Cineverse Corp. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Business Overview Cineverse is a premier streaming technology and entertainment company with its core business (i) across a portfolio of owned and operated enthusiast streaming channels with enthusiast fan bases; (ii) as a large-scale global aggregator and full-service distributor of feature films and television programs; and (iii) as a proprietary technology software-as-a-service platform for over-the-top (“OTT”) app development and content distribution through subscription video on demand ("SVOD"), dedicated ad-supported ("AVOD"), ad-supported streaming linear ("FAST") channels, social video streaming services, and audio podcasts. We distribute products for major brands such as Hallmark, ITV, Nelvana, ZDF, Konami, NFL and Highlander, 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, and Tubi, as well as (ii) physical goods, including DVD and Blu-ray Discs. We played a significant role in the digital distribution revolution that continues to transform the media landscape, playing a pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, and at the end of our fiscal year 2023, the Company's cinema equipment business concluded its active operations, as its contracts reached maturity. The Company no longer manages cinema equipment separately, and with the run-off of its operations, no longer presents this part of the business as a separate segment. All prior period reporting within this report reflects this change. Financial Condition and Liquidity As of December 31, 2023, the Company has an accumulated deficit of $489.3 million and negative working capital of $0.4 million. For the three and nine months ended December 31, 2023, the Company had a net loss attributable to common stockholders of $(2,864) thousand and $(6.9) million, respectively. Net cash used in operating activities for the nine months ended December 31, 2023 was $9.3 million, which included $6.5 million of incremental investment in our content portfolio via advances or minimum guarantee payouts. We may continue to generate net losses for the foreseeable future. The Company is party to a Loan, Guaranty, and Security Agreement with East 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 expires on September 15, 2024. The Line of Credit Facility bears interest at a rate equal to 1.5% above the prime rate, 10.00% as of December 31, 2023. As of December 31, 2023, $5.0 million was outstanding on the Line of Credit Facility, gross of issuance costs of $(69) thousand. On February 9, 2024, the Company expanded the Line of Credit Facility to $7.5 million at the same interest rate and with the same maturity date. In July 2020, we entered into an At-the-Market sales agreement (the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”) and B. Riley FBR, Inc. (“B. Riley” and, together with A.G.P., the “Sales Agents”), 24 pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on Nasdaq at the time of the sale of such shares. The Company is not obligated to sell any shares under the ATM Sales Agreement. Any sales of shares made under the ATM Sales Agreement will be made pursuant to an effective shelf registration statement, for an aggregate offering price of up to $30 million. During the first quarter of the fiscal year, the Company sold 177 thousand shares under the ATM Sales Agreement for $1.1 million in net proceeds, after deduction of commissions and fees. The ATM Sales Agreement has expired in accordance with its terms. On June 16, 2023, the Company closed on the sale of 2,150 thousand shares of Common Stock, 517 thousand pre-funded warrants, and warrants to purchase up to 2,667 thousand shares of Common Stock at a combined public offering price of $3.00 per share and accompanying warrant for aggregate gross proceeds of approximately $7.4 million, after deducting placement agent fees and other offering expenses in the amount of $0.6 million. The warrants had an exercise price of $3.00 per share, were exercisable immediately and will expire five years from the issuance. The Company received $2.999 per share for the pre-funded warrants, with the remaining $0.001 due at the time of exercise. All 516,667 pre-funded warrants were subsequently exercised in July 2023 for total proceeds of $0.5 thousand. In addition, the Company remains authorized to purchase up to an aggregate of 500 thousand shares of its outstanding Common Stock, following the announcement of a stock repurchase program on March 1, 2023. The Company will continue to invest in content development and acquisition, from which it believes it will obtain an appropriate return on its investment. We believe our cash and cash equivalents and our credit facility, as of December 31, 2023, will be sufficient to support our operations for at least twelve months from the filing of this report. The Company may also undertake equity or debt offerings, if necessary and opportunistically available, for further capital needs. Critical Accounting Estimates Our financial statements are prepared in accordance with accounting principles generally accepted in the 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 – Basis of Presentation and 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 these policies 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. 