the future, and to provide capital for general corporate purposes. (See Use of Proceeds). We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our shareholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, financial condition, and results of operation.

 

We could be negatively affected by actions of activist shareholders.

 

Campaigns by shareholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term shareholder value through actions such as financial restructuring, increased debt, special dividends, share repurchases or sales of assets or the entire company. If we are targeted by an activist shareholder in the future, the process could be costly and time-consuming, disrupt our operations and divert the attention of management and our employees from executing our strategic plan. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of our Board may lead to the perception of a change in the direction of our business, instability or lack of continuity, which may be exploited by our competitors, cause concern to current or potential customers, who may choose to transact with our competitors instead of us, and make it more difficult to attract and retain qualified personnel.

 

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our Common Shares, or if our results of operations do not meet their expectations, our share price and trading volume could decline.

 

The trading market for our Common Shares will be influenced by the research and reports that industry or securities analysts publish about us and our business. We do not have any control over these analysts. If any of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, any of the analysts who cover us downgrades our stock, or if our results of operations do not meet their expectations, our share price could decline.

 

We may be a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences to U.S. Holders.

 

In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (looking through certain 25% or more-owned subsidiaries) is passive income or (2) at least 50% of the average value of our assets (looking through certain 25% or more-owned subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the Section of this prospectus captioned “Material U.S. Federal Income Tax Consequences”) of our Common Shares, the U.S. Holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. The determination of whether we are a PFIC is a fact-intensive determination made on an annual basis applying principles and methodologies that in some circumstances are unclear and subject to varying interpretation. Our actual PFIC status for any taxable year will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or any subsequent taxable year. We urge U.S. Holders to consult their own tax advisors regarding the possible application of the PFIC rules.

 

-41-

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will” or “may,” or other words that convey uncertainty of future events or outcomes, to identify these forward-looking statements. Forward-looking statements in this prospectus may include, but are not limited to, statements about:

 

  expectations of future results of operations or financial performance;
     
  introduction of new products or compensation strategies;
     
  successful implementation of the Separation and our operations of the Entertainment Business following the Separation;
     
  plans for growth, future operations, and potential acquisitions;
     
  the size and growth potential of possible markets for our product candidates and our ability to serve those markets;
     
  the rate and degree of market acceptance of our business model;
     
  the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing and our ability to obtain additional financing;
     
  our ability to attract strategic partners with development, regulatory and commercialization expertise; and
     
  the development of our marketing capabilities.

 

There are numerous important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this prospectus under the caption “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We expressly disclaim any obligation or intention to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

-42-

 

 

USE OF PROCEEDS

 

We estimate the net proceeds to us in this offering will be approximately $11.8 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. This assumes an initial public offering price of $5.00 per share; and assumes no exercise of the underwriters’ over-allotment option to purchase additional Common Shares.

 

We plan to use the proceeds of the offering for general corporate purposes, which may include (i) working capital, (ii) capital expenditures, including those related to a potential expansion of the Joliette Plant, which is estimated at approximately CAD$1.0 million to CAD$1.5 million (approximately US$0.8 million to US$1.2 million) and includes the estimated costs of CAD$0.3 million to CAD$0.5 million (approximately US$0.2 million to US$0.4 million) related to bringing the Joliette Plant (which we expect to be leased to us post-Separation pursuant to the Joliette Plant Lease) into compliance with certain codes and environmental permits, (iii) operational purposes, including working capital to accelerate growth in our new content business and expand our cinema screen and services offerings and (iv) potential acquisitions in complementary businesses. While we do not currently have any agreement with respect to an acquisition, we intend to evaluate potential opportunities and could use proceeds of the offering to invest in one or more complementary businesses. The principal reasons for this offering are to increase our working capital, create a public market for our Common Shares, improve our ability to access the capital markets in the future, and to provide capital for general corporate purposes.

 

Due to the uncertainties inherent in our business, we cannot estimate with certainty the exact amounts of the net proceeds from this offering that may be used for any purpose. As a result, our management will have broad discretion in applying the net proceeds from this offering.

 

-43-

 

 

DIVIDEND POLICY

 

As of the date of this prospectus, we have never declared or paid any cash dividends on our Common Shares or other securities and do not anticipate declaring or paying any cash dividends in the foreseeable future. We currently intend to retain all available funds to finance the growth of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors in accordance with applicable law and will be dependent upon then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors considers relevant.

 

-44-

 

 

CAPITALIZATION

 

The table below describes our cash, cash equivalents and investments and capitalization as of June 30, 2022.

 

  on an actual basis;
     
  on a pro forma basis to give effect to the Separation and related transactions, as if such transactions had occurred on June 30, 2022; and
     
  on a pro forma, as-adjusted, basis to reflect the issuance and sale by us of Common Shares in this offering and the receipt of an estimated of $11.8 million of net proceeds, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the receipt by us of the proceeds of such sale, assuming no exercise of the underwriters’ over-allotment option to purchase additional Common Shares and giving effect to the Landmark Warrant and the grant of RSUs to our directors and officers upon the completion of this offering.

 

You should read this table in conjunction with the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

   

As of June 30, 2022

(unaudited)

 
    Actual     Pro Forma     Pro Forma As Adjusted  
    (in thousands)  
                   
Cash and cash equivalents   $ 2,966     $ 2,966     $ 14,743  
Debt:                        
Revolving credit facility     -       -       -  
20-year installment loan     2,522       -       -  
5-year equipment loan     272       272       272  
Tenant improvement loan     179       179       179  
Operating lease obligations     329       4,905       4,905  
Total debt   $ 3,302     $ 5,356     $ 5,356  
                         
Equity:                        
Preferred shares   $ -       -       -  
Class A Common shares     -       -       -  
Class B Common shares     -       -       -  
Additional paid in capital     -       -       24,990  
Accumulated other comprehensive loss     (4,181 )     (4,181 )     (4,181 )
Net parent investment     13,781       12,849       -  
Total equity   $ 9,600     $ 8,668     $ 20,809  
                         
Total capitalization   $ 12,902     $ 14,024     $ 26,165  

 

-45-

 

 

DILUTION

 

If you invest in our Common Shares in this offering, you will experience dilution to the extent of the difference between the public offering price per share and the net tangible book value per share of our Common Shares immediately after this offering. If you purchase our Common Shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price in this offering per share of our Common Shares and the pro forma as adjusted net tangible book value per share of our Common Shares upon closing of this offering. Net tangible book value represents the book value of our total tangible assets less the book value of our total liabilities. Pro forma net tangible book value per share represents our net tangible book value divided by the number of Common Shares issued and outstanding. Pro forma as adjusted net tangible book value per share represents our net tangible book value divided by the number of Common Shares issued and outstanding after giving effect to the pro forma adjustment described above, and the payment of estimated offering expenses by us in connection with the sale of Common Shares in this offering.

 

We calculate net tangible book value per common share by dividing our net tangible assets by the number Common Shares issued and outstanding as of June 30, 2022. Our net tangible book value as of June 30, 2022, was approximately $7.3 million. Our pro forma net tangible book value as of June 30, 2022, was $6.4 million, or $1.06 per common share. After giving effect to the pro forma adjustments described above, our pro forma as adjusted net tangible book value as of June 30, 2022, would have been $18.5 million, or $2.05 per share. This represents an immediate and substantial dilution of $2.95 per share to new investors purchasing Common Shares in this offering. The following table illustrates this dilution per share:

 

Assumed public offering price per common share           $ 5.00
Net tangible book value per common share as of June 30, 2022   $ 1.21        
Increase in net tangible book value per common share attributable to new investors   $ 0.84        
As adjusted net tangible book value per common share as of June 30, 2022 after giving effect to this offering           $ 2.05
Dilution per common share to new investors participating in this offering           $ 2.95

 

A $1.00 increase (or decrease) in the assumed initial offering price of $5.00 per share would increase (or decrease) the as adjusted net tangible book value per common share after giving effect to this offering by approximately $0.30, and dilution per common share to new investors by approximately $0.70, assuming that the number of Common Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be further diluted.

 

-46-

 

 

THE SEPARATION TRANSACTION

 

Strong Global Entertainment was incorporated as a company under the BCBCA on November 9, 2021. All of the outstanding Common Shares of Strong Global Entertainment are currently held by Strong/MDI, a wholly-owned subsidiary of Ballantyne. Prior to completion of this offering, Ballantyne will also own all of the outstanding capital stock of STS, who in turn owns all of the outstanding capital stock of Strong Studios. On November 9, 2021, Strong Entertainment Subco was incorporated as a company under the BCBCA. All of the outstanding Common Shares of Strong Entertainment Subco are currently held by Strong/MDI.

 

Prior to the completion of this offering, we, Strong Entertainment Subco and/or STS, will enter into the Master Asset Purchase Agreement, the IP Assignment Agreement (as defined below), the Ballantyne Asset Transfer Agreement, the Ballantyne IP Assignment Agreement, the Joliette Plant Lease, the Share Transfer Agreements and a number of other agreements with Ballantyne and or Strong/MDI for the purpose of accomplishing the Separation and setting forth various matters governing our relationship with Ballantyne after the completion of this offering. Pursuant to the Management Services Agreement, we and Ballantyne will provide certain services to each other, which could include information technology, legal, finance and accounting, human resources, tax, treasury, and other services, and will charge us a fee that is based on its actual costs and expenses for those services in the future (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations). These agreements will take effect upon the closing of this offering. We will enter into these agreements with Ballantyne and/or Strong/MDI while we are still an indirect wholly-owned subsidiary of Ballantyne and certain terms of these agreements are not necessarily the same as could have been obtained from a third party.

