Cineverse Corp.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis should be read in conjunction with our historical Condensed Consolidated Financial Statements and the related notes included elsewhere in this report.

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.

Business Overview

Cineverse is a premier streaming technology and entertainment company with its core business (i) across a portfolio of owned and operated enthusiast streaming channels with enthusiast fan bases; (ii) as a large-scale global aggregator and full-service distributor of feature films and television programs; and (iii) as a proprietary technology software-as-a-service platform for over-the-top (“OTT”) app development and content distribution through subscription video on demand ("SVOD"), dedicated ad-supported ("AVOD"), ad-supported streaming linear ("FAST") channels, social video streaming services, and audio podcasts. We distribute products for major brands such as Hallmark, Televisa, ITV, Nelvana, ZDF, Konami, NFL 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 Apple iTunes, Amazon Prime, Netflix, Hulu, Xbox, Pluto, and Tubi, as well as (ii) physical goods, including DVD and Blu-ray Discs.

We played a significant role in the digital distribution revolution that continues to transform the media landscape, playing a pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, and at the end of our fiscal year 2023, the Company's cinema equipment business concluded its active operations, as its contracts reached maturity. The Company no longer separately manages cinema equipment separately, and with the run-off of its operations, no longer presents this part of the business as a separate segment. All prior period reporting within this report reflects this change.

Financial Condition and Liquidity

As of September 30, 2023, the Company has an accumulated deficit of $486.5 million and negative working capital of $0.7 million. For the three and six months ended September 30, 2023, the Company had a net loss attributable to common stockholders of $(445) thousand and $(4.1) million, respectively. Net cash used in operating activities for the six months ended September 30, 2023 was $6.2 million, which included $5.3 million of cash outlay related to investments in our content portfolio via advances or minimum guarantee payouts. We may continue to generate net losses for the foreseeable future.

The Company is party to a Loan, Guaranty, and Security Agreement with East West Bank (“EWB”) providing for a revolving line of credit (the “Line of Credit Facility”) of $5.0 million, guaranteed by substantially all of our material subsidiaries and secured by substantially all of our and such subsidiaries’ assets. The line of credit expires on September 15, 2024. The Line of Credit Facility bears interest at a rate equal to 1.5% above the prime rate, 10.00% as of September 30, 2023. As of September 30, 2023, $5.0 million was outstanding on the Line of Credit Facility, gross of issuance costs of $96 thousand.

In July 2020, we entered into an At-the-Market sales agreement (the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”) and B. Riley FBR, Inc. (“B. Riley” and, together with A.G.P., the “Sales Agents”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common

Stock at the market prices prevailing on Nasdaq at the time of the sale of such shares. The Company is not obligated to sell any shares under the ATM Sales Agreement. Any sales of shares made under the ATM Sales Agreement will be made pursuant to an effective shelf registration statement, for an aggregate offering price of up to $30 million. During the first quarter of the fiscal year, the Company sold 177 thousand shares under the ATM Sales Agreement for $1.1 million in net proceeds, after deduction of commissions and fees.

On June 16, 2023, the Company closed on the sale of 2,150 thousand shares of Common Stock, 517 thousand pre-funded warrants, and warrants to purchase up to 2,667 thousand shares of Common Stock at a combined public offering price of $3.00 per share and accompanying warrant for aggregate gross proceeds of approximately $7.4 million, after deducting placement agent fees and other offering expenses in the amount of $0.6 million. The warrants had an exercise price of $3.00 per share, were exercisable immediately and will expire five years from the issuance. The Company received $2.999 per share for the pre-funded warrants, with the remaining $0.001 due at the time of exercise. All 516,667 pre-funded warrants were subsequently exercised in July 2023 for total proceeds of $0.5 thousand.

In addition, the Company remains authorized to purchase up to an aggregate of 500 thousand shares of its outstanding Common Stock, following the announcement of a stock repurchase program on March 1, 2023.

The Company will continue to invest in content development and acquisition, from which it believes it will obtain an appropriate return on its investment. As of September 30, 2023 and March 31, 2023, short term content advances were $7.9 million and $3.7 million, respectively, and content advances, net of current portion were, $2.6 million and $1.4 million, respectively.

We believe our cash and cash equivalents and our credit facility, as of September 30, 2023, will be sufficient to support our operations for at least twelve months from the filing of this report. The Company may also undertake equity or debt offerings, if necessary and opportunistically available, for further capital needs.

Critical Accounting Estimates

Our 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 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 Condensed 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.