25 Results of Operations for the Three Months Ended December 31, 2023, and 2022 (in thousands): Revenues For the Three Months Ended December 31, 2023 2022 $ Change % Change Streaming and digital $ 9,537 $ 11,598 $ (2,061 ) (18 )% Base distribution 2,811 8,121 (5,310 ) (65 )% Podcast and other 864 977 (113 ) (12 )% Other non-recurring 64 7,186 (7,122 ) (99 )% Total Revenue $ 13,276 $ 27,882 $ (14,606 ) (52 )% For the three months ended December 31, 2023, total revenue declined by $14.6 million, or 52% as compared to three months ended December 31, 2022. During this time, Streaming and Digital revenue for three months ended December 31, 2023, decreased by $2.1 million, driven by a decline in the Company's AVOD revenue of $1.7 million due to continued headwinds in the broader advertising market. This decrease was partially offset by a $0.5 million increase in SVOD revenue as the Company continues to see the benefits from its acquisitions which have contributed value-accretive libraries, distribution platforms and technologies, such as Screambox. The Company's $5.3 million decline in Base Distribution revenue for the three months ended December 31, 2023 as compared to the three months ended December 31, 2022 was primarily driven by a $3.8 million decline in theatrical revenue, in part due to the Terrifier 2 success in fiscal year 2023, a decline of $1.1 million in barter-related licensing deal in the third quarter of fiscal 2023, as well as a $0.8 million decline in DVD-related sales and related physical distribution revenue, as the Company's focus shifts away from physical sales. Other non-recurring revenue related to the Company's legacy cinema equipment as its operations run-off. Following the completion of cost recoupment, the expiration of the exhibitor master license agreements applicable to this line of revenue, and the recognition of all remaining constrained variable consideration, revenue decreased $7.1 million. In the third quarter of fiscal 2024, $0.1 million of remaining systems sales were recognized. Direct Operating Expenses For the Three Months Ended December 31, 2023 2022 $ Change % Change Direct operating expenses $ 5,464 $ 14,411 $ (8,947 ) (62 )% The $8.9 million decrease in Direct Operating Expenses for the three months ended December 31, 2023 is primarily driven by the variable costs associated with a 52% decrease in quarterly revenue, including reduced licensing, royalty and participation expenses of $3.6 million; reduced manufacturing, freight, and fulfillment charges of $3.4 million. In addition, the Company's reserve against advances provided to partners decreased by $1.1 million relative to the three months ended December 31, 2022 and a $0.5 million increase in acquired content-related preparation costs capitalized as a result of the Company's content investment initiative. Selling, General and Administrative Expenses For the Three Months Ended December 31, 2023 2022 $ Change % Change Compensation expense $ 4,336 $ 5,217 $ (881 ) (17 )% Corporate expenses 796 1,780 (984 ) (55 )% Share-based compensation 183 658 (475 ) (72 )% Other operating expenses 1,058 1,452 (394 ) (27 )% Selling, General and Administrative $ 6,373 $ 9,107 $ (2,733 ) (30 )% Selling, general and administrative expenses for the three months ended December 31, 2023 decreased by $2.7 million. In comparison to the three months ended December 31, 2022, compensation expenses decreased by $0.9 26 million due to a $0.7 million reduction in bonus accrual attributable to fiscal year 2024 performance, a decrease in recurring salaries and associated taxes of $0.7 million, partially offset by a $0.2 million increase in severance expense. Corporate expenses decreased by $1.0 million primarily related a reduction of $0.6 million in legal fees and $0.4 million in other consulting and service providers, as a result of the Company's savings initiatives. Share-based compensation has decreased by $0.5 million, as a result of forfeitures associated with US-based workforce reduction, a decline in stock price, and a relatively higher