 

The following are the principal steps of the Separation:

 

  1. Pursuant to the terms of the Master Asset Purchase Agreement and an assignment agreement between Strong/MDI and Strong Entertainment Subco (the “IP Assignment Agreement”), Strong/MDI will transfer to Strong Entertainment Subco the assets comprising Strong/MDI’s operating business, except for the Joliette Plant, and Strong Entertainment Subco will assume the liabilities relating thereto, except for the 20-year installment loan collateralized by the Joliette Plant, all in consideration for Common Shares of Strong Entertainment Subco;
     
  2. Pursuant to the terms of the Joliette Plant Lease, Strong/MDI will lease the Joliette Plant to Strong Entertainment Subco for a fifteen (15) year lease, with the option of Strong Entertainment Subco to renew for five (5) consecutive periods of five years each, and a right of first refusal to purchase the Joliette Plant in the event that Strong/MDI wishes to sell the property to a third-party in the future;
     
  3. Pursuant to the terms of the Ballantyne Asset Transfer Agreement and the Ballantyne IP Assignment Agreement, (i) Ballantyne will transfer to STS a limited number of contracts and intellectual property used in the Entertainment Business and (ii) STS will indemnify and hold harmless Ballantyne in an aggregate amount not to exceed $250,000 per year, against the currently outstanding product liability or personal injury claims (such maximum amount excluding legal fees) arising out of products sold or distributed in the U.S. by the operations of the businesses being transferred to us in the Separation, all in a tax-free transfer under Section 351 of the U.S. Internal Revenue Code as well as to indemnify Ballantyne for all expenses (including legal fees) related to the defense of such claims;
     
  4. Pursuant to a Share Transfer Agreement between Strong/MDI and Strong Global Entertainment, Strong/MDI will transfer 100% of the Common Shares of Strong Entertainment Subco to Strong Global Entertainment in exchange for additional Common Shares and 100 new Class B Shares of Strong Global Entertainment;
     
  5. Pursuant to a Share Transfer Agreement between Ballantyne and Strong/MDI, Ballantyne will transfer all of the shares of capital stock of STS to Strong/MDI in consideration for Common Shares of Strong/MDI;
     
  6. Pursuant to a Share Transfer Agreement between Strong/MDI and Strong Global Entertainment, Strong/MDI will transfer all of the shares of capital stock of STS received in step 5 to Strong Global Entertainment in consideration for additional Common Shares of Strong Global Entertainment; and
     
  7. Strong/MDI will change its name.

 

As a consequence of the transactions noted above, we will lease the Joliette Plant under the Joliette Plant Lease, and will indirectly acquire all of the assets and liabilities related to the screen manufacturing business held by Strong/MDI and/or Ballantyne prior to the offering and all of the shares of STS.

 

Pursuant to the Master Asset Purchase Agreement, to the extent that permits or consents are not obtained to transfer any particular assets or operations to us prior to the closing of this offering, Strong/MDI will continue to own such assets or operations but will operate them for our benefit and we will be entitled to the economic benefits thereof. See “Certain Relationships and Related Party Transactions—Relationship with Ballantyne—Master Asset Purchase Agreement and Share Transfer Agreements.”

 

-47-

 

 

The diagram below depicts a simplified version of our current organizational structure, together with the governing law of each corporate entity.

 

 

The diagram below depicts a simplified version of our organizational structure immediately following the completion of the Separation and the closing of this offering, together with the governing law of each corporate entity, assuming the underwriters do not exercise their over-allotment option.

 

 

* The percentage calculation does not take into account the RSUs to be issued to our directors and officers upon the completion of this offering (see “Executive and Director Compensation—Long-Term Incentives—Equity Grants”).

 

-48-

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The unaudited pro forma condensed combined financial statements consist of the unaudited pro forma condensed combined statements of income for the six months ended June 30, 2022 and the year ended December 31, 2021, and the unaudited pro forma condensed combined balance sheet as of June 30, 2022. The unaudited pro forma condensed combined financial statements have been derived by application of pro forma adjustments to our historical combined financial statements included elsewhere in this prospectus.

 

The unaudited pro forma condensed combined balance sheet reflects the Separation, this offering and other transactions, as described below, as if they occurred on June 30, 2022, while the unaudited pro forma condensed combined statements of operations give effect to the Separation and this offering as if they occurred on January 1, 2021. The pro forma adjustments, described in the related notes, are based on currently available information and certain estimates and assumptions that management believes are reasonable. These estimates and assumptions are preliminary and have been made solely for purposes of developing these unaudited pro forma condensed combined financial statements. Actual results could differ, perhaps materially, from these estimates and assumptions. Included in the pro forma adjustments are items that are directly related to the Separation and this offering, factually supportable and, for purposes of the unaudited pro forma condensed combined statements of operations, have a continuing impact.

 

The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred had the Separation or this offering been completed on June 30, 2022 for the unaudited pro forma condensed combined balance sheet or on January 1, 2021 for the unaudited pro forma condensed combined statements of operations. The unaudited pro forma condensed combined financial statements should not be relied on as indicative of the historical operating results that we would have achieved or any future operating results or financial position that we will achieve after the completion of this offering.

 

The unaudited pro forma condensed combined financial statements reflect the impact of certain transactions, which primarily comprise the following:

 

  the Separation, which outlines the assets and liabilities to be contributed by Ballantyne to Strong Global Entertainment at Separation date, including the Joliette Plant Lease between Strong/MDI and Strong Entertainment Subco, as described in the section titled “The Separation Transaction”;
     
  the receipt of approximately $11.8 million in net proceeds from the sale of Common Shares in this offering at an assumed initial offering price of $5.00 per share, assuming no exercise of the underwriters’ over-allotment option to purchase additional Common Shares, after deducting the underwriting discount and commissions and estimated offering expenses payable by us; and
     
  the effect of the Landmark Warrant and the grant of RSUs to our directors and officers upon the completion of this offering.

 

We have historically operated as an operating segment of Ballantyne. Ballantyne currently provides certain services to us, and costs associated with these functions have been allocated to us. 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 allocated from Ballantyne. These allocations are primarily reflected within operating expenses in our combined 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 offering or of the additional costs we will incur in the future as we operate as a stand-alone company.

 

Following the completion of this offering, we expect Ballantyne to continue to provide certain services to us and we expect to provide certain services to Ballantyne pursuant to the Management Services Agreement. See the section titled “Certain Relationships and Related Party Transactions—Relationship with Ballantyne – Management Services Agreement”. Pursuant to the Management Services Agreement, we will charge Ballantyne a fee based on our actual costs for providing those services to Ballantyne (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations). In turn, Ballantyne will also charge us a fee that is based on its actual costs for providing those services to us in the future (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations). The unaudited pro forma condensed combined financial statements have not been adjusted for as estimate of these management services to the extent that future costs are expected to be different from historical allocations Actual results may differ from historical allocations or pro forma estimated management services costs.

 

Following the completion of this offering, we will be subject to the reporting requirements of the Exchange Act. We will be required to establish procedures and practices as a stand-alone public company in order to comply with our obligations under the Exchange Act and related rules and regulations. As a result, we will incur additional costs, including audit, investor relations, stock administration and regulatory compliance costs. These additional costs will differ from the costs that were historically allocated to us from Ballantyne.

 

-49-

 

 

The following unaudited pro forma condensed combined financial statements and the related notes should be read in conjunction with the sections titled “Use of Proceeds,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the annual audited combined financial statements, the unaudited interim combined financial statements and the related notes included elsewhere in this prospectus.

 

(in thousands)   June 30, 2022 (unaudited)  
    Actual     Adjustments     Pro Forma  
Assets                  
Current assets:                        
Cash and cash equivalents   $ 2,966     $ 11,777 (a)   $ 14,743  
Accounts receivable, net     5,701       -       5,701  
Inventories, net     3,834       -       3,834  
Other current assets     3,904       -       3,904  
Total current assets     16,405       11,777       28,182  
Property, plant and equipment, net     5,055       (3,454 )(b)     1,601  
Operating lease right-of-use assets     262       4,576 (c)     4,838  
Film and television programming rights, net     1,380       -       1,380  
Intangible assets, net     11       -       11  
Goodwill     927       -       927  
Other assets     3       -       3  
Total assets   $ 24,043     $ 12,899     $ 36,942  
                         
Liabilities and Equity                        
Current liabilities:                        
Accounts payable   $ 3,977     $ -     $ 3,977  
Accrued expenses     3,059       (364 )(e)     2,695  
Short-term debt     2,794       (2,522 )(d)     272  
Current portion of long-term debt     35       -       35  
Current portion of operating lease obligations     62       191 (c)     253  
Deferred revenue and customer deposits     2,481       -       2,481  
Total current liabilities     12,408       (2,695 )     9,713  
Long-term debt, net of current portion     144       -       144  
Operating lease obligations, net of current portion     267       4,385 (c)     4,652  
Deferred income taxes     597       -       597  
Other long-term liabilities     1,027       -       1,027  
Total liabilities     14,443       1,690       16,133  
Commitments, contingencies and concentrations                        
                         
Equity:                        
Class A Common Shares     -       -       -  
Class B Common Shares     -       -       -  
Additional paid-in capital     -       24,990 (e)     24,990  
Accumulated other comprehensive loss     (4,181 )     -       (4,181 )
Net parent investment     13,781       (13,781 )(e)     -  
Total equity     9,600       11,209       20,809  
Total liabilities and equity   $ 24,043     $ 12,899     $ 36,942  

 

  (a) Represents estimated net proceeds from the sale and issuance by us of 3.0 million Common Shares in this offering at the initial public offering price of $5.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. This assumes no exercise of the underwriters’ over-allotment option to purchase additional Common Shares.
  (b) Represents the elimination of the carrying value of the Joliette Plant that will not transfer to the Company as part of the Separation.
  (c) Represents the recognition of a right-of-use asset and operating lease obligation in connection with entering into the Joliette Plant Lease.
  (d) Represents the elimination of the installment 20-year loan collateralized by the Joliette Plant that will not transfer to the Company as part of the Separation.
  (e) Represents the elimination of Net parent investment, the establishment of additional paid-in capital in connection with this offering, and giving effect to the Landmark Warrant and the grant of RSUs to our directors and officers upon the completion of this offering.

