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 Corp. (“Cineverse”, “us”, “our”, "we", and “Company” refers to Cineverse Corp. and its subsidiaries unless the context otherwise requires) was incorporated in Delaware on March 31, 2000. Since our inception, we have played a role in the digital distribution revolution that continues to transform the media and entertainment landscape. The Company has a long legacy in using technology to transform the entertainment industry and played a pioneering role in transitioning movie screens from traditional analog film prints to digital distribution. Over the past several years, Cineverse has transformed itself from being a digital cinema equipment and physical content distributor to a leading independent streaming company. Cineverse is a streaming technology and entertainment company with its core business operating as (i) a portfolio of owned and operated streaming channels with enthusiast fan bases; (ii) a large-scale global aggregator and full-service distributor of feature films and television programs; and (iii) 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 video on demand ("AVOD"), ad-supported streaming linear ("FAST") channels, social video streaming services, and audio podcasts. Our streaming channels reach audiences in several distinct ways: direct-to-consumer, through these major application platforms, and through third party distributors of content on platforms. The Company’s streaming technology platform, known as Matchpoint TM , is a software-based streaming operating platform which provides clients with AVOD, SVOD, transactional video on demand ("TVOD") and linear capabilities, automates the distribution of content, and features a robust data analytics platform. We distribute products for major brands such as Hallmark, ITV, Nelvana, ZDF, Konami, NFL and Highlander, as well as 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. 25 Financial Condition and Liquidity We have a history of net losses and we may continue to generate net losses for the foreseeable future. As of December 31, 2024, the Company has an accumulated deficit of $501.7 million and a working capital surplus of $6.8 million. For the three and nine months ended December 31, 2024, the Company had a net income attributable to Common Stock holders of $7.0 million and $2.5 million, respectively. Net cash provided by operating activities for the nine months ended December 31, 2024 was $5.0 million, which is net of $4.8 million incremental investment in our content portfolio via advances or minimum guarantee payouts. The Company is party to a Loan, Guaranty, and Security Agreement, as amended, with East West Bank ("EWB") providing for a $7.5 million Line of Credit Facility, guaranteed by substantially all of our material subsidiaries and secured by substantially all of our and our subsidiaries’ assets. The Line of Credit Facility bears interest at a rate equal to 1.5% above the prime rate, equal to 9.0% as of December 31, 2024. The Line of Credit Facility matures on September 15, 2025. The Company intends to renew when the Line of Credit matures. As of December 31, 2024, $3.8 million was outstanding on the Line of Credit Facility, net of issuance costs of $153 thousand. Subsequent to December 31, 2024, our Line of Credit balance was paid down to $0. On April 5, 2024, T3 Borrower, a wholly-owned subsidiary of the Company, entered into the T3 Loan Agreement with the T3 Lender, and the Company as guarantor. The T3 Loan Agreement provides for the T3 Loan with a principal amount not to exceed $3.7 million, and a maturity date of April 1, 2025, with a permitted extension of the term for 120 days under certain conditions. The T3 Loan bears no interest until the maturity date other than an interest advance equal to $576 thousand at the closing of the T3 Loan on April 5, 2024. The interest advance was recorded as a discount on the T3 Loan at inception and will be amortized to interest expense and increase the loan amount over its term. If the T3 Loan is extended as noted above, the T3 Loan will bear interest at a rate of 1.44% per month. The T3 Borrower may prepay the obligations under the T3 Loan, in full or in part, without penalty or premium. The proceeds under the T3 Loan Agreement are being used for the funding under the Company’s distribution arrangements for the film titled Terrifier 3 (the “Film”). The T3 Loan Agreement contains customary covenants, representation and warranties and events of default. The T3 Loan, including interest of $576 thousand, was repaid in advance during the quarter ended December 31, 2024. After the principal of the T3 Loan is paid in full, the T3 Lender will be entitled to receive 15% of all royalties earned by the Company on the Film under its distribution agreements for the Film until the T3 Lender has received 1.75 times the full commitment amount of $3.7 million, consisting of the principal amount plus interest and fees advanced to T3 Borrower, plus any extension interest. The T3 Loan is secured by a first priority interest in all of T3 Borrower’s rights and interest in the Film and the distribution agreements, including the proceeds to the T3 Borrower from the distribution of the Film. On May 3, 2024, the Company entered into a sales agreement (the “2024 Sales Agreement”) with A.G.P./Alliance Global Partners and The Benchmark Company, LLC (collectively, the “Sales Agents”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock. Shares of Common Stock may be offered and sold for an aggregate offering price of up to $15 million. The Sales Agents’ obligations to sell shares under the 2024 Sales Agreement are subject to satisfaction of certain conditions, including the continuing effectiveness of the Registration Statement on Form S-3 (Registration No. 333-273098) (the “Registration Statement”) filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on June 30, 2023 and declared effective by the SEC on January 25, 2024, and other customary closing conditions. The Company will pay the Sales Agents a commission of 3.0% of the aggregate gross proceeds from each sale of shares and has agreed to provide the Sales Agents with customary indemnification and contribution rights. The Company has also agreed to reimburse the Sales Agents for certain specified expenses. The Company is not obligated to sell any shares under the 2024 Sales Agreement and has not sold any shares through the date of this report. The Company will continue to invest in content development and acquisition, from which it believes it will obtain an appropriate return on its investment. As of December 31, 2024 and March 31, 2024, short term content advances were $8.8 million and $9.3 million, respectively, and content advances, net of current portion, were $1.4 million and $2.6 million, respectively. Our capital requirements will depend on many factors, and we may need to use existing capital resources and/or undertake equity or debt offerings, if necessary and opportunistically available, for further capital needs. We believe our cash and cash equivalents and availability under our Line of Credit Facility as of December 31, 2024 will be sufficient to support our operations for at least twelve months from the filing of this report. 26 Critical Accounting Estimates Our Condensed Consolidated 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 Condensed Consolidated 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 consolidated 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. Results of Operations for the three months ended December 31, 2024 and 2023 (in thousands) : Revenues For the Three Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Streaming and digital $ 14,128 $ 9,537 $ 4,591 48 % 35 % 72 % Podcast and other 2,058 864 1,194 138 % 5 % 7 % Base distribution 24,481 2,811 21,670 771 % 60 % 21 % Other and non-recurring 73 64 9 14 % 0 % 0 % Total Revenue $ 40,740 $ 13,276 $ 27,464 207 % 100 % 100 % For the three months ended December 31, 2024, total revenue grew by $27.5 million compared to the three months ended December 31, 2023. Streaming and digital revenue increased by $4.6 million, primarily due to the net favorable impact of content releases' timing relative to the same period in the prior year, including the impact of Terrifier 3. Podcast and other revenue grew by $1.2 million due to revenue increases from both: (i) direct advertising ($1.1 million) and (ii) the Company's Bloody Disgusting podcast content ($0.1 million). Base distribution revenue increased by $21.7 million mainly due to Terrifier 3 theatrical release in October 2024. Other non-recurring revenue is related to the Company's legacy digital cinema equipment business ("Digital Cinema") as its operations continue to run-off. Digital Cinema revenue increased insignificantly million compared to the same period in the prior year. The Company doesn't anticipate future revenue related to the Digital Cinema business. Direct Operating Expenses For the Three Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Direct operating expenses $ 20,997 $ 5,464 $ 15,533 284 % 52 % 41 % The increase of $15.5 million in Direct Operating Expenses for the three months ended December 31, 2024, compared to the same period of 2023 significantly relates to the impact of Terrifier 3 release. Specifically, the increase is due to: (i) $13.0 million higher royalty expense, (ii) $1.3 million increase in marketing costs (including digital marketing), (iii) $0.6 million theatrical distribution fees to our service provider, and (iv) $0.7 million higher manufacturing, fulfillment and freight charges. 