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 consolidated financial statements and the related notes included elsewhere in this document. 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 NFL, Hallmark 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, iTunes, Amazon Prime, Netflix, Hulu, Xbox, Sony PlayStation, Tubi and cable video-on-demand ("VOD"), and (ii) physical goods, including DVD and Blu-ray Discs. We report our financial results in two primary segments as follows: (1) cinema equipment business and (2) media content and entertainment business (“Content & Entertainment” or "CEG"). The cinema equipment business segment consists of the non-recourse, financing vehicles and administrators for our digital cinema equipment (the “Systems”) installed in movie theatres throughout the United States and Canada and in Australia and New Zealand. It also provides fee-based support to over 12,000 movie screens as well as directly to exhibitors and other third party customers in the form of monitoring, billing, collection and verification services. Our Content & Entertainment segment is a market leader in: (1) ancillary market aggregation and distribution of entertainment content and; (2) branded and curated over-the-top ("OTT") digital network business providing entertainment channels and applications. Beginning in December 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 Fees ("VPF") revenues ceased to be recognized on such Systems, related to such distributors. Furthermore, because the Phase I Deployment installation period ended in November 2007, a majority of the VPF revenue associated with the Phase I Deployment Systems has ended. As of June 30, 2020, all of our 3,328 systems from the Phase I Deployment phase of our cinema equipment business segment had ceased to earn a significant portion of 32 VPF revenue from certain major studios, although various other studios, consisting mostly of small independent studios, will continue to pay VPFs through December 2020. We expect to continue to earn such ancillary revenue from the cinema equipment segment through December of 2020; however, such amounts are expected to be significantly less material to our consolidated financial statements. The reduction in VPF revenue on cinema equipment business 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 since November 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: (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. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan. We are structured so that our cinema equipment business segment operates independently from our Content & Entertainment business. As of June 30, 2020, we had approximately $12.1 million of non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We also have approximately $34.9 million of outstanding debt principal, as of June 30, 2020 that is attributable to our Content & Entertainment and Corporate segments. Risks and Uncertainties The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in certain industries. Closures of certain entertainment facilities and retail locations have significantly impacted consumers’ behaviors as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. As part of our Content & Entertainment business, we sell physical goods, including DVDs and Blu-ray discs, at brick-and-mortar stores. Many of such stores in the United States closed during the spring of 2020 due to COVID-19 restrictions, and many of those have not yet re-opened, or have re-opened on a limited basis. We expect that we will experience a loss of sales of such physical goods due to such closures, and we cannot predict the extent of such losses, or how long the closures or limited openings of the stores may last. As part of our Cinema Equipment business, we earn revenues that are generated when movies are exhibited by theatres. Many movie theatres in the United States closed during the spring of 2020 due to COVID-19 restrictions and many of those have not yet re-opened, or have re-opened on a limited basis. To the extent movies are not shown in movie theatres due to the closures, we have not received, and will not receive, related revenue. The studios that produce movies may elect to delay the release of movies until theatres re-open, or to bypass exhibiting movies in theatres at all and distribute the movies through other means, such as on streaming platforms, in which case we would not earn revenues at all from such movies. These events have negatively affected, and are expected to continue to negatively affect, our business and results of operations. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related closures and market conditions will persist, or the extent of the impact they will have on our business or results of operations and financial condition. Results of Operations for the Three Months Ended June 30, 2020 and 2019 Revenues Three Months Ended June 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business $ 605 $ 3,993 $ (3,388) (85) % Content & Entertainment Business 5,413 5,810 (397) (7) % $ 6,018 $ 9,803 $ (3,785) (39) % Revenues generated by our Cinema Equipment Business segment decreased primarily as a result of the reduced number of Systems earning VPF revenue and commissions for Phase II Deployment Systems. Phase II Deployment Systems deployment period for major studios ended in November 2018, which combined, contributed to the decrease in revenues. Revenues in the Content & Entertainment Business segment decreased mainly due to lower sales volume of owned and licensed products offset by higher distributed