 

-50-

 

 

(in thousands)   Six Months Ended June 30, 2022
(unaudited)
 
    Actual     Adjustments     Pro Forma  
                   
Net product sales   $ 14,386     $ -     $ 14,386  
Net service revenues     4,157       -       4,157  
Total net revenues     18,543               18,543  
Cost of products sold     10,692       65 (a)     10,757  
Cost of services     3,547       -       3,547  
Total cost of revenues     14,239       65       14,304  
Gross profit     4,304       (65 )     4,239  
Selling and administrative expenses:                        
Selling     1,225       -       1,225  
Administrative     2,770       108 (b)     2,878  
Total selling and administrative expenses     3,995       108       4,103  
Income from operations     309       (173 )     136  
Other (expense) income:                        
Interest income     2       -       2  
Interest expense     (53 )     36 (c)     (17 )
Foreign currency transaction gain     128       -       128  
Other income, net     4       -       4  
Total other income     81       36       117  
Income before income taxes     390       (137 )     253  
Income tax expense (benefit)     (184 )     32 (d)     (152
Net income   $ 206     $ (105 )   $ 101  
                         
Pro forma net income per share:                        
Basic                   $ 0.01  
Diluted                   $ 0.01  
                         
Pro forma weighted-average shares used to compute net loss per share: (e)                        
Basic                     9,000  
Diluted                     9,150  

 

-51-

 

 

(in thousands)  Year Ended December 31, 2021
(unaudited)
 
   Actual   Adjustments   Pro Forma 
             
Net product sales  $19,631   $-   $19,631 
Net service revenues   6,341    -    6,341 
Total net revenues   25,972         25,972 
Cost of products sold   14,078    127(a)   14,205 
Cost of services   4,526    -    4,526 
Total cost of revenues   18,604    127    18,731 
Gross profit   7,368    (127)   7,241 
Selling and administrative expenses:               
Selling   1,781    -    1,781 
Administrative   4,387    183(b)   4,570 
Total selling and administrative expenses   6,168    183    6,351 
Income from operations   1,200    (310)   890 
Other (expense) income:               
Interest expense   (107)   84(c)   (23)
Foreign currency transaction loss   (65)   -    (65)
Other income, net   153    -    153 
Total other (expense) income   (19)   84    65 
Income before income taxes   1,181    (226)   955 
Income tax expense   (360)   53(d)   (307)
Net income  $821   $(173)  $648 
                
Pro forma net income per share:               
Basic            $

0.07

 
Diluted            $

0.07

                
Pro forma weighted-average shares used to compute net income per share: (e)               
Basic             

9,000

 
Diluted             

9,150

 

 

  (a) Represents (i) the elimination of depreciation expense related to the Joliette Plant that will not transfer to the Company as part of the Separation and (ii) the recognition of rent expense in connection with entering into the Joliette Plant Lease allocated to Cost of products sold.
  (b) Represents (i) the recognition of legal fees incurred in connection with the defense of the outstanding product liability or personal injury claims and (ii) the recognition of rent expense in connection with entering into the Joliette Plant Lease allocated to Administrative expenses.
  (c) Represents the elimination of interest expense related to the installment 20-year loan collateralized by the Joliette Plant that will not transfer to the Company as part of the Separation.
  (d) Represents the income tax impact of adjustments (a) through (c).
  (e) Pro forma weighted-average shares outstanding for purposes of calculating basis net income per share is based on the number of Common Shares expected to be outstanding following this offering. Pro forma weighted-average shares outstanding for purposes of calculating diluted net income per share is based on the number of Common Shares expected to be outstanding following this offering plus the issuance of the Landmark Warrant.

 

-52-

 

 

SELECTED HISTORICAL AND OTHER COMBINED FINANCIAL DATA

 

The selected historical condensed combined statements of income of Strong Global Entertainment for the years ended December 31, 2021 and December 31, 2020 have been derived from the audited combined financial statements of Strong Global Entertainment included elsewhere in this prospectus. The selected historical condensed combined statement of income of Strong Global Entertainment for the year ended December 31, 2019 has been derived from the audited combined financial statements of Strong Global Entertainment not included elsewhere in this prospectus. The selected historical condensed combined statements of operations of Strong Global Entertainment for the six months ended June 30, 2022 and June 30, 2021 and the related selected historical condensed combined balance sheet as of June 30, 2022 have been derived from the unaudited combined financial statements of Strong Global Entertainment included elsewhere in this prospectus. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements.

 

Our historical results are not necessarily indicative of our results in any future period. To ensure a full understanding of the selected financial data, the information presented below should be reviewed in combination with the audited combined financial statements and the related notes thereto included elsewhere in this prospectus.

 

This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Strong Global Entertainment” and the financial statements of Strong Global Entertainment and the notes thereto included elsewhere in this prospectus.

 

Our historical combined financial statements, which are discussed below, are prepared on a stand-alone basis in accordance with U.S. GAAP and are derived from Ballantyne’s 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 Ballantyne. Our combined results are not necessarily indicative of our future performance and do not reflect what our financial performance would have been had we been a stand-alone public company during the periods presented.

 

Ballantyne currently provides certain services to us, and costs associated with these functions have been allocated to us. 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 Ballantyne. These allocations are reflected within operating expenses in our combined 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 offering or of the additional costs we will incur in the future as we operate as a stand-alone company.

 

Following the completion of this offering, we expect Ballantyne to continue to provide certain services to us and we expect to provide certain services to Ballantyne, pursuant to the Management Services Agreement. See the section titled “Certain Relationships and Related Party Transactions—Relationship with Ballantyne – Management Services Agreement”. Pursuant to the Management Services Agreement, we will charge Ballantyne a fee based on our actual costs for providing those services to Ballantyne (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations). In turn, Ballantyne will also charge us a fee that is based on its actual costs for providing those services to us in the future (with mark-up, if necessary, to comply with applicable transfer pricing principles under Canadian and U.S. tax regulations).

 

-53-

 

 

Following the completion of this offering, we will be subject to the reporting requirements of the Exchange Act. We will be required to establish procedures and practices as a stand-alone public company in order to comply with our obligations under the Exchange Act and related rules and regulations. As a result, we will incur additional costs, including audit, investor relations, stock administration and regulatory compliance costs. These additional costs will differ from the costs that were historically allocated to us from Ballantyne.

 

    Six Months Ended June 30,     Years Ended December 31,  
    2022     2021     2021     2020     2019  
                               
Statement of Income Data:                                        
Net product sales   $ 14,386     $ 7,726     $ 19,631     $ 15,987     $ 26,448  
Net service revenues     4,157       2,659       6,341       4,833       10,921  
Total net revenues     18,543       10,385       25,972       20,820       37,369  
Cost of products sold     10,692       5,207       14,078       10,980       16,369  
Cost of services     3,547       1,818       4,526       5,193       8,842  
Total cost of revenues     14,239       7,025       18,604       16,173       25,211  
Gross profit     4,304       3,360       7,368       4,647       12,158  
Selling and administrative expenses:                                        
Selling     1,225       744       1,781       1,656       2,080  
Administrative     2,770       1,961       4,387       4,312       4,700  
Total selling and administrative expenses     3,995       2,705       6,168       5,968       6,780  
Loss on disposal of assets     -       -       -       (33 )     (69 )
Income (loss) from operations     309       655       1,200       (1,354 )     5,309  
Other (expense) income:                                        
Interest income     2       -       -       -       -  
Interest expense     (53 )     (60 )     (107 )     (112 )     (139 )
Fair value adjustment to notes receivable     -       -       -       -       (2,857 )
Foreign transaction gain (loss)     128       (218     (65 )     (292 )     (288 )
Other income, net     4       164       153       3,129       1,732  
Total other income (expense)     81       (114     (19 )     2,725       (1,552 )
Income (loss) before income taxes     390       541       1,181       1,371       3,757  
Income tax (expense) benefit     (184 )     (277 )     (360 )     74       (1,864 )
Net income   $ 206     $ 264     $ 821     $ 1,445     $ 1,893  

 

 

    June 30, 2022
(unaudited)
 
    Actual     Pro Forma As Adjusted(1)  
Balance Sheet Data:                
Assets:                
Cash and cash equivalents   $ 2,966     $ 14,743  
Accounts receivable, net     5,701       5,701  
Inventories, net     3,834       3,834  
Property, plant and equipment, net     5,055       1,601  
Liabilities and equity:                
Accounts payable, accrued expenses and other current liabilities   $ 9,517     $ 9,153  
Short- and long-term debt     2,973       451  
Lease obligations     329       4,905  
Total equity     9,600       20,809  

 

  (1) The pro forma as adjusted balance sheet data in the table above reflects (i) the Separation, (ii) the sale and issuance by us of our Common Shares in this offering, based upon the receipt of an estimated of $11.8 million of net proceeds therefrom, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and (iii) the effect of the Landmark Warrant and the grant of RSUs to our directors and officers upon the completion of this offering. This assumes no exercise of the underwriters’ over-allotment option to purchase additional Common Shares.

