Cineverse (CNVS) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Unaudited financials as of December 31, 2022, present $94.9 million total assets, $57.3 million total liabilities, and a $6.6 million net loss for the nine months ended Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 (Unaudited) | Mar 31, 2022 | | :--- | :--- | :--- | | Total Assets | $94,895 | $104,636 | | Total Current Assets | $46,248 | $52,163 | | Goodwill | $21,025 | $21,084 | | Intangible assets, net | $18,864 | $20,034 | | Total Liabilities | $57,251 | $63,686 | | Total Current Liabilities | $50,747 | $56,992 | | Total Equity | $37,644 | $40,950 | Condensed Consolidated Statements of Operations (in thousands) | Metric | Nine Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2021 | | :--- | :--- | :--- | | Revenues | $55,478 | $39,202 | | Total operating expenses | $61,783 | $38,606 | | Operating income (loss) | $(6,305) | $596 | | Net income (loss) | $(6,620) | $4,595 | | Net income (loss) attributable to common stockholders | $(6,919) | $4,351 | | Diluted EPS | $(0.04) | $0.03 | Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(7,901) | $4,746 | | Net cash used in investing activities | $(429) | $(5,031) | | Net cash provided by financing activities | $4,064 | $2,636 | | Net change in cash and cash equivalents | $(4,266) | $2,351 | Note 1. Nature of Operations and Liquidity Operating in Cinema Equipment and Content & Entertainment, the company reports an accumulated deficit of $479.2 million and negative working capital of $4.5 million, yet expects sufficient liquidity - The company reports through two segments: Cinema Equipment (servicing digital cinema assets) and Content & Entertainment (distributing independent content and operating OTT channels)[106][107] - As of December 31, 2022, the company had an accumulated deficit of $479.2 million and negative working capital of $4.5 million, with net cash used in operations for the nine months ended totaling $7.9 million[108] - The company has a $5.0 million revolving line of credit with East West Bank (EWB), fully drawn as of December 31, 2022, expiring September 15, 2023, with a potential one-year extension[109] Note 2. Basis of Presentation and Summary of Significant Accounting Policies This note details U.S. GAAP financial statement preparation, key accounting policies for revenue recognition, intangible assets, goodwill, and stock-based compensation, noting 43% revenue concentration from four customers - Cinema Equipment VPF revenue is recognized upon first movie display, with Phase II Deployment VPFs subject to a "cost recoupment" cap, recognized once uncertainty is resolved[154][155][159] - Content & Entertainment revenue from digital platforms and physical goods is recognized when control transfers to the customer, with gross or net reporting based on the company's role as principal or agent[161][165] - The company recorded an employee retention tax credit of $2.0 million and $2.5 million for the three and nine months ended December 31, 2022, respectively, under the CARES Act[125] - For the three months ended December 31, 2022, 43% of consolidated revenues came from four customers: Iconic (16%), Distribution Solutions (7%), Amazon.com, Inc. (14%), and Tubi (6%)[175] Note 3. Other Interests The company holds a 100% equity interest in CDF2 Holdings, a non-consolidated VIE with $2.1 million maximum loss exposure, and a cost-method investment in Roundtable Entertainment Holdings, Inc - The company owns 100% of CDF2 Holdings, a VIE, but does not consolidate it, carrying the investment at $0 with a maximum loss exposure of $2.1 million in accounts receivable as of December 31, 2022[192][193][194] - On March 15, 2022, the company purchased preferred stock and warrants in Roundtable Entertainment Holdings, Inc. for 316,937 shares of its common stock, valued at $0.2 million using the cost method[197] Note 4. Stockholders' Equity As of December 31, 2022, 275 million common shares were authorized, with 3.6 million issued for preferred dividends, equity vesting, and earnouts, resulting in $0.1 million cumulative preferred stock dividends in arrears - During the nine months ended December 31, 2022, the company issued approximately 3.6 million shares of common stock for preferred dividends, equity incentive vesting, and the Bloody Disgusting earnout commitment[201] - Cumulative dividends in arrears on preferred stock were $0.1 million as of December 31, 2022[203] Stock-Based Compensation Expense (in thousands) | Period | Selling, general and administrative | | :--- | :--- | | Three Months Ended Dec 31, 2022 | $708 | | Nine Months Ended Dec 31, 2022 | $3,906 | Note 5. Line of Credit Facility On September 15, 2022, the company secured a $5.0 million revolving line of credit with East West Bank, fully drawn at year-end with a 9.0% interest rate, subject to various covenants - The company entered into a $5.0 million Line of Credit Facility with EWB on September 15, 2022, which expires on September 15, 2023[218] - The facility's interest rate is 1.5% above the prime rate, which was 9.0% as of December 31, 2022, with the full $5.0 million outstanding at period-end[218] Note 6. Segment Reporting The company operates two segments: Cinema Equipment, generating $11.2 million revenue and $7.7 million operating income, and Content & Entertainment, with $44.3 million revenue and a $6.6 million operating loss for the nine months ended December 31, 2022 Segment Financials for Nine Months Ended Dec 31, 2022 (in thousands) | Segment | Revenues | Direct Operating Expenses | Operating Income (Loss) | | :--- | :--- | :--- | :--- | | Cinema Equipment | $11,218 | $359 | $7,719 | | Content & Entertainment | $44,260 | $29,500 | $(6,625) | | Corporate | $— | $— | $(7,399) | | Consolidated | $55,478 | $29,859 | $(6,305) | Segment Financials for Three Months Ended Dec 31, 2022 (in thousands) | Segment | Revenues | Direct Operating Expenses | Operating Income (Loss) | | :--- | :--- | :--- | :--- | | Cinema Equipment | $7,186 | $89 | $6,015 | | Content & Entertainment | $20,696 | $14,322 | $(561) | | Corporate | $— | $— | $(2,014) | | Consolidated | $27,882 | $14,411 | $3,440 | Note 7. Income Taxes The company's effective tax rate was 0% for both the three and nine months ended December 31, 2022, due to a full valuation allowance against deferred tax assets, reflecting inability to utilize net operating loss carryforwards - The effective tax rate for the three and nine months ended December 31, 2022 was 0%, compared to 4% and (14%) for the respective periods in 2021[7] - The company has not recorded tax benefits on its losses due to a full valuation allowance offsetting potential deferred tax assets from net operating loss carryforwards[229] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, highlighting 98% Q3 and 42% nine-month revenue growth driven by Content & Entertainment, increased operating expenses, a $5.0 million Q3 net income, and $5.1 million Q3 Adjusted EBITDA Overview The company operates in Cinema Equipment and Content & Entertainment segments, serving as a leading digital media distributor for independent content across various digital platforms and physical media - The company is a leading distributor of independent content for major brands such as Hallmark, Televisa, NFL, and Scholastic[9] - Distribution channels include digital platforms such as Apple iTunes, Amazon Prime, Netflix, Hulu, VOD, and FAST, alongside physical goods like DVD and Blu-ray[9] - A majority of Virtual Print Fee (VPF) revenue from the Phase I Deployment has ended as equipment reached the conclusion of its 10-year payment period[10] Financial Condition and Liquidity The company has a fully drawn $5.0 million revolving line of credit, and despite an accumulated deficit and negative working capital, management believes current liquidity is sufficient for the next twelve months - The company has a $5.0 million Line of Credit Facility with East West Bank, expiring September 15, 2023, with $5.0 million outstanding as of December 31, 2022[12] - As of December 31, 2022, the company had an accumulated deficit of $479.2 million and negative working capital of $4.5 million[236] - Management believes cash and credit facility availability will be sufficient to support operations for at least twelve months from the report filing date[237] Results of Operations For the three months ended December 31, 2022, total revenues increased 98% to $27.9 million, driven by Cinema Equipment and Content & Entertainment growth, with nine-month revenues up 42% to $55.5 million, accompanied by increased operating expenses Revenues by Segment - Three Months Ended Dec 31 (in thousands) | Revenue Source | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Streaming and Digital | $12,576 | $8,357 | $4,219 | 50% | | Base Distribution | $8,120 | $3,667 | $4,453 | 121% | | Cinema Equipment | $7,186 | $2,060 | $5,126 | 249% | | Total | $27,882 | $14,084 | $13,798 | 98% | - Q3 Streaming and Digital revenue growth was driven by a 79% increase in FAST and TV-VOD revenue from the DMR acquisition and new channels, and a 38% increase in subscription revenue from the Screambox platform, boosted by content like 'Terrifier 2'[16] Revenues by Segment - Nine Months Ended Dec 31 (in thousands) | Revenue Source | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Streaming and Digital | $33,115 | $21,292 | $11,823 | 56% | | Base Distribution | $11,145 | $6,366 | $4,779 | 75% | | Cinema Equipment | $11,218 | $11,544 | $(326) | (3)% | | Total | $55,478 | $39,202 | $16,276 | 42% | - For the nine months ended Dec 31, 2022, SG&A expenses increased by $8.5 million (41%), primarily due to higher compensation from acquisitions, increased legal expenses, and other operating costs like rent and marketing[57] Adjusted EBITDA Adjusted EBITDA, a non-GAAP measure, was $5.1 million for the three months ended December 31, 2022, a significant increase from $1.3 million in the prior year, while the nine-month Adjusted EBITDA was $1.1 million - Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, M&A costs, and other certain items[65] Adjusted EBITDA Reconciliation - Three Months Ended Dec 31 (in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income (loss) | $5,022 | $(404) | | Adjusted EBITDA | $5,086 | $1,342 | Adjusted EBITDA Reconciliation - Nine Months Ended Dec 31 (in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income (loss) | $(6,620) | $4,595 | | Adjusted EBITDA | $1,107 | $7,494 | Cash Flow For the nine months ended December 31, 2022, net cash used in operating activities was $7.9 million, a significant shift from $4.7 million provided in the prior year, primarily due to operating loss and a decrease in accounts payable Cash Flow Summary - Nine Months Ended Dec 31 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(7,901) | $4,746 | | Net cash used in investing activities | $(429) | $(5,031) | | Net cash provided by financing activities | $4,064 | $2,636 | | Net increase (decrease) in cash | $(4,266) | $2,351 | - The $7.9 million use of cash from operations in the nine months to Dec 31, 2022, was driven by the operating loss and an $11.8 million decrease in accounts payable to vendors[38] Item 4. Controls and Procedures Management concluded that as of December 31, 2022, disclosure controls and procedures were ineffective due to material weaknesses in financial close, information controls, and insufficient accounting personnel, with remediation efforts underway - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were not effective[41] - Material weaknesses were identified in internal controls for financial close and reporting, information and communication controls, and insufficient personnel with appropriate accounting knowledge[42][74] - Remediation steps include hiring a new CFO and EVP Finance & Accounting, restructuring accounting processes, hiring additional personnel, and engaging external advisors to improve internal controls[52][50] PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no legal proceedings to report for the period - None[55] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022, or the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 - No material changes to the Risk Factors have occurred since previous filings[44] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[75] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None[25] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[26] Item 6. Exhibits This section provides an index of exhibits filed with the report, including security agreements, loan agreements, officer certifications, and XBRL data files - The exhibit index lists various agreements and certifications filed with the report, such as the Amended and Restated Loan, Guaranty and Security Agreement with East West Bank, and Officer's Certificates pursuant to the Sarbanes-Oxley Act[32]