BALLANTYNE STRONG, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto appearing
elsewhere in this report. Management's discussion and analysis contains not only
historical information, but also forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Statements that are not historical
are forward-looking and reflect expectations for future Company performance. For
these statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.



Forward-looking statements involve a number of risks and uncertainties,
including but not limited to those discussed in the "Risk Factors" section
contained in Item 1A in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021, and the following risks and uncertainties: the negative
impact that the COVID-19 pandemic has already had, and may continue to have, on
the Company's business and financial condition; the general economic impact of
the ongoing military conflict in Ukraine, including the impact of related
sanctions being imposed by the U.S. Government and the governments of other
countries, and the impact of potential reprisals as a consequence of the
military conflict in Ukraine and any related sanctions; the Company's ability to
maintain and expand its revenue streams to compensate for the lower demand for
the Company's digital cinema products and installation services; potential
interruptions of supplier relationships or higher prices charged by suppliers;
the Company's ability to successfully compete and introduce enhancements and new
features that achieve market acceptance and that keep pace with technological
developments; the Company's ability to successfully execute its capital
allocation strategy or achieve the returns it expects from these holdings; the
Company's ability to maintain its brand and reputation and retain or replace its
significant customers; challenges associated with the Company's long sales
cycles; the impact of a challenging global economic environment or a downturn in
the markets (such as the current economic disruption and market volatility
generated by the ongoing COVID-19 pandemic and the ongoing military conflict in
Ukraine and related sanctions); economic and political risks of selling products
in foreign countries (including tariffs); risks of non-compliance with U.S. and
foreign laws and regulations, potential sales tax collections and claims for
uncollected amounts; cybersecurity risks and risks of damage and interruptions
of information technology systems; the Company's ability to retain key members
of management and successfully integrate new executives; the Company's ability
to complete acquisitions, strategic investments, entry into new lines of
business, divestitures, mergers or other transactions on acceptable terms, or at
all; the impact of the COVID-19 pandemic and the ongoing military conflict in
Ukraine and related sanctions on the companies in which the Company holds equity
stakes; the Company's ability to utilize or assert its intellectual property
rights, the impact of natural disasters and other catastrophic events (such as
the ongoing COVID-19 pandemic or the ongoing military conflict in Ukraine); the
adequacy of insurance; the impact of having a controlling stockholder and
vulnerability to fluctuation in the Company's stock price. Given the risks and
uncertainties, readers should not place undue reliance on any forward-looking
statement and should recognize that the statements are predictions of future
results which may not occur as anticipated. Many of the risks listed above have
been, and may further be, exacerbated by the COVID-19 pandemic, its impact on
the cinema and entertainment industry, the ongoing military conflict in Ukraine
and related sanctions, and the worsening economic environment. Actual results
could differ materially from those anticipated in the forward-looking statements
and from historical results, due to the risks and uncertainties described
herein, as well as others not now anticipated. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements. Except
where required by law, the Company assumes no obligation to update
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.



Overview



Continuing Operations



Ballantyne Strong, Inc. ("Ballantyne Strong," "the Company," "we," "our," and
"us") is a holding company with business operations in the entertainment
industry and holdings in public and privately held companies. Our Strong
Entertainment segment includes one of the largest manufacturers of premium
projection screens and customized screen support systems, and we also distribute
other products and provide technical support services to the cinema, amusement
park and other markets.



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We recently launched Loud Studios with the aim of expanding Loud entertainment include content creation and production of feature films and series. The launch of Loud Studios aims to further diversify our revenue streams and expand our potential markets, while leveraging and expanding our existing industry relationships.



In connection with the sale of our Strong Outdoor operating business to Firefly
in August 2020, we entered into a Master Services Agreement and agreed to
provide certain support services to Firefly. In addition, we use our facility in
Alpharetta, Georgia for our Digital Ignition technology incubator and co-working
facility. Results of those operations are included within "Other" in our results
of operations.


