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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-05-15 · 43 added, 70 removed, 100 unchanged (53% of the section changed)

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Throughout 2020 and 2021 the theatres reopened as soon as local restrictions and the status of the COVID-19 pandemic would allow.

As of March 31, 2024, 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 recovers from the 2023 SAG-AFTRA strike, 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.

As of September 30, 2024, 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 recovers from the 2023 SAG-AFTRA strike, 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.

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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.

Based on 2024 losses, we will selectively invest in expanding our operations.

We expect our total operating expenses to decrease in the foreseeable future to meet our revenue and cost control objectives.

We plan to invest in our sales and support operations to support our new product initiatives and budget goals.

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 intend to target new customers by selectively investing 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 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.

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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.

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

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Results of Operations

Three months ended March 31, 2024 compared to the three months ended March 31, 2023

Three Months Ended March 31,

Net sales increased 4.0% to $3.890 million for the three months ended March 31, 2024 from $3.741 million for the three months ended March 31, 2023.

With fewer movie releases in 2024, theater owners reduced construction during the three months ended March 31, 2024.

In response, the Company increased sales by $0.149 million largely with lower margin equipment revenues.

Three Months Ended March 31,

While revenue increased, gross profit decreased 35.1% to $0.676 million for the three months ended March 31, 2024 from $1.402 million for the three months ended March 31, 2023 or an decrease of $(0.366) million.

As a percentage of total revenues, gross profit percentage decreased to 17.4% from 27.9% due to lower margin seat revenues.

Research and Development

Three Months Ended March 31,

Research and development expense increased by $0.007 million or 11% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due to higher compensation expense.

Selling, General and Administrative Expense

Three Months Ended March 31,

The decrease in selling, general and administrative expense of $(0.250) million or 16.6% was due primarily to lower legal and public company filing expense as well as lower credit loss reserves in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Other Income (Expense)

Three Months Ended March 31,

Other Income(Expense) was $0.048 million for the three months ended March 31, 2024 compared to Other Income(Expense) of $0.102 million for the three months ended March 31, 2023 or a decline $(0.054) million was primarily due to the higher marketable securities gains in the three months ended March 31, 2023 compared to the fixed interest income in the three months ended March 31, 2024.

Net Income (Loss)

Three Months Ended March 31,

Net loss was $(0.601) million for the three months ended March 31, 2024 compared to net loss of $(0.424) million for the three months ended March 31, 2023 or a decline $(0.177) million.

The decrease was due to the lower gross margin of $(0.366) million, offset by lower operating expenses of $0.243 million and lower other income of $(0.054) million.

Nine months ended March 31, 2024 compared to the nine months ended March 31, 2023

Nine Months Ended March 31,

Net sales decreased $(0.645) million or 4.5% to $13.790 million for the nine months ended March 31, 2024 from $14.435 million for the nine months ended March 31, 2023.

The July through November 2023 SAG-AFTRA strike impacted movie production and releases.

With fewer movie releases in 2023 and 2024, theater owners reduced construction during the nine months ended March 31, 2024.

Nine Months Ended March 31,

Along with the revenue decrease of 4.5%, gross profit decreased $(0.658) million or 16.8% to $3.254 million for the nine months ended March 31, 2024 from $3.912 million for the nine months ended March 31, 2023.

Due to lower margin product revenues, gross profit percentage decreased to 23.6% for the nine months ended March 31, 2024 from 27.1% for the nine months ended March 31, 2023.

Three months ended September 30, 2024 compared to the three months ended September 30, 2023

Three Months Ended September 30,

Net sales decreased 20.8% to $5.252 million for the three months ended September 30, 2024 from $6.635 million for the three months ended September 30, 2023 due to higher one-time sales in the three months ended September 2023.

Three Months Ended September 30,

Along with the 20.8% revenue decline, gross profit decreased 24.6% to $1.372 million for the three months ended September 30, 2024 from $1.819 million for the three months ended September 30, 2023 or an decrease of $(0.447) million.

As a percentage of total revenues, gross profit percentage decreased to 26.1% from 27.4% due to lower margin revenues.

Research and Development

Nine Months Ended March 31,

Research and development expense increased by $0.017 million or 8.7% for the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023 due to higher compensation expense.

Three Months Ended September 30,

Research and development expenses decreased by $(0.006) million or 9% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 due to lower compensation expense.

Selling, General and Administrative Expense

Nine Months Ended March 31,

The decrease in selling, general and administrative expense of $(0.193) million or 4.5% was due primarily to lower legal and public company filing expense as well as lower credit loss reserves in the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023.