fees. 33 Direct Operating Expenses Three Months Ended June 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business $ 182 $ 234 $ (52) (22) % Content & Entertainment Business 2,497 3,378 (881) (26) % $ 2,679 $ 3,612 $ (933) (26) % Decrease in direct operating expenses in the three months ended June 30, 2020 for the Content & Entertainment Business compared to the prior period was primarily due to a decrease in revenue. Selling, General and Administrative Expenses Three Months Ended June 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business $ 549 $ 496 $ 53 11 % Content & Entertainment Business 1,895 3,224 (1,329) (41) % Corporate 1,396 2,129 (733) (34) % $ 3,840 $ 5,849 $ (2,009) (34) % Selling, general and administrative expenses for the three months ended June 30, 2020 decreased, by $2.0 million, primarily due to a $1.0 million decrease in personnel related expenses and $0.3 million in real estate and occupancy expenses, as a result of our cost cutting initiatives, a decrease of $0.5 million in professional consulting services and a decrease of $0.1 million in travel related expenses. Depreciation and Amortization Expense on Property and Equipment Three Months Ended June 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business $ 1,403 $ 1,646 $ (243) (15) % Content & Entertainment Business 103 86 17 20 % Corporate 18 42 (24) (57) % $ 1,524 $ 1,774 $ (250) (14) % Depreciation and amortization expense decreased in our Cinema Equipment Business segment as additional digital cinema projection Systems reached the conclusion of their ten-year useful lives during fiscal year 2020. Interest expense, net Three Months Ended June 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business $ 578 $ 828 $ (250) (30) % Corporate 712 1,454 (742) (51) % $ 1,290 $ 2,282 $ (992) (43) % Interest expense in the Cinema Equipment Business segment decreased primarily as a result of reduced debt balances compared to the prior period, primarily on the Prospect Term Loan. Interest expense in our Corporate Segment decreased as a result of lower loan balances from our Credit Facility and Second Lien Loans. Income Tax Expense We recorded income tax expense of approximately zero and $0.1 million of income tax expense for the three months ended June 30, 2020 and 2019, respectively, in our Cinema Equipment Business and Corporate segments for state and federal income taxes. . 34 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 (including the results of Cinema Equipment Business segment) for the three months ended June 30, 2020 decreased by $0.7 million, or 134%, compared to the three months ended June 30, 2019. Adjusted EBITDA income from our Content & Entertainment business and corporate segment was $0.1 million for the three months ended June 30, 2020 compared to negative $2.3 million for the three months ended June 30, 2019. The increase in Adjusted EBITDA compared to the prior period is primarily due to a decrease in selling, general and administrative expense. 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. 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. 35 Following is the reconciliation of our consolidated net loss to Adjusted EBITDA: Three Months Ended June 30, ($ in thousands) 2020 2019 Net loss $ (19,870) $ (5,039) Add Back : Income tax expense — 47 Depreciation and amortization of property and equipment 1,524 1,774 Amortization of intangible assets 590 995 Interest expense, net 1,290 2,282 Changes in fair value on equity investment in Starrise 15,794 — Other expense, net 299 463 Stock-based compensation and expenses 177 11 Net income attributable to noncontrolling interest 14 6 Adjusted EBITDA $ (182) $ 539 Adjustments related to the Cinema Equipment Business Depreciation and amortization of property and equipment $ (1,403) $ (1,646) Amortization of intangible assets (8) (11) Stock-based compensation and expenses — 1 Loss (income) from operations 1,661 (1,133) Adjusted EBITDA from Content & Entertainment business and corporate segment $ 68 $ (2,250) 36 Critical Accounting Policies and Estimates Our 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 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 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. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K, filed with the SEC on July 6, 2020. Recent Accounting Pronouncements See Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included herein. Liquidity and Capital Resources We incurred consolidated net loss of $19.9 and $5.0 for the three months ended June 30, 2020 and 2019, respectively. We have an accumulated deficit of $430.8 million, and negative working capital of $57.7 million, as of June 30, 2020. In addition, we have significant debt-related contractual obligations as of June 30, 2020 and beyond. We have incurred net losses each year since we commenced our operations. Since our inception, we have financed our operations substantially through the private placement of shares of our common and preferred stock, the issuance of promissory notes, our initial public offering and subsequent private and public offerings, notes payable and common stock used to fund various acquisitions. We may continue to generate net losses in the future primarily due to depreciation and amortization, interest on notes payable, 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 our debt agreements 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. The Prospect Loan requires certain screen turn performance from certain of our Cinema Equipment Business subsidiaries. While such restrictions may reduce the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements, we do not have similar restrictions imposed upon our CEG business. We may seek to raise additional capital as 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. Bison Note Payable As discussed in Note 1 - Nature of Operations and Liquidity , the Company entered into a loan with Bison for $10.0 million and issued Warrants to purchase 1,400,000 shares of the Company's Class A Common Stock. See Note 6 - Stockholders' Deficit for further discussion of the warrants. The loan was made in accordance with the Stock Purchase Agreement between the Company and Bison Entertainment Investment Limited, another affiliate of Bison, entered into on June 29, 2017 (the "Stock Purchase Agreement"). 