 

-54-

 

 

    Six Months Ended June 30,     Years Ended December 31,  
    2022     2021     2021     2020     2019  
Statement of Cash Flow Data:                                        
Net cash (used in) provided by operating activities   $ (2,022   $ 1,468      $ 4,831     $ 4,023     $ 4,185  
Net cash used in investing activities     (516 )     (54 )     (394 )     (467 )     (1,597 )
Net cash provided by (used in) financing activities     898       (1,282 )     (3,334 )     (3,353 )     (2,561 )
Other Supplemental Metrics:                                        
Gross margin     23.2 %     32.4 %     28.4 %     22.3 %     32.5 %
EBITDA(1)   $ 808     $ 1,072     $ 2,194     $ 2,353     $ 4,792  
Adjusted EBITDA     752       200       725       (119     6,984  

 

  (1) Use of Non-GAAP Measures

 

We have prepared our combined financial statements in accordance with United States 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 to exclude income taxes, interest, and depreciation and amortization, Adjusted EBITDA also excludes, share-based compensation, fair value adjustments, severance, foreign currency transaction gains (losses), 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 or to net cash from operating activities as measures of operating results or liquidity. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies, and the measures exclude financial information that some may consider important in evaluating our performance.

 

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

 

We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.

 

The following table presents a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:

 

   

Six Months Ended

June 30,

   

Years Ended

December 31,

 
    2022     2021     2021     2020     2019  
                               
Net income   $ 206     $ 264     $ 821     $ 1,445     $ 1,893  
Interest expense, net     51       60       107       112       139  
Income tax expense (benefit)     184       277       360       (74 )     1,864  
Depreciation and amortization     367       471       906       870       896  
EBITDA     808       1,072       2,194       2,353       4,792  
Stock-based compensation     72       92       175       232       213  
Loss on disposal of assets and impairment charges     -       -       -       33       69  
Foreign currency transaction (gain) loss     (128     218       65       292       288  
Gain on property and casualty and business interruption insurance recoveries     -       (148 )     (148 )     (3,107 )     (1,235 )
Employee retention credit     -       (1,049     (1,576 )     -       -  
Fair value adjustment to notes receivable     -       -       -       -       2,857  
Severance and other     -       15       15       78       -  
Adjusted EBITDA   $ 752     $ 200     $ 725     $ (119 )   $ 6,984  

 

-55-

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion and analysis of the financial condition and results of operations of Strong Global Entertainment as of, and for, the periods presented. As discussed elsewhere, our historical combined financial statements, which are discussed below, are prepared on a stand-alone basis in accordance with U.S. GAAP and are derived from Ballantyne’s 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 Ballantyne. Our combined results are not necessarily indicative of our future performance and do not reflect what our financial performance would have been had we been a stand-alone public company during the periods presented. And such information does not give effect to the Separation. We describe in this section the businesses that will be contributed to us by Ballantyne as part of our Separation, as if they were our businesses for all historical periods described.

 

Overview

 

We are one of the largest manufacturers of premium projection screens and customized screen support systems, and we also distribute digital cinema equipment and provide technical support services to the entertainment industry. We provide exhibitors with a single source for cinema and projection products, solutions and services. We are focused on improving the operating performance as the United States and other countries recover from COVID-19 related business disruptions. We plan to manage the Strong Global Entertainment business segment to grow market share and organic revenue and improve operating results, with the intent of expanding the ultimate valuation of the business. In addition, we may acquire other businesses, which may be within or outside of the Company’s existing markets.

 

Impact of COVID-19 Pandemic

 

In December 2019, a novel coronavirus disease was initially reported, and in March 2020, the World Health Organization characterized COVID-19 as a pandemic. COVID-19 has had a widespread and detrimental effect on the global economy as a result of the continued increase in the number of cases, particularly in the United States, and actions by public health and governmental authorities, businesses, other organizations and individuals to address the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations and shutdowns. The ultimate impact of the COVID-19 pandemic on our business and results of operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the COVID-19 pandemic, including repeat or cyclical outbreaks, and any additional preventative and protective actions that governments, or we or our customers, may direct, which may result in an extended period of continued business disruption and reduced operations. For instance, some areas of the United States have experienced surges in COVID-19 cases and new variants of COVID-19, which has, in some cases, led to the closure of recently re-opened businesses and further postponed opening other businesses, including movie theaters. Any resulting financial impact cannot be reasonably estimated at this time, but we expect it will continue to have a material impact on our business, financial condition and results of operations.

 

The repercussions of the COVID-19 global pandemic resulted in a significant impact to our customers, specifically those in the entertainment and advertising industries, and their ability and willingness to spend on our products and services, which continues to negatively impact us. A significant number of our customers temporarily ceased operations during the pandemic, some of which continue to be suspended; as such, we have experienced, and anticipate that we will continue to experience at least until our customers have resumed normal operations, a significant decline in our results of operations. For instance, during this time, many movie theaters and other entertainment centers were forced to close or curtail their hours and, correspondingly, have terminated or deferred their non-essential capital expenditures. While some movie theaters and chains have begun to re-open, or announced plans to re-open in the near future, theater operators may continue to experience reduced revenues for an extended period due to, among other things, consumer concerns over safety and social distancing, depressed consumer sentiment due to adverse economic conditions, including job losses, capacity restrictions, and postponed release dates, shortened “release windows” between the release of motion pictures in theaters and an alternative delivery method, or the release of motion pictures directly to alternative delivery methods, bypassing the theater entirely, for certain movies, and continued COVID-19 outbreaks could cause these theaters to suspend operations again. The COVID-19 pandemic has also adversely affected film production and may adversely affect the pipeline of feature films available in the short- or long-term. In addition to decreased business spending by our customers and prospective customers and reduced demand for our products, lower renewal rates by our customers, increased customer losses/churn, increased challenges in or cost of acquiring new customers and increased risk in collectability of accounts receivable may have a material adverse effect on our business and results of operations. We have also experienced other negative impacts; among other actions, we were required to temporarily close our screen manufacturing facility in Canada due to the governmental response to COVID-19, which we were able to re-open on May 11, 2020, and have experienced lower revenues from field services and a reduction in non-recurring time and materials-based services. The completion of our outsourced screen finishing facility in China by a third party was also delayed by the COVID-19 pandemic. We may also experience one or more of the following conditions that could have a material adverse impact on our business operations and financial condition: adverse effects on our strategic partners’ businesses or on the businesses of companies in which we hold investments; impairment charges; extreme currency exchange-rate fluctuations; inability to recover costs from insurance carriers; and business continuity concerns for us, our customers and our third-party vendors.

 

-56-

 

 

The Consolidated Appropriations Act extended and expanded the availability of the CARES Act employee retention credit through June 30, 2021. Subsequently, the American Rescue Plan Act of 2021 (‘ARP Act’), enacted on March 11, 2021, extended and expanded the availability of the employee retention credit through December 31, 2021, however, certain provisions apply only after December 31, 2020. This new legislation expanded the group of qualifying businesses to include businesses with fewer than 500 employees and those who previously qualified for the Paycheck Protection Program (the “PPP Loan”). The employee retention credit is calculated to be equal to 70% of qualified wages paid to employees after December 31, 2020, and before January 1, 2022. During calendar year 2021, a maximum of $10,000 in qualified wages for each employee per qualifying calendar quarter may be counted in determining the 70% credit. Therefore, the maximum tax credit that can be claimed by an eligible employer is $7,000 per employee per qualifying calendar quarter of 2021. We have determined that the qualifications for the credit were met in the first, second and third quarters of 2021. During the nine months ended September 30, 2021, we applied for refunds of a total of $1.6 million of payroll taxes previously paid and recognized a corresponding reduction in compensation expenses. Of the $1.6 million, $1.3 million was recorded within cost of services and $0.3 million was recorded within selling and administrative expenses during the nine months ended September 30, 2021. The Infrastructure Investment and Jobs Act was signed into law November 15, 2021, and ended the availability of the employee retention credit for the entire fourth quarter of 2021.

 

The future and ultimate impact of the COVID-19 pandemic on our business and results of operations beyond the first quarter of fiscal year ending December 31, 2022 is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the COVID-19 pandemic and any additional preventative and protective actions that governments, or we or our customers, may direct, which may result in an extended period of continued business disruption and reduced operations. However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which include the possibility of a global recession.

 

We cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to the unprecedented nature of the disruption to our operations and the unpredictability of the COVID-19 global pandemic. As a consequence, our estimates of the duration of the pandemic and the severity of the impact on our future earnings and cash flows could change and have a material impact on our results of operations and financial condition.

