| BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The accompanying interim Condensed Consolidated Financial Statements of Cineverse Corp. have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on June 29, 2023. These Condensed Consolidated Financial Statements are unaudited and have been prepared by the Company following the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations; however, the Company believes the disclosures are adequate to make the information presented not misleading. The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023. Interim results are not necessarily indicative of the results for a full year. The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Significant items subject to such estimates and assumptions include revenue recognition, allowance for doubtful accounts, returns and recovery reserves, goodwill and intangible asset impairments, share-based compensation expense, valuation allowance for deferred income taxes and amortization of intangible assets. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates. We own an 85 % interest in CON TV, LLC ("CONtv"), a worldwide digital network that creates original content, and sells and distributes on-demand digital content on the internet and other consumer digital distribution platforms, such as gaming consoles, set-top boxes, handsets, and tablets. We evaluated the investment under the voting interest entity model and determined that the entity should be consolidated as we have a controlling financial interest in the entity through our ownership of outstanding voting shares, and that other equity holders do not have substantive voting, participating or liquidation rights. We recorded net income attributable to noncontrolling interest in our Condensed Consolidated Statements of Operations equal to 11 % of outstanding profit interest units retained by the noncontrolling interests. There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023 . Segment Reporting Beginning in fiscal year 2024, following the run-off of the Company's digital cinema operations, the Company now manages its operations and manages its business in one reporting segment. Earlier periods presented herein have been presented to conform to this reportable segment composition. Reclassifications Certain amounts have been reclassified to conform to the current presentation. Cash and Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less to be “cash equivalents.” We maintain bank accounts with major banks, which from time to time may exceed the Federal Deposit Insurance Corporation’s insured limits. We periodically assess the financial condition of the institutions and believe that the risk of any loss is minimal. Employee Retention Tax Credit The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") provided an employee retention credit which was a refundable tax credit against certain employment taxes. The Consolidated Appropriations Act (the "Appropriations Act") extended and expanded the availability of the employee retention credit through December 31, 2021. The Appropriations Act amended the employee retention credit to be equal to 70 % of qualified wages paid to employees during the 2021 fiscal year. The Company qualified for the employee retention credit beginning in June 2020 for qualified wages through September 2021 and filed a cash refund claim during the fiscal year ended March 31, 2023 in the amount of $ 2.5 million in the Employee retention tax credit line on the Company’s Consolidated Statements of Operations. As of June 30, 2023, the tax credit receivable of $ 1.8 million has been included in the Employee retention tax credit line on the Company's Condensed Consolidated Balance Sheet. Property and Equipment, Net Property and equipment, net are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
Computer equipment and software 3 - 5 years
Internal use software 5 years
Machinery and equipment 3 - 10 years
Furniture and fixtures 3 - 7 years We capitalize costs associated with software developed or obtained for internal use when the preliminary project stage is completed, and it is determined that the software will provide significantly enhanced capabilities and modifications. These capitalized costs are included in property and equipment, net and include external direct cost of services procured in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with, and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended use. Once the software is ready for its intended use, the costs are amortized over the useful life of the software. Post-configuration training and maintenance costs are expensed as incurred. We amortize internal-use software over its estimated useful life on a straight-line basis. Intangible Assets, Net Intangible assets are stated at cost less accumulated amortization. For intangible assets that have finite lives, the assets are amortized using the straight-line method over the estimated useful lives of the related assets. For intangible assets with indefinite lives, the assets are tested annually for impairment or sooner if a triggering event occurs. Amortization lives of intangible assets are as follows:
Content Library 3 – 20 years
Advertiser Relationships and Channel 3 – 13 years
Customer Relationships 5 – 13 years
Software 10 years
Trademarks and Tradenames 2 – 15 years
Supplier Agreements 2 years The Company’s intangible assets included the following (in thousands):
As of June 30, 2023
Cost Basis Accumulated Net
Content Library $ 24,073 $ ( 21,176 ) $ 2,897