We also continue to evaluate capital allocation opportunities to invest in other
public or private companies or acquire other businesses, which may be within or
outside of the Company's existing markets. During 2021, we completed the
divestiture of our Convergent digital signage business and allocated additional
capital to increase our positions in GreenFirst and FGF. In February 2022, we
also completed the acquisition of the land and building housing our Digital
Ignition incubator and co-working business.



Discontinued Operations


Convergent transaction in February 2021



As part of a transaction that closed on February 1, 2021, we divested our
Convergent business segment. The purchase price was (i) $15.0 million in cash
and (ii) $2.5 million in the form of a subordinated promissory note.
Additionally, a portion of the Purchase Price was placed in escrow and a portion
of the purchase price was subject to a working capital adjustment. As further
consideration, the buyer also assumed approximately $5.7 million of debt,
bringing the total enterprise value for Convergent sale to approximately $23.2
million. We recorded a gain of approximately $14.8 million during 2021 related
to the sale of Convergent.



Firefly transaction in August 2020



On August 3, 2020, we sold certain assets of the Strong Outdoor operating
business to Firefly, and we continue to make available 300 digital taxi tops to
Firefly. Strong Digital Media, LLC ("SDM"), an indirect subsidiary of Ballantyne
Strong, retained certain accounts receivable as well as liabilities other than
executory obligations under transferred contracts to the extent such liabilities
are required to be performed following closing or constitute certain deferred
revenue. The transaction closed on the same day.



Following these divestitures, we have presented the operating results of Convergent and Strong Outdoor as discontinued operations for all periods presented. Note 3 contains additional information regarding these transactions.



Impact of COVID-19 Pandemic



In December 2019, a novel coronavirus disease ("COVID-19") was initially
reported, and in March 2020, the World Health Organization characterized
COVID-19 as a pandemic. COVID-19 and variants thereof have 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 are experiencing new
surges in COVID-19 cases, 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.



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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 equity stakes; 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.



The future and ultimate impact of the COVID-19 pandemic on our business and
results of operations beyond the second quarter of fiscal year 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.



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 business 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 and second quarters of 2021. In July 2021,
we applied for a refund of $1.5 million of payroll taxes previously paid and
recognized a corresponding reduction in compensation expenses during the three
months ending June 30, 2021.



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Results of Operations



The following table sets forth our operating results for the periods indicated:



                                       Three Months Ended
                                            June 30,
                                      2022            2021         $ Change        % Change
                                             (dollars in thousands)
Net revenues                       $     9,143     $    6,094     $     3,049           50.0 %
Cost of revenues                         6,723          3,630           3,093           85.2 %
Gross profit                             2,420          2,464             (44 )         (1.8 )%
Gross profit percentage                   26.5 %         40.4 %
Selling and administrative
expenses                                 3,305          2,448             857           35.0 %
(Loss) income from operations             (885 )           16            (901 )      (5631.3 )%
Other expense                           (4,056 )         (369 )        (3,687 )        999.2 %
Loss before income taxes and
equity method holding loss              (4,941 )         (353 )        (4,588 )       1299.7 %
Income tax benefit (expense)               303            (23 )           326        (1417.4 )%
Equity method holding loss                (960 )         (376 )          (584 )        155.3 %
Net loss from continuing
operations                         $    (5,598 )   $     (752 )   $    (4,846 )        644.4 %




                                       Six Months Ended
                                           June 30,
                                      2022           2021         $ Change        % Change
                                            (dollars in thousands)
Net revenues                       $   19,169     $   10,866     $     8,303            76.4 %
Cost of revenues                       14,237          7,241           6,996            96.6 %
Gross profit                            4,932          3,625           1,307            36.1 %
Gross profit percentage                  25.7 %         33.4 %
Selling and administrative
expenses                                6,579          5,366           1,213            22.6 %
Loss from operations                   (1,647 )       (1,741 )            94            (5.4 )%
Other expense                          (2,925 )         (288 )        (2,637 )         915.6 %
Loss before income taxes and
equity method holding loss             (4,572 )       (2,029 )        (2,543 )         125.3 %
Income tax expense                        (47 )          (92 )            45           (48.9 )%
Equity method holding loss             (1,780 )       (1,145 )          (635 )          55.5 %
Net loss from continuing
operations                         $   (6,399 )   $   (3,266 )   $    (3,133 )          95.9 %



Three months completed June 30, 2022 Compared to the three months ended June 30, 2021



Revenues



Net revenues during the quarter ended June 30, 2022 increased 50.0% to $9.1
million from $6.1 million during the quarter ended June 30, 2021. The increase
in consolidated net revenue was primarily due to the continuing recovery of the
Strong Entertainment business from the impact of COVID-19 as demand increased
for services and screens.



                         Three Months Ended
                              June 30,
                          2022          2021        $ Change       % Change
                               (dollars in thousands)
Strong Entertainment   $    8,822      $ 5,828     $    2,994           51.4 %
Other                         321          266             55           20.7 %
Total net revenues     $    9,143      $ 6,094     $    3,049           50.0 %




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Strong Entertainment



Revenue from Strong Entertainment increased 51.4% to $8.8 million in the second
quarter of 2022 from $5.8 million in the second quarter of 2021. The increase
from the prior year was due to a $2.5 million increase in product revenue and a
$0.5 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


Consolidated gross margin decreased $0.1 million at $2.4 million during the quarter ended June 30, 2022 of $2.5 million during the quarter ended June 30, 2021. As a percentage of revenue, gross margin was 26.5% and 40.4% for the quarters ended June 30, 2022 and June 30, 2021respectively.



Excluding the impact of employee retention credits, which favorably impacted the
prior year period, gross profit during the quarter ended June 30, 2021 would
have been 26.6% as compared to 26.5% in the current period.



                         Three Months Ended
                              June 30,
                          2022          2021        $ Change       % Change
                               (dollars in thousands)
Strong Entertainment   $    2,098      $ 2,386     $     (288 )        (12.1 )%
Other                         322           78            244          312.8 %
Total gross profit     $    2,420      $ 2,464     $      (44 )         (1.8 )%




Strong Entertainment


Gross profit in the Strong Entertainment segment was $2.1 million or 23.8% of
revenues in the second quarter of 2022. Gross profit in the Strong Entertainment
segment was $2.4 million or 40.9% of revenues in the second quarter of 2021,
which included a positive impact of $0.8 million from employee retention
credits. Excluding the impact of the employee retention credit, gross profit
would have been 26.5% of revenue as compared to 23.8% in the current period.



Gross profit from product sales was $1.8 million or 27.7% of revenues for the
second quarter of 2022 compared to $1.4 million or 34.1% of revenues for the
second quarter of 2021. During the current period, we experienced increased
costs for materials, packaging and shipping, which partially offset the
favorable impact of higher revenue levels.



Gross profit from service revenue was $0.2 million or 11.6% of revenues for the
second quarter of 2022 compared to $1.0 million or 58.4% of revenues for the
second quarter of 2021. Excluding the impact of the employee retention credit,
gross profit from service revenue for the second quarter of 2021 would have been
$0.1 million or 5.0% of revenue.



32






Loss From Operations


Consolidated loss from operations was $0.9 million in the second quarter of 2022
compared to breakeven in the second quarter of 2021. Excluding the impact of
employee retention credits, which favorably impacted the prior year period, loss
from operations during the quarter ended June 30, 2021 would have been $1.3
million.



                                        Three Months Ended
                                             June 30,
                                         2022          2021       $ Change      % Change
                                             (dollars in thousands)
Strong Entertainment                  $       180     $ 1,369     $  (1,189 )       (86.9 )%
Other                                         (36 )      (401 )         365         (91.0 )%
Total segment operating income                144         968          (824 )       (85.1 )%
Unallocated administrative expenses        (1,029 )      (952 )         (77 )         8.1 %
Total (loss) income from operations   $      (885 )   $    16     $    (901
)     (5631.3 )%




Strong Entertainment generated income from operations of $0.2 million in the
second quarter of 2022 compared to operating income of $1.4 million in the
second quarter 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 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.