 

Results of Operations:

 

The following tables set forth our operating results for the periods indicated (in thousands):

 

    Six Months Ended June 30,              
    2022     2021     $ Change     % Change  
    (dollars in thousands)        
Net revenues   $ 18,543     $ 10,385     $ 8,158       78.6 %
Cost of revenues     14,239       7,025       7,214       102.7 %
Gross profit     4,304       3,360       944       28.1 %
Gross profit percentage     23.2 %     32.4 %                
Selling and administrative expenses     3,995       2,705       1,290       47.7 %
Income from operations     309       655       (346     (52.8 )%
Other income (expense)     81       (114     195       (171.1 )%
Income before income taxes     390       541       (151     (27.9 )%
Income tax expense     (184 )     (277 )     93       (33.6 )%
Net income   $ 206     $ 264     $ (58     (22.0 )%

 

   Years Ended December 31,         
   2021   2020   $ Change   % Change 
   (dollars in thousands)     
Net revenues  $25,972   $20,820   $5,152    24.7%
Cost of revenues   18,604    16,173    2,431    15.0%
Gross profit   7,368    4,647    2,721    58.6%
Gross profit percentage   28.4%   22.3%          
Selling and administrative expenses   6,168    5,968    200    3.4%
Loss on disposal of assets   -    (33)   33    (100.0)%
Income (loss) from operations   1,200    (1,354)   2,554    (188.6)%
Other (expense) income   (19)   2,725    (2,744)   (100.7)%
Income before income taxes   1,181    1,371    (190)   (13.9)%
Income tax (expense) benefit   (360)   74    (434)   (586.5)%
Net income  $821   $1,445   $(624)   (43.2)%

 

-57-

 

 

Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

 

Revenue increased 78.6% to $18.5 million during the first six months of 2022 from $10.4 million in the first six months of 2021. The increase from the prior year was due to a $6.7 million increase in product revenue and a $1.5 million increase in service revenue. Demand and revenue from products and services benefited from the continuing recovery in the cinema industry as restrictions eased and studios began accelerating the release of new content to the cinemas. Studios recently resumed releasing major movies to the cinemas and continue to have a backlog of content planned for release in 2022 and 2023.

 

We expect the pace of recovery of our revenue will continue to be dependent upon the overall measures in place to control COVID-19, and any variants thereof, and the pace at which studios release new feature films to the market.

 

Gross profit increased 28.1% to $4.3 million in the first six months of 2022 from $3.4 million in the first six months of 2021. The increase in gross profit was primarily attributable to higher screen, equipment and field service revenue, partially offset by $0.8 million of employee retention credits recognized in the prior period. As a percentage of revenue, gross profit was 23.2% in 2022 compared to 32.4% of revenues in 2021. Excluding the impact of the employee retention credit, gross profit during the six months ended June 30, 2021 would have been 24.2%.

 

Gross profit from product sales was $3.7 million or 25.7% of revenues during the first six months of 2022 compared to $2.5 million or 32.6% of revenues during the first six months of 2021. Gross profit from service revenue was $0.6 million or 14.7% of revenues during the first six months of 2022 compared to $0.8 million or 31.7% of revenues during the first six months of 2021. Excluding the impact of employee retention credits recognized in the prior period, gross profit from service revenue would have been breakeven.

 

Income from operations during the first six months of 2022 was $0.3 million compared to $0.7 million during the first six months of 2021. The decrease in income from operations was primarily due to the favorable impact on the prior year period of $1.0 million of employee retention credits and $0.1 million of bad debt recovery, which did not recur in the current period. In addition, there were also increases to selling and administrative expenses due to higher compensation and benefits, marketing and travel and entertainment expenses related to the increased revenue and business activity in the current period as compared to the prior year.

 

Total other income of $0.1 million during the first six months of 2022 included $0.1 million of foreign currency transaction adjustments and $0.1 million of net interest expense. Total other expense of $0.1 million during the first six months of 2021 primarily consisted of $0.2 million of foreign current transaction adjustments and $0.1 million of interest expense, partially offset by a $0.1 million gain on our property and casualty claim for the weather-related incident at our production facility in Quebec, Canada.

 

Income tax expense was approximately $0.2 million and $0.3 million during the six months ended June 30, 2022 and June 30, 2021, respectively. Our income tax expense consisted of income tax on both domestic and foreign earnings.

 

Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

 

Revenue increased 24.7% to $26.0 million in 2021 from $20.8 million in 2020. The increase from the prior year was due to a $3.6 million increase in product revenue and a $1.5 million increase in service revenue. Demand and revenue from both product sales and service revenue benefited from the continuing recovery from the impact of COVID-19. As restrictions eased and customer demand increased, revenues from have increased compared to the same period in 2020. Revenue during 2020 was negatively impacted by the COVID-19 pandemic, including the government-mandated temporary closure of our screen manufacturing facility in Quebec, Canada and lower revenues from equipment sales and field service projects. The impact was particularly acute in the second quarter of 2020 when most entertainment venues across the world were forced to close in response to the pandemic. In the second half of 2020 and throughout 2021, our revenues recovered as many cinemas and theme parks began reopening.

 

While major markets have eased COVID-19 related restrictions, or lifted them entirely, we expect the pace of recovery of our revenue will continue to be dependent upon the overall measures in place to control COVID-19, and any variants thereof, and the pace at which studios release new feature films to the market. Studios recently resumed releasing major movies to the cinemas and continue to have a backlog of content planned for release in 2022 and 2023. In addition, we believe many of our customers will benefit from government programs such as the Shuttered Venue Operators Grant, which has allocated over $14 billion of assistance to the entertainment industry.

 

Gross profit increased 58.6% to $7.4 million in 2021 from $4.6 million in 2020. As a percentage of revenue, gross profit improved to 28.4% in 2021 compared to 22.3% of revenues in 2020. The 2021 annual period included a positive impact of $1.3 million as a result of the employee retention credit. Excluding the impact of the employee retention credit, gross profit for the year ended December 31, 2021 would have been 23.5% of revenue. The increase in gross profit was primarily attributable to higher screen, equipment and field service revenue, combined with the favorable impact of the $1.3 million employee retention credit and actions taken to control costs. Gross profit from product sales was $5.6 million or 28.3% of revenues during 2021 compared to $5.0 million or 31.3% of revenues during 2020. Gross profit from service revenue was $1.8 million or 28.6% of revenues during 2021 compared to negative $0.4 million or negative 7.4% of revenues during 2020.

 

-58-

 

 

Income from operations during 2021 was $1.2 million compared to a loss from operations of $1.4 million during 2020. The improvement in income from operations was primarily due to the increase in revenue and gross profit described above, combined with the benefit of $0.3 million of employee retention credits included in selling and administrative expenses.

 

Total other income of $19,000 during 2021 included $0.1 million of interest expense, $0.1 million of foreign currency transaction adjustments, partially offset by a $0.1 million gain on our property and insurance claim for the weather-related incident at our production facility in Quebec, Canada. Total other income of $2.7 million during 2020 primarily consisted of a $3.1 million gain on our property and casualty and business interruption claims for the weather-related incident at our production facility in Quebec, partially offset by $0.1 million of interest expense and $0.3 million of foreign currency transaction adjustments. We believe the business interruption settlement covered the majority of the losses we incurred as a result of the roof collapse, and the property and casualty gain was comprised of the insurance recovery in excess of the carrying value of the damaged equipment.

 

Income tax expense was approximately $0.4 million during 2021 compared to income tax benefit of $0.1 million during 2020. Our income tax expense consisted of income tax on both domestic and foreign earnings.

 

Use of Non-GAAP Measures

 

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles. 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 to exclude income taxes, interest, and depreciation and amortization, Adjusted EBITDA also excludes share-based compensation, impairment charges, fair value adjustments, severance, foreign currency transaction gains (losses), and expenses, gains on insurance recoveries, certain tax credits and other cash and non-cash charges and gains.

 

EBITDA and Adjusted EBITDA are not measures of performance defined in accordance with GAAP. However, Adjusted EBITDA is used internally in planning and evaluating our operating performance. Accordingly, management believes that disclosure of these metrics offers investors, bankers and other stakeholders an additional view of our operations that, when coupled with the GAAP results, provides a more complete understanding of our financial results.

 

EBITDA and Adjusted EBITDA should not be considered as an alternative to net income or to net cash from operating activities as measures of operating results or liquidity. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies, and the measures exclude financial information that some may consider important in evaluating our performance.

 

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

 

-59-

 

 

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):

 

   

Six Months Ended

June 30,

   

Years Ended

December 31,

 
    2022     2021     2021     2020  
                         
Net income   $ 206     $ 264     $ 821     $ 1,445  
Interest expense     51       60       107       112  
Income tax expense (benefit)     184       277       360       (74 )
Depreciation and amortization     367       471       906       870  
EBITDA     808       1,072       2,194       2,353  
Stock-based compensation     72       92       175       232  
Loss on disposal of assets and impairment charges     -       -       -       33  
Foreign currency transaction (gain) loss     (128     218       65       292  
Gain on property and casualty and business interruption insurance recoveries     -       (148 )     (148 )     (3,107 )
Employee retention credit     -       (1,049     (1,576 )     -  
Severance and other     -       15       15       78  
Adjusted EBITDA   $ 752     $ 200     $ 725     $ (119 )

 

Liquidity and Capital Resources

 

During the past several years, we have primarily met our working capital and capital resource needs from our operating cash flows and credit facilities. Our primary cash requirements involve operating expenses, working capital, capital expenditures, and investments. Our capital expenditures during 2020 included costs incurred in the construction of the production facility in Quebec, Canada that sustained damage as a result of inclement weather.