Our significant accounting policies are discussed in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to the Condensed Consolidated Financial Statements, included in Item 1, Condensed Consolidated Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q. Management believes that these policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

Results of Operations for the Three Months Ended September 30, 2023, and 2022 (in thousands):

Revenues

For the three months ended September 30, 2023, total revenue declined by $994 thousand, or 7%, as compared to three months ended September 30, 2022. During this time, Streaming and Digital revenue for three months ended September 30, 2023, decreased by $0.9 million, as the Company's AVOD revenue has declined $2.1 million due to continued headwinds in the broader advertising market. This decrease was partially offset by a $1.2 million increase in SVOD revenue as the Company continues to see the benefits from its acquisitions which have contributed value-accretive libraries, distribution platforms and technologies, such as Screambox.

The Company's $0.3 million decline in Base Distribution revenue for three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily driven by a decline in DVD-related sales and related physical distribution revenue.

Relative to three months ended September 30, 2022, the Company's Podcast and other revenue increased $352 thousand, driven by an increased number of campaigns during the period.

Other non-recurring revenue relating to the Company's legacy cinema equipment as its operations run-off. Following the completion of cost recoupment and the expiration of the exhibitor master license agreements applicable to this line of revenue, equipment deployment revenue and the associated services decreased $1.8 million. Digital system sales have also continued its anticipated decrease in the amount of $0.6 million as compared to the three months ended September 30, 2022, from $0.7 million in the second quarter of fiscal 2023 to $0.1 million in the second quarter of fiscal 2024. These decreases were partially offset by $2.3 million of non-recurring variable consideration following the resolution of uncertainty associated with the underlying revenue related to the cinema equipment obligations, as compared to $0 variable consideration recognized in the second quarter of fiscal year 2023.

Direct Operating Expenses

The decrease in Direct Operating Expenses for the three months ended September 30, 2023 is driven by a 7% decrease in quarterly revenue, continued integration efforts with respect to the Company's acquisitions during fiscal year 2022, such as DMR and Bloody Disgusting. Notably, the physical revenue decrease contributed to a $1.1 million decline. Additionally, there was a reduction in the reserve for advances of $887 thousand over the comparative period as the Company's digital cinema business with studios has concluded in FY23 and the latest trends in content performance. There was a $821 thousand decrease due to capitalized content, an estimated a $762 thousand decrease in the fiscal year 2024 Bloody Disgusting earnout based on fiscal year 2024 forecast performance, and $861thousand from the cessation of third-party SAAS related costs primarily from internalizing services and cost savings synergies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2023 decreased by $2.8 million. In comparison to the three months ended September 30, 2022, compensation expenses decreased by $721 thousand due to a $705 thousand reduction in bonus accrual attributable to fiscal year 2024 performance, an increase in capitalized labor of $178 thousand, partially offset by a $186 thousand increase in severance expense. Corporate expenses decreased by $320 thousand primarily related a reduction of $365 thousand in third-party consulting and legal fees as a result of the Company's cost saving initiatives. Share-based compensation has decreased by $1.7 million, as a result of the US-based workforce reduction, a decline in stock price, and a relatively higher number of award tranches vesting, as well as a decrease in FY23 share-based bonuses. Other operating expenses remained relatively consistent, period-over-period.

Depreciation and Amortization Expense

Depreciation expense has continued to decrease primarily due to substantially the remainder of our digital cinema projection systems reaching the conclusion of their ten-year useful lives during the fiscal year ended March 31, 2023. Conversely, the Company's continued investment in intangible assets, such as Dove Family Channel and an increase in capitalized labor has increased the Company's amortization for the three months ended September 30, 2023.

Interest expense, net

For the three months ended September 30, 2023, interest expense decreased by $185 thousand from $380 thousand to $195, primarily as a result of a $183 thousand decrease in deferred consideration amortization.

Results of Operations for the Six Months Ended September 30, 2023, and 2022 (in thousands):

Revenues

For the six months ended September 30, 2023, the Company's revenue declined by $1.6 million. The decrease was driven by a $1.3 million decline in the Company's base distribution, resulting from a $1.6 million decline in physical sales, partially offset by a $0.3 million reduction in the return reserve, a $0.3 million decrease in other non-recurring revenue from the run-off of the Company's digital cinema operations, whereas in the prior year $4.0 was recognized as a result of ongoing operations, in fiscal year 2024, $3.3 million was recognized as a result of the release of variable revenue at the conclusion of the digital cinema contracts' terms. Streaming and digital revenue decreased as a result of a $4.5 million decline in AVOD revenue due continued headwinds in the broader advertising market in FY24, partially offset by a $2.2 million increase in SVOD revenue as the Company continues to see the benefits from its acquisitions which have contributed value-accretive libraries, distribution platforms and technologies, as well as $1.8 million from digital revenue and distribution. These decreases were partially offset by podcast revenue, which benefited from greater demand in fiscal year 2024.

