MOVING iMAGE TECHNOLOGIES INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and related notes included elsewhere in this Report. This discussion contains forward-looking statements reflecting our current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”, and elsewhere in this Report. Overview We are a leading provider of technology, products, and services to movie theater operators and sports and entertainment venues. 1) We provide a set of valuable services to movie theater operators and other critical screening and viewing rooms. These services include overall project management, which can encompass a wide range of design, integration, installation, and procurement services for new auditorium builds, refurbishments, or upgrades to existing facilities. 2) We design and manufacture a set of proprietary products that are sold either as part of our project management services or a la carte. Examples of these products include our ADA-compliant accessibility products and our Caddy brand, a leading provider of proprietary cup holders, trays, and other products sold into our strategic markets of motion picture 23 Table of Contents exhibition, entertainment, and sports venues as well as other non-strategic markets. We also resell third-party technologies, including but not limited to items such as screens, projectors, and servers. 3) We resell third-party products as part of our project management services or a la carte. These include technology products such as screens, projectors, servers, and FF&E (furniture, fixtures, and equipment). 4) Finally, we have a set of recently introduced products that we believe have the potential to be disruptive to the movie theater, entertainment and sports venue industries. For example, our operations enhancement and theater management solution include a software-as-a-service (SaaS) platform combined with other technologies that allow theater operators to improve their quality control. We have also developed a translator product and service that will enable moviegoers to watch a movie in any language that the film is available in, all in the same auditorium through a set of augmented reality glasses. Another example is a proprietary mobile cart we’ve developed to enable eSports and gaming in movie-theater auditoriums. In June 2020, MiT LLC members created Moving iMage Technologies, Inc. (“MiT Inc.”) to facilitate the Company’s initial public offering (“IPO”). Upon formation of MiT Inc., 2,000,000 shares of MiT Inc. Common Stock were issued to members of MiT LLC. On July 7, 2021, MiT LLC and MiT Inc. entered into an exchange agreement (“Exchange Agreement”) whereby the members of MiT LLC exchanged their membership interest for 2,350,000 shares of Common Stock in MiT Inc. As a result of the Exchange Agreement, the members of MiT LLC owned approximately 79% or 4,452,334 of the outstanding Common Stock of MiT Inc. As a result, MiT LLC (the entity where the Company conducts its business) became a wholly-owned subsidiary of MiT Inc. (the SEC registrant). The transaction was accounted for as a merger of entities under common ownership in accordance with generally accepted accounting principles in the United States of America (“GAAP”). This determination was primarily based on the facts that, immediately before and after the transaction: (i) MiT LLC owners owned a substantial majority of the voting rights in the combined company, (ii) MiT LLC designated a majority of the members of the initial board of directors of the combined company, and (iii) MiT LLC’s senior management holds all key positions in the senior management of the combined company. As a result, the historical financial statements of MiT LLC and MiT Inc. for the year ended June 30, 2021 have been retroactively revised to reflect the consolidation of MiT, Inc. and MiT LLC. All inter-company transactions and balances between MiT Inc. and MiT, LLC have been eliminated. Factors affecting our performance Effect of COVID-19 global pandemic .The COVID-19 pandemic has had an unprecedented impact on the world and the movie exhibition industry. The social and economic effects have been widespread. At various points during the pandemic, authorities around the world imposed measures intended to control the spread of COVID-19, including stay-at-home orders and restrictions on large public gatherings, which caused movie theaters in countries around the world to temporarily close. The repercussions of the COVID-19 global pandemic resulted in a significant impact to our customers, specifically those in the entertainment and cinema industries. As a result, the Company implemented various cash preservation strategies, including, but not limited to, temporary personnel and salary reductions, halting non-essential operating and capital expenditures, and negotiating modified timing and/or abatement of contractual payments with landlords and other major suppliers. Throughout 2020 and 2021 the theatres reopened as soon as local restrictions and the status of the COVID-19 pandemic would allow. As of June 30, 2022, a large majority of domestic and international theatres were open. The industry’s recovery to historical levels of new film content, both in terms of the number of new films and box office performance, is still underway, as the industry also continues to adjust to evolving theatrical release windows, competition from streaming and other delivery platforms, supply chain delays, inflationary pressures, labor shortages, wage rate pressures and other economic factors. Based on our current estimates of recovery, we believe we have, and will generate, sufficient cash to sustain operations. Nonetheless, the COVID-19 pandemic has had, and continues to have, adverse effects on the Company’s business, results of operations, cash flows and financial condition. Investment in growth . We have invested, and intend to continue to invest, in expanding our operations, increasing our headcount, developing our products and services to support our growth and expanding our infrastructure. We expect our total 24 Table of Contents operating expenses to increase in the foreseeable future to meet our growth objectives. We plan to continue to invest in our sales and support operations with a particular focus in the near term of adding additional sales personnel to further broaden our support and coverage of our existing customer base, in addition to developing new customer relationships. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, and the return on these investments may be lower than we expect. In addition, as we invest in expanding our operations internationally, our business and results of operations will become further subject to the risks and challenges of international operations, including higher operating expenses and the impact of legal and regulatory developments outside the United States. Adding New Customers and Expanding Sales to Our Existing Customer Base . We intend to target new customers by continuing to invest in our field sales force. We also intend to continue to target large customers’ organizations who have yet to use our products and services. A typical initial order involves educating prospective customers about the technical merits and capabilities and potential cost savings of our products and services as compared to our competitors’ products. We believe that customer references have been, and will continue to be, an important factor in winning new business. We expect that a substantial portion of our future sales will be sales to existing customers, including expansion of their product and service offerings, as we offer new products and services through the existing sales channel. Our business and results of operations will depend on our ability to continue to add new customers and sell additional products and services to our growing base of customers. Promoting our Brand and Offering Additional Products . Our future performance will depend on our continued ability to achieve brand recognition for our proprietary line of products. We plan to increase our marketing expenditures to continue to create and maintain prominent brand awareness. Also, our future performance will depend on our ability to continue to offer high quality, high performance and high functionality products and services. We intend to continue to devote efforts to introduce new products and services including new versions of our existing product lines. We expect that our results of operations will be impacted by the timing, size and level of success of these brand awareness and product and service offering efforts. Ability to Maintain Gross Margins . Our gross margins have been and are expected to continue to be affected by a variety of factors, including competition, the timing of changes in pricing, shipment volumes, new product introductions, changes in product mixes, changes in our purchase price of components and assembly and test service costs and inventory write downs, if any. Our goal is to strive to maintain gross profits for products that may have a declining average selling price by continuing to focus on increased sales volume and looking to reduce operating costs. Decreases in average selling prices are primarily driven by competition and by reduced demand for products that face potential or actual technological obsolescence. We also focus on managing our inventory to reduce our overall exposure to price erosion. In addition, we seek to introduce new products and services with higher gross margins to offset the potential effect of price erosion on other lines of products. For example, we have recently productized and began marketing a new system which combines full compliance with the Americans with Disabilities Act with a multi-language capability — we expect this system will have higher margins than a substantial number of existing products we offer. In addition, we expect our offerings of Direct View LED screens to also carry significantly higher margins. Fluctuations in Revenues and Earnings . Both the sales cycle and the contract fulfillment cycle is dependent on a number of factors from our customers that are not in our control. Accordingly, backlog, the recognition of backlog into revenue and related earnings may fluctuate from quarter to quarter depending on our customers’ particular requirements, which can sometimes change between the initial signing of a contract to its ultimate fulfillment. Net sales The principal factors that have affected or could affect our net sales from period to period are: ● The condition of the economy in general and of the cinema and/or cinema equipment industry in particular, ● Our customers’ adjustments in their order levels, ● Seasonality in our business, specifically our second fiscal quarter which is traditionally weaker, ● Changes in our pricing policies or the pricing policies of our competitors or suppliers, ● The addition or termination of key supplier relationships, 25 Table of Contents ● The rate of introduction and acceptance by our customers of new products and services, ● Our ability to compete effectively with our current and future competitors, ● Our ability to enter into and renew key relationships with our customers and vendors, ● Changes in foreign currency exchange rates, ● A major disruption of our information technology infrastructure, ● Unforeseen catastrophic events such as the COVID-19 pandemic, armed conflict, terrorism, fires, typhoons and earthquakes, and ● Any other disruptions, such as labor shortages, unplanned