The following discussion and analysis should be read in conjunction with our historical 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 the Hallmark
Channel, Televisa, ITV,
We report our financial results in two primary segments as follows: (1) cinema
equipment business and (2) media content and entertainment business ("
Beginning in
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:
(1) return the Systems to us; (2) renew their license agreement for successive
one-year terms; or (3) 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.
We are structured so that our cinema equipment business segment operates
independently from our
29 Risks and Uncertainties
The COVID-19 pandemic and related economic repercussions created significant
volatility and uncertainty impacting the Company's results for the period. As
part of our
Longer term, there may be a shift in consumer preference towards digital consumption over theatrical viewing. Studios may reduce their theatrical slates to tentpoles and certain genres releasing other content directly on their own streaming services. If fewer movies are released theatrically, this shift to digital viewing reduces revenue opportunities for virtual print fees and sales of digital cinema equipment. While the Company has been encouraged by the pace of mass vaccinations, spikes or the emergence of new variants could require future closures, which impact the Cinema Equipment business.
In connection to the CEG business, if larger branded companies choose to make their content available earlier on their own streaming platforms, this could limit our ability monetize this content on a transactional digital basis, as consumers can access it via the company's streaming platform. However, most content suppliers including filmmakers and producers, do not have their own streaming platforms and rely on us for distribution through our digital home entertainment business and OTT digital networks. As a result, this risk is limited, and our digital distribution capabilities and digital networks provide us with the opportunity to take advantage of this consumer shift towards digital consumption.
Over the last year and a half, the COVD-19 pandemic resulted in a film and TV production slow-down. Independent producers and filmmakers had to either suspend or delay their productions due to rising infection rates and the high costs of appropriate COVID-19 production protocols. As a result, there are fewer available films to acquire, so our pipeline for content could be negatively impacted. As well, with the rise of new variants, productions may be at risk again of shutting down or being delayed, which would further limit available content.
The COVID-19 pandemic has also resulted in an acceleration of cord-cutting, and, as more consumers move away from cable, this could lead to a decrease in cable TV VOD revenues, as well as a decrease in licensing fees as Pay One window budgets get shifted from licensing and towards originals. However, given the overall shift towards digital consumption, these risks may be offset by increased revenues from transactional, subscription and ad supported/FAST platforms, including our own owned and operated digital network business.
Liquidity
We have incurred net losses historically and have an accumulated deficit of
30 Capital Raises
On
In
On
On
As of
Sale of Cinematic Equipment
On
As previously announced, on
31
On
Starrise's ordinary shares (HK 1616) are listed on the main board of the
Borrowings
On
On
Upon a series of payments
We believe the combination of: (i) our cash and cash equivalent balances at
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in
32
Our significant accounting policies are discussed in Note 2 - Summary of
Significant Accounting Policies, of the Notes to Consolidated Financial
Statements, Financial Statements and Supplementary Data, of this Quarterly
Report on Form 10-
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
Computer equipment and software 3-5 years Internal use software 5 years Digital cinema projection systems 10 years Machinery and equipment 3-10 years Furniture and fixtures 3-6 years
Leasehold improvements are being amortized over the shorter of the lease term or the estimated useful life of the improvement. Maintenance and repair costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized.
Software developed or purchased for internal use by the Company is capitalized and amortized over its estimated useful life. Changes in these estimates could result in impairment in the value of the asset.
Useful lives are determined based on an estimate of either physical or economic
obsolescence, or both. During the three months ended
FAIR VALUE ESTIMATES
We evaluate our goodwill for impairment in the fourth quarter of each fiscal
year (as of
The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test.
The quantitative test involves comparing the estimated fair value of a reporting unit with its respective book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, an impairment loss is recognized in an amount equal to the excess.
33
The Company tests for goodwill impairment annually at
We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset's residual value, if any. The assessment for recoverability is based primarily on our ability to recover the carrying value of its long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the assets the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset's fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows.
REVENUE RECOGNITION
We determine revenue recognition by:
? identifying the contract, or contracts, with the customer; ? identifying the performance obligations in the contract; ? determining the transaction price; ? allocating the transaction price to performance obligations in the contract; and ? recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.
We recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the services provided, sales of physical products (DVDs and Blu-ray Discs) or when the content is available for subscription on the digital platform or available on the point-of-sale for transactional and video on demand services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes are recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.
