FINANCIAL POSITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report") and with our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2021as filed with the Securities and Exchange Commission("SEC"). The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in "Risk Factors" under Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
Redbox is an established brand and leading provider in the home entertainment market in
the United States. The Company is focused on providing its customers with the best value in entertainment and the most choice in how they consume it, through physical media and/or digital services. Redbox is undergoing a significant business expansion and digital transformation. The Company has transitioned from a pure-play DVD rental company to a multi- faceted entertainment company that provides tremendous value and choice by offering DVD rentals as well as multiple digital products across a variety of content windows including transactional (TVOD), ad-supported (AVOD/FLTV) and being a distributor of feature films with a growing library of original content. Redbox currently conducts its business through two operating segments: (1) Legacy Business and (2) Digital Business. For its Legacy Business, the Company operates a nationwide network of approximately 38,000 self-service kiosks where consumers can rent or purchase new-release DVDs and Blu-ray DiscsTM ("movies"). The Company also generates service revenue by providing installation, merchandising and break-fix services to other kiosk businesses. Finally, the Company acquires, and distributes movies exclusively through its film distribution label, Redbox Entertainment, LLC, acquiring rights to talent-led films that are distributed across Redbox platforms as well as through third party digital services. For its Digital Business, the Company provides both transactional and ad-supported digital streaming services, which include 1) Redbox On Demand, a transactional service providing digital rental or purchase of new release and catalog movies and TV content, 2) Redbox Free On Demand (AVOD), an ad- supported service providing free movies and TV shows on demand, and 3) Redbox Free Live TV (FLTV), a free, ad-supported television service giving access to over 145 linear channels. The Company also sells third-party display advertising via its mobile app, website, and e-mails, as well as display and digital video advertising at the kiosk. Due to risks and uncertainties related to the ongoing adverse effects of the COVID-19 pandemic on the Company's operating results, together with the Company's recurring operating losses, accumulated deficit and negative working capital, there is substantial doubt as to our ability to continue as a going concern. See "Business Update, Going Concern and Strategic Alternatives."
Redbox Legacy Business
Redbox's mission has always been to make it ridiculously cheap and easy for customers to get the home entertainment they want. Redbox provides exceptional customer value with new release movie disc rentals priced at approximately
$2.00a night, about one-third of the cost of a digital rental, which are typically $5.99or more on digital retail platforms. Customers have the flexibility to rent a movie from one location and return their rental to any kiosk. Kiosks are located primarily in retail centers that experience heavy foot traffic, including grocery stores, mass retailers, drug stores, dollar retailers, and convenience stores. With approximately 32,000 locations and more than 150 retail partners, consumers have convenient access to kiosks as part of their routine shopping experiences. Revenue is generated primarily through the fees charged to rent or purchase a movie at the kiosk. In turn, Redbox pays retailers a percentage of the revenue generated at the Redbox kiosks installed at their locations. The Company obtains content through revenue sharing agreements and license agreements with major studios as well as through direct purchases from independent distributors and other suppliers. Redbox has built a unique asset in its loyalty and rewards program, Redbox Perks, which currently boasts approximately 40 million members. Customers earn points for their rentals or purchases and can use those points for free rentals in the future. This tiered loyalty program gives the Company the ability to reward its most loyal and valuable customers while providing a currency for incenting increased transaction frequency and other behaviors, such as downloading the Redbox app or trying new products and services. Redbox Perks is a vehicle to provide greater value to customers and is central to its marketing and customer strategy. The 24
program is a differentiator in the market and competitive advantage for Redbox. Redbox's customers are value-conscious, love movies and entertainment, and tend to be late-adopters of new technology. Given the scale of the existing customer base, the Company has built a sizable marketing program that includes approximately 45 million e-mail subscribers, approximately 5 million SMS subscribers, approximately 45 million mobile app downloads, and nearly 400 million weekly impressions at retail. To drive further engagement with our customers, Redbox established
