Ballantyne Strong, Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the Ballantyne Strong, Inc. Third Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's conference is being recorded. I would now like to turn the call over to John Nesbitt of IMS Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Valentine Strong's earnings conference call for the third quarter ended September 30th, 2021. On the call today from Valentine Strong are Mark Roberson, Chief Executive Officer, and Todd Major, Chief Financial Officer. Before we begin, I'd like to remind everyone that some statements made on this call will be forward-looking in nature. These statements are based on management's current view and expectation as of today, and the company is under no obligation and expressly disclaims any obligation to update forward-looking statements except as required by law. These statements are also subject to risks and uncertainties and may cause actual results to differ materially from those described in today's call. Risks and uncertainties are also described in the company's SEC filings. Today's presentation and discussion also contain references to non-GAAP financial measures. The definition of non-GAAP terms and reconciliations to GAAP measures are available in the earnings release posted on the Investor Relations section of the company's website. Our non-GAAP measures may not be comparable to those used by other companies, and we encourage you to review and understand all of our financial reporting before making any investment decisions. At this time, I'd like to turn the call over to Mark. Okay? Go ahead, Mark.

Thanks, John. Good afternoon, and thank you for joining us today. I'm pleased to report that the entertainment industry and our entertainment operating business continue to make meaningful progress, and our equity holdings continue to drive value. Box office results so far this fall have been encouraging, and in some cases, record-breaking. The slate of studio releases coming out over the next 24 months is impressive, and we believe those trends foretell a robust entertainment environment for 2022 and beyond. Our capital allocation strategies, namely our minority stakes in Green First, FG Financial, and Firefly, are well positioned, and we're excited about the potential capital appreciation opportunity in each of those holdings. This quarter, we began marking our Green First investment to market, reporting a pre-tax unrealized gain of $8.4 million based on the current market price as of September 30th. The combination of positive momentum in the entertainment operating business, controlled operating expenses, and the unrealized appreciation in our equity holdings resulted in significantly improved operating results with operating income near break even, positive net income and positive adjusted EBITDA, and EPS coming in at 38 cents per share for the quarter. On slides 5 through 11 of the presentation, Strong Entertainment is an established leader in the entertainment business. We have an industry reputation that's been built over the past 80 years. We have exclusive arrangements with IMAX, Cinemark, and we provide equipment and services to the majority of the cinema operators in North America. This business has historically produced solid and stable cash flows for many years. Obviously, COVID had a major impact on the industry and also on our business. We're now starting to see things strengthen and believe we're in the early innings of a robust recovery. As vaccination rates have continued to climb and government restrictions have continued to subside, consumer demand for all forms of entertainment and excitement about returning to the cinema has continued to strengthen. And the flow of high quality content into theatrical exhibition is expected to accelerate. IMAX reported their September box office had recovered and actually surpassed their pre-COVID September 2019 September results, with Shang-Chi and Free Guy leading the way. IMAX then broke their own all-time record in October on the global releases of Dune and Bond. Cinemark also recently announced that Venom was its best October opening ever. So, clearly, folks are coming back to the cinema. and industry revenues are starting to reflect increase in quality content from the studios. In addition, cinema operators are becoming more creative with new ways to leverage their investment with private showings, local language content, sporting events, and esports, among others, starting to find their way into the cinemas. Consumer demand for moviegoing remains strong, and the release schedule for the remainder of 2021, and especially 2022, is impressive. The Eternals, Ghostbusters, the latest Spider-Man, and Matrix are all on tap to close out the year. For 2022, the slate is even stronger with Doctor Strange, Thor, and Black Panther from Marvel, Batman, Flash, and Aquaman from DC, and new sequels for Jurassic World, Mission Impossible, Transformers, Top Gun, and Avatar, among others on deck for theatrical release. And 2023 is starting to take shape as well. We believe the backdrop is favorable for the industry rebound to accelerate as we look ahead for the next several years. In addition to our strong legacy in the cinema vertical, we've also been increasing the level of diversification in our screen business. Because we manufacture our own coatings and have in-house R&D capabilities, we've been able to expand our product line with the Eclipse immersive screens for theme parks and simulators. And our Eclipse business has been growing throughout COVID and is on target to double in 2021. And we've also been able to start selling paints and coatings and other screen products into more non-cinema attractions, such as the Van Gogh exhibits and the Illuminarium. These are growth areas that diversify our revenue and provide additional expansion opportunities. Because of our reputation for innovation, service, and quality, We've built strong relationships with industry leaders like Cineonic, iMac, Cinemark, Marcus, AMC, and many others. As part of the focus on innovation, we've been working to optimize our screens for laser projection. Laser projection provides meaningful operational efficiencies for the operator while also enhancing the premium experience for the viewer. We see the transition to laser from Xenon driving a lengthy upgrade cycle in the industry. As just one example, Cinemark has publicly stated that they plan to upgrade all their screens to laser projection over the next 10 years, and they're currently less than 10% into that cycle. On the services side, we're a leading provider of technical support, installation, and managed services. We see demand for services and distribution products increasing as studio releases and box office revenues accelerate. Service revenues increased 43% in this quarter as compared to the third quarter of last year. We're working to increase our market share post-COVID and see a favorable landscape for expansion. We expect to see outsourcing of technical services increase for exhibitors. especially as demand from the heavy slate of upcoming releases begins to put more pressure, more operational pressure on the cinemas. Moving on to our equity holdings, which is slide 12 through 15 of the presentation, Firefly, Green First, and FG Financial continue to execute their strategic plans, and we're excited about the potential future appreciation in the portfolio. Starting with Green First, which completed its acquisition of the lumber assets of Rainier Advanced Materials in August, making it one of the 10 largest lumber producers in Canada. We participated in the rights offering to backstop the acquisition, allocating additional capital to increase our position from 7 million shares to 15.3 million shares. We're bullish on the outlook for Green First, and we look forward to participating in their long-term success. We also hold 1 million shares of FG Financial. FGF recently launched its SPAC platform and has closed its first SPAC transaction with OPFI and also announced a merger agreement with Hagerty in its second SPAC. After the end of the quarter, FG Financial completed a $2.6 million capital raise and is commencing a follow-on rights offering under the same terms as the public offering. We intend to fully participate and plan to commit additional capital to the FGF rights offering to increase our stake. Firefly is also gaining momentum coming out of COVID. Their revenues have been increasing, and they've been successful in raising additional growth capital. Firefly recently announced the acquisition of Curb Taxi Media, making it the dominant mobility media company in the New York market. As Firefly continues to scale, and eventually looks towards a liquidity event, we believe this holding could deliver significant upside potential. Overall, a solid quarter, and we believe trends are strengthening as we look ahead. With that, I'll turn the call over to Todd.