Payment terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. We have in the past entered into arrangements in connection with activation fees due from our System deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
Cinema Equipment Business
Our Cinema Equipment Business consists of financing vehicles and administrators for 2,519 Systems installed nationwide in our first deployment phase ("Phase I Deployment") to theatrical exhibitors and for 3,025 Systems installed domestically and internationally in our second deployment phase ("Phase II Deployment").
We retain ownership of our digital cinema equipment (the "Systems") and the residual cash flows related to the Systems in Phase I Deployment after the end of the 10-year deployment payment period.
34
For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees ("VPFs") from motion picture studios and distributors and ACFs from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, "Services").
VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period in which the digital title first plays on a System for general audience viewing in a digitally equipped movie theatre, as Phase I Deployment's and Phase II Deployment's performance obligations have been substantially met at that time.
Phase II Deployment's agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once "cost recoupment," as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all "overhead and ongoing costs", as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time "cost recoupment bonus." The Company evaluated the constraining estimates related to the variable consideration, i.e., the one-time bonus and determined that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.
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:
(1) return the Systems to us; (2) renew their license agreement for successive
one-year terms; or (3) 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.
Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.
Exhibitors who purchased and own Systems using their own financing in the Cinema
Equipment Business paid us an upfront activation fee of approximately
35
The Cinema Equipment Business earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service fee equal to 2.5% of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPF's and the performance obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on screens utilizing our Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding VPF fees are due from the movie studios and distributors.
Content & Entertainment Business
CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand ("VOD" or "OTT Streaming and Digital"), and physical goods (e.g., DVDs and Blu-ray Discs) ("Physical Revenue" or "Base Distribution Business"). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company's performance obligations include the delivery of content for transactional, subscription and ad supported/FAST on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the performance obligation is satisfied which is when the content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical Revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.
Physical goods reserves for sales returns and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
CEG also has contracts for the theatrical distribution of third party feature movies and alternative content. CEG's distribution fee revenue and CEG's participation in box office receipts is recognized at the time a feature movie and alternative content are viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature movies' or alternative content's theatrical release date.
Principal Agent Considerations
We determine whether revenue should be reported on a gross or net basis for each revenue stream based on the transfer of control of goods and services. Key indicators that we use in evaluating gross versus net treatment include, but are not limited to, the following:
? which party is primarily responsible for fulfilling the promise to provide the specified good or service; and ? which party has discretion in establishing the price for the specified good or service. Shipping and Handling
Shipping and handling costs are incurred to move physical goods (e.g., DVDs and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.
Contract Liabilities
We generally record a receivable related to revenue when we have an unconditional right to invoice and receive payment, and we record deferred revenue (contract liability) when cash payments are received or due in advance of our performance, even if amounts are refundable.
36
We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
Our CEG segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. Reserves for product returns and other allowances is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
Deferred revenue pertaining to our Content & Entertainment Business includes amounts related to the sale of DVDs with future release dates.
Deferred revenue relating to our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms.
The ending deferred revenue balance, including current and non-current balances,
as of
During the three months ended
Participations and royalties payable
When we use third parties to distribute company owned content, we record participations payable, which represent amounts owed to the distributor under revenue-sharing arrangements. When we provide content distribution services, we record accounts payable and accrued expenses to studios or content producers for royalties owed under licensing arrangements. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers.
37 BUSINESS COMBINATIONS
A business combination is an acquisition of business. Business combination are accounted by allocating the purchase price of the business across the assets acquired from the business and assumed liabilities.