Unallocated administrative expenses was $1.0 million in both the second quarter
of 2022 and 2021. The recognition of employee retention credits of $0.2 million
in the prior year was partially offset by lower compensation and benefits
expenses in the current period.



Other Financial Items



Total other expense of $4.1 million during the second quarter of 2022 primarily
consisted of a $4.2 million unrealized loss on equity holdings and $0.1 million
of interest expense, partially offset by $0.2 million of foreign currency
transaction adjustments. Total other expense of $0.4 million during the second
quarter of 2021 primarily consisted of $0.2 million of foreign currency
transaction adjustments and $0.2 million of interest expense.



Income tax benefit was $0.3 million during the second quarter of 2022 compared
to expense of $23 thousand during the second quarter of 2021. Our income tax
benefit during the second quarter of 2022 consisted primarily of current and
deferred income tax on foreign earnings, which includes the unrealized loss
on
equity holdings.


We recorded a loss on our investment using the equity method of $1.0 million in the second quarter of 2022. We recognized an investment loss under the equity method of $0.4 million during the second quarter of 2021, which consisted mainly of $0.4 million from GreenFirst.



As a result of the items outlined above, we generated a net loss from continuing
operations of $5.6 million, or $0.29 per basic and diluted share, in the second
quarter of 2022, compared to a net loss from continuing operations of $0.7
million, or $0.04 per basic and diluted share, in the second quarter of 2021.



33





Semester completed June 30, 2022 Compared to the half-year ended June 30, 2021



Revenues



Net revenues during the six months ended June 30, 2022 increased 76.4% to $19.2
million from $10.9 million during the six months ended June 30, 2021. The
increase in consolidated net revenue was primarily due to the continuing
recovery of the Strong Entertainment business from the impact of COVID-19 as
demand increased for services and screens.



                         Six Months Ended
                             June 30,
                         2022         2021        $ Change       % Change
                              (dollars in thousands)
Strong Entertainment   $ 18,543     $ 10,301     $    8,242           80.0 %
Other                       626          565             61           10.8 %
Total net revenues     $ 19,169     $ 10,866     $    8,303           76.4 %




Strong Entertainment



Revenue from Strong Entertainment increased 80.0% to $18.5 million in the first
half of 2022 from $10.3 million in the first half 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



Consolidated gross profit increased to $4.9 million during the six months ended
June 30, 2022 from $3.6 million during the six months ended June 30, 2021. As a
percentage of revenue, gross profit was 25.7% and 33.4% for the six months ended
June 30, 2022 and June 30, 2021, respectively. Excluding the impact of the
employee retention credit, gross profit during the six months ended June 30,
2021 would have been 22.4%.



                         Six Months Ended
                             June 30,
                         2022         2021        $ Change       % Change
                              (dollars in thousands)
Strong Entertainment   $   4,304     $ 3,276     $    1,028           31.4 %
Other                        628         349            279           79.9 %
Total gross profit     $   4,932     $ 3,625     $    1,307           36.1 %




Strong Entertainment


Gross profit in the Strong Entertainment segment was $4.3 million or 22.7% of
revenues in the first half of 2022. Gross profit in the Strong Entertainment
segment was $3.3 million or 31.8% of revenues in the first half of 2021, which
included a positive impact of $0.8 million from employee retention credits.
Excluding the impact of the employee retention credit, gross profit would have
been 23.6% of revenue as compared to 22.7% in the current period.



34






Gross profit from product sales was $3.7 million or 25.7% of revenues for the
first half of 2022 compared to $2.5 million or 32.6% of revenues for the first
half of 2021. During the current period, we experienced increased costs for
materials, packaging and shipping which partially the favorable impact of
increasing revenue levels.



Gross profit from service revenue was $0.6 million or 14.7% of revenues for the
first half of 2022 compared to $0.8 million or 31.7% of revenues for the first
half of 2021. Excluding the impact of the employee retention credit, gross
profit from service revenue for the first half of 2021 would have been
breakeven.



Loss From Operations



Consolidated loss from operations was $1.6 million in the first half of 2022
compared to $1.7 million in the first half of 2021. Excluding the impact of
employee retention credits, which favorably impacted the prior year period, loss
from operations during the six months ended June 30, 2021 would have been $3.0
million.