number of award tranches fully vesting. Other operating expenses decreased by $0.4 million, primarily driven by reductions in marketing related costs of $0.3 million as a result of spending controls put into place. Depreciation and Amortization Expense For the Three Months Ended December 31, 2023 2022 $ Change % Change Amortization of intangible assets $ 879 $ 712 $ 167 23 % Depreciation of property and equipment 133 211 (78 ) (37 )% Depreciation and Amortization $ 1,012 $ 924 $ 88 10 % Amortization expense has continued to increase and depreciation expense has continued to decrease as a result of the Company's shift away from the physical business to its focus on content-related spend during the three months ended December 31, 2023. Interest expense, net For the three months ended December 31, 2023, interest expense decreased by $76 thousand from $367 thousand to $291, primarily as a result of a $69 thousand decrease in deferred consideration amortization. Results of Operations for the nine months ended December 31, 2023 and 2022 (in thousands): Revenues For the Nine Months Ended December 31, 2023 2022 $ Change % Change Streaming and digital $ 29,006 $ 31,375 $ (2,369 ) (8 )% Base distribution 4,529 11,145 (6,616 ) (59 )% Podcast and other 1,953 1,740 213 12 % Other non-recurring 3,780 11,218 (7,438 ) (66 )% Total Revenue $ 39,268 $ 55,478 $ (16,210 ) (29 )% For the nine months ended December 31, 2023, the Company's revenue declined by $16.2 million. The decrease was driven by a $6.6 million decline in the Company's base distribution, driven by a $3.7 million decline in theatrical revenue following fiscal year 2023's theatrical success with films such as Terrifier 2, and a $2.4 million decrease in DVD and related supply chain costs, as the Company has shifted its focus away from the physical business. Streaming and digital revenue decreased by $2.4 million, driven by a $6.2 million decrease in AVOD from the headwinds faced in the advertising market, partially offset by a $2.6 million increase in SVOD and a $0.9 million increase from digital revenue as the Company continued to see the benefits from recent years' acquisitions, such as DMR, Fandor and Bloody Disgusting, which have contributed value-accretive libraries, distribution platforms and technologies. The decrease in Other non-recurring revenue decline was related to the run-off of the Company's legacy digital cinema business, whose active operations ran-off at the end of fiscal year 2023. For the nine months ended 27 December 31, 2023, variable consideration from these operations had decreased by $5.8 million and system sales decreased by$1.5 million. Direct Operating Expenses For the Nine Months Ended December 31, 2023 2022 $ Change % Change Direct operating expenses $ 17,097 $ 29,859 $ (12,762 ) (43 )% For the nine months ended December 31, 2023, the Company's direct operation expense decreased $12.8 million. The decrease was primarily driven by $4.3 million in fulfillment and manufacturing costs associated with the decline in the Company's physical distribution business, a $2.5 million decrease in licenses, royalties, and participation expenses, a $2.2 million decrease in the Company's costs associated with the Company's reserves against advances to partners, a $1.6 million reduction in SaaS related costs as a result of internalizing services previously performed by third parties and cost savings synergies, and $0.7 million related to a decrease in an estimated Bloody Disgusting earnout liability based on fiscal year 2024 performance to-date. Selling, General and Administrative Expenses For the Nine Months Ended December 31, 2023 2022 $ Change % Change Compensation expense $ 13,369 $ 16,361 $ (2,992 ) (18 )% Corporate expenses 3,092 5,193 (2,101 ) (40 )% Share-based compensation 1,092 3,855 (2,763 ) (72 )% Other operating expenses 3,535 3,607 (72 ) (2 )% Selling, General and Administrative $ 21,088 $ 29,016 $ (7,928 ) (27 )% During the nine months ended December 31, 2023, the Company's SG&A decreased by $7.9 million. Relative to nine months ended December 31, 2022, compensation related costs primarily decreased due to a reduction in the Company's bonus expense of $2.2 million and an increase in capitalized labor of $0.5 million from the development of the Company's Matchpoint software. Corporate expenses declined by $2.1 million primarily decreased due to a corporate focus on reducing third-party legal costs in the amount of $1.5 million and a decline of $0.6 million in other consulting and service providers due to the Company's cost-saving initiatives. Share-based compensation also decreased by $2.8 million, as a result of the US-based workforce reduction, a