 

We ended the second quarter of 2022 with total cash and cash equivalents of $3.0 million. Of the $3.0 million as of June 30, 2022, $1.7 million was held in Canada and the remaining $1.3 million was held in the U.S.

 

In response to the COVID-19 pandemic and related closures of cinemas, theme parks and entertainment venues, we took decisive actions discussed above to conserve cash, reduce operating expenditures, delay capital expenditures, and manage working capital.

 

Cash Flows from Operating Activities

 

Net cash used in operating activities was $2.0 million during the first six months of 2022 as compared to net cash provided by operating activities of $1.6 million during the first six months of 2021. Net cash used in operating activities during the first half of 2022 declined from 2021, despite improved operating results, largely due to working capital timing, specifically vendor payments made in the first half of 2022 for projection and audio equipment sold to customers where advance deposits were received in the prior period.

 

Net cash provided by operating activities was $4.8 million in 2021 as compared to $4.0 million in 2020. Net cash provided by operating activities during 2021 included cash generated from operating results, as well as favorable changes in working capital, including cash deposits from customers for projection and audio equipment sales. Net cash provided by operating activities during 2021 included favorable changes in working capital, partially offset by our operating loss.

 

-60-

 

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $0.5 million and $0.1 million during the first six months of 2022 and 2021, respectively. Net cash used in investing activities during the first half of 2022 included a $0.3 million outflow related to the acquisition of film and television programming rights and $0.2 million of capital expenditures. Net cash used in investing activities during the first quarter of 2021 consisted entirely of capital expenditures.

 

Net cash used in investing activities was $0.4 million and $0.5 million during 2021 and 2020, respectively, and consisted entirely of capital expenditures.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities was $0.9 million during the first six months of 2022, consisting primarily of $1.1 million transferred from Ballantyne, partially offset by $0.2 million of principal payments on debt. Net cash used in financing activities was $1.3 million during the first six months of 2021, consisting primarily of $1.2 million transferred to Ballantyne and $0.2 million of principal payments on debt.

 

Net cash used in financing activities was $3.3 million in 2021, consisting primarily of $3.0 million transferred to Ballantyne and $0.3 million of principal payments on debt. Net cash used in financing activities was $3.4 million in 2020, consisting primarily of $3.5 million transferred to Ballantyne and $0.2 million of principal payments on debt, partially offset by the issuance of $0.4 million of debt.

 

Debt

 

Strong/MDI Installment Loans

 

On September 5, 2017, Strong/MDI, entered into a demand credit agreement, as amended and restated May 15, 2018, with a bank consisting of a revolving line of credit for up to CAD$3.5 million subject to a borrowing base requirement, a 20-year installment loan for up to CAD$6.0 million and a 5-year installment loan for up to CAD$0.5 million.

 

On June 7, 2021, Strong/MDI entered into a demand credit agreement (the “2021 Credit Agreement”), which amended and restated the demand credit agreement dated as of September 5, 2017. The 2021 Credit Agreement consists of a revolving line of credit for up to CAD$2.0 million subject to a borrowing base requirement, a 20-year installment loan for up to CAD$5.1 million and a 5-year installment loan for up to CAD$0.5 million. Amounts outstanding under the line of credit are payable on demand and bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans bear interest at the lender’s prime rate plus 0.5% and are payable in monthly installments, including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The 2021 Credit Agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity method investments) not exceeding 2.5 to 1, a current ratio (excluding amounts due from related parties) of at least 1.3 to 1 and minimum “effective equity” of CAD$4.0 million. There was CAD$3.3 million, or approximately $2.5 million, of principal outstanding on the 20-year installment loan as of June 30, 2022, which bears variable interest at 4.2%. There was CAD$0.4 million, or approximately $0.3 million, of principal outstanding on the 5-year installment loan as of June 30, 2022, which also bears variable interest at 4.2%. Strong/MDI was in compliance with its debt covenants as of June 30, 2022. These borrowings are due on demand by the lender. Strong/MDI does not intend to transfer the revolving line of credit and the 20-year installment loan collateralized by the Joliette Plant to us.

 

We expect the 2021 Credit Agreement to be terminated in connection with the Separation and this offering. We are currently in discussions related to a new credit facility with the existing lender and are continuing to review terms and conditions with the lender. A new credit facility, if completed, would be finalized and implemented following the completion of the Separation.

 

Landmark Transaction

 

On March 3, 2022, Strong Studios acquired, from Landmark, the rights to original feature films and television series, and has been assigned third party rights to content for global multiplatform distribution. The transaction entailed the acquisition of certain projects which are in varying stages of development, none of which have, as yet, produced revenue. In connection with such assignment and purchase, Strong Studios agreed to pay to Landmark approximately $1.7 million in four separate payments, $0.3 million of which was paid upon the closing of the transaction. The $1.7 million acquisition price was allocated to three projects in development, including $1.0 million to Safehaven, $0.3 million to Flagrant and $0.4 million to Shadows in the Vineyard. We also agreed to issue the Landmark Warrant. The Landmark Warrant allows for cashless exercise in certain limited circumstances and provides for certain registration rights for such warrant shares. In the event that the initial public offering does not occur within a specified time, Landmark would have the right to surrender the warrant in exchange for 2.5% ownership in Strong Studios.

 

-61-

 

 

As a condition precedent to entry into the AA Agreement, Strong Studios agreed to enter into distribution agreements for the AA Projects (the “AA Distribution Agreements”) with Screen Media Ventures, LLC (“SMV”). Pursuant to the AA Distribution Agreements, SMV agreed to purchase the global distribution rights to Safehaven for $6.5 million and Flagrant for $2.5 million upon delivery of each project.

 

During the second quarter of 2022, Safehaven 2022, Inc. was established to manage the production and financing of the Safehaven television series, one of the projects acquired from Landmark. Strong Studios owns 49% of Safehaven 2022 and the remaining 51% is owned by Unbounded. We did not pay any consideration in exchange for our 49% equity interest in Safehaven 2022. Unbounded also did not contribute any assets or liabilities to Safehaven 2022 and agreed to provide day-to-day management services in exchange for their 51% ownership. Unbounded will also serve as a co-producer on the project. We assigned the Landmark distribution agreement to Safehaven 2022, and the Landmark distribution agreement serves as collateral for the production financing at Safehaven 2022. We will share profits and losses, if any, from Safehaven 2022 with Unbounded on a pro-rata basis based on their relative ownership percentages.

 

We allocated $1.0 million of the $1.7 million acquisition price to the Safehaven project and incurred an additional $0.1 million of development costs during the six months ended June 30, 2022. We transferred the $1.1 million in intellectual property representing the rights and assets related to the Safehaven project and Safehaven 2022 agreed to reimburse Strong Studios $1.1 million for those costs following payment of any senior secured debt and prior to any profit participations or equity distributions. The $1.1 million payable to Strong Studios represents an obligation of Safehaven 2022 to Strong Studios and is not contingent on any specific event. Accordingly, we have classified the amount due from Safehaven 2022 as a receivable within Other current assets on our Combined Balance Sheet as of June 30, 2022. We expect Safehaven 2022 to reimburse the acquisition cost allocated to the project based on its ultimate expected revenues and profits from the exploitation of the project. Safehaven 2022 will begin to generate revenue and expenses upon delivery of the completed Safehaven project to SMV, which is expected to occur in early 2023. The $6.5 million minimum guarantee is due and payable to Safehaven 2022 in installments of 25% upon delivery and acceptance, 25% three months thereafter, and the remaining 50% six months thereafter. Upon delivery and acceptance, Safehaven 2022 expects to recognize $6.5 million in initial revenue from the distribution rights and will record cost of sales using the individual-film-forecast method based on the ratio of the current period’s revenues to management’s estimated remaining total gross revenues to be earned. Safehaven 2022 is an equity method holding and we will reflect our proportionate share of the net periodic profit and loss of Safehaven 2022 as equity method income (loss) during each reporting period.

 

Safehaven 2022 subsequently entered into an $8.9 million Loan and Security Agreement with Bank of Hope to provide interim production financing for the Safehaven production, secured by the Landmark distribution agreement. Safehaven 2022 is the sole borrower and guarantor under the loan agreement. As of June 30, 2022, Safehaven 2022 had borrowed $2.6 million under the facility for production costs incurred to that date.

 

We reviewed our ownership in Safehaven 2022 and concluded that we have significant influence, but not a controlling interest, in Safehaven 2022 based on our ownership being less than 50% along with having one of three representatives on the board. We also reviewed whether we otherwise had the power to make decisions that significantly impact the economic performance of Safehaven 2022 and concluded that we did not control the entity and are not the primary beneficiary. Accordingly, we will apply the equity method of accounting to our equity holding in Safehaven 2022 and will record our proportionate share of the net income/loss resulting from the equity holding as a single line item captioned “equity method holding income (loss)” on our statement of operations.

 

Credit Risk Concentrations

 

Our top ten customers accounted for approximately 48% and 54% of combined net revenues during the six months ended June 30, 2022 and, June 30, 2021 respectively, and 39% of combined net revenues during the year ended December 31, 2021. Trade accounts receivable from these customers represented approximately 53% and 29% at June 30, 2022 and December 31, 2021, respectively. None of our customers accounted for more than 10% of our combined net revenues during the six months ended June 30, 2022, and one customer accounted for more than 10% of our net combined receivables as of June 30, 2022. One of our customers accounted for more than 10% of our combined net revenues during the six months ended June 30, 2021. None of our customers accounted for more than 10% of both our combined net revenues during 2021 and our net combined receivables as of December 31, 2021. While we believe our relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from our significant customers could have a material adverse effect on our financial condition and results of operations. We could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which we sell our products.

