Ballantyne Strong, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Ballantyne Strong, Inc. First Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To join the question queue, press star, then one on a touchtone phone. To withdraw yourself from the queue, press star, then two. Please also note this event is being recorded. And now I would like to turn the call over to Jen Belladeau of IMS Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Ballantyne Strong's earnings conference call for the first quarter ended March 31st, 2022. On the call today from Ballantyne Strong are Mark Robertson, Chief Executive Officer of and Todd Major, Chief Financial Officer. There is also a slide presentation that management will be referencing that is available on the investor relations section of the Ballantyne Strong website. 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 expectations 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 on today's call. Risks and uncertainties are also described in the company's SEC filing. 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 post 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 Robertson. Go ahead, Mark.

Thanks, Jen. Good afternoon, everyone, and thanks for joining the call today. On our year-end call about a month and a half ago, we discussed the positive momentum we were seeing in our entertainment business as well as in our equity holdings. If you're following along with PowerPoint, I'll start on slide 45 to go through the quarter. This year is off to a strong start, and Q1 revenues are more than double from where they were last year. We're witnessing a robust reopening recovery in cinema, and the current outlook for entertainment business continues to be strong. Revenues increased 110% for the quarter to just over $10 million. while EBITDA and results from continuing operations improved 83% and 68% on the flow through from the resurgence in the cinema space. As we look ahead to the rest of this year and beyond, we expect those industry trends to continue to provide a favorable backdrop. Moving to slide seven through nine, over the past couple of years, we've been working hard to diversify our revenue streams in the entertainment business So in addition to the rebound in revenues from our cinema customers, our Eclipse product line, which is for immersive theme parks and simulators, also continued to generate growth. And most recently, we added content with the addition of Strong Studios, which we expect to be a meaningful contributor going forward. Two weeks ago, all the major exhibitors and studios gathered together in Las Vegas for the annual CinemaCon trade show. It was kind of a reunion with the industry finally back together in large numbers. And there was a tangible level of increased optimism and confidence coming from both the exhibitors as well as from the studios. There were several key referring themes from the conference that I thought were useful and would like to share with you. Number one, people are coming back to the cinema and are coming back in large numbers. Box office results are strong and breaking records. Sony, for instance, reiterated that from August of last year, which was the last CinemaCon, through this March to this CinemaCon, they generated over $3 billion at the box office. IMAX and Cinemark have announced record-setting box office performances. Spider-Man No Way Home was the sixth largest global opening ever. Just this past weekend, Doctor Strange drove large audiences back to cinema and was the second largest opening weekend since COVID started. Yesterday, AMC reported its revenues were up 5x. Two, the major studios were all united in voicing their commitment to the theatrical experience. During COVID, there was a lot of well-publicized experimentation with direct-to-streaming and day-and-date releases and other models. Without exception, the major studios all expressed their commitment to the theatrical window. and the reality that blockbuster releases generate more revenue and profit when they can have multiple bites of the apple and create a strong opening in the theater. For cinema customers, that's obviously welcome news, and it's really just part of the continuing evolution as exhibition and streaming coexist and optimize the revenue opportunities for each project. Three, the backlog of new blockbuster releases coming this year and future years is enormous. We just had Dr. Strange open up, as we mentioned this past weekend, to really strong numbers. We have Top Gun coming out at the end of this month. And as you look out, the slate of content to The Feminist doesn't show any signs of slowing down. We've got Thor, Black Panther, Flash, another Venom, Aquaman, their sequels to Jurassic Park, a couple of Mission Impossible, Transformers, a new Buzz Lightyear, continuing the Toy Story lineage. And there are many, many more that I won't try to name. And then we also have the re-release of Avatar in September, which will be followed by the new Avatar, Way of Water, which will close out the year in December. And word is that James Cameron is already completing production or working on production on three additional Avatar sequels that will follow. And if you recall, the original Avatar drove a meaningful upgrade cycle in industry 10 years ago when it first came out. And as the industry confidence is returning, We're also seeing exhibitors starting to reinvest in their businesses again. AMC just announced a major upgrade to laser projection. As you may recall, we are the exclusive supplier of screens to AMC, and we're excited to support them as they invest in bringing the best premium experience to their audiences. We would expect this first round of upgrades in the middle to back half of the year, and believe this represents the first phase of a longer cycle. Cinemark, who we also supply on an exclusive basis, has also committed to upgrading all of their cinemas to laser as well. So coming out of COVID, with industry beginning to reinvest and with our leadership position, we feel that we're well positioned. Moving over to slide 10, our Eclipse immersive screen business has continued to perform well, and we continue to explore additional unique applications for paints and coatings in that product line. The Navy Simulator projects have been a nice addition. We've completed two projects recently and have several more coming over the next couple of years. And again, the Eclipse line is a smaller but potentially faster growing part of the screen business. And it's one where I believe we're really just getting started on marketing and creating awareness in the market for the Eclipse line. On slide 11, with our services business, We're also seeing demand pick up. Our recurring monthly revenue maintenance contracts are back to pre-COVID levels now. And project and installation work are starting to pick up as well. We're also seeing increased demand for sales of projection and audio equipment as exhibitors are upgrading to improve the consumer experience and starting to prepare for the upcoming releases. We're also striving to become a broader one-stop shop and increase our share of business with our existing customers. With the laser upgrades, for example, we're working to capture a broader array of project management and installation activities that we really haven't done in the past, which should provide a complimentary boost to our service revenues as well as screen as we support the laser upgrade project. Moving over to slide 12 and 13, with the announcement of the launch of Strong Studios this quarter, We're excited to add content as a new line of business in the entertainment group. This opens up a brand new growth driver for the business. As you may recall from our last year-end discussion, we acquired a portfolio of 12 projects from Chicken Soup as part of the deal. We plan to start production on two of those projects in the coming months. They're already greenlit and ready to go. For those two projects, we've licensed the distribution rights to screen media and in return for a $9 million minimum revenue guarantee upon delivery. Our overall business model and the goal with Strong Studios is to build our content library over time and to do so in a financially disciplined manner. We'll be utilizing co-production and pre-sales to secure production funding while we're building out the content library, creating both near-term revenue as well as longer-term participation and value. Moving over to slide 15 and 20, we'll talk about equity holdings. In addition to the entertainment business, we hold equity stakes in three operating companies, Green First Forest Products, FG Financial, and Firefly. Green First reported its first quarter, which was profitable, I might add, since completing their acquisition. We hold 15.3 million shares, and Green First is a leading lumber producer in Canada. with the capacity to produce over 900 million boards each annually. We believe Central Canada is a great place from a lumber supply standpoint and believe Green First is well positioned both in the current cycle as well as in the longer term. Green First recently uplisted at the TSX, and just last week Interfor, which is one of the largest lumber producers in North America, announced that they had acquired a 16% stake in Green First. We view Interfor's investment as a positive long-term indicator for holding a green purse. FG Financial continued to expand its reinsurance SPAC platforms. Again, we hold 1.6 million common shares with FGF. During the quarter, FGF completed two SPAC IPOs. Those are the third and fourth IPOs supporting FG's SPAC strategy. If you recall, Alldale completed its business combination with Hagerty in December of And FG New America completed its combination with OpFi back in July. Additionally, FG's reinsurance business is patiently deploying capital, and they entered into two new contracts as well. We also hold shares of Firefly, which is a private VC-backed company. Firefly continues to grow post-COVID and continues to be innovative. They recently announced a new program where they're partnering with Hyundai have Firefly's in-car as well as their on-screen screens installed, generating advertising revenue to subsidize for fleet and drivers. Firefly will enroll professional drivers and fleet operators when they purchase new Hyundai vehicles in the program so that the drivers can earn advertising revenue to subsidize the cost of the purchase of the car. Just another way that Firefly is intending to build their relationships and strengthen their position as well as driving scale. As they continue to grow and eventually look towards a form of liquidity event, we believe the firefly holding could deliver significant upside potential for us down the road.

Todd, why don't you walk us through the quarter? Thanks, Mark, and good afternoon, everyone. Slide 22 contains a summary comparison of consolidated Q1 2022 results to the prior year. Strong Entertainment's operating results saw meaningful increases in revenue and profitability as the industry-wide recovery from COVID continues. Revenues from the sale of products and services were each up over 110% compared to the prior year. While gross margin dollars also more than doubled year over year, gross margin as a percentage of sales was roughly flat, with shifts in product mix, including higher sales of projection and audio equipment, being the primary driver. As you would expect, we're also seeing an uptick in some of our sales and marketing efforts as the industry continues to open up. The marking of the value of our green first equity holding to fair value resulted in a $1.7 million unrealized gain during Q1. As we've mentioned in the past, the benefit from unrealized gain on our equity holdings are excluded from our calculation of adjusted EBITDA, which also increased significantly from Q1. Moving to slide 23, which is a quarterly trend of strong entertainment for the five most recent quarters. Not only did Q1 of 2022 outperform the prior year, we're pleased to see the strong entertainment business deliver improvements sequentially over Q4 of last year as well. Gross profit and operating income during the second and third quarters of 2021 benefited from the recognition of employee retention credits. Overall, we are encouraged by the recent trends and operating results of the business. Slide 24 is a summarized balance sheet as of the end of Q1 2022 and also December 2021 and 2020. Cash flows used in operations and decreases in working capital during the first quarter, which were primarily related to deferred revenue, combined with the cash payment in connection with the Strong Studios acquisition of projects from Chicken Soup and the down payment for the purchase of the digital ignition building, were partially offset by the receipt of a $2.3 million prepayment on the SageNet note receivable. The purchase of the digital ignition building in Alpharetta, which we previously leased, resulted in the removal of the right-of-use asset and leased liability with an offsetting increase to PP&E and long-term debt. The increase in other liabilities since the end of 2020 is primarily due to an increase in deferred taxes as a result of the appreciation of our green first equity holdings. That wraps up the financial review, and I'll now turn the call back to Mark.

Thanks, Todd. Our entertainment business has been accelerating as industry's emerging from COVID. The momentum appears to be sustainable and increasing. Supported by the enthusiasm we're hearing from our major customers as releases accelerate. With additional strong studios, we now have an additional growth engine with projects starting to kick off this summer. And our holdings in Firefly, SQ Financial, and Green Force continue to add additional upside to overall long-term value of the business. So that will now open up the line for any questions.

We will now begin the question and answer session. To ask a question, press star, then 1 on a touchtone phone. If you're using a speakerphone, you may need to pick up your handset before pressing any keys. To remove your spell from the question queue, press star, then two. We will pause momentarily to assemble our roster. And our first question comes from Brett Reese with Jannie. Please go ahead.

Hi, Mark. Hi, Todd. Hi, Brett. Hey, there. Yeah, hi. Thanks for calling in. Yeah, sure. Can I ask you on Firefly, you know, you read a lot that, you know, the Uber and Lyft, you know, drivers have to, you know, make more money. Is that a tailwind, you know, because the, you know, the advertising device on the top of the car is incremental, you know, revenue for the Lyft and Uber drivers. So is that a tailwind for, you know, enhanced sales with Firefly?

Yeah, yeah, Brett. I mean, I certainly think so. And I believe that's an important part of the thesis is, you know, these, You know, these drivers, you know, just like everything else, they get squeezed by increasing gas prices and other things as well. And, you know, they've got to make more money. And, you know, one of the ways that they can do that is by utilizing their vehicle, you know, for more than just, you know, the fare coming through the Uber app by utilizing it for advertising. And, you know, Firefly is a great example of how they can do that, and they've got a great program. This deal that they're setting up with Hyundai is just another way that they're expanding their ability to reach those drivers and partnering on the front end of the purchase of the fleet vehicles. We think that's an important part of the Firefly thesis. Great.

On a $10 million revenue run rate, did we generate positive cash flow this quarter?

Cash flow from operations was a bit of a use. We had some deferred revenue that we had recorded at the end of the year. We'd received the cash prior to the end of 2021 that we recognized in revenue during the quarter, so there was a little bit of a use from an operations standpoint during the quarter. Then we also purchased the digital ignition buildings. We had about a $500,000 down payment on that purchase And then we also had the Strong Studios acquisition where we paid about $300,000 as our upfront payment from that. So all of those combined netted against the $2.5 million, the $2.3 million we received from SageNet. There was about a $700,000 or $800,000 cash use overall during the quarter. But not all of that was operational.

Okay. And Can we expect soon to see incremental revenue from the initiative with the Belgian company in Europe? Is that something that starts up pretty soon, or is that off in the horizon?

It'll start fairly soon, Brett. It may start slowly. because Europe is a little bit slower to reopen and to accelerate and start their upgrade cycles than we're seeing in the U.S. So we don't expect it to start like a rocket, but we do expect it to start very soon, and we're working with them now on the logistics and other aspects so that we can actually be able to start shipping from that facility as soon as in the fall, late summer, fall. So, you know, that will allow us to really establish a quick ship you know, beachhead in Europe where we can service those customers much faster and much more economically and, you know, give us a good position to start increasing market share in Europe as that market, you know, starts to accelerate their post-COVID recovery as well.

Are the margins higher on your net product sales or on your net service revenue? Because I see your net service revenue you know, doubled quarter to quarter, which was very nice to see.

Yeah. It really, there's not a straight answer to your question because there's a lot of difference. There's a lot of product mix difference potentially in the product line sales. So it depends on the product. You know, our services generally carry nice margins. Our screens carry very nice margins. We have other products we distribute that we distribute, you know, third-party products that are at lower margins. So it really depends on the mix within the product sales line item. If we're heavy on screens, you'll see the product margins, you know, tick up. If we're heavy on distributions, you may see that percentage drop, you know, but obviously it's contributing margin dollars. And our service revenues are generally fairly consistent.

All right. One more, if I may, and you something you may not be able to answer, but I'll give it a go. With respect to the IPO, are you holding off going forward with it to await potentially better pricing because of market conditions, and how do you weigh that versus perhaps lower prices for what you want to do and use the money for?

Yeah, we're evaluating that, you know, week by week. You know, obviously the, you know, and there are limits to what I can say specifically with regard to the IPO. But what I can say is that, you know, we have filed publicly the S-1. We will be updating that S-1 with, you know, Q-1 financials here shortly because those numbers will go stale, you know, at the end of this week or first of next week. So once we get the S-1... updated with Q1 carve-out financials, you know, and obviously the SEC has to clear it at that point, we'll be in a position to where we could launch the IPO at such time as market conditions are appropriate. That's really all I can kind of say about in terms of timing out at this point is we're going to be ready to go. You know, we have certain objectives we want to achieve, and when it's right, you know, we'll start moving forward. All right.

Thank you for answering all my questions, and I'm going to step back. But thank you. Good quarter.

Thanks, as always, Brett. Appreciate the call.

Thank you.

Again, if you'd like to join the question queue, press star, then 1. And the next question comes from Frank Jones with Barlow Capital. Please go ahead.

Hey, guys. Thanks for taking my question. So I was... Wondering, hey, could you provide a little more insight into the $9 million that you expect with Strong Studios? Specifically, maybe a little more color on how you expect to realize the revenue and over what kind of a rough time frame that would be.

Sure. Yeah, thanks for the question, Frank. I'm not going to get into too much detail specifics on precise timing specifically, But what I will tell you is that the $9 million, maybe I should just back up and kind of explain what it represents and kind of how the model works would be helpful first as well. When we acquired these projects from Chicken Soup, we acquired 12 projects. Two of those projects we're proceeding with quickly and plan to be in production. as early as mid-summer on one of them, and late summer to fall on the second one. And then there are other projects beyond that. But on these first two projects, we have a minimum revenue guarantee from Screen Media, which is the distribution arm under Chicken Soup, where they'll distribute that, they'll license that for distribution on their crackle network. So at the time that we deliver each of those series, to them you know so that it's available for their exploitation that's when we would receive the minimum revenue guarantees for each of those projects and that's when we would anticipate recognizing revenue so we anticipate that both of those could likely occur in this year it's certainly possible that they could slip out into early next year but within the next you know nine to twelve months you know we would expect to deliver those episodes and be able to recognize the revenue from those projects. And then obviously we have, you know, we're excited about the business. We're not just doing it, you know, for those two projects. Those are a nice start and launch to the business. You know, it gives us a head start, you know, to where we can kind of hit the ground running with revenue-producing projects, you know, right out of gate as opposed to waiting and building the business for a year before we get to that stage. And, you know, we're working on building the pipeline of other projects. And we plan to employ a fairly similar model, you know, with a lot of our other projects to where we utilize, you know, revenue guarantees from distributors, you know, prior to starting production, you know, to be able to generate revenue and generate near-term revenue as well as longer-term participation, you know, but do it in a very capital light, financially disciplined fashion so that we're not taking a lot of risk on these projects. So I don't know if that answered your question, but hopefully that's some background that's helpful.

Oh, yeah, that's very helpful. Thank you very much. Yeah, that's it for me. Thank you. Okay.

All right. Thanks.

We have no further questions, so this concludes our question and answer session, and I will turn the conference back over to management for any closing remarks.

Thanks. Thanks, everyone, for dialing in and listening to the call. If you do have any other questions that come up after the call, feel free to reach out to either myself or Todd, and I look forward to talking to you again shortly when we report Q2 in August. Thanks.

The conference is now concluded. Thank you for attending today's presentation, and you may now