CINEVERSE CORP. The following discussion and analysis should be read in conjunction with our historical Condensed Consolidated Financial Statements and the related notes included elsewhere in this report. This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as "believes," "anticipates," "expects," "intends," "plans," "will," "estimates," and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
OVERVIEW
Since our inception, we have played a significant role in the digital distribution revolution that continues to transform the media landscape. In addition to our pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, we have become a leading distributor of independent content, both through organic growth and acquisitions. We distribute products for major brands such as Hallmark, Televisa, ITV,Nelvana , ZDF, Konami, NFL and Scholastic, as well as leading international and domestic content creators, movie producers, television producers and other short-form digital content producers. We collaborate with producers, major brands and other content owners to market, source, curate and distribute quality content to targeted audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to Apple iTunes, Amazon Prime, Netflix, Hulu, Xbox, Pluto, Tubi and most video-on-demand ("VOD") and free ad-supported television ("FAST") streaming platforms, as well as (ii) physical goods, including DVD and Blu-ray Discs. We report our financial results in two reportable segments as follows: (i) Cinema Equipment Business ("Cinema Equipment") and (ii) Content and Entertainment Business ("Content & Entertainment "). The Cinema Equipment segment consists of the non-recourse, financing vehicles and administrators for our digital cinema equipment (the "Systems") installed in movie theatres throughoutNorth America . It also provides fee-based support to over 465 movie screens as well as directly to exhibitors and other third-party customers in the form of monitoring, billing, collection and verification services. OurContent & Entertainment segment operates in: (i) ancillary market aggregation and distribution of entertainment content and (ii) branded and curated over-the-top ("OTT") digital network business providing entertainment channels and applications. Beginning inDecember 2015 , certain of our cinema equipment began to reach the conclusion of their 10-year deployment payment period with certain distributors and, therefore, Virtual Print Fee ("VPF") revenues ceased to be recognized on such Systems, related to such distributors. Furthermore, because the Phase I Deployment installation period ended inNovember 2007 , a majority of the VPF revenue associated with the Phase I Deployment Systems has ended. The reduction in VPF revenue on Cinema Equipment systems approximately coincided with the conclusion of certain of our non-recourse debt obligations and, therefore, the reduced cash outflows related to such non-recourse debt obligations partially offset the reduced VPF revenue sinceNovember 2017 . Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time they have the option to: (i) return the Systems to us; (ii) renew their license agreement for successive one-year terms; or (iii) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan.
We are structured so that our Cinema Equipment segment operates independently
from our
28--------------------------------------------------------------------------------
Financial Condition and Liquidity
As ofDecember 31, 2022 , the Company has an accumulated deficit of$479.2 million and negative working capital of$4.5 million . For the three and nine months endedDecember 31, 2022 , the Company had net income (loss) attributable to common shareholders of$4.9 million and($6.9) million , respectively. Net cash used in operating activities for the nine months endedDecember 31, 2022 was$7.9 million . We may continue to generate net losses for the foreseeable future. The Company is party to a Loan, Guaranty, and Security Agreement withEast West Bank ("EWB") providing for a revolving line of credit (the "Line of Credit Facility") of$5.0 million , guaranteed by substantially all of our material subsidiaries and secured by substantially all of our and such subsidiaries' assets. The Line of Credit Facility bears interest at a rate equal to 1.5% above the prime rate. The Line of Credit Facility expires onSeptember 15, 2023 with a one-year extension available at EWB's discretion. As ofDecember 31, 2022 ,$5.0 million was outstanding on the Line of Credit Facility. Under the Line of Credit Facility, the Company is subject to certain financial and nonfinancial covenants including terms which require the Company to maintain certain metrics and ratios, maintain certain minimum cash on hand, and to report financial information to our lender on a periodic basis.