 

Some operators in the cinema industry carry high levels of balance sheet leverage arising from pre-COVID acquisitions. Cineworld Group Plc, the parent company of Regal Cinemas and one of the largest cinema operators, filed for Chapter 11 bankruptcy on September 7, 2022 to restructure their balance sheet and alleviate their debt burden. As of June 30, 2022, we had $0.2 million in accounts receivable related to products and services sold to Regal Cinemas. The bankruptcy filing is expected to negatively impact the collectability of our accounts receivable and could also negatively impact our revenue in future periods.

 

Financial instruments that potentially expose us to a concentration of credit risk principally consist of accounts receivable. We sell products to a large number of customers in many different geographic regions. To minimize credit concentration risk, we perform ongoing credit evaluations of our customers’ financial condition or use letters of credit.

 

-62-

 

 

Hedging and Trading Activities

 

Our primary exposure to foreign currency fluctuations pertains to our operations in outside of Canada. In certain instances, we may enter into foreign exchange contracts to manage a portion of this risk. We do not have any trading activities that include non-exchange traded contracts at fair value.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Inflation

 

We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our net revenues or profitability. Historically, we have been able to offset any inflationary effects by either increasing prices or improving cost efficiencies.

 

Recently Issued Accounting Pronouncements

 

See Note 2, Summary of Significant Accounting Policies, to the combined financial statements for a description of recently issued accounting pronouncements.

 

-63-

 

 

Critical Accounting Policies and Estimates

 

Revenue Recognition

 

The Company accounts for revenue using the following steps:

 

  Identify the contract, or contracts, with a customer;
  Identify the performance obligations in the contract;
  Determine the transaction price;
  Allocate the transaction price to the identified performance obligations; and
  Recognize revenue when, or as, the Company satisfies the performance obligations.

 

The Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine whether they are distinct, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes 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. 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.

 

-64-

 

 

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, 2022, December 31, 2021 or December 31, 2020.

 

Film and Television Programming Rights

 

Commencing in March 2022, the Company began producing original productions and acquiring rights to films and television programming. Film and television programming rights include the unamortized costs of in-process or in-development content produced or acquired by us. Our capitalized costs include all direct production and financing costs, capitalized interest when applicable, and production overhead. Film and television program rights are stated at the lower of amortized cost or estimated fair value.

 

The costs of producing content are amortized using the individual-film-forecast method. These costs are amortized based on the ratio of the current period’s revenues to management’s estimated remaining total gross revenues to be earned (“Ultimate Revenue”) as of each reporting date to reflect the most current available information. Management’s judgment is required in estimating Ultimate Revenue and the costs to be incurred throughout the life of each film or television program.  Amortization is adjusted when necessary to reflect increases or decreases in forecasted Ultimate Revenues.

 

For an episodic television series, the period over which Ultimate Revenues are estimated cannot exceed ten years following the date of delivery of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later.  For films, Ultimate Revenue includes estimates over a period not to exceed ten years following the date of initial release.

 

Content assets are expected to be predominantly monetized individually and therefore are reviewed at the individual level when an event or change in circumstance indicates a change in the expected usefulness of the content or the fair value may be less than the unamortized cost.

 

Due to the inherent uncertainties involved in making such estimates of Ultimate Revenues and expenses, these estimates may differ from actual results. In addition, in the normal course of our business, some films and titles will be more successful or less successful than anticipated. Management regularly reviews and revises, when necessary, its Ultimate Revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or a write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value.  An increase in the estimate of Ultimate Revenue will generally result in a lower amortization rate and, therefore, less film and television program amortization expense, while a decrease in the estimate of Ultimate Revenue will generally result in a higher amortization rate and, therefore, higher film and television program amortization expense, and also periodically results in an impairment requiring a write-down of the film cost to the title’s fair value. We have not yet incurred any of these write-downs.

 

An impairment charge would be recorded in the amount by which the unamortized costs exceed the estimated fair value. Estimates of future revenue involve measurement uncertainties and it is therefore possible that reductions in the carrying value of film library costs may be required because of changes in management’s future revenue estimates.

 

Cost Allocations

 

Our historical combined financial statements are prepared on a stand-alone basis in accordance with U.S. GAAP and are derived from Ballantyne’s 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 Ballantyne. Ballantyne currently provides certain services to us, and costs associated with these functions have been allocated to us. 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 Ballantyne. These allocations are reflected within operating expenses in our combined 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 offering or of the additional costs we will incur in the future as we operate as a stand-alone company.

 

Quantitative and Qualitative Disclosures About Market Risk

 

The principal market risks affecting us are exposure to interest rates and foreign currency exchange rates. We market our products throughout the U.S. and the world. As a result, we could be adversely affected by such factors as changes in foreign currency rates and weak economic conditions. As a majority of our sales are currently denominated in U.S. dollars, a strengthening of the dollar can and sometimes has made our products less competitive in foreign markets.

 

Interest Rates—Interest rate risks from our interest related accounts are not deemed significant. As of June 30, 2022, there was CAD$3.3 million, or approximately $2.5 million, of principal outstanding on a 20-year installment loan, which bears variable interest at 4.2%. On June 30, 2022, there was CAD$0.4 million, or approximately $0.3 million, of principal outstanding on a 5-year installment loan, which also bears variable interest at 4.2%. A 1.00% increase in the effective interest rate applied to these borrowings would result in an increase in pre-tax interest expense of approximately $30,000 on an annualized basis.

 

Foreign Exchange—Exposures to transactions denominated in currencies other than the entity’s functional currency are primarily related to our subsidiaries operating outside of Canada. Fluctuations in the value of foreign currencies create exposures, which can adversely affect our results of operations. From time to time, as market conditions indicate, we may enter into foreign currency contracts to manage the risks associated with forecasted transactions. Our cash at our U.S. subsidiary is denominated in foreign currencies, where fluctuations in exchange rates will impact our cash balances in Canadian dollar terms. A hypothetical 10% change in the value of the U.S. dollar would impact our reported cash balance by approximately $0.3 million.

 

-65-

 

 

BUSINESS

 

Organization and Business Overview

 

Operations

 

Following the Separation, Strong Global Entertainment will include the operations of Strong/MDI, a leading global manufacturer and distributor of premium large format projection screens and coatings, STS, which provides comprehensive managed services, technical support and other products and services in the United States. Strong Global Entertainment’s key markets include the cinema exhibition industry, theme parks, schools, museums, networks and other entertainment-related markets. We also distribute and support third party products, including digital projectors, servers, menu boards and sound systems.

 

Products and Services

 

Projection Screens and Support Systems — We believe we are a leading manufacturer and distributor of premium large format projection screens to the cinema industry in North America and around the globe. We have contractual relationships to supply screens to IMAX, AMC, Cinemark and many of the other major cinema operators worldwide. We expect those relationships to continue post Separation. We also manufacture innovative screen support structures custom built to adapt to virtually any venue requirement, with a unique self-standing modular construction that allows for easy assembly and adjustable size.

 

In addition to traditional projection screens, we also manufacture our Eclipse curvilinear screens, which are specially designed to provide maximum viewer engagement in media-based attractions and immersive projection environments. We distribute Eclipse screens for use in theme parks, immersive exhibitions, as well as military simulation applications. The solid surface is designed to minimize light loss and maintain higher resolution at lower lumen output. Patented speaker panels allow selective placement of rear mounted speakers to ensure the audio derives from the source media on screen. Applications include interactive dark rides, 3D/4D theme park rides, flying theaters and motion simulators.

 

Our management believes that our screens are among the highest quality in the industry in terms of performance including the amount of gain (or brightness of the image reflected from the screen’s surface), viewing angles, and other characteristics important to the viewing experience. Our high quality is driven by our innovative manufacturing process, focus on quality control and our proprietary coatings. We believe that we are the only major screen manufacturer that develops and produces its own proprietary coatings, which are critical to the overall quality and continued innovation of our screens.

 

Technical Services — We provide digital projection equipment installation and after-sale maintenance and network support services to the cinema operators in the United States. Our field service technicians and our NOC staff work hand in hand to monitor and resolve system and other issues for our customers. Many of our customers choose annual managed service arrangements for maintenance and repair services. We also provide maintenance services to customers who choose not to be covered by a managed service contract on a time and materials basis. Our NOC, staffed by software engineers and systems technicians, operates 24/7/365 and monitors our customers’ networked equipment remotely, often providing proactive solutions to systems issues before they cause system failures.

 

Other Products — We distribute projectors, servers, audio systems and other third-party products including lenses and lamps to customers in North and South America.

 

Strong Studios

 

We recently launched Strong Studios, a subsidiary of STS, for the purpose of expanding our Entertainment Business to include content creation and production of feature films and series. The launch of Strong Studios is intended to further diversify our revenue streams and increase our addressable markets, while leveraging our existing relationships in the industry. Strong Studios acquired, from Landmark, an unrelated party, rights to certain original feature films and television series, and has been assigned third party rights to content for global multiplatform distribution.