Redbox Entertainment, LLCas a movie distribution label. Through this label, the Company acquires North American rights and distributes feature films through Redbox kiosks, Redbox On Demand, third party digital transactional platforms and other streaming services. Redbox Entertainmentacquires rights to finished films and also commits to slate financing deals for films to be produced, giving the Company input on creative direction. The Company generates gross profit from these films through promotional initiatives on its own platform and by selling downstream window rights to subscription streaming services. Moreover, because the Company acquires long term exclusive rights to these films, Redbox is building a content library which can be used on its Free On Demand (AVOD) and Free Live TV (FLTV) services or further licensed to other streaming platforms in future windows. In addition, Redbox Entertainmentbenefits from the Company's robust rental data that has been accumulated over the years, giving the Company proprietary insights into what titles and talent will perform well on its platforms. The Company has released a number of films since 2019 under the Redbox Entertainmentlabel. The Company has already announced a slate deal with Basil Iwanyk, the producer of the blockbuster John Wickfranchise, committing to 12 action/thriller films over the next several years. Finally, Redbox has a service business, which employs a team of best-in-class field workers nationwide to manage kiosk installation, merchandising and break-fix services. In addition to maintaining Redbox's kiosk network, the Company's service team also supports other kiosk businesses. The Company has service agreements with multiple companies that have national and regional kiosk networks and since June of 2020, Redbox has been the primary vendor for Amazon to service their expanding Amazon Hub Lockerlocations. The service business helps mitigate the costs of the field operations for the Legacy DVD business while generating incremental margin dollars.
Redbox digital business
Redbox is rapidly expanding its digital product offering, leveraging its customer and marketing scale to transform the brand. The Company is building a digital ecosystem that consumers can use as a one stop shop for their entertainment needs by engaging with a variety of digital video services within the Redbox app in an integrated, easy-to use format. This simplifies the customer experience, drives multi-product adoption, and minimizes customer churn. These services span multiple business models including transactional, ad-supported, and anticipated in the future, subscription. The Company's digital products are available to stream across web browsers, mobile devices, and almost every major consumer device, including Roku, Apple TV, Samsung, LG, AndroidTV, VIZIO, Xbox and PlayStation. In
December 2017, the Company launched Redbox On Demand, a digital transactional video-on-demand service (TVOD), allowing customers to rent or buy new release and catalog digital movies and television episodes, with new release prices typically ranging from $5.99to $24.99and catalog movies from $1.99to $3.99, not including any discounts. Since 2020, customers have also been able to digitally rent movies that are still in theaters, which is known as Premium Video-On-Demand (PVOD). Customers pay a transactional fee to rent or buy content while earning Redbox Perks loyalty points every time they transact. Redbox On Demand has seen rapid growth and adoption with nearly 4 million customers since launch. That growth has been fueled primarily though leveraging the Company's own marketing channels including e-mail and SMS and offering rewards points and other promotional activity to drive digital customer acquisition. In February 2020, the Company launched Redbox Free Live TV (FLTV), an ad-supported digital linear television service, as a complement to the existing transactional On Demand service. With over 145 linear channels and growing, including five Redbox branded and programmed channels, Free Live TV gives customers the opportunity to channel surf and find content that interests them. A variety of these Redbox- branded channels, are currently syndicated to the Roku Channel, LG Channels and Vizio Watchfree services, which drives greater viewership and revenue. The Company has plans to continue syndicating Redbox programmed channels to additional 3rd party services. Redbox launched an ad-supported Free On Demand (AVOD) service in December 2020. AVOD gives consumers complete control over when and what they watch, and combined with Redbox's growing AVOD library, which has more than 10,000 movies and TV episodes, consumers have a broad amount of content to choose from. The ad-supported services (FLTV and AVOD) have seen strong growth in engagement as new channels and titles are added and awareness of the offering grows. 25
Finally, Redbox operates a media advertising business which monetizes more than 100 million monthly display and digital video ad-impressions across its mobile app, web, e-mail and kiosk network. The Company drives advertising revenue through a mix of programmatic advertising and direct sales. Direct ad sales for the media above as well as video advertising for Free On Demand and FLTV are driven by both internal sales team and strategic sales partnerships with Screenvision and the
Palomino Media Group.