maintenance or other manufacturing problems. Cost of goods sold Cost of goods sold includes the cost of products or components that we purchase from third party manufacturers plus assembly and packaging labor costs for these third parties or in-house designed products. Cost of goods sold is also affected by inventory obsolescence if our inventory management is not effective or efficient. We mitigate the risk of inventory obsolescence by stocking relatively small amounts of inventory at any given time, and relying instead on a strategy of manufacturing or acquiring products based on orders placed by our customers. In April 2022, the Company entered into an Asset Purchase Agreement with QSC, LLC to purchase an aggregate of $1.5 million of inventory from QSC, LLC. This asset purchase agreement was not within the Company's normal policy of acquiring small amounts of inventory, however the Company viewed this purchase as a strategic opportunity to expand its strategy of enabling under-served communities to enjoy the movie going experience and as such entered into this transaction. General and administrative expenses General and administrative expenses relate primarily to compensation and associated expenses for personnel in general management, information technology, human resources, procurement, planning and finance, as well as outside legal, investor relations, accounting, consulting and other operating expenses. Selling and marketing expenses Selling and marketing expenses relate primarily to salary and other compensation and associated expenses for internal sales and customer relations personnel, advertising, outbound shipping and freight costs, tradeshows, royalties under a brand license, and selling commissions. 26 Table of Contents Research and development expenses Research and development expenses consist of compensation and associated costs of employees engaged in research and development projects, as well as materials and equipment used for these projects, and third-party compensation for research and development services. We do not engage in any long-term research and development contracts, and all research and development costs are expensed as incurred. Results of Operations Year ended June 30, 2022 compared to year ended June 30, 2021 Net sales ​ ​ ​ ​ ​ ​ ​ Year Ended June 30, ​ (in 000’s) ​ 2022 ​ 2021 ​ $ 18,351 ​ $ 7,247 ​ Net revenues increased 153.2% to $18.35 million for the year ended June 30, 2022 from $7.25 million for the prior fiscal year primarily due to the recovery from the impact of COVID-19 on the exhibition industry. Backlog at June 30, 2022 was approximately $10.03 million, which represented orders currently planned to be shipped substantially by December 31, 2022. Backlog at June 30, 2021 was $9.44 million. All open orders at June 30, 2021, except one for approximately $0.2 million due to customer deferral, were fulfilled in FY 2022. Gross Profit ​ ​ ​ ​ ​ ​ ​ Year Ended June 30, ​ (in 000’s), ​ 2022 2021 ​ $ 4,461 ​ $ 1,689 ​ Gross profit increased 164.1% to $4.46 million for the year ended June 30, 2022 from $1.69 million for the prior fiscal year. As a percentage of total revenues, gross margin increased to 24.3% for the year ended June 30, 2022 from 23.3% for the prior year. The increase in gross margin as a percentage of revenues was driven primarily by product mix, as higher margin parts and services revenues made up a larger percentage of total revenues. In addition, the margin increase was affected by an increase in higher margin Caddy cupholder sales. Research and Development ​ ​ ​ ​ ​ ​ ​ Year Ended June 30, ​ (in 000’s) ​ 2022 2021 ​ $ 238 ​ $ 152 ​ The increase in research and development expense was primarily associated with the impact of COVID-19 on 2021. We expect research and development expense to increase as a percentage of sales in the future as we continue to increase product development on our green product line, SaaS (software as a service) products, LED screen support systems, Caddy products, and others as our business expands into new areas. 27 Table of Contents Selling, General and Administrative Expense ​ ​ ​ ​ ​ ​ ​ Year Ended June 30, ​ (in 000’s) ​ 2022 2021 ​ $ 5,985 ​ $ 3,098 ​ The increase in selling, general and administrative expense was due primarily to the impact of COVID-19 in the prior period as the Company instituted cost containment measures, such as headcount reduction, executive pay reduction and cost avoidance. Additionally, during the year ended June 30, 2022 the Company incurred significant expenses associated with becoming a public company, such as increased legal, accounting and other regulatory costs. Interest and Other (Expense)/ Income ​ ​ ​ ​ ​ Year Ended June 30, (in 000’s) 2022 2021 $ 417 ​ $ 916 ​ The change in interest and other (expense)/income was primarily due to unrealized losses on marketable securities in the 2022 year. Net Loss ​ ​ ​ ​ ​ ​ ​ Year Ended June 30, ​ (in 000’s) ​ 2022 2021 ​ $ (1,345) ​ $ (645) ​ Net loss was $(1.35) million for the year ended June 30, 2022 compared to a net loss of $(0.645) million for the prior year. This increase in net loss was predominately driven by higher selling, general and administrative expenses that offset increases in gross margin. In addition, net loss impacted by realized gain on investments of $0.459 million in 2021 versus and $0.242 million unrealized loss on investments in 2022, offset by a $0.197 million decrease in interest expense. Liquidity and Capital Resources During the past several years, we have primarily met our working capital and capital resource needs from our operating cash flows and financing activities. We believe that our existing sources of liquidity, including cash, credit facilities and operating cash flow, will be sufficient