Thanks, Mark. Consistent with recent quarters, today's financial review will cover the operating results of our continuing operations and do not include convergent and strong outdoor now that they have been classified as discontinued operations. Slide 17. contains a summary comparison of Q3 2021 to the prior year. Revenue and operating results continue to compare favorably to the prior year as the strong entertainment business recovered from the impact of COVID on the prior year. Operating results for the third quarter of 2021 also reflect $600,000 benefit from the recognition of employee retention credits. As a reminder, the favorable impact of these credits are excluded from adjusted EBITDA. Below the operating income line, we realized a $1.7 million gain related to the proceeds received from the sale of a portion of the green first rights. We also recorded a pre-tax $8.4 million unrealized gain on investments. Starting with the third quarter of 2021, we are now marking the value of our green first investment to market, which resulted in the large unrealized gain. Similar to the employee retention credits, the benefit from both the realized and unrealized gain on investments are excluded from our calculation of adjusted EBITDA. Even after excluding the benefits from the ERC and the gains on investments, adjusted EBITDA saw an 81% increase over the prior year. Turning to slide 18 now, the year-over-year increase in strong entertainment revenue was primarily due to higher revenues from screen systems, field maintenance, and monitoring services in our Eclipse curvilinear screen projects. Those increases were partially offset by the timing of a large projection equipment sale in the third quarter of 2020, which skews the quarterly comparison. Gross margin of 37% during the third quarter includes a $400,000 benefit from the employee retention credits. Excluding this benefit, gross margin during the third quarter would have been approximately 30% and improvement over 17% in the prior year. An additional $100,000 benefit from ERCs was recorded within Strong Entertainment's SG&A during the third quarter of 2021. Slide 19 shows a quick historical trend of Strong Entertainment showing the operating results of the last few years, including pre-COVID. Prior to COVID, the group was generating revenue in the $35 to $45 million range annually, with EBITDA margins in excess of 20%. During the significant negative impacts of COVID during 2020, we were able to implement a series of cost management measures and Strong Entertainment finished the year at a near break-even level. While Strong Entertainment has not returned to the pre-COVID levels, we are pleased how the industry recovery and our cost control efforts have positively impacted the business over the trailing 12 months. Slide 20 is a snapshot of the balance sheet as of the end of September compared to the end of 2020. The most significant change relates to our investment in Green First. As previously mentioned, during the third quarter, we allocated capital to exercise the Green First rights to acquire 8.3 million additional shares. Approximately 8.3 million U.S. of cash came from a balance sheet, and an additional 1.7 million came from the sale of a portion of the rights. Following Green First acquisition and issuance of additional common shares, our percentage ownership of Green First is approximately 9%. As a result, we discontinued accounting for the green first using the equity method of accounting, and on a go-forward basis, we'll use the fair value approach and we'll account for our green first investment on a mark-to-market basis. Even after the additional investment in green first, cash balances remain strong. Our debt and lease obligations have been reduced, and shareholders' equity has nearly doubled since the end of 2020. That concludes the financial review. Let me turn the call back to Mark.