Redbox’s transformation into a multi-faceted entertainment company creates multiple areas for future growth. The company’s expansion into AVOD and our planned eventual expansion into SVOD channels allows Redbox to participate in a very large and rapidly growing market. The Company is convinced that it can create long-term value by focusing on:
Growing multi-product customers. Redbox intends to grow multi-product customers through increasing customer acquisition marketing and spend across streaming device partners, marketing at the kiosk, and other external paid media. To date, the Company has relied primarily on e-mail and SMS channels to drive customer acquisition. Thus, over time, with increased spend and attention via these additional channels, and with more content and services offered, the Company expects to drive greater customer growth. Redbox intends to also drive greater multi-product customer adoption through improved CRM, greater personalization and targeted use of promotions to create more personalized customer funnels to encourage users to trial and adopt other digital services within the Redbox app. Accelerating AVOD adoption. Redbox projects growth for the Company's ad-supported service through measured investment to expand the Free Live TV and Free On Demand content offerings. Through increased content volume and improved content quality, the Company expects to drive higher engagement and more hours watched per customer. Further, this improved content is expected to drive an increase in customers, accelerating the business while maintaining a reasonable customer acquisition cost. Ramping Content Acquisition.
Redbox Entertainmentdrives additional revenue in two ways. First, it provides more content for Redbox kiosks, On Demand and the ad-supported offerings; secondly, it generates revenue from distribution and licensing to other streaming platforms. The Company expects to ramp the number of Redbox Entertainmentbranded releases to 36 a year over time. The number of releases will naturally ramp as committed titles complete production and are delivered and the pipeline continues to grow. Launching SVOD channels platform. As part of its long-term growth strategy, the Company's intended launch of Redbox's SVOD channels service will become another meaningful revenue stream. Redbox would act as the merchant of record, collecting 100% of the subscription revenue before paying the SVOD channel owner's revenue share. By providing access to multiple SVOD channel options, customers could easily subscribe to one or more SVOD services all within the Redbox app, and Redbox could merchandise the third party SVOD content and service via the approximately 45 million Redbox app downloads on mobile devices, streaming media players, game consoles, and connected televisions.
Impact of COVID-19 and Emerging Industry Trends
March 2020, the World Health Organizationrecognized the novel strain of coronavirus, COVID-19, as a pandemic. Public and private sector policies and initiatives to reduce the transmission of COVID-19 varied significantly across the United States. Throughout 2021, a significant percentage of the U.S.population was subject to meaningful restrictions on activities, which included limitations on the operation of non-essential businesses including retail operations, requirements that individuals remain in or close to their homes, school closures, theater closures, limitations on large gatherings, travel restrictions and other policies to promote or enforce physical distancing. These restrictions not only impacted how the Company's customers used its products and services but also affected content production, release and distribution. As a result of these restrictions, many consumers subscribed to additional streaming services to satisfy their content needs as the number of new release movies, released theatrically and through home entertainment, decreased by more than 50% in both 2020 and 2021 compared with 2019, which had 140 theatrical titles. During 2020 and 2021, the Company experienced a decline in physical movie rentals, due in part to a significant decline in new movie releases and theater closures along with governmental and retail store restrictions. The Company's On Demand transactional offering is also dependent on new releases, albeit at a lesser level than the physical business as the On Demand platform has a larger catalog offering. Beginning in the second half of 2020, the growth potential of Redbox On Demand was negatively impacted by fewer new releases and changes in release strategy by studios throughout the pandemic. Starting late in 2021 and into the first quarter of 2022, the U.S.population experienced a wave of illness brought on by a variant of COVID-19, widely referred to as the Omicron variant. During the peak holiday rental season as content started to release at Redbox, the variant began to spread amongst the population, again impacting customer rental behavior. The disruptions from 26
Omicron, including further delays to productions and film releases by studios, has further resulted in periods of no new releases and has led studios to explore and pursue alternative release strategies for their films, including direct to services streaming, day and date outputs and PVOD outputs.