We believe our cash and cash equivalent balances, and availability under our
credit facility, as of
Critical Accounting Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our Condensed Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2 - Summary of Significant Accounting Policies, of the Notes to the Condensed Consolidated Financial Statements, included in Item 1, Condensed Consolidated Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q. Management believes that fair value estimates, revenue recognition, asset acquisitions and business combinations are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. Results of Operations for the Three Months EndedDecember 31, 2022 and 2021 (in thousands): Revenues For the Three Months Ended December 31, Change Period over Period 2022 % of Revenue 2021 % of Revenue $ Change % ChangeContent & Entertainment Streaming and Digital$ 12,576 45 %$ 8,357 59 %$ 4,219 50 % Base Distribution 8,120 29 % 3,667 26 % 4,453 121 % Cinema Equipment 7,186 26 % 2,060 15 % 5,126 249 %$ 27,882 100 %$ 14,084 100 %$ 13,798 98 % 29
-------------------------------------------------------------------------------- Streaming and Digital experienced 79% growth in "FAST" and TV-VOD revenue due to the addition of six new streaming channels related to theAsian Media Rights, LLC d/b/a Digital Media Rights ("DMR") business acquisition and five managed channel additions of The Country Network, Real Madrid TV,El Rey , The Elvis Presley Channel andThe Only Way is Essex. Additionally, Subscription revenue grew 38% primarily due to the Screambox platform performance driven by strong content acquisition strategies driving increasing subscriptions and the aforementioned DMR business acquisition. New releases such as Terrifier 2, MK Ultra,Chesapeake Shores , and continued success ofDemon Slayer , Highlander andShort Circuit added to overall performance. Revenue in Base Distribution increased by 121% for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . The increase is driven by significant growth in box office theatrical performance bolstered by the Terrifier 2 release during the three months endedDecember 31, 2022 . Revenues generated by the Cinema Equipment business increased as a result of an increase in Phase II variable consideration of$7.4 million during the period offset by lower system revenue and eligible VPF systems. Total system revenue recognized was($0.3) million and$1.3 million , during the three months endedDecember 31, 2022 and 2021, respectively. Blockbuster content released during the period endingDecember 31, 2022 was consistent with Studio output from the prior period, however VPF eligible theatres decreased significantly for the same period last year. Direct Operating Expenses For the Three Months Ended December 31, Change Period over Period 2022 2021 $ Change % Change Content & Entertainment$ 14,322 $ 6,320 $ 8,002 127 % Cinema Equipment 89 139 (50 ) 36 %$ 14,411 $ 6,459 $ 7,952 123 % The increase in direct operating expenses for the three months endedDecember 31, 2022 for theContent & Entertainment segment compared to the prior year was primarily due to$6.6 million higher content and licensing costs including royalties and distribution expenses related to the continued growth in revenue noted above, coupled with a$1.2 million increase related to DVD manufacturing and fulfillment.
Selling, General and Administrative Expenses
For the Three Months Ended
December 31, Change Period over Period
2022 2021 $ Change % Change
Compensation expense $ 5,135 $ 3,881 $ 1,254 32 %
Public company expenses 1,780 1,560 220 14 %
Share-based compensation 709 1,349 (640 ) (47 )%
Insurance expense 625 391 234 60 %
Other operating expenses 858 177 681 385 %
$ 9,107 $ 7,358 $ 1,749 24 %
Selling, general and administrative expenses for the three months ended December
31, 2022 increased by $1.7 million primarily due to a $1.3 million increase in
compensation expense primarily from the acquisition of DMR partially offset by a
reduction in payroll taxes in the prior year as a result of the CARES Act and
$0.7 million increase in other operating expenses primarily from rent, direct
marketing and subscriptions, offset by $0.6 million decrease related to
stock-based compensation to management and employees.
Public company expenses include accounting, legal, audit, investor relations and other related public company costs.