                                        Six Months Ended
                                            June 30,
                                        2022         2021        $ Change       % Change
                                             (dollars in thousands)
Strong Entertainment                  $    790     $  1,122     $     (332 )        (29.6 )%
Other                                     (170 )       (433 )          263          (60.7 )%
Total segment operating income             620          689            (69 )        (10.0 )%
Unallocated administrative expenses     (2,267 )     (2,430 )          163 
         (6.7 )%
Total loss from operations            $ (1,647 )   $ (1,741 )   $       94           (5.4 )%




Strong Entertainment generated income from operations of $0.8 million in the
first half of 2022 compared to operating income of $1.1 million in the first
half 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 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.



Unallocated administrative expenses decreased to $2.3 million in the first half
of 2022 compared to $2.4 million in the first half of 2021. Compensation and
benefits expenses decreased in the current period as compared to prior year but
were partially offset by the recognition of employee retention credits of $0.2
million recognized in the prior year.



Other Financial Items


Total other expense of $2.9 million during the first half of 2022 primarily
consisted of a $2.5 million unrealized loss on equity holdings, a $0.2 million
adjustment to the carrying value of the SageNet Promissory Note in connection
with a prepayment, and $0.1 million of interest expense, and $0.1 million of
foreign currency transaction adjustments. Total other expense of $0.3 million
during the first half of 2021 primarily consisted of $0.2 million of foreign
currency transaction adjustments and $0.3 million of interest expense, 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.



Income tax expense was approximately $47 thousand during the first half of 2022
compared to $0.1 million during the first half of 2021. Our income tax expense
consisted primarily of current and deferred income tax on foreign earnings,
which includes unrealized loss on equity holdings.



We recorded a loss on our equity method holding of $1.8 million during the first
half of 2022. We recorded an equity method investment loss of $1.1 million
during the first half of 2021, consisting of $0.7 million from GreenFirst and
$0.4 million from FGF.



35






As a result of the items outlined above, we generated a net loss from continuing
operations of $6.4 million, or $0.33 per basic and diluted share, in the first
half of 2022, compared to a net loss from continuing operations of $3.2 million,
or $0.18 per basic and diluted share, in the first half of 2021.



Cash and capital resources



During the past several years, we have primarily met our working capital and
capital resource needs from our operating cash flows, sales of our common stock
and credit facilities. Our primary cash requirements involve operating expenses,
working capital, capital expenditures, equity holdings, and other general
corporate activities.



We ended the second quarter of 2022 with total cash and cash equivalents and
restricted cash of $4.6 million compared to $8.9 million as of December 31,
2021. Of the $4.6 million as of June 30, 2022, $1.7 million was held by our
Canadian subsidiary, Strong/MDI, and $0.2 million was restricted. Strong/MDI
makes intercompany loans to the U.S. parent company which do not trigger
Canadian withholding taxes if they meet certain requirements. As of June 30,
2022, the parent company had outstanding intercompany loans from Strong/MDI of
approximately $38.6 million. In the event those loans are not repaid, or are
recharacterized as dividends to the U.S. parent company, we would be required to
pay 5% Canadian withholding taxes, which have been fully accrued as of June
30,
2022.


In response to the COVID-19 pandemic and related closures of movie theatres, theme parks and entertainment venues, we have taken decisive action to conserve cash, reduce operating expenses, delay capital expenditures and manage working capital.



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 CDN$2.0 million subject to a borrowing base requirement, a
20-year installment loan for up to CDN$5.1 million and a 5-year installment loan
for up to CDN$0.5 million. These borrowings are due on demand by the lender and
total $2.8 million as of June 30, 2022.