As a result of temporary theater closures during the COVID-19 pandemic, studios and content producers either delayed the release of movies into future periods or experimented with alternative release strategies which altered the typical release strategy for new movies. One alternative release method, was to sell movies directly to subscription services for exclusive release on their respective platforms. As a result, these titles were not available through a traditional transactional On Demand window, thus leading to fewer new release titles available to the Company. However, as studios continue to evolve their window release strategies, more and more studios are retaining their home entertainment distribution rights despite the initial sale of a title to a streaming service. This allows Redbox to make the movie available for rental through the kiosk and possibly On Demand at a later date. The Company expects studios to sell titles directly to streaming services from time to time, but it may be less likely going forward with the reopening of theatrical exhibitors and the opportunity to achieve higher returns for both studios and artists. The Company is further mitigating the impact of titles sold exclusively to subscription services by building out a library of content via its
Redbox Entertainmentlabel. Redbox Entertainmenttitles are available physically and digitally on Redbox platforms and are monetized across other platforms. The second alternative release strategy that emerged, known as a day-and-date release, is a simultaneous release on a studio's own digital platform as well as a theatrical release to provide optionality to those customers whoare not ready to return to the theater. This shared window strategy can negatively impact the physical rental performance of a title as most of these titles release at a later date at the kiosk and transactionally on Redbox On Demand in a subsequent window. Studios whohave previously released titles on streaming services on the same date as in theatres in 2021 have announced plans to return to theatrical windows of 45 to 90 days, before these titles go to home entertainment; however, studios continue to experiment with timing of releases on their owned and operated platforms which may continue to negatively impact Redbox's ability to monetize future titles. The third alternative release is known as premium video on demand or "PVOD" which creates an early transactional window for an at-home digital theatrical release at a higher price point, typically $19.99. The PVOD releases provided consumers a way to watch new releases at home while theaters remain shuttered. Redbox On Demand participates in and benefits from PVOD releases as it provides an early window option to Redbox customers at higher price points. The Company expects studios to return to a more normal release slate as COVID-19 restrictions continue to ease due to the relationship with theatrical exhibitors and the draw of higher margin potential. Nevertheless, a number of titles continue to shift back further in 2022 and into 2023. In the first quarter of 2022, Redbox experienced intermittent periods of no new releases causing inconsistency in titles available at Redbox kiosks and on the Redbox On Demand platform, impacting rental performance. The Company expects new release content to build back up throughout 2022 as the pandemic subsides. This expectation is based on known titles delayed from 2020 and 2021, which are planned for release in 2022 and 2023. The Company will continue to build out its digital offerings on both linear and on demand ad-supported to provide more options for customers to consume content at varying price points including free with ads. The Company believes that the complement of digital services creates greater utility to its customers and makes the offering more competitive relative to more focused streamers, while also reducing the reliance on content in a single content window.
Business update, business continuity and strategic alternatives
Historically, rentals have been correlated with the number and quality of new theatrical titles released in a quarter. During 2021 and for the first three months of 2022, Redbox's business was negatively impacted by the effects of the ongoing COVID-19 pandemic, which resulted in fewer than expected theatrical releases. In addition, the significant increase in impacts from the Omicron variant caused further disruption to the business. As such, Redbox rentals have not recovered to the extent expected and, notwithstanding the year-over-year increase in new theatrical releases, were lower than pre-COVID-19 levels. As part of an effort to expand its business and transform into a multi-faceted entertainment company, during the fourth quarter of 2021 and into the first three months of 2022, Redbox increased its marketing and on-demand expenditures. Costs also increased as Redbox purchased more content, which were not offset by an increase in revenues. Redbox has been exploring a number of potential strategic alternatives with respect to the Company's corporate or capital structure and seeking financing to fund operations and one-time restructuring costs. In
March 2022, the Company's Board of Directors established a Strategic Review Committee to, among other things, consider and oversee strategic alternatives or transactions that may be available to the Company with respect to its corporate or capital structure. Redbox is also executing on a previously announced 27