Three Months Ended September 30,

The increase in selling, general and administrative expense of $0.011 million or 0.8% was due primarily fewer payroll hours allocated to cost of goods sold offset by lower headcount expense in the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Other Income (Expense)

Nine Months Ended March 31,

The March 31, 2024 to March 31, 2023 decrease of $(0.002) million in other income (expense) was primarily due to the lower interest income of $0.140 million in the nine months ended March 31, 2024 compared to the net unrealized and realized marketable securities gains of $0.142 million in the nine months ended March 31, 2023.

Net Income (Loss)

Nine Months Ended March 31,

Net loss was ($0.956) million for the nine months ended March 31, 2024 compared to a net loss of $(0.472) million for the nine months ended March 31, 2023 or a decline $(0.484) million.

The loss increase was due to lower revenues and related lower gross margin impact of $(0.658) million, lower operating expenses of $0.176 million and lower other income of $(0.002) million.

Three Months Ended September 30,

Other Income(Expense) was $0.043 million for the three months ended September 30, 2024 compared to Other Income(Expense) of $0.055 million for the three months ended September 30, 2023 or a decline $(0.012) million.

The decline was primarily due to a lower cash balance and the related lower interest income in the three months ended September 30, 2023 compared to the higher cash balance and the related higher interest income in the three months ended September 30, 2024.

Net (Loss)/Income

Three Months Ended September 30,

Net loss was $(0.025) million for the three months ended September 30, 2024 compared to net income of $0.439 million for the three months ended September 30, 2023 or a decline $(0.464) million.

The decrease was due to the lower gross margin of $(0.447) million, offset by higher operating expenses of $0.005 million and lower other income of $(0.012) million.

Liquidity and Capital Resources

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On July 7, 2021, the Company completed an initial public offering resulting in net proceeds of approximately $12.360 million.

Cash balance at March 31, 2024 was approximately $5.946 million, as compared to $6.616 million at June 30, 2023.

Cash balance at September 30, 2024 was approximately $5.246 million, as compared to $5.278 million at June 30, 2024.

On August 8, 2024, the Board of Directors authorized salary reductions of $100,000 for the CEO from $250,000 to $150,000 and salary reductions for the Executive VP, Operations, Executive VP, Sales and Marketing from $234,000 to $212,000, respectively and the CFO from $220,000 to $200,000.

Cash Flows from Operating Activities

Net cash provided by operating activities was $(0.337) million for the nine months ended March 31, 2024, primarily due to $(0.030) million in working capital decreases along with $(0.956) million in net losses and offset by $0.649 million in other non-cash expenses.

Within working capital change, the uses of cash of $(0.978) million included changes in inventory, prepaids, payables and lease liabilities offset by $0.948 million of changes in receivables, accrued expense, unearned warranty revenue and deposits.

Net cash used by operating activities was ($0.685) million for the nine months ended March 31, 2023, was primarily due to a net loss of ($0.472) million, $0.087 million in non-cash expenses and ($0.300) million in other working capital balances.

The net change in other working capital was primarily due to increases in inventory and payables and decreases in customer deposits, offset by decreases in accounts receivable and prepaid expenses.

Compared to September 30, 2023, net cash used by operating activities increased by $0.175 million in September 30, 2024 due to cost reductions and lower inventory levels.

Net cash used by operating activities was $(0.032) million for the three months ended September 30, 2024, primarily due to $(0.180) million in working capital decreases along with $(0.025) million in net losses

and offset by $0.173 million in other non-cash expenses.

Within working capital change, the cash used of $(0.818) million included declines in payables, customer deposits and lease liabilities offset by $0.638M in provision for receivables, inventory, prepaids, accrued expense and unearned warranty revenue.

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.

Cash Flows from Investing Activities

Net cash used in investing activities was $(0.012) million for the nine months ended March 31, 2024, for equipment purchases.

Net cash used in investing activities was $(4.751) million for the nine months ended March 31, 2023 was predominantly the result of sales of investments of $4.758 million .

Net cash used in investing activities was zero for the three months ended September 30, 2024.

Net cash used in investing activities was $(0.001) million for the three months ended September 30, 2023, for equipment purchases.

Cash Flows from Financing Activities

Net cash used in financing activities was $(0.334) million used to repurchase shares for the nine months ended March 31, 2024 and $(0.049) for March 31, 2023.

Net cash used in financing activities was zero for the three months ended September 30, 2024 and the three months ended September 30, 2023.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with U.S.

generally accepted accounting principles (“US GAAP”).

For a discussion of the critical accounting policies and estimates, refer to the “Critical Accounting Policies and Estimates” section in Part II, Item 7 of our 2024 Form 10-K.

There have been no material changes during the three months ended September 30, 2024 to the judgments, assumptions and estimates upon which our critical accounting estimates are based.

Additionally, refer to Note 1 of our notes to our unaudited consolidated financial statements included in this Form 10-Q for additional discussion of our summary of significant accounting policies and use of estimates.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis