Discontinued Operations

6 Months Ended

Jun. 30, 2024

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Note 4. Discontinued Operations

Strong/MDI

On May 3, 2024, Strong Global Entertainment entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI, FGAC Investors LLC, and CG Investments VII Inc. (together with FGAC Investors LLC, the “Sponsors”). FGAC’s currently issued and outstanding Class A restricted voting shares (the “Class A Restricted Voting Shares”) and share purchase warrants (the “Warrants”) are listed on the Toronto Stock Exchange (the “TSX”). In addition, FGAC has approximately 2.9 million Class B shares (the “Class B Shares”) issued and outstanding.

Pursuant to the Acquisition Agreement, FGAC intends to acquire, directly or indirectly, all of the outstanding shares in the capital of Strong/MDI (the “MDI Acquisition”). As a result of the MDI Acquisition, Strong/MDI will become a wholly-owned subsidiary of FGAC. The MDI Acquisition values Strong/MDI at a pre-money valuation of $30 million (as adjusted pursuant to the Acquisition Agreement, the “MDI Equity Value”). On Closing, FGAC will satisfy the Purchase Price (as defined in the Acquisition Agreement) with: (i) cash, in an amount equal to 25% of the net proceeds of a concurrent private placement, if any (the “Cash Consideration”), (ii) the issuance to the Company of preferred shares (“Preferred Shares”) with an initial preferred share redemption amount of $9.0 million, and (iii) the issuance to the Company of that number of Common Shares equal to (a) the MDI Equity Value minus (x) the Cash Consideration and (y) the Preferred Shares, divided by (b) $10.00. The Purchase Price is also subject to a working capital adjustment, if any.

Management evaluated the classification of Strong/MDI as a discontinued operation as of June 30, 2024 and determined Strong/MDI is a component of an entity and represented a discontinued operation. Accordingly, Strong/MDI has been included as part of discontinued operations for all periods presented.

In connection with the closing of the MDI Acquisition (the “Closing”), FGAC intends to rename itself Saltire Holdings, Ltd. (“Saltire”). It is a condition of Closing that the common shares of FGA (the “Common Shares”) be listed and the Warrants continue to be listed on the TSX.

The Closing is conditional on, among other things, there being no legal impediments to Closing and all required authorizations, consents and approvals necessary to effect Closing having occurred, or being filed or obtained, as applicable, the Common Shares being conditionally listed for trading on a stock exchange, the approval of the MDI Acquisition by the holders of Class A Restricted Voting Shares at a meeting of shareholders to be held in connection with the MDI Acquisition, receipts having been obtained for both the preliminary and final prospectus and other usual and customary conditions for transactions of this nature. The obligations of the Company at Closing are also conditional on, among other usual and customary conditions for transactions of this nature, (a) the truth and accuracy of FGAC’s representations and warranties, (b) the compliance and/ or performance by FGAC of its covenants under the Acquisition Agreement, and (c) there having been no material adverse change with respect to FGAC. The Closing is also conditional on, among other usual and customary conditions for transactions of this nature, the following conditions of Closing in favour of FGAC: (a) the truth and accuracy of the Company and Strong/MDI’s representations and warranties, (b) the compliance and/or performance by the Company and MDI of their covenants under the Acquisition Agreement, (c) the completion of all required third party authorizations, consents and approvals, and (d) there having been no material adverse change with respect to Strong/MDI or its business and there being no events, facts or circumstances that shall have occurred which would result or which could reasonably be expected to result, individually or in the aggregate, in a material adverse change with respect to Strong/MDI or its business.

It is anticipated that, upon completion of the MDI Acquisition, on a non-diluted basis and assuming completion of a $10 million private placement and the issuance of 338,560 Common Shares to CG Investments VII Inc. as consideration for its deferred underwriting fee, the Company will hold an ownership interest of approximately 29.6% in Saltire.

Strong Studios

In March 2022, Strong Studios, Inc. (“Strong Studios”) acquired, from Landmark Studio Group LLC (“Landmark”), the rights to original feature films and television series, and was assigned third party rights to content for global multiplatform distribution. The transaction entailed the acquisition of certain projects which are in varying stages of development. During the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven 2022”) was established to manage the production and financing of the Safehaven television series, one of the in-process projects acquired from Landmark.

In September 2023, the Company acquired all of the outstanding capital stock of Unbounded Media Corporation (“Unbounded”), an independent media and creative production company. Unbounded developed, created and produced film, advertising, and branded content for a broad range of clients. The Company expected Unbounded, in partnership with Strong Studios, would also further develop its original IP portfolio, under its Fieldhouse Entertainment division, which included feature films employing Strong Studios’ long form production expertise and industry network.

As of December 31, 2023, the board of directors of Strong Global Entertainment approved the Company’s plan to exit its content business, including Strong Studios and Unbounded and authorized management to proceed with such plan. The plan is expected to improve the Company’s focus on its core businesses, reduce general and administrative costs, and improve financial performance. The Company may receive proceeds from the disposition of certain parts of the business and could recover development costs incurred in certain of the Strong Studios projects in the future; however, any recovery is highly speculative, and management is not able to estimate the amount, timing or likelihood of recoveries. These estimates may change based on the ultimate disposition of the operations and potential recoveries.