to meet our projected capital needs for the foreseeable future. On July 7, 2021, the Company completed an initial public offering resulting in net proceeds of approximately $11.24 million. Our cash balance at June 30, 2022 was approximately $2.34 million, as compared to $1.27 million at June 30, 2021. Our short-term investments balance at June 30, 2022 was $4.36 million compared to $0 at June 30, 2021. In response to uncertainties associated with the COVID-19 pandemic, we took significant steps to preserve cash and remain in a strong competitive position for when the crisis subsided. Throughout 2020 and 2021 the theatres reopened as soon as local restrictions and the status of the COVID-19 pandemic would allow. As of June 30, 2022, a large majority of domestic and international theatres were open. The industry’s recovery to historical levels of new film content, both in terms of the number of new films and box office performance, is still underway, as the industry also continues to adjust to evolving theatrical release windows, competition from streaming and other delivery platforms, supply chain delays, inflationary pressures, labor shortages, wage rate pressures and other economic factors. Based on the Company’s current estimates of recovery, it believes it has, and will generate, sufficient cash to sustain operations. Nonetheless, the COVID-19 pandemic has had, and continues to have, adverse effects on the Company’s business, results of operations, cash flows and financial condition. 28 Table of Contents Cash Flows from Operating Activities Net cash used in operating activities was $3.39 million for year ended June 30, 2022, due primarily to the operating loss combined with an increase in accounts receivable, an increase in inventory, offset by an increase in customer deposits. Net cash used in operating activities was $1.7 million for the year ended June 30, 2021, due to the operating loss combined with, the negative cash impact of the gain on forgiveness of debt and net changes in working capital items of approximately $200,000. The net change in working capital was primarily due to a decrease in accounts payable and prepaid and other, offset by a decrease in accounts receivable and an increase in customer deposits. Cash Flows from Investing Activities Net cash used in investing activities was $4.96 million for the year ended June 30, 2022. This was comprised primarily of investments in marketable securities. Net cash provided by investing activities was $548,000 for the year ended June 30, 2021. This was comprised predominately of sales of marketable securities. Cash Flows from Financing Activities Net cash provided by financing activities was $9.41 million for the year ended June 30, 2022. This increase was predominately due to the net proceeds of $11.2 million received from our IPO, offset by payments on Notes payable and our line of credit. Net cash provided by financing activities of $1.36 million for the year ended June 30, 2021 was due to proceeds from our private placement of securities, plus proceeds received for the PPP loan, less payments on notes payable and our line of credit. Financial Instruments and Credit Risk Concentrations Our top ten customers accounted for approximately 48% and 55% of net revenues for the years ended June 30, 2022 and 2021, respectively. Trade accounts receivable from these customers represented approximately 48% and 18% of net receivables at June 30, 2022 and 2021, respectively. While we believe our relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. We could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which we sell our products. Financial instruments that potentially expose us to a concentration of credit risk principally consist of accounts receivable and notes receivable. We sell products to a large number of customers in many different geographic regions. To minimize credit concentration risk, we perform ongoing credit evaluations of our customers’ financial condition or use letters of credit. Off-Balance Sheet Arrangements and Contractual Obligations Our Contractual Obligations consist principally of leasing equipment and facilities under operating leases. The future estimated payments under these arrangements are summarized below: ​ ​ ​ ​ ​ (in 000’s) ​ ​ Total Operating leases ​ Payments 2023 ​ $ 293 2024 ​ 302 2025 ​ 174 Total future lease payments ​ $ 769 ​ There were no other material contractual obligations other than inventory and property, plant and equipment purchases in the ordinary course of business. Seasonality Our operating results can vary from quarter to quarter as a result of seasonality in consumer spending and payment patterns. A large part of our business is concerned with new theater builds, which often see substantial delays due to weather, but also financing 29 Table of Contents timing, permits and governmental delays, and other unpredictable problems often associated with large real estate projects. Specifically, our revenue growth generally is higher during the first and fourth quarters of the fiscal year as the weather improves, the digital cinema market becomes more active and customers begin new theater builds or remodel projects. During these periods, we tend to experience increased transaction volume. Conversely, our revenue growth generally slows during the second quarter of the fiscal year, as spending on new theater construction and theater improvement projects tends to slow leading up to the holiday season and through the winter months. As a result, growth in transaction volume also tends to slow during these periods. We expect this seasonality to continue for the foreseeable future, which may cause fluctuations in our operating results and financial metrics. However, our seasonality