Thanks, Todd.

To wrap up before we conclude, Strong Entertainment has rebounded nicely since last spring, mirroring the recovery in the cinema and entertainment industry, as well as benefiting from diversification of the business. We believe the cinema recovery is in its early stages and the outlook for studio releases and cinema business is favorable. Our equity holdings are executing on their plans. and we believe they continue to have meaningful long-term upside opportunity. Our balance sheet is in solid shape, which allowed us to increase our equity stake in green first, and we plan to use our balance sheet to increase our holdings in FGS as well this quarter. Also, before we move on to Q&A, I wanted to touch on the plan name change from Ballantyne Strong to FG Group Holdings. We have our shareholders meeting in early December, and assuming the proposal is passed by our shareholders, we plan to proceed with the name change and also change our ticker symbol to FGH. With the IPO and the planned separate listing for the entertainment group, we believe this is a good time to effect a change of the name at the Ballantyne level. The Ballantyne Strong name has historically been closely associated with the cinema business, and we believe the name change to FG Group Holdings better reflects the future business plans of the holding company.

We'll now open up the call if there's any questions.

Thank you. To register a question, you may press the 1 followed by the 4 on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, you can press the 1 followed by the 3. And our first question comes from the line of Dan Bellinger with Mayflower Capital. Please go ahead.

Hey, guys. Thanks for taking my question. So really exciting about the Illumina product. It's seen pretty good growth over the past few years. Could you maybe give a little more insight into the non-cinema applications you're seeing for this product?

Sure thing, Dan. Appreciate the question. So the Illuminarium is not a product. The Illuminarium is actually a customer where we sold product into from our screen division. So just to back up, non-cinema, as we mentioned, the call has become, it's small, but it's become a much more important part of the business. And, you know, it's probably about less than 10% of the business today, but it's grown to that from virtually zero two to three years ago. So, you know, our diversification of the business model and expansion And the ability to leverage the capabilities and the R&D and the product line that we've developed in the cinema business to applications outside of cinema is something we're pretty excited about. And the Illuminarium is really one example of that. And it was a pretty big example in Q3 or Q2. There are other examples, you know, which include the Eclipse product itself. where we're selling curvilinear screens in the theme parks and for simulators and military applications. The Luminarium project was a situation where we weren't selling a clip screen, but we were selling paints and coatings and products that we would use in a cinema application in the non-cinema ventures. The same with the Van Gogh exhibits that you've seen going around this summer. So the non-cinema vertical is a small and growing part of the business, and we're pretty excited about it.

Great. That's helpful. Yeah, that's it for me. Thanks. Good luck going forward, guys.

Thanks, Dan. Appreciate it.

And as a reminder, ladies and gentlemen, you can press the 1 followed by the 4 if you have any questions. And our next question is from the line of Brett Reese with Jannie Montgomery Scott. Please go ahead.

Good afternoon. I'm pretty good. The timeline on the IPO, can you give us any guidance on that?

Yeah, that's a really good question, Brett. Unfortunately, I can give zero guidance on that, according to our attorneys. We're at a period of time where I'm really not allowed to talk about the Strong Entertainment IPO at all. So really, I would tell you to stay tuned, and we will communicate something as soon as we're able to in that regard.