We believe that our existing sources of liquidity, including cash and cash
equivalents, operating cash flow, credit facilities, equity holdings,
receivables and other assets will be sufficient to meet our projected capital
needs for at least the next twelve months. However, our ability to continue to
meet our cash requirements will depend on, among other things, the duration of
COVID-19 related restrictions on cinemas, theme parks and other entertainment
venues, our ability to achieve anticipated levels of revenues and cash flow from
operations, performance of our equity holdings, our ability to manage costs and
working capital successfully and the continued availability of financing, if
needed. We cannot provide any assurance that our assumptions used to estimate
our liquidity requirements will remain accurate due to the 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. In the event of a sustained market deterioration, and continued
declines in net sales, we may need additional liquidity, which would require us
to evaluate available alternatives and take appropriate actions. We may,
depending on a variety of factors, including market conditions for capital
raises, the trading price of our common stock and opportunities for uses of any
proceeds, engage in additional public or private offerings of equity or debt
securities to increase our capital resources. However, financial and economic
conditions, including those resulting from the COVID-19 pandemic, could limit
our access to credit and impair our ability to raise capital, if needed, on
acceptable terms or at all, and we cannot provide any assurance that we will be
able to obtain any additional sources of financing or liquidity on acceptable
terms, or at all. See Note 11 to the condensed consolidated financial statements
for a description of our debt as of June 30, 2022.



Cash flow from operating activities



Net cash used in operating activities from continuing operations was $3.0
million during the six months ended June 30, 2022, primarily due to cash
outflows for selling and administrative expenses and reductions in working
capital, partially offset by the operating income generated by Strong
Entertainment. Net cash used in operating activities from continuing operations
was $3.5 million during the six months ended June 30, 2021 primarily due to cash
outflows for selling and administrative expense and reductions in working
capital which was primarily a result of the recognition of a receivable of $1.5
million in connection with filing for the employee retention credits, partially
offset by the operating income generated by Strong Entertainment.



36





Cash flow from investing activities



Net cash used in investing activities from continuing operations was $0.9
million during the six months ended June 30, 2022, which consisted of a $2.0
million purchase of common stock of FGF, $0.8 million of capital expenditures
and $0.3 million outflow related to the acquisition of film and television
programming rights, partially offset by the $2.3 million receipt of the SageNet
Promissory Note. Net cash used in investing activities from continuing
operations was $0.3 million during the six months ended June 30, 2021, which
consisted entirely of capital expenditures.



Cash flow from financing activities



Net cash used in financing activities from continuing operations was $0.4
million during the six months ended June 30, 2022, which primarily consisted of
principal payments on short-term and long-term debt. Net cash provided by
financing activities from continuing operations was $3.8 million during the six
months ended June 30, 2021, which consisted of $6.3 million of net proceeds from
the issuance of our common stock, partially offset by $2.4 million of principal
payments on finance leases and short-term debt.



Use of Non-GAAP Measures


We prepare our consolidated financial statements in accordance with United
States generally accepted accounting principles ("GAAP"). In addition to
disclosing financial results prepared in accordance with GAAP, we disclose
information regarding Adjusted EBITDA, which differs from the term EBITDA as it
is commonly used. In addition to adjusting net income (loss) to exclude income
taxes, interest, and depreciation and amortization, Adjusted EBITDA also
excludes discontinued operations, share-based compensation, impairment charges,
equity method income (loss), fair value adjustments, severance, foreign currency
transaction gains (losses), transactional gains and expenses, gains on insurance
recoveries and other cash and non-cash charges and gains.



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



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



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



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



37





The following table provides reconciliations of GAAP net loss to EBITDA and Adjusted EBITDA (in thousands):


                                                                                                  Quarters Ended June 30,
                                                                      2022                                                                      2021
                                                           Corporate                                                                 Corporate
                                          Strong              and          Discontinued                             Strong              and          Discontinued
                                       Entertainment         Other         

Activities Consolidated Entertainment Other activities Consolidated Net income (loss)