27 Selling, General and Administrative Expenses For the Three Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Compensation expense $ 6,574 $ 4,336 $ 2,238 52 % 16 % 33 % Corporate expenses 832 796 36 5 % 2 % 6 % Share-based compensation 498 183 315 172 % 1 % 1 % Other operating expenses 1,457 1,058 399 38 % 4 % 8 % Selling, General and Administrative $ 9,361 $ 6,373 $ 2,988 47 % 23 % 48 % Selling, general and administrative expenses for the three months ended December 31, 2024 increased by $3.0 million compared to the same period of 2023, primarily due to (i) bonus accrual driven by Terrifier 3 theatrical revenue results and (ii) higher share-based compensation. Excluding the effect of bonus accrual, compensation expenses decreased by $0.2 million, in comparison to the three months ended December 31, 2023, driven by a change in the Company's employment mix, as a result of a greater investment in Cineverse Services India. Depreciation and Amortization Expense For the Three Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Amortization of intangible assets $ 806 $ 879 $ (73 ) (8 )% 2 % 7 % Depreciation of property and equipment 140 133 7 5 % 0 % 1 % Depreciation and Amortization $ 946 $ 1,012 $ (66 ) (7 )% 2 % 8 % Amortization expense and depreciation expense have remained relatively consistent for the three months ended December 31, 2024 and 2023 as the Company's intangible focused investment mix has remained consistent year-over-year. Interest Expense, Net For the three months ended December 31, 2024, interest expense increased by $2.1 million from $0.3 million to $2.3 million primarily due to: (i) interest participation relating to the T3 Loan (which was obtained and repaid during the fiscal year), (ii) higher drawings on our line of credit, and (iii) increased interest rates in 2024. Results of Operations for the Nine Months Ended December 31, 2024 and 2023 (in thousands) : Revenues For the Nine Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Streaming and digital $ 31,920 $ 29,006 $ 2,914 10 % 51 % 74 % Podcast and other 4,374 1,953 2,421 124 % 7 % 5 % Base distribution 26,153 4,529 21,624 477 % 42 % 12 % Other and non-recurring 159 3,780 (3,621 ) (96 )% 0 % 10 % Total Revenue $ 62,606 $ 39,268 $ 23,338 59 % 100 % 100 % For the nine months ended December 31, 2024, total revenue grew by $23.3 million compared to the nine months ended December 31, 2023. Streaming and digital revenue for the nine months ended December 31, 2024 increased by $2.9 million compared to the same period of 2023, primarily due to: (i) $1.6 million of license fee revenue recorded during the period related to the licensing of the Dog Whisperer content, and (ii) net favorable impact of other content releases' timing relative to the same period in the prior year, including effect of Terrifier 3 content. Podcast and other revenue grew by $2.4 million due to revenue increases from both: (i) direct advertising ($1.7 million) and (ii) the Company's Bloody Disgusting podcast content ($0.7 million). 28 Base distribution revenue increased by $21.6 million mainly due to Terrifier 3 theatrical release in October 2024. Other non-recurring revenue related to Digital Cinema decreased $3.6 million compared to the same period of 2023 as its operations continue to run-off. The Company doesn't anticipate future revenue related to the Digital Cinema business. Direct Operating Expenses For the Nine Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Direct operating expenses $ 31,738 $ 17,097 $ 14,641 86 % 51 % 44 % The increase of $14.6 million in Direct Operating Expenses for the nine months ended December 31, 2024, compared to the same period of 2023 significantly relates to the impact of Terrifier 3 release. Specifically, the increase is due to the net effect of the following changes: (i) $11.9 million higher royalty expense, (ii) $0.8 million increase in marketing costs, (iii) $0.6 million theatrical distribution fees to our service provider, (iv) $1.2 