37 On July 20, 2018, the Company entered into a term loan agreement (the “2018 Loan Agreement”) with Bison Global, pursuant to which the Company borrowed from Bison Global $10.0 million (the “2018 Loan”). The 2018 Loan has a one (1) year term that may be extended by mutual agreement of Bison Global and the Company and bears interest at 5% per annum, payable quarterly in cash. At the same time, the 2017 Loan was terminated and the proceeds of the 2018 Loan were used to pay off the 2017 Loan. On July 12, 2019, we entered into a Termination Agreement for the 2018 Loan and at the same time entered into a $10.0 million Bison Convertible Note with Bison Global. Bison Convertible Note The Bison Convertible Note has a term ending on March 4, 2020, and bears interest at 5% per annum. The principal is due on March 4, 2020, in cash or in shares of Common Stock, or a combination of cash and Common Stock, at the Company’s option. The Bison Convertible Note is convertible at the Company's option, at any time prior to payment in full of the principal balance and all accrued interest of the note, to convert this note in whole or in part, into fully paid and nonassessable shares of the Company's Class A common stock. The Bison Convertible Note is Convertible into 6,666,666 shares of Company's Class A common stock, based on initial conversion price of $1.50 per share. On April 15, 2020, the Company signed an amendment to this note, effective as of March 4, 2020, to extend the maturity date of the note to March 4, 2021. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to additional paid-in-capital) of $478 thousand. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value of similar non-convertible debt; the debt is being amortized to interest expense using the effective interest method over the term of the note. The embedded conversion feature was fully amortized as of March 31, 2020. The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan. The Bison Convertible Note, offset by the concurrent payoff and termination of the 2018 Loan, did not result in any increase to the Company’s outstanding debt balance. Non-Recourse Indebtedness Our Cinema Equipment Business has historically been financed through a series of non-recourse loans. Certain of the subsidiaries that make up the Cinema Equipment Business have pledged their assets as collateral for, and are liable with respect to, certain indebtedness for which our other subsidiaries and their assets generally are not. We have referred to this indebtedness as "non-recourse debt" because the recourse of the lenders is limited to the assets of specific subsidiaries. Such indebtedness includes the Prospect Loan, the KBC Facilities, the 2013 Term Loans, the P2 Vendor Note and the P2 Exhibitor Notes. The balance of our non-recourse debt, net of related debt issuance costs, as of June 30, 2020 was $11.5 million for our Cinema Equipment Business segment. We continue to expect cash flows from our Cinema Equipment Business operations will be sufficient to satisfy our liquidity and contractual requirements that are linked to these operations. Revolving Credit Agreements On March 30, 2018, the Company entered into a Credit Facility with East West Bank for a maximum of $19.0 million in revolving loans outstanding at any one time with a maturity date of March 31, 2020, which may be extended for two successive one-year periods at the sole discretion of the lender, subject to certain conditions. Interest under the Credit Facility is due monthly at a rate elected by the Company of either 0.5% plus Prime Rate or 3.25% above LIBOR Rate established by the lender. As of June 30, 2020 and March 31, 2020, respectively, there was $10.2 million and $14.5 million outstanding, respectively, and there was $0.8 million available, under the Credit Facility based on the Company's borrowing base as of June 30, 2020. On July 3, 2019, the Company entered into the EWB Amendment to the Credit Facility. The EWB Amendment reduced the size of the facility to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, and extended the maturity date to June 30, 2020. In connection with the EWB Amendment, three of our subsidiaries became additional Guarantors under the EWB Credit Agreement. On June 25, 2020, the Company signed amendment, No. 4 to extend the maturity date to June 30, 2021 and to waive certain event of default provisions. 