Results of Operations for the Three Months Ended
Revenues For the Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Cinema Equipment Business$ 6,231 $ 605 $ 5,626 930 % Content & Entertainment 8,784 5,413 3,371 62 %$ 15,015 $ 6,018 $ 8,997 149 %
The revenues in the Content & Entertainment Business segment increased by 62%
for the three months ended
Direct Operating Expenses For the Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Cinema Equipment Business$ 257 $ 182 $ 75 41 % Content & Entertainment 4,374 2,497 1,877 75 %$ 4,631 $ 2,679 $ 1,952 73 %
The increase in direct operating expenses in the three months ended
Selling, General and Administrative Expenses
For the Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Cinema Equipment Business$ 429 $ 549 $ (120 ) (22 )% Content & Entertainment 2,818 1,895 923 33 % Corporate 2,796 1,396 1,400 100 %$ 6,043 $ 3,840 $ 2,203 57 %
Selling, general and administrative expenses for the three months ended
38 Bad Debt expense
The bad debt expense was
Depreciation and Amortization Expense on Property and Equipment
For the Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Cinema Equipment Business$ 507 1,403 (896 ) (64 )% Content & Entertainment 143 103 40 39 % Corporate (1 ) 18 (19 ) (106 )%$ 649 $ 1,524 $ (875 ) (57 )%
Depreciation and amortization expense decreased in our Cinema Equipment Business
Segment as the majority of our digital cinema projection systems reached the
conclusion of their ten-year useful lives during the year ended
Interest expense, net For the Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Cinema Equipment Business$ 133 $ 578 $ (445 ) (77 )% Content & Entertainment - - - - % Corporate 11 712 (701 ) (98 )%$ 144 $ 1,290 $ (1,146 ) (89 )%
Interest expense in the Cinema Equipment Business segment decreased primarily as a result of reduced debt balances compared to the prior period on the Prospect Term Loan. Interest expense in our Corporate segment decreased as a result of lower loan balances from our Credit Facility, Second Lien Loans and the conversion of the Bison Convertible Note and the Mingtai Convertible Note into shares of Class A common stock in the prior period.
Income Tax Expense
We recorded an income tax benefit of
Our effective tax rate for the three months ended
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, change in fair value on equity investment in Starrise and certain other items.
Consolidated Adjusted EBITDA (including the results of Cinema Equipment Business
segment) for the three months ended
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 its stockholders, as a valuable financial metric.
39
We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net 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 loss from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net loss from continuing 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 consolidated financial statements prepared in accordance with GAAP.
Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:
For the Three Months Ended June 30, ($ in thousands) 2021 2020 Net income (loss)$ 5,194 $ (19,870 ) Add Back: Income tax benefit (63 ) - Depreciation and amortization of property and equipment 649 1,524 Amortization of intangible assets 847 590 Gain on forgiveness of PPP loan and extinguishment of note payable (2,178 ) - Interest expense, net 144 1,290 Change in fair value on equity investment in Starrise (334 ) 15,794 Acquisition, integration and other expense 173 299 Provision for doubtful accounts 71 - Stock-based compensation 983 177 Net income (loss) attributable to noncontrolling interest (7 ) 14 Adjusted EBITDA$ 5,479 $ (182 )
Adjustments related to the Cinema Equipment Business Depreciation and amortization of property and equipment
$ (507 ) $ (1,403 ) Amortization of intangible assets - (8 ) Stock-based compensation and expenses - - Acquisition, integration and other expense (11 ) - Provision for doubtful accounts (27 ) - Income from operations (4,912 ) 1,661 Adjusted EBITDA from non-cinema equipment business$ 22 $ 68
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included herein.
Changes in our cash flows were as follows:
For the Three Months Ended June 30, ($ in thousands) 2021 2020 Net cash provided (used in) by operating activities$ 3,621 $ (3,738 ) Net cash used in investing activities (791 ) (508 ) Net cash (used in) provided by financing activities (6,324 ) 5,237
Net change in cash, cash equivalents, and restricted cash
As of
As of
40
For the three months ended
For the three months ended
For the three months ended
For the three months ended
For the three months ended
For the three months ended
We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, interest on our debt obligations, marketing and promotional activities and content acquisition and marketing costs. Certain of these costs, including costs of content acquisition, marketing and promotional activities, could be reduced if necessary. The restrictions imposed by the terms of our debt obligations may limit our ability to obtain financing, make it more difficult to satisfy our debt obligations or require us to dedicate a substantial portion of our cash flow to payments on our existing debt obligations. We feel we are adequately financed for at least the next twelve months; however, we may need to raise additional capital for working capital as deemed necessary. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity.
41 Seasonality
Revenues from our Cinema Equipment segment derived from the collection of VPFs from motion picture studios are seasonal, coinciding with the timing of releases of movies by the motion picture studios. Generally, motion picture studios release the most marketable movies during the summer and the winter holiday season. The unexpected emergence of a hit movie during other periods can alter the traditional trend. The timing of movie releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter or any other quarter. While CEG benefits from the winter holiday season, we believe the seasonality of motion picture exhibition, is becoming less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout the year.
Off-balance sheet arrangements
We are not a party to any off-balance sheet arrangements, other than operating
leases in the ordinary course of business, which are disclosed above in the
table of our significant contractual obligations, and
Impact of Inflation
The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse impact on our operating results.
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