Advertiser Relationships and Channel 12,604 ( 1,348 ) 11,256
Supplier Agreements 11,430 ( 11,430 ) -
Customer Relationships 8,690 ( 7,668 ) 1,022
Software 3,200 ( 640 ) 2,560
Trademark and Tradenames 4,026 ( 2,573 ) 1,453
Total Intangible Assets $ 64,023 $ ( 44,835 ) $ 19,188
As of March 31, 2023
Cost Basis Accumulated Net
Content Library $ 23,970 $ ( 21,126 ) $ 2,844
Advertiser Relationships and Channel 12,604 ( 1,062 ) 11,542
Supplier Agreements 11,430 ( 11,430 ) —
Customer Relationships 8,690 ( 7,600 ) 1,090
Trademark and Tradenames 4,026 ( 2,274 ) 1,752
Software 3,200 ( 560 ) 2,640
Total Intangible Assets $ 63,920 $ ( 44,052 ) $ 19,868 During the three months ended June 30, 2023 and 2022, the Company had amortization expense of $ 0.7 million, respectively . As of June 30, 2023, amortization expense is expected to be (in thousands):
Total
In-process intangible assets $ 1,888
Remainder of fiscal year 2024 2,404
2025 2,307
2026 2,040
2027 1,521
2028 1,246
Thereafter 7,782
$ 19,188 Content Assets The Company capitalizes direct costs incurred in the production of content from which it expects to generate a return over the anticipated useful life and the Company’s predominant monetization strategy informs the method of amortizing these deferred costs. The determination of the predominant monetization strategy is made at commencement of the production or license period and the classification of the monetization strategy as individual or group only changes if there is a significant change to the title’s monetization strategy relative to its initial assessment. The costs are presently capitalized within construction-in-process and will be amortized as a group are included within Depreciation and Amortization within the Condensed Consolidated Statements of Operations. Impairment of Long-lived and Finite-lived Intangible Assets We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset’s fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. There were no impairment charges recorded for long-lived and finite-lived intangible assets during the three months ended June 30, 2023 and 2022 . Goodwill Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is tested for impairment on an annual basis or more often if warranted by events or changes in circumstances indicating that the carrying value may exceed fair value, also known as impairment indicators. Inherent in the fair value determination for each reporting unit are certain judgments and estimates relating to future cash flows, including management’s interpretation of current economic indicators and market conditions, and assumptions about our strategic plans with regard to its operations. To the extent additional information arises, market conditions change, or our strategies change, it is possible that the conclusion regarding whether our remaining goodwill is impaired could change and result in future goodwill impairment charges that will have a material effect on our consolidated financial position or results of operations. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test. The Company reassessed goodwill impairment on its annual measurement date of March 31, 2023 by performing a qualitative analysis and determined that it was not more likely than not that the fair value of its reporting unit is less than its carrying amount. No goodwill impairment charge was recorded in the three months ended June 30, 2023 and 2022 . Fair Value Measurements The fair value measurement disclosures are grouped into three levels based on valuation factors: • Level 1 – quoted prices in active markets for identical investments • Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs) • Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments) The following tables summarize the levels of fair value measurements of our financial assets and liabilities (in thousands):
As of June 30, 2023
Level 1 Level 2 Level 3 Total
Assets:
Equity investment in Metaverse, at fair value $ — $ — $ 5,200 $ 5,200
$ — $ — $ 5,200 $ 5,200
Liabilities:
Current portion of earnout consideration on purchase of a business $ — $ — $ 1,526 $ 1,526
$ — $ — $ 1,526 $ 1,526
As of March 31, 2023
Level 1 Level 2 Level 3 Total
Assets:
Equity investment in Metaverse, at fair value $ — $ 5,200 $ 5,200
$ — $ — $ 5,200 $ 5,200
Liabilities:
Current portion of earnout consideration on purchase of a business $ — $ — $ 1,444 $ 1,444
$ — $ — $ 1,444 $ 1,444 The Company has accounted for its investment in A Metaverse Company ("Metaverse") (SEHK: 1616) under the equity method of accounting as the Company can exert significant influence over Metaverse with its direct ownership and affiliation with the Company’s majority shareholders. The Company has also made an irrevocable election to apply the fair value option under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 825-10, Financial Instruments , as it relates to its equity investment in Metaverse. The Company previously used quoted trading price of the Stock Exchange of Hong Kong to measure the investment's fair value. Following the halting of Metaverse stock trading on the Stock Exchange of Hong Kong on April 1, 2022, the Company valued our equity investment in Metaverse using a market approach and the investment is categorized as a Level 3 valuation based on unobservable inputs. The Company estimated the fair value of Metaverse based on the last known enterprise value, adjusting for trends in enterprise valuations and market capitalization for comparable companies. As