decline in stock price, and a relatively higher number of awards tranches fully vesting. Depreciation and Amortization Expense For the Nine Months Ended December 31, 2023 2022 $ Change % Change Amortization of intangible assets $ 2,381 $ 2,193 188 9 % Depreciation of property and equipment 406 715 (309 ) (43 )% Depreciation and Amortization $ 2,787 $ 2,908 (121 ) (4 )% Depreciation expense decreased primarily due to the remainder of our digital cinema assets reaching the conclusion of their ten-year useful lives during the fiscal year ended March 31, 2023. Amortization expense has continued to increase as a result of the Company's shift away from the physical business to its focus on content related spend. Interest expense, net For the nine months ended December 31, 2023 relative to the nine months ended December 31, 2022, interest expense decreased by $99 thousand from $880 thousand to $781, primarily as a result of a $233 thousand decrease 28 in deferred consideration amortization, partially offset by a $182 thousand increase in line of credit related interest costs, which was entered into in September 2022. Adjusted EBITDA We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, 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. 29 Following is the reconciliation of our consolidated net (loss) income to Adjusted EBITDA (in thousands): For the Three Months Ended December 31, For the Nine Months Ended December 31, 2023 2022 2023 2022 Net income (loss) $ (2,736 ) $ 5,022 $ (6,589 ) $ (6,620 ) Add Back: Income tax (benefit) expense (24 ) — 12 — Depreciation and amortization 1,012 924 2,787 2,908 Interest expense 291 367 781 880 Loss from equity investment in Metaverse 3,043 — 3,761 1,828 Provision for doubtful accounts — 7 — 54 Stock-based compensation 183 658 1,092 3,855 Employee retention tax credit — (2,025 ) (2,475 ) Other (income) expense, net (147 ) 76 2 82 Net income attributable to noncontrolling interest (41 ) (8 ) (94 ) (35 ) Transition-related costs 259 15 1,094 371 Mergers and acquisition costs — — — 207 Adjusted EBITDA $ 1,840 $ 5,036 $ 2,846 $ 1,056 Cash Flow Changes in our cash flows were as follows (in thousands): For the Nine Months Ended December 31, 2023 2022 Net used in operating activities (9,287 ) $ (7,901 ) Net cash used in investing activities (482 ) (429 ) Net cash provided by financing activities 8,156 4,064 Net change in cash and cash equivalents $ (1,613 ) $ (4,266 ) For the nine months ended December 31, 2023, net cash used in operating activities is primarily driven by loss from operations, excluding non-cash expenses such as depreciation, amortization and stock-based compensation, and other changes in working capital. Specifically, the adjustments are primarily driven by net cash outflows related to content advances made to partners for which initial expenditures are generally recovered within six to twelve months and increases in accounts payable, accrued expenses, and other liabilities, partially offset by a decrease in accounts receivable and the unrealized loss from the Company's investment in Metaverse's stock. Operating cash flows 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. Cash used in investing activities was used in the expenditures towards long-lived intangible assets and fixed assets, as well as the receipt from the return of investment from the sale of equity securities. Cash provided by financing activities pertained to the draw and repayment of the Company's line of credit, payment of earnout consideration, and issuance of company equity, net of financing fees. For the nine months ended December 31, 2022, net cash used in operating activities was 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 ended December 31, 2022, the Company decreased accounts payable by $11.8 million to vendors. Cash received from virtual print fees ("VPFs"), from our legacy digital cinema business, decreased from the previous period in alignment with the decrease in eligible VPF systems. Prepaid and other current assets increased by $2.7 million. In addition, we made $1.1 million in advances for the nine months ended December 31, 2022. 30 Cash used in financing was used for the purchase of long-lived fixed assets. Net cash provided by financing activities was driven by the net receipt of $5 million from the Company's line of credit, partially offset by the Company's deferred consideration and debt issuance costs. Off-balance sheet arrangements We are not a party to any off-balance sheet arrangements other than as discussed in Note 2 – Basis of Presentation and 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 in CDF2 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.