trends may vary in the future as we introduce new products to new industry verticals and we become less concentrated in the new theater construction and improvement sector. Inflation We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our net revenues or profitability. During the year ended June 30, 2022, inflation increased to levels not seen since the 1980’s. The Company has historically been able to offset any inflationary effects by either increasing prices or improving cost efficiencies. Recently Issued Accounting Pronouncements See Note 1, Business Activity and Summary of Significant Accounting Policies, to the consolidated financial statements for a description of recently issued accounting pronouncements. Critical Accounting Policies and Estimates The following accounting policies involve judgments and estimates used in preparation of the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Our accounting policies are discussed in Note 1 to the financial statements in this Report. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the financial statements. Revenue Recognition The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenue is recognized when control of the promised goods is transferred to a customer and when performance conditions are satisfied as per the agreement, in an amount that reflects the consideration that we expect to receive in exchange for those goods as per the agreement with the customer. We generate all our revenue from agreements with customers. In case there are agreements with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. We allocate the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation and then evaluate how the services are transferred to the customer to determine the timing of revenue recognition. The Company considers the U.S. GAAP criteria for determining whether to report revenue gross as a principal versus net as an agent. Factors considered include whether the Company is the primary obligor, has risks and rewards of ownership, and bears the risk that a customer may not pay for the products provided or services performed. If there are circumstances where the above criteria are not met, revenues recognized are presented net of cost of goods sold. Contract assets consist of conditional or unconditional rights to consideration. Accounts receivable represent amounts billed to customers where the Company has an enforceable right to payment for performance completed to date (i.e., unconditional rights to consideration). 30 Table of Contents Contract liabilities consist of refund and warranty liabilities, as well as deposits received in advance on sales to certain customers. Such deposits are reflected as customer deposits and recognized in revenue when control of the products is transferred or when performance conditions are satisfied per the agreement. Cost of goods sold includes cost of inventory sold during the period, net of vendor discounts and allowances, and shipping and handling costs, and sales taxes. Taxes collected from customers are included in Accounts Payable on a net basis (excluded from revenues) until remitted to the government. Deferred contract acquisition costs consist of sales commissions paid to the sales force and the related employer payroll taxes, collectively “deferred contract acquisition costs”, are considered incremental and recoverable costs of obtaining a contract with a customer. The Company has determined that sales commissions paid are an immaterial component of obtaining a customer’s contract and has elected to expense sales commissions when earned. Inventory Valuation Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Our policy is to evaluate all inventory quantities for amounts on-hand that are potentially in excess of estimated usage requirements, and to write down any excess quantities to estimated net realizable value. Inherent in the estimates of net realizable values are management’s estimates related to customer demand and the development of new technology, which could make our theater and digital media products obsolete, among other items. Income Taxes Prior to the effective date of the IPO, the operating company was a limited liability company treated as a partnership for federal and state income tax purposes with all income tax liabilities and/or benefits of MiT LLC being passed through to the members. As such, there is no recognition of federal or state income taxes provided for in the year ended June 30, 2021 financial statements. Any uncertain tax position taken by the members is not an uncertain position of the Company. In accordance with the operating agreement of MiT LLC, to the extent possible without impairing MiT LLC’s ability to continue to conduct its business and activities, and in order to permit its members to pay taxes on the taxable income of MiT LLC, MiT LLC made distributions to members in the amounts equal to the estimated tax liability of its members computed as if members paid income tax at the highest marginal federal and state rate applicable to an individual resident of Fountain Valley, CA. Upon the effective date the IPO, the former MiT LLC members were eligible to receive a final tax distribution consisting of income taxes payable on MiT LLC earnings from January 1, 2019 through the effective date of the IPO (the “Final Tax Distribution”). Purchasers of shares of common stock in the IPO did not receive any portion of the Final Tax Distribution. On and after such date, we became fully subject to federal and state income taxes. We have agreed to pay, and to indemnify, defend and hold harmless the members of MiT LLC from any taxes which may at any time be asserted with respect to the Share Exchange. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.