of June 30, 2023 and March 31, 2023, the fair value was $ 5.2 million. The Company estimated the fair value of its earnout consideration using contractual inputs from the related business combination, which established specific fiscal year revenue growth, profitability and EBITDA targets. The Company utilizes the most up to date forecast to estimate the outcome against these targets to determine the ultimate estimated payout. During the quarter ended June 30, 2023 , the Company accrued interest of $ 30 thousand and an increase in the estimated earnout payments by $ 52 thousand based on fiscal year 2024 estimated performance. Our cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable and accrued expenses are financial instruments and are recorded at cost in the Condensed Consolidated Balance Sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature. Prepaid and Other Current Assets Prepaid and other current assets consisted of the following (in thousands):
As of
June 30, March 31,
Amounts due from producers $ 5,878 $ 3,724
Other receivables 125 420
Inventory 165 207
Other prepayments 1,469 1,107
Total prepaid and other current assets $ 7,637 $ 5,458 Amounts due from producers represents amounts prepaid to studios or content producers for which we provide content distribution services. We evaluate advances regularly for recoverability and record a provision for amounts that we expect may not be recoverable. The provision for advances were $ 0.2 million and $ 0.03 million for the three months ended June 30, 2023 and 2022, respectively. Other prepayments generally relate to prepaid operating expenses, short term deposits and prepaid taxes. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following (in thousands):
As of
June 30, March 31,
Accounts payable $ 10,291 $ 15,042
Amounts due to producers 14,112 13,114
Accrued compensation and benefits 2,330 2,532
Accrued other expenses 3,134 3,843
Total accounts payable and accrued expenses $ 29,867 $ 34,531 Revenue Recognition Payment terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. The following tables present the Company’s disaggregated revenue by source (in thousands):
Three Months Ended
2023 2022
Streaming and digital $ 10,114 $ 9,503
Base distribution 1,158 2,205
Podcast and other 429 455
Other non-recurring 1,279 1,427
Total revenue $ 12,980 $ 13,590 The Company's Streaming and digital revenue pertains to its OTT business, including the licensing, service, advertising, and subscription revenue related to the Company's streaming business and partnerships. Base distribution revenue relates to non-streaming revenue, including Theatrical revenue and the sale of DVD's. Podcast and other revenue primarily relates to the Company's Bloody Disgusting Podcast Network. Other non-recurring revenue relates to the Company's legacy digital cinema operations, whose operations have run-off, still may generate non-recurring revenue from the sale of cinema assets or the recognition of variable consideration as the associated uncertainty associated with the revenue is resolved. The Company follows the five-step model established by ASC 606, Revenue from contracts with customers ("ASC 606") when preparing its assessment of revenue recognition. Principal Agent Considerations Revenue earned from the delivery of digital content and physical goods may be recognized gross or net depending on the terms of the arrangement. We determine whether revenue should be reported on a gross or net basis based on each revenue stream. Key indicators that we use in evaluating gross versus net treatment include, but are not limited to, the following: • which party is primarily responsible for fulfilling the promise to provide the specified good or service; and • which party has discretion in establishing the price for the specified good or service. Shipping and Handling Shipping and handling costs are incurred to move physical goods (e.g., DVDs and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in direct operating expenses because we are responsible for delivery of the product to our customers prior to transfer of control to the customer. Credit Losses We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. We recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. Reserves for product returns and other allowances is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. During the three months ended June 30, 2023 and 2022, we did not recognize any credit losses as part of its ongoing operations or reversals of previously recorded provisions, and did not have any write-offs charged against the allowance. Contract Liabilities We generally record a receivable related to revenue when we have an unconditional right to invoice and receive payment, and we record deferred revenue (contract liability) when cash payments are received or due in advance of our performance, such as the sale of DVDs with future release dates, even if amounts are refundable. Amounts recorded as contract liabilities are generally not long-term in nature. The ending deferred revenue balance, including current and non-current balances as of June 30, 2023 and March 31, 2023, was and $ 0.2 million and $ 0.2 million respectively. For the three months ended June 30, 2023, the additions to our deferred revenue balance were primarily due to cash payments receive d or due in advance of satisfying performance obligations, while the reductions of $ 0.2 million to our deferred revenue balance were primarily due to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business. Participations and royalties payable When we use third-parties to distribute company owned content, we record participations payable, which represent amounts owed to the distributor under revenue-sharing arrangements. When we provide content distribution services, we record accounts payable and accrued expenses to studios or content producers for royalties owed under licensing arrangements. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers. Concentrations For the three months ended June 30, 2023 , one customer represented 28 % of consolidated revenues. For the three months ended June 30, 2022 , one customer represented approximately 19 % and another customer represented approximately 13 % of consolidated revenues. Direct Operating Costs Direct operating costs consist of cost of revenue, fulfillment expenses, shipping costs, property taxes and insurance on systems, royalty expenses, impairments of advances and marketing and direct personnel costs. Stock-based Compensation The Company issues stock-based awards to employees and non-employees, generally in the form of restricted stock, restricted stock units, stock appreciation rights ("SARs") and performance stock units ("PSUs"). The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock units and modifications to existing stock options, to be recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) based on their fair values. The Company measures the compensation expense of employee and nonemployee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period during which the employee or nonemployee is required to provide service in exchange for the award. The fair values of options and SARs are calculated as of the date of grant using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility, risk-free rate and expected term. The Company’s estimates of these assumptions are primarily based on the trading price of the Company’s stock, historical data, peer company data and judgment regarding future trends and factors. Forfeitures are recognized as they occur. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carryforwards and for differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are established when management is unable to conclude that it is more likely than not that some portion, or all, of the deferred tax asset will ultimately be realized. The Company is primarily subject to income taxes in the United States. The Company accounts for uncertain tax positions in accordance with an amendment to ASC Topic 740-10, Income Taxes (Accounting for Uncertainty in Income Taxes) , which clarified the accounting for uncertainty in tax positions. This amendment provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not” to be sustained were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is more than 50 % likely to be recognized upon ultimate settlement with the taxing authority is recorded. The Company had no uncertain tax positions as o f June 30, 2023 and March 31, 2023. Earnings per Share ("EPS") Basic net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include stock options and warrants outstanding during the period, using the treasury stock method. Potentially dilutive common shares are excluded from the computations of diluted income (loss) per share if their effect would be anti-dilutive. A net loss available to common stockholders causes all potentially dilutive securities to be anti-dilutive and are not included. Basic and diluted net loss per share are computed as follows (in thousands, except share and per share data):
Three Months Ended
2023 2022
Basic net loss per share:
Net loss attributable to common stockholders $ ( 3,638 ) ( 6,093 )
Shares used in basic computation:
Weighted-average shares of common stock outstanding 9,879 8,771
Basic net loss per share $ ( 0.37 ) $ ( 0.69 )
Shares used in diluted computation:
Weighted-average shares of common stock outstanding 9,879 8,771
Stock options and SARs — —
Weighted-average number of shares 9,879 8,771
Diluted net loss per share $ ( 0.37 ) $ ( 0.69 ) Included in the computation of basic EPS are the 516,667 pre-funded warrants which were issued and sold on June 16, 2023. The calculation of diluted net loss per share for the quarters ended June 30, 2023 and 2022 does not include the impact o f 2,666,667 and 0 warrants, respectively, as well as 934 thousand and 425 thousand potentially dilutive shares, respectively, relating to equity-based awards, as their impact would have been anti-dilutive due to the respective period's net loss. Recently Issued Accounting Pronouncements The Company evaluates all Accounting Standard Updates ("ASUs") issued but not yet effective by FASB for consideration of their applicability. ASU's not included in the Company's disclosures were assessed and determined to be not applicable and material to the Company's consolidated financial statements or disclosures. In July 2023, the FASB issued ASU No 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)” pursuant to SEC Staff Accounting Bulletin No. 120, which adds interpretive guidance for public companies to consider when entering into share-based payment transactions while in possession of material non-public information. This update is reflected in the Accounting Standard Codification upon issuance and will be effective in the Company's second quarter of fiscal year 2024, beginning July 1, 2023. The Company does not expect the adoption to have a material impact on our consolidated financial statements. |