million higher manufacturing, fulfillment and freight charges, (v) $1.1 million higher license participations and advertising pool impression costs, and offset by (vi) $1.1 million lower SaaS subscription fees. Selling, General and Administrative Expenses For the Nine Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Compensation expense $ 14,713 $ 13,369 $ 1,344 10 % 24 % 34 % Corporate expenses 2,576 3,092 (516 ) (17 )% 4 % 8 % Share-based compensation 1,471 1,092 379 35 % 2 % 3 % Other operating expenses 3,528 3,535 (7 ) (0 )% 6 % 9 % Selling, General and Administrative $ 22,288 $ 21,088 $ 1,200 6 % 36 % 54 % Selling, general and administrative expenses for the nine months ended December 31, 2024 increased by $1.2 million compared to the same period of 2023, primarily due to (i) bonus accrual driven by Terrifier 3 theatrical revenue results and (ii) higher share-based compensation. Excluding the effect of bonus accrual, compensation expenses decreased by $1.1 million, in comparison to the nine months ended December 31, 2023, driven by a change in the Company's employment mix as a result of a greater investment in Cineverse Services India. Corporate expenses decreased by $0.5 million primarily driven by the Company's continued focus on cost savings initiatives. Depreciation and Amortization Expense For the Nine Months Ended December 31, As a % of Revenue 2024 2023 $ Change % Change 2024 2023 Amortization of intangible assets $ 2,330 $ 2,381 $ (51 ) (2 )% 4 % 6 % Depreciation of property and equipment 453 406 47 12 % 1 % 1 % Depreciation and Amortization $ 2,783 $ 2,787 $ (4 ) (0 )% 4 % 7 % Amortization expense and depreciation expense have remained relatively consistent for the nine months ended December 31, 2024, compared to the nine months ended December 31, 2023, as the Company's intangible focused investment mix has remained consistent over the past year. Interest Expense, Net For the nine months ended December 31, 2024 compared to the same period of 2023, interest expense increased by $2.3 million from $0.8 million to $3.1 million primarily due to: (i) interest participation relating to the T3 Loan (which was obtained and repaid during the fiscal year), (ii) higher drawings on our line of credit and (ii) increased interest rates in 2024. 29 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. Following is the reconciliation of our consolidated net income (loss) to Adjusted EBITDA (in thousands) : For the Three Months Ended December 31, For the Nine Months Ended December 31, 2024 2023 2024 2023 Net income (loss) $ 7,161 $ (2,736 ) $ 2,906 $ (6,589 ) Add Back: Income tax (benefit) expense 6 (24 ) 19 12 Depreciation and amortization 946 1,012 2,783 2,787 Interest expense 2,342 291 3,110 781 (Gain) loss from equity investment in Metaverse (138 ) 3,043 (142 ) 3,761 Stock-based compensation 490 183 1,463 1,092 Other (income) expense, net 65 (147 ) (96 ) 2 Net income attributable to noncontrolling interest (48 ) (41 ) (155 ) (94 ) Transition-related costs — 259 27 1,094 Adjusted EBITDA $ 10,824 $ 1,840 $ 9,915 $ 2,846 30 Cash Flows Changes in our cash flows were as follows (in thousands) : For the Nine Months Ended December 31, 2024 2023 Net cash provided by (used in) operating activities $ 4,984 $ (9,287 ) Net cash used in investing activities (655 ) (482 ) Net cash provided by (used in) financing activities (3,413 ) 8,156 Net Change in Cash and Cash Equivalents $ 916 $ (1,613 ) Cash flows for the current fiscal period For the nine months ended December 31, 2024, net cash provided by operating activities was primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization and stock-based compensation, and other changes in working capital. Further, we had cash outflows related to content advances made to partners for which initial expenditures are generally recovered within six to twelve months and operating prepayments, partially offset by the collection of the Company's ERTC claim. 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 assets, net of proceeds from sale of equity securities. Cash used in financing activities was primarily due to the net $2.4 million repayment of the Line of Credit Facility, repayment of our $3.1 million T3 Loan (which was obtained during the fiscal year), $0.3 million net payment of deferred acquisition consideration and $0.2 million used to repurchase outstanding shares. Cash flows for the prior fiscal period 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. 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. 31