MOVING iMAGE TECHNOLOGIES INC.: Form 10-Q for the period ended Dec 31, 2023

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 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.

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 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 December 31, 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 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.

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 December 31, 2023 compared to the three months ended December 31, 2022

Sales

Three Months Ended December 31,

(in 000’s)

Net sales decreased 32.6% to $3.265 million for the three months ended December 31, 2023 from $4.843 million for the three months ended December 31, 2022. The $(1.578) million sales decline was largely due to the absence of a one-time Covid-19 relief program, the Shuttered Venue Operators Grant or SVOG that ended in 2022. In 2022, the Company’s customers took advantage of the SVOG incentives to invest in their venues and purchased our goods and services. This one-time 2022 event did not repeat in 2023. In a comparable period without SVOG effects, in the three months ended December 31, 2021, sales were $3.419 million. Compared to the three months ended December 31, 2021, the December 31, 2023 sales of $3.265 million declined by $(0.154) million or 4.5%.

Gross Profit

Three Months Ended December 31,

(in 000’s),

Along with the revenue decrease of 32.6%, gross profit decreased 42.2% to $0.759 million for the three months ended December 31, 2023 from $1.312 million for the three months ended December 31, 2022 or an decrease of $(0.553) million. As a percentage of total revenues, gross profit percentage decreased to 23.2% from 27.1% as a result of product mix towards lower margin equipment.

Research and Development

Three Months Ended December 31,

(in 000’s)

Research and development expense increased by $0.011 million or 18% for the three months ended December 31, 2023 compared to the three months ended December 31, 2022 due to higher compensation expense.

Selling, General and Administrative Expense

Three Months Ended December 31,

(in 000’s)

The increase in selling, general and administrative expense of $0.126 million or 9.2% was due primarily to higher compensation expense in the three months ended December 31, 2023 compared to the three months ended December 31, 2022.

Other Income (Expense)

Three Months Ended December 31,

(in 000’s)

The December 31, 2023 to December 31, 2022 decline of $(0.148) imillion in other income (expense) was primarily due to the lower $0.036 million interest income in the three months ended December 31, 2023 compared to the net unrealized and realized marketable securities gains of $0.184 million in the three months ended December 31, 2022.

Net Income (Loss)

Three Months Ended December 31,

(in 000’s)

Net loss was $(0.794) million for the three months ended December 31, 2023 compared to net income of $0.046 million for the three months ended December 31, 2022 or a decline $(0.840) million. The decrease was due to lower revenues $(1.578) million, as a result of the non-recurring 2022 SVOG incentives in 2023, the related lower gross margin impact of $(0.553) million, higher operating expenses of $(0.157) million and lower other income of $(0.130) million.

Six months ended December 31, 2023 compared to the six months ended December 31, 2022

Sales

Six Months Ended December 31,

(in 000’s)

Net sales decreased $(0.795) million or 7.4% to $9.900 million for the six months ended December 31, 2023 from $10.695 million for the six months ended December 31, 2022. The absence of SVOG incentives in 2023 compared to 2022 and the prolonged SAG-AFTRA strike reduced new movie releases in 2023. As a result, theater owners reduced construction during the six months ended December 31, 2023.

Gross Profit

Six Months Ended December 31,

(in 000’s),

Along with the revenue decrease of 7.4%, gross profit decreased 10.2% to $2.578 million for the six months ended December 31, 2023 from $2.8719 million for the six months ended December 31, 2022 or a decrease of $(0.293) million. As a percentage of total revenues, gross profit percentage decreased to 26.0% from 26.8%.

Research and Development

Six Months Ended December 31,

(in 000’s)

Research and development expense increased by $0.012 million or 9.4% for the six months ended December 31, 2023 compared to the six months ended December 31, 2022 due to higher compensation expense.

Selling, General and Administrative Expense

Six Months Ended December 31,

(in 000’s)

The increase in selling, general and administrative expense of $0.052 million or 1.8% was due primarily to higher compensation expense in the six months ended December 31, 2023 compared to the six months ended December 31, 2022.

Other Income (Expense)

Six Months Ended December 31,

(in 000’s)

The December 31, 2023 to December 31, 2022 increase of $0.068 million in other income (expense) was primarily due to the higher interest income of $0.109 million in the six months ended December 31, 2023 compared to the net unrealized and realized marketable securities gains of $0.041 million in the six months ended December 31, 2022.

Net Income (Loss)

Six Months Ended December 31,

(in 000’s)

Net loss was ($0.355) million for the six months ended December 31, 2023 compared to a net loss of $(0.049) million for the six months ended December 31, 2022 or a decline $(0.306) million. The decrease was due to lower revenues $(0.795) million, as a result of the non-recurring 2022 SVOG incentives in 2023, the related lower gross margin impact of $(0.293) million, higher operating expenses of $0.081 million offset by higher other income of $0.068 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 December 31, 2023 was approximately $5.139 million, as compared to $6.616 million at June 30, 2023.

Cash Flows from Operating Activities

Net cash used in operating activities was $(1.364) million for the six months ended December 31, 2023, primarily due to $(1.190) million in working capital decreases along with $(0.355) million in net losses and offset by $0.181 million in other non-cash expenses. Within working capital change, the uses of cash of $(1.268) million included changes in receivables, inventory, prepaids, payables and customer deposits. Cash provided by working capital of $0.078 million was due to the changes in accrued expenses and lease liabilities. The net cash used in operating activities was $(0.705) million for the six months ended December 31, 2022, primarily due to net loss of $(0.049) million offset by net changes in working capital items of $(0.656) million. The net change in working capital was primarily due to increases in inventory and decreases in accrued expense and customer deposits offset by reduced receivables and prepaids.

Cash Flows from Investing Activities

Net cash used in investing activities was $(0.012) million for the six months ended December 31, 2023, for equipment purchases. Net cash used in investing activities was $(0.060) million for the six months ended December 31, 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 $0.101 million used to repurchases shares for the six months ended December 31, 2023 and zero for December 31, 2022.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (our principal executive) and Chief Financial Officer (our principal financial officer and principal accounting officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) were not effective at December 31, 2023 due to material weaknesses in our internal control over financial reporting as described below.

Prior to the completion of our IPO, we had been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. During the course of preparing our consolidated financial statements for the years ended June 30, 2023 and 2022, we determined that we had material weaknesses in our internal control over financial reporting relating to our financial reporting processes relating to (i) the design and operation of our closing and financial reporting process, (ii) the fact that we had no formal or documented accounting policies or procedures, (iii) the fact that certain segregation of duties issues existed and (iv) the fact that there was no formal review process around journal entries recorded. To improve internal controls, and starting with the three months ended March 31, 2023 and continuing since, Management updates month end close checklists, has implemented more segregation of duties among its limited accounting staff and the CFO formally approves month end journal entries.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2023, there have been no changes in our internal controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors reported in Item 1A in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.