Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain matters in this Quarterly Report on Form 10-Q (this “Report”), including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.
Forward-looking statements include information concerning our possible or assumed future results of operations and expenses, business strategies and plans, competitive position, business environment, and potential growth opportunities. Forward-looking statements include all statements that are not historical facts. In some cases, forward-looking statements can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would,” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2022, and in our other filings with the SEC, could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
● the potential duration and impact of potential future pandemics and its effect on our business, financial condition, results of operations and cash flows;
● interruptions or higher prices of products and services from our suppliers;
● inability to timely introduce new products and services or enhance existing products and services;
● our dependence on distributors, dealers and resellers to sell and market our products and services, and any failure on our part to maintain and further develop our sales channels;
● inability to accurately forecast consumer demand for our products and services and adequately manage our inventory;
● increasing product costs that may cause our operating margins to decline;
● significant variation in revenues and profitability in a particular quarter as a result of the length, unpredictability and seasonality of our sales and contract fulfillment cycles;
● significant customers who cease purchasing our products and services at any time;
● inability ability to maintain our brand;
● inability to offer high-quality customer support;
● our ability to successfully address any product liability claims as well as other legal proceedings;
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● our ability to convert all of our backlog into revenue and cash flows;
● our ability to operate in a highly competitive market;
● the extent of competitive pricing pressure from our customers;
● our ability to successfully enter into and operate new lines of business;
● our ability to successfully acquire other businesses, product lines and technologies and address any problems encountered therewith;
● our ability to attract and retain highly skilled personnel and to manage our growth with our limited resources effectively;
● our ability to protect our trademarks and other intellectual property;
● the impact of security breaches through cyber-attacks, cyber intrusions or otherwise; and
● the impact of general political, social and economic conditions.
Given these uncertainties, you should not place undue reliance on any forward-looking statements in this Report. Also, forward-looking statements represent our beliefs and assumptions only as of the date of this Report. You should read this Report and the documents that we have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect.
Any forward-looking statement made by us in this Report speaks only as of the date on which it is made. Except as required by law, we disclaim any obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward- looking statements, even if new information becomes available in the future. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included 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 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
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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.
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 September 30, 2023, 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 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
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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 are dependent on a number of factors from our customers that are not in our control. Accordingly, backlog, the conversion 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 and 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,
● 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,
● A lack of entertainment content caused by entertainment content provider labor disputes, strikes and work shutdowns, 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, except for periodic strategic purchases, and relying instead on a strategy of manufacturing or acquiring products based on orders placed by our customers.
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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.
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
Three months ended September 30, 2023 compared to the three months ended September 30, 2022
Sales
Three Months Ended September 30,
(in 000’s)
2023
2022
$
6,635
$
5,852
Net sales increased 13.4% to $6.635 million for the three months ended September 30, 2023 from $5.852 million for the three months ended September 30, 2022. In 2023, with more new movie releases compared to prior years theater owners were encouraged to increase theater construction during the three months ended September 30, 2023.
Gross Profit
Three Months Ended September 30,
(in 000’s),
2023
2022
$
1,819
$
1,559
Along with the revenue increase of 13.4%, gross profit increased 16.7% to $1.819 million for the three months ended September 30, 2023 from $1.559 million for the three months ended September 30, 2022 or an increase of $0.260 million. As a percentage of total revenues, gross profit percentage increased to 27.4% from 26.6%. The Company’s lower cost strategic inventory purchases improved the gross margin percentage. Both the lower cost QSC purchases and the sales of lower cost used and refurbished equipment resulted in higher gross margin percentages.
Research and Development
Three Months Ended September 30,
(in 000’s)
2023
2022
$
67
$
66
Research and development expense was virtually unchanged for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
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Selling, General and Administrative Expense
Three Months Ended September 30,
(in 000’s)
2023
2022
$
1,368
$
1,445
The decrease in selling, general and administrative expense was due primarily to lower consulting, audit, tax and legal compliance costs.
Other Income (Expense)
Three Months Ended September 30,
(in 000’s)
2023
2022
$
55
$
(143)
The September 30, 2023 to September 30, 2022 change in other income (expense) was primarily due to the $55,000 interest income in the three months ended September 30, 2023 compared to the unrealized marketable securities losses in the three months ended September 30, 2022.
Net Income (Loss)
Three Months Ended September 30,
(in 000’s)
2023
2022
$
439
$
(95)
Net income was $0.439 million for the three months ended September 30, 2023 compared to net loss of $(0.095) million for the three months ended September 30, 2022 or an improvement of $0.534 million. The increase was due to higher revenues and related gross margin of $0.260 million, lower operating expenses of $0.077 million and higher other income of $0.197 million.
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 and operating cash flow, will be sufficient to fund our operations and to meet our projected capital needs for a period of at least 12 months from the date the condensed consolidated financial statements are available to be issued. On July 7, 2021, the Company completed an initial public offering resulting in net proceeds of approximately $12.360 million. Cash balance at September 30, 2023 was approximately $6.408 million, as compared to $6.616 million at June 30, 2023.
Cash Flows from Operating Activities
Net cash used in operating activities was $(0.207) million for the three months ended September 30, 2023, primarily due to $(0.735) million in working capital declines offset by the $0.439 million in net income and $0.090 million in other non-cash expenses. The net change in other working capital was primarily due to increases in receivables, inventory and payables and decreases in customer deposits, offset by decreases in prepaid and accrued expenses. The net cash used in operating activities was $(0.020) million for the three months ended September 30, 2022, primarily due to net loss of $(0.095) million offset by net changes in working capital items of $(0.398) million. The net change in working capital was primarily due to increases in inventory and customer deposits offset by lower payables and other items.
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Cash Flows from Investing Activities
Net cash used in investing activities was $(0.001) million for the three months ended September 30, 2023, for equipment purchases. Net cash used in investing activities was $(0.026) million for the three months ended September 30, 2022 primarily due to the net result of marketable securities purchases and sales.
Cash Flows from Financing Activities
Net cash used in financing activities was zero for the three months ended September 30, 2023 and September 30, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.