 

David Ozer has served as the president of Strong Studios since March 2022. Prior to joining Strong Studios, he served from 2018 to 2022 as CEO of Landmark Studio Group. Prior to that, he held executive level positions at multinational media corporations, including Starz Media, RHI Entertainment, Sonar, DIC Entertainment and Sony Pictures Television.

 

Markets

 

We sell screen systems worldwide, with primary markets being North America and Asia. Screen systems are primarily sold on a direct basis, although we also use third-party distributors and integrators in some markets. We plan to continue, selling our screens worldwide, both directly and through third-party distributors.

 

We have non-exclusive distribution agreements with NEC and Barco that allow us to market digital projectors in North and South America. In connection with the Separation, pursuant to an assignment agreement, the non-exclusive distribution agreements between NEC and Ballantyne will be assigned to STS, which will be our wholly owned subsidiary post-Separation. The non-exclusive distribution agreement between NEC and Ballantyne requires the consent of NEC in order to be assigned to STS, which we expect we will be able to obtain prior to the offering. The non-exclusive distribution agreement with Barco is between Barco and STS. Recently, we announced that we entered into a preferred commercial relationship with Cinionic, Inc., the world’s leading provider of laser cinema solutions, to enhance the services to operators across North America. We believe this relationship enhances our ability to service our valued customers by providing increased access to technology, better training for our technicians and will strengthen our global reach due to closer relationships with their international sales teams.

 

We provide technical services in the United States and also market and sell our services both directly to theater owners and other entertainment-related markets and through dealers or VAR networks. We anticipate that we will continue to provide these services following the Separation.

 

-66-

 

 

Competition

 

There are several other companies that manufacture and distribute projection screens. We believe that our primary competitors in the worldwide projection screen market include Harkness Screens International Ltd., Severtson, Screen Solutions, Spectro, MECHANISCHE Weberei BOHEMIA s.r.o. and Galalite Projection Screens. Competitive factors include product performance characteristics, quality, availability, location/shipping logistics and price.

 

The market for our other digital cinema equipment and technical services is highly competitive, and the industry is fragmented. The primary competitive factors are price, product quality, features and customer support. Competition in the digital cinema equipment market includes other integrators and resellers. Manufacturers may also sell equipment directly to exhibitors, especially for large orders. We believe that our primary competition for installation, after-sale maintenance, and NOC services is Christie Digital Systems USA, Inc., Moving Image Technologies, Tri-State Digital Services and Sonic Equipment Company. We also compete with in-house technical resources at some of our larger entertainment customers for services work.

 

Financial Instruments and Credit Risk Concentrations

 

Our top ten customers accounted for approximately 48% and 54% of combined net revenues during the six months ended June 30, 2022 and June 30, 2021, respectively, and approximately 39% of 2021 combined net revenues. Trade accounts receivable from these customers represented approximately 53% and 29% of net combined receivables at June 30, 2022 and December 31, 2021, respectively. None of our customers accounted for more than 10% of our combined net revenues during the six months ended June 30, 2022, and one customer accounted for more than 10% of our net combined receivables as of June 30, 2022. One of our customers accounted for more than 10% of our combined net revenues during the six months ended June 30, 2021. None of our customers accounted for more than 10% of both our combined net revenues during 2021 and our net combined receivables as of December 31, 2021.

 

Manufacturing

 

We manufacture cinema screens through Strong/MDI in Joliette, Quebec, Canada. These manufacturing operations consist of an approximately 80,000 square-foot facility for the manufacture of screen systems. These facilities include PVC welding operations with programmable automations, as well as two 90-foot high screen coating towers with state-of-the-art precision coating application software and painting systems. This world class ISO certified operation has the capability of manufacturing multiple standard screens simultaneously to large format 2D and 3D screens for cinema and special venue applications. This facility will not transfer to us as part of the Separation, but we expect to be able to continue to utilize this facility pursuant to the Joliette Plant Lease. We have also recently established outsourced warehousing and finishing operations in Belgium and China that will allow us to be more responsive to local customer orders in those markets.

 

Quality Control

 

We believe that our quality control procedures and the quality standards for the products that we manufacture, distribute or service have contributed significantly to our reputation for high performance and reliability. The inspection of incoming materials and components as well as the testing of all of our products during various stages of the sales and service cycle are key elements of this program.

 

Trademarks

 

We own or otherwise have rights to various trademarks and trade names used in conjunction with the sale of our products. We believe our success will not be dependent upon trademark protection, but rather upon our scientific and engineering capabilities and research and production techniques. We consider the Strong® trademark to be of value to our business.

 

Human Capital Resources

 

Following the Separation, we anticipate that we will have 164 employees, all of which except one will be full-time employees. Our employees are not party to any collective bargaining agreements.

 

The Company believes it complies with all applicable state, local and international laws governing nondiscrimination in employment in every location in which the Company operates. All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status. We continue to monitor our demand for skilled and unskilled labor and provide training and competitive compensation packages in an effort to attract and retain skilled employees.

 

The Company, including its subsidiaries, remains deeply rooted in cinema screen manufacturing and cinema-focused services. In this regard, we continuously drive our efforts to be the best partner for our customers, investment for our shareholders, neighbor in our community and to provide an empowering work environment for our employees.

 

-67-

 

 

Moreover, the Company is committed to the health, safety and wellness of its employees. We have modified our business practices and implemented certain policies at our offices in accordance with best practices to accommodate, and at times mandate, social distancing and remote work practices, including restricting employee travel, modifying employee work locations, implementing social distancing and enhanced sanitary measures in our facilities, and cancelling attendance at events and conferences. In addition, we have invested in employee safety equipment, additional cleaning supplies and measures, re-designed production lines and workplaces as necessary and adapted new processes for interactions with our suppliers and customers to safely manage our operations.

 

Regulation

 

We are subject to complex laws, rules and regulations affecting our domestic and international operations relating to, for example, environmental, safety and health requirements; exports and imports; bribery and corruption; tax; data privacy; labor and employment; competition; and intellectual property ownership and infringement. Compliance with these laws, rules and regulations may be onerous and expensive, and if we fail to comply or if we become subject to enforcement activity, our ability to manufacture our products and operate our business could be restricted and we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to manufacture our products and operate our business.

 

Some of these complex laws, rules and regulations – for example, those related to environmental, safety and health requirements – may particularly affect us in the jurisdictions in which we manufacture products, especially if such laws and regulations require the use of abatement equipment beyond what we currently employ; require the addition or elimination of a raw material or process to or from our current manufacturing processes; or impose costs, fees or reporting requirements on the direct or indirect use of energy, or of materials or gases used or emitted into the environment, in connection with the manufacture of our products. There can be no assurance that in all instances a substitute for a prohibited raw material or process would be available, or be available at reasonable cost.

 

Properties

 

Our United States corporate offices are located at 5960 Fairview Road, Suite 275, Charlotte, North Carolina, 28210, where we use office space leased by Ballantyne under the Management Services Agreement. Ballantyne’s existing lease expires in May 2024. In addition, we, our subsidiaries or Ballantyne owned or leased the following facilities as of the date hereof:

 

  Strong/MDI, owns an approximate 80,000 square-foot manufacturing plant in Joliette, Quebec, Canada. The Joliette Plant is used for offices, manufacturing, assembly and distribution of cinema and other screens. We believe this facility is adequate for future needs and we may use a portion of the proceeds from this offering for capital expenditures related to the Joliette Plant. See “Use of Proceeds”. We expect to be able to continue to utilize this facility pursuant to the Joliette Plant Lease to be entered into between Strong Entertainment Subco and Strong/MDI.
     
  STS leases a combined office and warehouse facility in Omaha, Nebraska, which is primarily used for the storage and distribution of third-party products. The lease for this facility expires in February 2027.

 

We believe these facilities are adequate for future needs. In addition, we do not anticipate any difficulty in retaining occupancy of any leased facilities, either by renewing leases prior to expiration or replacing them with equivalent leased facilities, or purchasing these or other facilities in the future.

 

Legal Proceedings

 

In the ordinary course of our business operations, we are involved, from time to time, in certain legal disputes. Ballantyne is named as a defendant in product liability/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 previously distributed by the operations of the businesses being transferred to us un the Separation containing wiring that may have contained asbestos. Each case names dozens of corporate defendants in addition to Ballantyne. In Ballantyne’s experience, a large percentage of these types of claims have never been substantiated and have been dismissed by the courts. Ballantyne’s legal counsel has further indicated to us that Ballantyne has not suffered any adverse verdict in a trial court proceeding related to asbestos claims, but has settled several of these lawsuits, and intends to continue to defend these lawsuits. Under the Ballantyne Asset Purchase Agreement, we will agree to indemnify Ballantyne 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 Ballantyne for all expenses (including legal fees) related to the defense of such claims. When appropriate, Ballantyne may settle certain claims from time to time. We do not expect the resolution of these cases to have a material adverse effect on our financial condition, results of operations or cash flows.

 

-68-

 

 

MANAGEMENT

 

Executive Officers, Directors and Director Nominees

 

The following table sets forth the names and ages, as of the date of this prospectus, and titles of the individuals who will serve as our executive officers and members of our Board of Directors at the time of the offering.

 

Name   Age   Position
Mark D. Roberson   57   Chief Executive Officer and Director
Todd R. Major   49   Chief Financial Officer, Secretary and Treasurer
Ray F. Boegner   72   President
D. Kyle Cerminara   45   Director and Chairman
Richard E. Govignon Jr.   45   Director
John W. Struble   46   Director
Marsha G. King   55