Strong Entertainment(SGE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's financial statements for Q2 2023 reflect significant growth driven by the new Strong Studios segment and its IPO, despite increased operating expenses leading to a net loss Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $41,550 | $25,538 | | Cash and cash equivalents | $4,371 | $3,615 | | Film and television programming rights, net | $7,691 | $1,501 | | Total Liabilities | $32,678 | $16,334 | | Short-term debt | $12,219 | $2,510 | | Total Equity | $8,872 | $9,204 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $17,839 | $8,823 | $27,790 | $18,543 | | Gross profit | $7,209 | $2,099 | $9,530 | $4,304 | | Income (loss) from operations | $177 | ($60) | $535 | $309 | | Net (loss) income | ($416) | $13 | ($40) | $206 | | Basic EPS | ($0.06) | $0.00 | ($0.01) | $0.03 | - Net cash used in operating activities for the six months ended June 30, 2023, was $0.6 million, a significant improvement from the $2.0 million used in the same period of 2022. Net cash from financing activities was $1.9 million, primarily due to $2.4 million in net proceeds from the IPO[19][146][148] Notes to the Condensed Consolidated Financial Statements The notes detail the company's IPO, the accounting for the new Strong Studios segment's content acquisitions and revenue events, and changes in debt and related-party transactions - The company completed its IPO on May 15, 2023, selling 1,000,000 Class A Common Shares at $4.00 per share, raising net proceeds of approximately $1.4 million after costs[22][69] - Strong Studios acquired film and TV rights from Landmark Studio Group for approximately $1.7 million and issued a warrant to Landmark[74] - In June 2023, the company acquired 100% of Safehaven 2022, which holds the rights to the 'Safehaven' series. Subsequently, Safehaven 2022 sold a 75% interest in the series to Ravenwood, recognizing $6.4 million in revenue and $5.4 million in related costs during Q2 2023[76][79][80] - The company's top ten customers accounted for 41% of consolidated net revenues for the first six months of 2023, with one customer representing over 10% of both revenues and receivables, indicating significant customer concentration[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes significant Q2 2023 revenue growth to the Strong Studios segment, while noting increased operating expenses and sufficient liquidity post-IPO Q2 2023 vs Q2 2022 Performance (in thousands) | Metric | Q2 2023 | Q2 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $17,839 | $8,823 | $9,016 | 102.2% | | Gross profit | $7,209 | $2,099 | $5,110 | 243.4% | | Gross profit % | 40.4% | 23.8% | - | - | | Income (loss) from operations | $177 | ($60) | $237 | (395.0)% | | Net (loss) income | ($416) | $13 | ($429) | N/M | - Q2 2023 revenue included $6.4 million from the sale of an ownership stake in the 'Safehaven' series. Excluding this, revenue increased 29.9% YoY[124] - Gross profit for Q2 2023 included approximately $4.4 million from the 'Safehaven' sale. Excluding this, the gross profit margin would have been 24.5%[127] Adjusted EBITDA Reconciliation (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | ($416) | $13 | ($40) | $206 | | EBITDA | $1,866 | $303 | $2,531 | $808 | | Adjusted EBITDA | $3,515 | $130 | $4,081 | $752 | Item 3. Quantitative and Qualitative Disclosures about Market Risk This section is not applicable as the company qualifies as a 'smaller reporting company' under SEC regulations - Disclosure is not required as the company is a "smaller reporting company" as defined by Item 229.10(f)(1) of Regulation S-K[175] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[176] - No material changes in internal control over financial reporting occurred during the fiscal quarter[177] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal disputes, including an asbestos-related indemnity agreement with its former parent, for which a loss contingency reserve has been recorded - The company has an agreement to indemnify former parent FG Group Holdings for certain asbestos-related personal injury claims, capped at $250,000 per year plus legal expenses[178] - A loss contingency reserve of approximately $0.2 million was recorded as of June 30, 2023, for potential losses related to these claims[178] Item 1A. Risk Factors No material changes to previously disclosed risk factors were reported since the final prospectus filing on May 16, 2023 - No material changes to risk factors were reported since the final prospectus filed on May 16, 2023[179] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the use of IPO proceeds and various unregistered equity issuances, including warrants and shares withheld for tax obligations - The IPO, which closed on May 18, 2023, raised total net proceeds of approximately $1.4 million after deducting underwriting discounts and commissions[182] - On May 26, 2023, the company issued a warrant to Landmark Studio Group LLC to purchase up to 150,000 Common Shares at an exercise price of $4.00 per share, exercisable for three years beginning six months after the IPO[181] - During the quarter, 26,177 shares were withheld from employees at an average price of $3.99 per share to satisfy tax obligations on stock grants[185] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[186] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[187] Item 5. Other Information The company reported no other information for this item - None[188] Item 6. Exhibits The company filed various exhibits, including agreements related to the 'Safehaven' production and standard CEO and CFO certifications - Filed agreements related to the 'Safehaven' series, including a purchase agreement, an assignment agreement amendment, a stock purchase agreement, and a management agreement[189] - Standard certifications under Rule 13a-14(a) and Section 1350 were filed by the CEO and CFO[189]