38 Other Indebtedness On October 9, 2018, the Company issued the Mingtai Convertible Note for $5.0 million. All proceeds from the Mingtai Convertible Note were used to pay the then-outstanding $5.0 million 2013 Notes. The $5.0 million in aggregate principal bears interest at 8% maturing on October 9, 2019 with two one-year extensions at the Company's option. The Mingtai Convertible Note is convertible into 3,333,333 shares of the Company's Class A common stock, based on initial conversion price of $1.50 per share. On October 9, 2019, the Company signed an extension, for one additional year from the original maturity date to be due on October 9, 2020. This note will continue in full force and effect in accordance with its terms, including Company’s reservation of its right to further extend the maturity date of this note, if it so elects. The Mingtai Convertible Note is convertible at the option of the Lender, or the Company, at any time prior to payment in full of the principal balance, and all accrued interest of this Mingtai Convertible Note in whole, or in part, into fully paid and non-assessable shares of Company’s Class A common stock at the conversion rate of $1.50. Upon conversion prior to maturity by Mingtai, or the Company, we may elect to settle such conversion in shares of our Class A common stock, cash or a combination thereof. Upon the maturity date, the Company has the option to pay in Class A common shares convertible at the greater of the closing price of the Class A common stock or $1.10. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to additional paid-in capital) of $270 thousand. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value similar nonconvertible debt; the debt discount is being amortized to interest expense using the effective interest method over the one year term of the Mingtai Convertible Note. On April 15, 2020, the Company received $2.2 million from East West Bank, the Company’s existing lender, pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 10, 2022 (the “PPN Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the PPN Maturity Date. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act and could be subject to repayment. In addition, as discussed in more detail in Note 5 - Notes Payable , our debt obligations have instituted certain financial and liquidity covenants and capital requirements, and from time to time, we may need to use available capital resources and raise additional capital to satisfy these covenants and requirements. Changes in our cash flows were as follows: Cash Flows For the Three Months Ended June 30, ($ in thousands) 2020 2019 Net cash (used) provided by operating activities $ (3,738) $ 4,015 Net cash provided (used) in investing activities 508 (252) Net cash provided (used) in financing activities 5,237 (5,493) Net change in cash and cash equivalents $ 2,007 $ (1,730) As of June 30, 2020, we had cash and restricted cash balances of $17.3 million. Net cash provided by operating activities is primarily driven by loss from operations, excluding non-cash expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, offset by changes in working capital. Cash received from VPFs declined from the previous period as Phase I Deployment Systems in our Cinema Equipment Business reached the conclusion of their deployment payment period with certain major studios. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. Operating cash flows from CEG 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 39 clients for which initial expenditures are generally recovered within six to twelve months. Cash flows used in investing activities consisted of proceeds from the sale of Starrise shares of $0.6 million and purchases of property, equipment and internal use software. For the three months ended June 30, 2020, cash flows used in financing activities reflects payments of approximately $7.8 million for the Credit Facility and Prospect Loan, offset by $3.4 million from Credit Facility draw, $7.5 million received in connection with the sale of 10,666,666 shares of Class A common stock and exercise of warrants, and $2.2 million received pursuant to the Payment Protection Program of the Coronavirus Aid, Relief and Economic Security Act. We have contractual obligations that primarily consist of term notes payable, credit facilities, and non-cancelable operating leases related to office space. 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. We believe the combination of: (i) our cash and cash equivalent balances as of June 30, 2020, (ii) expected cash flows from operations, (iii) cost cutting measures including payroll expense reduction and real estate occupancy cost reductions, and (iv) the extension of maturity dates of our borrowings, the ability to convert the convertible debt into Class A common stock, the Starrise equity investment, the capital raises during and subsequent to June 30, 2020, and the support or availability of funding from other capital resources and financings will be sufficient to satisfy our contractual obligations, as well as liquidity for our operational and capital requirements, for twelve months from the filing of this document. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity. Seasonality Revenues from our Cinema Equipment Business 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. Our CEG segment benefits from the winter holiday season, and as a result, revenues in the segment are typically highest in our fiscal third quarter; however, we believe the seasonality of motion picture exhibition is becoming less pronounced as the motion picture studios are releasing movies 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 CDF2 Holdings, LLC ("CDF2 Holdings"), our wholly-owned unconsolidated subsidiary. As discussed further in Note 3 - Other Interests to the Condensed Consolidated Financial Statements included in Item 1 of this 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. 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. 40