Management evaluated the classification of the content business as a discontinued operation as of December 31, 2023. The content business included employees and operations that were dedicated solely to that portion of the overall business. In addition, the Company’s accounting system and bank accounts were set up in a manner that allowed for the cash flows to be clearly distinguished from the rest of the entity. Management determined its content business is a component of an entity and represented a discontinued operation effective December 31, 2023. Accordingly, the content business has been included as part of discontinued operations for all periods presented. As noted above, management began implementing the exit plan in late December 2023. All employees of the content business were notified of the Company’s plans to exit the business in December and management immediately began working to implement the exit plan.

In connection with the plan to exit the content business, the Company shut down the acquired Unbounded operations effective December 31, 2023.

The Company also entered into a letter of intent during December 2023 and executed a Stock Purchase Agreement effective January 1, 2024 for the sale of the majority of the Strong Studios operations. As a result, the Company has classified the assets and liabilities to reflected as discontinued operations as of December 31, 2023. The assets and liabilities transferred to the purchaser during the first quarter of 2024.

Pursuant to the Stock Purchase Agreement, the Company transferred the Strong Studios legal entity and all assets and liabilities related to Strong Studios, except the assets and liabilities related to Safehaven. The Stock Purchase Agreement included a sales price of $0.6 million in cash, to be paid in installments, and assumption of certain liabilities of Strong Studios. In addition to the $0.6 million purchase price, the Company could recoup its investments in the underlying projects in the future if they projects are profitably commercialized. The first installment payment was due in February 2024, but the payment has not been received from the purchaser, and management is uncertain if the cash purchase price will ultimately be received. As a result, the Company has adjusted the carrying value of the net assets related to Strong Studios to $0.

The Safehaven series was not transferred as part of the Stock Purchase Agreement as the Company and the other investors in the series were involved in a dispute relating to the financial management of the project. As a result of the dispute and the impact on the Company’s ability to predict any future revenue participation from the sale/license of the series, the carrying value of the assets and liabilities was adjusted to $0. In July 2024, the Company resolved the dispute, which did not result in any cash payments or a material impact to its current period financial statements. In addition, the Company maintained a right to receive distributions to recover its investment and to participate in series profits (if any).

The major classes of assets and liabilities included as part of discontinued operations are as follows (in thousands):

	June 30, 2024						December 31, 2023
	Strong/MDI		Strong Studios		Total		Strong/MDI		Strong Studios		Total
Cash	$	484	$	-	$	484	$	649	$	-	$	649
Accounts receivable, net		2,919		-		2,919		2,948		27		2,975
Inventories		2,460		-		2,460		2,598		-		2,598
Other current assets		640		-		640		743		7		750
Property, plant and equipment, net		987		-		987		1,105		-		1,105
Goodwill and intangible assets		906		-		906		903		-		903
Film & TV programming rights		-		-		-		-		906		906
Total assets of discontinued operations	$	8,396	$	-	$	8,396	$	8,946	$	940	$	9,886
Accounts payable and accrued expenses	$	1,836	$	-	$	1,836	$	2,376	$	1,321	$	3,697
Deferred revenue and customer deposits		304		-		304		469		-		469
Short-term debt		2,895		-		2,895		2,438		-		2,438
Long-term debt		-		-		-		-		71		71
Deferred income tax liabilities, net		107		-		107		125		-		125
Total liabilities of discontinued operations	$	5,142	$	-	$	5,142	$	5,408	$	1,392	$	6,800

The major line items constituting the net loss from discontinued operations are as follows (in thousands):

	Three Months Ended June 30, 2024									Three Months Ended June 30, 2023
	Strong/MDI			Strong Studios			Total			Strong/MDI			Strong Studios		Total
Net revenues	$	3,940		$	-		$	3,940		$	4,617		$	6,379	$	10,996
Cost of revenues		2,358			110			2,468			2,763			1,985		4,748
Gross profit		1,582			(110	)		1,472			1,854			4,394		6,248
Selling and administrative expenses		1,145			204			1,349			899			3,600		4,499
Income (loss) from operations		437			(314	)		123			955			794		1,749
Other expense		62			-			62			(487	)		-		(487	)
Income (loss) from discontinued operations before taxes		499			(314	)		185			468			794		1,262
Income tax expense		(35	)		-			(35	)		(369	)		-		(369	)
Net income (loss) from discontinued operations	$	464		$	(314	)	$	150		$	99		$	794	$	893

	Six Months Ended June 30, 2024									Six Months Ended June 30, 2023
	Strong/MDI			Strong Studios			Total			Strong/MDI			Strong Studios			Total
Net revenues	$	7,327		$	-		$	7,327		$	8,051		$	6,379		$	14,430
Cost of revenues		4,394			205			4,599			4,895			1,985			6,880
Gross profit		2,933			(205	)		2,728			3,156			4,394			7,550
Selling and administrative expenses		1,783			131			1,914			1,595			3,792			5,387
Loss (gain) on disposal of assets		2			-			2			-			(1	)		(1	)
Income (loss) from operations		1,148			(336	)		812			1,561			603			2,164
Other income (expense)		141			-			141			(407	)		-			(407	)
Income (loss) from discontinued operations before taxes		1,289			(336	)		953			1,154			603			1,757
Income tax expense		(168	)		-			(168	)		(63	)		-			(63	)
Net income (loss) from discontinued operations	$	1,121		$	(336	)	$	785		$	1,091		$	603		$	1,694