30--------------------------------------------------------------------------------
Depreciation and Amortization Expense
For the Three Months Ended December 31, Change Period over Period
2022 2021 $ Change % Change
Amortization of Intangible Assets $ 713 $ 695 $ 18 3 %
Depreciation of Property and Equipment 211 336 (125 ) (37 )%
$ 924 $ 1,031 $ (107 ) (10 )%
Depreciation expense decreased primarily due to the majority of our digital
cinema projection systems reaching the conclusion of their ten-year useful lives
during the three months ended
Interest expense, net
Interest expense, net increased by$0.3 million from$0.1 million for the three months endedDecember 31, 2021 to$0.4 million for theDecember 31, 2022 as a result of deferred and earnout consideration accretion related to the acquisitions of Bloody Disgusting, FoundationTV and DMR and interest expense associated with our new Line of Credit facility obtained inSeptember 2022 .
Employee retention tax credit
Employee retention tax credit was$2.0 million for the three months endedDecember 31, 2022 compared to no employee retention credit for the three months endedDecember 31, 2021 . The employee retention tax credits were filed pursuant to the CARES Act.
Results of Operations for the Nine Months Ended
Revenues
For the Nine Months Ended December 31, Change Period over Period
2022 % of Revenue 2021 % of Revenue $ Change % Change
Content & Entertainment
Streaming and Digital $ 33,115 60 % $ 21,292 54 % $ 11,823 56 %
Base Distribution 11,145 20 % 6,366 16 % 4,779 75 %
Cinema Equipment 11,218 20 % 11,544 30 % (326 ) (3 )%
$ 55,478 100 % $ 39,202 100 % $ 16,276 42 %
Streaming and Digital experienced 102% growth in "FAST" and TV-VOD revenue due
to the addition of six new streaming channels related to the DMR business
acquisition and five managed channel additions of The Country Network, Real
Madrid TV, El Rey , The Elvis Presley Channel and The Only Way is Essex.
Additionally, Subscription revenue grew 39% primarily due to the Screambox
platform performance driven by strong content acquisition strategies driving
increasing subscriptions and the aforementioned DMR business acquisition. Top
performing titles, including new releases, such as the Terrifier 2, Demon
Slayer , Boon, The Ravine, The Mulligan, Incarnation, 7 Days, Chesapeake Shores ,
When Calls the Heart and the classics, Short Circuit and Highlander added to
overall performance.
Revenue in Base Distribution increased by 75% for the nine months ended December
31, 2022 compared to the nine months ended December 31, 2021 . The increase is
driven by significant growth in box office theatrical performance bolstered by
the Terrifier 2 release during the nine months ended December 31, 2022 .
31
--------------------------------------------------------------------------------
Revenues generated by our Cinema Equipment business decreased slightly despite
an increase in Phase II variable consideration of $9.1 million during the
period. Total system revenue recognized was $2.0 million and $9.1 million during
the nine months ended December 31, 2022 and 2021, respectively. Blockbuster
content released during the period ending December 31, 2022 was consistent with
Studio output from the prior period, however VPF eligible theatres decreased
significantly for the same period last year.
Direct Operating Expenses
For the Nine Months Ended December
31, Change Period over Period
2022 2021 $ Change % ChangeContent & Entertainment$ 29,500 $ 13,863 $ 15,637 113 % Cinema Equipment 359 560 (201 ) (36 )%$ 29,859 $ 14,423 $ 15,436 107 % The increase in direct operating expenses in the nine months endedDecember 31, 2022 for theContent & Entertainment segment was primarily due to$11.0 million higher content and licensing costs including royalties and distribution expenses related to the continued growth in revenue noted above, coupled with a$2.4 million increase related to DVD manufacturing and fulfillment, a$1.2 million increase in delivery, platform and Software as a service ("SaaS") and platform expenses, primarily due to the additive DMR acquisition,$0.7 million related to film restoration and conversion and website content production costs. The decrease in direct operating expenses in the nine months endedDecember 31, 2022 for the Equipment business compared to the prior period was primarily due to a decrease in property taxes as a result of system sales.