                     $        (1,371 )   $    (4,227 )   $            -     $       (5,598 )   $           641     $    (1,393 )   $          324     $         (428 )
Net income from discontinued
operations                                          -               -                  -                  -                   -               -               (324 )             (324 )
Net (loss) income from continuing
operations                                     (1,371 )        (4,227 )                -             (5,598 )               641          (1,393 )                -               (752 )
Interest expense, net                              29              58                  -                 87                  36             111                  -                147
Income tax (benefit) expense                     (271 )           (32 )                -               (303 )                17               6                  -                 23
Depreciation and amortization                     154             182      
           -                336                 235             131                  -                366
EBITDA                                         (1,459 )        (4,019 )                -             (5,478 )               929          (1,145 )                -               (216 )
Stock-based compensation expense                    -             175                  -                175                   -             159                  -                159
Equity method holding loss (income)                 -             960                  -                960                 383              (7 )                -                376
Unrealized loss on equiity holdings             1,932           2,246                  -              4,178                   -               -                  -                  -
Foreign currency transaction
(income) loss                                    (206 )             -                  -               (206 )               234               -                  -                234
Employee retention credit                           -               -      
           -                  -              (1,049 )          (245 )                -             (1,294 )
Adjusted EBITDA                       $           267     $      (638 )   $            -     $         (371 )   $           497     $    (1,238 )   $            -     $         (741 )




                                                                                                 Six Months Ended June 30,
                                                                      2022                                                                      2021
                                                           Corporate                                                                 Corporate
                                          Strong              and          Discontinued                             Strong              and          Discontinued
                                       Entertainment         Other         

Activities Consolidated Entertainment Other activities Consolidated Net income (loss)

                     $          (637 )   $    (5,762 )   $            -     $       (6,399 )   $            33     $    (3,299 )   $       14,649     $       11,383
Net income from discontinued
operations                                          -               -                  -                  -                   -               -            (14,649 )          (14,649 )
Net (loss) income from continuing
operations                                       (637 )        (5,762 )                -             (6,399 )                33          (3,299 )                -             (3,266 )
Interest expense, net                              53              87                  -                140                  60             164                  -                224
Income tax expense                                 40               7                  -                 47                  79              13                  -                 92
Depreciation and amortization                     367             335      
           -                702                 471             169                  -                640
EBITDA                                           (177 )        (5,333 )                -             (5,510 )               643          (2,953 )                -             (2,310 )
Stock-based compensation expense                    -             369                  -                369                   -             473                  -                473
Equity method holding loss                          -           1,780                  -              1,780                 736             409                  -              1,145
Employee retention credit                           -               -                  -                  -              (1,049 )          (245 )                -             (1,294 )
Unrealized loss on equiity holdings             1,064           1,387                  -              2,451                   -               -                  -                  -
Foreign currency transaction loss                 134               2                  -                136                 218               -                  -                218
Gain on property and casualty
insurance recoveries                                -               -                  -                  -                (148 )             -                  -               (148 )
Severance and other                                 -             222                  -                222                  15              87                  -                102
Adjusted EBITDA                       $         1,021     $    (1,573 )   $            -     $         (552 )   $           415     $    (2,229 )   $            -     $       (1,814 )



Hedging and trading activities



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



38






Seasonality



Generally, our revenue and earnings fluctuate moderately from quarter to
quarter. As we increase our sales in our current markets, and as we expand into
new markets in different geographies, it is possible we may experience different
seasonality patterns in our business. As a result, the results of operations for
the three and six months ended June 30, 2022 are not necessarily indicative of
the results that may be expected for an entire fiscal year.



Recently published accounting pronouncements

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

Significant Accounting Policies and Estimates

In preparing our consolidated financial statements in conformity with U.S.
generally accepted accounting principles, management must make a variety of
decisions which impact the reported amounts and the related disclosures. These
decisions include the selection of the appropriate accounting principles to be
applied and the assumptions on which to base accounting estimates. In making
these decisions, management applies its judgment based on its understanding and
analysis of the relevant circumstances and our historical experience.



Our accounting policies and estimates that are most critical to the presentation
of our results of operations and financial condition, and which require the
greatest use of judgments and estimates by management, are designated as our
critical accounting policies. See further discussion of our critical accounting
policies under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in our Annual Report on Form 10-K for our
year ended December 31, 2021. We periodically re-evaluate and adjust our
critical accounting policies as circumstances change. There were no significant
changes in our critical accounting policies during the three months ended June
30, 2022.

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