Direct Operating Expenses

For the six months ended September 30, 2023, the Company's direct operation expense decreased $3.8 million. The decrease was primarily driven by a $1.5 million dollar reduction in SAAS related costs as a result of internalizing services previously performed by third parties and cost savings synergies, $1.2 million reduction in the costs associated with the Company's physical sales and related distribution costs in line with the decline in physical revenue, a $1.1 million reduction in the provision related to advances, and a $0.8 million related to a decrease in an estimated Bloody Disgusting earnout liability based on fiscal year 2024 performance to-date. These were partially offset by a $0.8 million dollar increase in royalty-related expenses based on the terms of the Company's contracts, and a $0.4 million increase in digital marketing expenses.

Selling, General and Administrative Expenses

During the six months ended September 30, 2023, the Company's SG&A decreased by $4.7 million. Relative to six months ended September 30, 2022, compensation related costs primarily decreased due to a $1.5 million decrease in the Company's bonus accrued expense and an increase in capitalized labor of $0.3 million from the development of the Company's Matchpoint software. Corporate expenses primarily decreased due to a corporate focus on reducing third-party legal and consulting costs in the amount of $1.3 million, which was partially offset by an increase in audit fees in the amount of $0.2 million. Share-based compensation has decreased by $2.3 million, as a result of the US-based workforce reduction, a decline in stock price, and a relatively higher number of awards tranches vesting, as well as fiscal year 2023 share-based bonuses. Other operating expenses primarily increased due to an increase in advertising barter costs in the amount of $0.3 million.

Depreciation and Amortization Expense

Depreciation expense has continued to decrease primarily due to substantially the remainder of our digital cinema projection systems reaching the conclusion of their ten-year useful lives during the fiscal year ended March 31, 2023.

Adjusted EBITDA

We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items.

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 our stockholders, as a valuable financial metric.

We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net income (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 income (loss) from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to net income (loss) from 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 Condensed Consolidated Financial Statements prepared in accordance with GAAP.

Following is the reconciliation of our consolidated net loss to Adjusted EBITDA (in thousands):

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Cash Flow

Changes in our cash flows were as follows (in thousands):

For the six months ended September 30, 2023, net cash used in operating activities is primarily driven by loss from operations, excluding non-cash expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, including capitalized content spend and other changes in working capital. Operating cash flows are typically seasonally lower during the first two fiscal quarters and higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season. In addition, we made net advances of $5.3 million for the six months ended September 30, 2023, as part of the advances we make on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months. Cash used in investing activities was used in the expenditures towards long-live intangible assets and fixed assets. Cash provided by financing activities pertained to the issuance of company equity, net of financing fees.

For the six months ended September 30, 2022, net cash provided by operating activities is primarily driven by a loss from operations, excluding non-cash expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, gain on extinguishment of note payable, including other changes in working capital. Additionally, during the six months ended September 30, 2022, the Company decreased Accounts payable, accrued expenses, and other liabilities by $5.5 million to vendors. Cash received from virtual print fees in our legacy cinema equipment business decreased from the previous period in alignment with the decrease in eligible VPF systems. 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. Other current assets, and other long term assets increased by $2.9 million. Consistent with FY24, operating cash flows from Content & Entertainment Business are typically seasonally lower during the first two fiscal quarters, and higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season. In addition, we made net advances of $1.5 million during the six months ended September 30, 2022. Cash used in investing activities was used in the expenditures towards long-live intangible assets and fixed assets. Cash provided by financing activities pertained to the drawdown on the Company's line of credit, offset by the payoff of notes payable.

Off-balance sheet arrangements

We are not a party to any off-balance sheet arrangements other than as discussed in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies, Basis of Presentation and Consolidation and Note 3 - Other Interests to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly 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.

Definition and Limitations of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Evaluation of Disclosure Controls and Procedures

The management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in the Exchange Act), as of September 30, 2023. Based on such evaluation, our principal executive officer and principal financial and accounting officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, on a timely basis, and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures as of September 30, 2023.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The following risk factor supplements the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.

On March 31, 2023, the Company's share price was $8.40 and since has declined to a share price of $1.15 as of November 7, 2023. Under the accounting standard, ASC 350-20,Goodwill a Company is required to test for impairment on an annual basis, but in the presence of a triggering event, the Company performs additional testing. Under ASC 350, Goodwill, a sustained decline in share price represents a triggering event which would require the Company to test for impairment. There may be a risk that the Company incurs expenses related to goodwill impairment.