Selling, General and Administrative Expenses
For the Nine Months Ended December
31, Change Period over Period
2022 2021 $ Change % ChangeCompensation expense$ 14,864 $ 10,369 $ 4,495 43 % Public company expenses 5,193 4,214 979 23 % Share-based compensation 3,906 3,277 629 19 % Insurance expense 2,048 1,181 867 73 % Other operating expenses 3,005 1,479 1,526 103 %$ 29,016 $ 20,520 $ 8,496 41 % Selling, general and administrative expenses for the nine months endedDecember 31, 2022 increased by$8.5 million primarily due to$2.2 million increase in compensation expense from the acquisitions of Fandor, DMR, and Bloody Disgusting,$1.6 million increase in bonus, severance and insurance expense related to management and employees,$1.0 million increase related to legal expense and$1.1 million increase in other operating expenses primarily from rent, direct marketing and subscriptions.
Public company expenses include accounting, legal, audit, investor relations and other related public company costs.
Depreciation and Amortization Expense
For the Nine Months Ended December 31, Change Period over Period
2022 2021 $ Change % Change
Amortization of Intangible Assets 2,193 2,238 (45 ) (2 )%
Depreciation of Property and Equipment 715 1,425 (710 ) (50 )%
$ 2,908 $ 3,663 $ (755 ) (21 )%
32--------------------------------------------------------------------------------
Depreciation expense decreased primarily due to the majority of our digital
cinema projection systems reaching the conclusion of their ten-year useful lives
during the nine months ended
Interest expense, net
Interest expense, net increased by$0.6 million to$0.9 million for the nine months endedDecember 31, 2022 as a result of deferred and earnout consideration accretion related to the acquisitions of Bloody Disgusting, FoundationTV and DMR and interest expense associated with our new Line of Credit facility obtained inSeptember 2022 .
Employee retention tax credit
Employee retention tax credit was$2.5 million for the nine months endedDecember 31, 2022 compared to no employee retention credit for the nine months endedDecember 31, 2021 . The employee retention tax credits were filed pursuant to the CARES Act.
Changes in fair value in Metaverse
OnApril 1, 2022 , trading of Metaverse's ordinary shares was halted on theHong Kong Stock Exchange . This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. The changes in the valuation resulted in a decrease in fair value of$1.8 million during the nine months endedDecember 31, 2022 .
Adjusted EBITDA
We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items.
Adjusted EBITDA is not a measurement of financial performance under GAAP and may
not be comparable to other similarly titled measures of other companies. We use
Adjusted EBITDA as a financial metric to measure the financial performance of
the business because management believes it provides additional information with
respect to the performance of its fundamental business activities. For this
reason, we believe Adjusted EBITDA will also be useful to others, including our
stockholders, as a valuable financial metric.
We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful
supplement to net income (loss) from continuing operations as an indicator of
operating performance. We also believe that Adjusted EBITDA is a financial
measure that is useful both to management and investors when evaluating our
performance and comparing our performance with that of our competitors. We also
use Adjusted EBITDA for planning purposes and to evaluate our financial
performance because Adjusted EBITDA excludes certain incremental expenses or
non-cash items, such as stock-based compensation charges, that we believe are
not indicative of our ongoing operating performance.
We believe that Adjusted EBITDA is a performance measure and not a liquidity
measure, and therefore a reconciliation between net income (loss) from
continuing operations and Adjusted EBITDA has been provided in the financial
results. Adjusted EBITDA should not be considered as an alternative to net
income (loss) from operations as an indicator of performance or as an
alternative to cash flows from operating activities as an indicator of cash
flows, in each case as determined in accordance with GAAP, or as a measure of
liquidity. In addition, Adjusted EBITDA does not take into account changes in
certain assets and liabilities as well as interest and income taxes that can
affect cash flows. We do not intend the presentation of these non-GAAP measures
to be considered in isolation or as a substitute for results prepared in
accordance with GAAP. These non-GAAP measures should be read only in conjunction
with our Condensed Consolidated Financial Statements prepared in accordance with
GAAP.
33--------------------------------------------------------------------------------
Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:
For the Three Months Ended
December 31,
2022 2021
Net income (loss) $ 5,022 $ (404 )
Add Back:
Income tax benefit - (26 )
Depreciation and amortization 924 1,031
Interest expense 367 97
Change in fair value on equity investment in Metaverse - (453 )
Other expense 91 107
Provision (recovery) for doubtful accounts 7 (378 )
Stock-based compensation 708 1,349
Employee retention tax credit (2,025 ) -
Net (income) loss attributable to noncontrolling interest (8 ) 19
Adjusted EBITDA $ 5,086 Adjustments related to Cinema Equipment Depreciation and amortization $ (82 )$ (196 ) Provision for doubtful accounts (7 ) - Income from operations (5,948 ) (1,483 ) Adjusted EBITDA from non-Cinema Equipment$ (951 ) $ (337 ) For the Nine Months Ended December 31, 2022 2021 Net income (loss)$ (6,620 ) $ 4,595 Add Back: Income tax benefit - (576 ) Depreciation and amortization 2,908 3,663 Gain on forgiveness of PPP loan - (2,178 ) Interest expense 880 277 Change in fair value on equity investment in Metaverse 1,828 (1,453 ) Other expense 661 283 Provision (recovery) for doubtful accounts 54 (418 ) Stock-based compensation 3,906 3,278 Employee retention tax credit (2,475 ) - Net (income) loss attributable to noncontrolling interest (35 ) 23 Adjusted EBITDA$ 1,107
Adjustments related to Cinema Equipment Depreciation and amortization$ (303 ) $ (1,001 ) Acquisition, integration and other expense - (11 ) Provision (recovery) for doubtful accounts (54 ) 500 Income from operations (7,720 ) (8,715 ) Adjusted EBITDA from non-Cinema Equipment$ (6,970 )
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements included herein.
34--------------------------------------------------------------------------------
Cash Flow
Changes in our cash flows were as follows:
For the Nine Months Ended
December 31,
2022 2021
Net cash (used in) provided by operating activities
(429 ) (5,031 )
Net cash provided by financing activities 4,064 2,636
Net increase (decrease) in cash and cash equivalents
For the nine months endedDecember 31, 2022 , net cash used in operating activities is primarily driven by loss from operations, excluding non-cash expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, including other changes in working capital. Additionally, during the nine months endedDecember 31, 2022 , the Company decreased accounts payable by$11.8 million to vendors. Cash received from VPFs decreased from the previous period in alignment with the decrease in eligible VPF systems. Prepaid and other current assets increased by$2.7 million . Operating cash flows from theContent & Entertainment segment are typically seasonally lower during the first two fiscal quarters and higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season. In addition, we made$1.1 million in advances for the nine months endedDecember 31, 2022 , we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months. For the nine months endedDecember 31, 2021 , net cash provided by operating activities was primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, gain on extinguishment of note payable, including other changes in working capital. Additionally, during the nine months endedDecember 31, 2021 , the Company paid down$32.6 million to vendors at both theContent & Entertainment segment and Corporate. Operating cash flows from theContent & Entertainment segment are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and lower in the other two quarters as we pay royalties on such revenues. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twenty four months. For the nine months endedDecember 31, 2021 revenues from the sale of digital projections Systems was$9.1 million .
Off-balance sheet arrangements
We are not a party to any off-balance sheet arrangements other than as discussed in Note 2 - Summary of Significant Accounting Policies, Basis of Presentation and Consolidation and Note 3 - Other Interests to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q, we hold a 100% equity interest inCDF2 Holdings , which is an unconsolidated variable interest entity ("VIE"), which wholly owns Cinedigm Digital Funding 2, LLC; however, we are not the primary beneficiary of the VIE. 35
--------------------------------------------------------------------------------
© Edgar Online, source