Let me ask you just generically, what do you have to do to – let's pretend it wasn't Valentine's Strong. What do you have to do to move forward on an IPO?

Yeah, so the basic steps, and this would apply to any company, you know, performing or going through an IPO process, you know, step one is preparing, you know, the carve-out financials and a separate carve-out audit of the entertainment group, which has been audited as part of Valentine in our case, but there's separate procedures required for the carve-out financials and the carve-out audit. that leads to the filing of an S-1 with the SEC. So, any company going public, you know, really the first step beyond preparation is the filing of the initial S-1. And the S-1 goes in, and then there's a minimum of 30-day review period by the SEC. After that, there's a back and forth comment period, you know, at which time, once that's concluded, and that can take 30 days or several months. Usually, it can be any range of that. After the comment period is concluded, then an IPO could proceed.

Okay. Can I assume that the SG&A is going to be higher this quarter because you're laying out money, you know, for, you know, financial professionals to, you know, to put together the S-1?

We definitely have, you know, additional, you know, professional firms engaged. you know, in the process and performing your work related to the legal and the accounting and audit work and preparation, you know, for the separation or the IPO. Those costs under GAAP get deferred into the cost of the offering. So you may not see those necessarily hit our SG&A, but we will be incurring additional costs that will be reflected as part of the transaction when the IPO occurs.

Okay. In the second quarter conference call, you mentioned or somebody asked about an IPO of a comparable company, and the transcript just, you know, I couldn't make out what it is. It was MIT. Do you know the name of that company and what the stock symbol is so I can just, you know, start to do my own kicking of the tires of, you know, what Ballantyne Strong might be valued at?

Sure, absolutely, Brett. That company, the name is Moving Image Technologies, and their ticker symbol is MITQ. Okay. They went public back in the summer, so I'm assuming that's who you're referring to.

Okay, so I see that's trading at about a $30 million market cap. How do we compare to them?

Yeah, I mean, again, I think, you know, within the boundaries of what I'm allowed to talk about, I can't really talk about valuation of the entertainment business at this time. I look forward to talking to you about it soon.

OK, that's that's cool. Now, before COVID hit Ballantyne Strong. was doing $35 to $45 million in revenues. You know, we're back up to, you know, $6 million a quarter, which is an annualized run rate of $24 million. Do you think within the next year or two we can get back up to that $35, $45 million or maybe even exceed it? You know, have some of our, you know, lesser capitalized competitors, you know, fallen out so we pick up market share?

Yeah, I mean, certainly, you know, without giving specific guidance, you know, I certainly, we certainly are bullish on, you know, our ability to gain share post-COVID because it has, you know, some folks haven't survived. You know, we believe that the exhibitors will rely more heavily on, you know, outsourcing, particularly in the service area, outsourcing of services to folks like our STS group on the service side. So, you know, we think the factor up, is favorable, you know, as our customers continue to recover, that we will participate in that and we'll see, you know, growth, you know, from the current, you know, as you said, 24, 25 million annualized run rate, you know, back up closer to those, certainly closer to those pre-COVID levels and hopefully.

Right, right. Now, you have about $10 million cash after the outlays for the exercise of the Green First rights. You talk about you're going to be participating in the FTF rights offering. Is there a ballpark number of how much of your cash you're going to use for that? And then what's left? And then is what's left, you know, sufficient working capital for what you guys have on the drawing board, you know, the next six months to a year?

Yeah, we feel good about the capital position. We intend, as you said, in the earnings release and the call, we intend to fully participate in the FGF rights offering. We don't know precisely how many shares we'll be able to secure in the rights offering. It depends on the level of participation by other folks. But if Based on the formula in the rights offering itself, we're entitled to, I think it's 0.15 shares per share. So if you do the math on that on our million shares that we hold, that's how many shares we'd be able to buy if everyone else fully participates. Right. We assume that... There's never 100% participation, and we plan to oversubscribe.

Right, right. Do you speak to and get any kind of daily or monthly input on how the operations at Firefly are actually going?

Firefly is a private company, so, you know, they're not required to share, you know, confidential private information with us. You know, we certainly do get indications from them about how the business is going and what we understand their businesses. It has grown and is continuing to grow quite nicely post-COVID.

Right, right. That's all for me. Thank you very much for answering my questions.

No problem, Brent.

Thank you very much. I appreciate the questions.

And at this time, we have no further questions on the phone line. And that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.