series of restructuring actions and initiatives to improve its efficiency and reduce its cost structure, including, but not limited to, (i) optimizing its kiosk network and (ii) executing a workforce reduction across its supply chain and corporate teams. However, the risks and uncertainties related to the ongoing adverse effects of the COVID-19 pandemic on the Company's operating results, together with the Company's recurring operating losses, accumulated deficit and negative working capital, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For the three months ended
March 31, 2022, the Company generated negative cash flows from operations of $14.8 million, had an accumulated deficit of $334.4 millionand negative working capital of $79.8 million. The Company evaluated the impact of the additional financing and restructuring actions and initiatives further described below on its ability to continue as a going concern. On March 29, 2022, the Company completed a reduction in force of 150 employees. One-time restructuring charges of $3.8 millionwere incurred, the substantial amount of which related to severance. The Company estimates that the workforce reduction will decrease its annual operating costs by approximately $13.1 million. On April 15, 2022certain subsidiaries of the Company entered into the Incremental Assumption and Amendment Agreement No. 6, amending its Credit Agreement (the "Sixth Amendment"), pursuant to which the Sixth Amendment Incremental Revolving Lenders (as defined in the Credit Agreement) will make available to certain subsidiaries of the Company Sixth Amendment Incremental Revolving Commitments (as defined in the Credit Agreement) in an aggregate amount equal to $50.0 millionsubject to certain conditions, the proceeds of which will be used to make payments in accordance with the Budget Plan (as defined in the Credit Agreement) and pay certain fees and expenses. From April 15, 2022until the Signing Deadline Date, borrowings under the Sixth Amendment Incremental Revolving Facility (as defined in the Credit Agreement) were limited to no more than $15.0 millionin the aggregate. During April 2022, the Company borrowed the available $15.0 millionunder its Sixth Amendment Incremental Revolving Facility. Pursuant to the Sixth Amendment, additional borrowings of $35.0 millionunder its Sixth Amendment Incremental Facility would become available if, by no later than May 10, 2022(the "Signing Deadline Date"), the Company entered into a valid and binding definitive purchase agreement for the sale of all or substantially all of the assets, or all of the equity interests of the Company (the "Company Sale"), and which purchase agreement either (i) provided for the payment in full (principal and interest) of the Senior Facilities other than the Term B-2 Loans or (ii) otherwise was in form and substance reasonably acceptable to the Administrative Agent. Pursuant to the Credit Agreement, the Company Sale shall be consummated no later than October 31, 2022. The details of the Sixth Amendment are discussed in further detail in Note 6: Debt in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. As a further condition to the Sixth Amendment, the Company issued to HPS Investment Partners, LLC(administrative agent and collateral agent to the Credit Agreement) and certain affiliates (as defined in the Credit Agreement) warrants with an exercise price of $0.0001per share (the "HPS Warrants") to purchase 11,416,700 shares of Class A common stock of the Company ("Common Stock") in the event certain milestones were not met under the Amended Credit Agreement. Upon signing of the CSSE merger agreement, the HPS Warrants became void and all rights of the warrant holders thereunder to exercise the HPS Warrants ceased. Our unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. In connection with the Sixth Amendment, on April 15, 2022, the Company entered into a Voting and Support Agreement with AP VIII Aspen Holdings, L.P.("Aspen"), Seaport Global SPAC, LLCand Redwood Holdco, LP("Redwood"), (collectively the "Stockholders"), whereby the Stockholders agreed to vote their shares of the Company (i) in favor of any strategic transaction approved and recommended by the Company's Board of Directors (the "Board"), or any committee to which the Board delegates authority, subject to certain terms and conditions (each, a "Transaction"), (ii) in opposition to any transaction involving the Company that has not been approved and recommend by the Board, and (iii) in favor of any directors that are proposed or nominated to the Board by the Company at any annual meeting of the Company. The Company further agreed, pursuant to the Voting and Support Agreement, to (i) permanently reduce a portion of its revolving commitment under its Union Revolving Credit Facility in an amount equal to $10.6 million(and the Company made such reduction) and (ii) among other agreements, refrain from borrowing under the Union Revolving Credit Facility without the consent of Aspenand Redwood Holdco, LP(other than with respect to certain scheduled borrowings and borrowings to cover interest, fees and expenses). 28
In connection with the execution of the Sixth Amendment, the Company agreed to implement certain changes to the composition and size of its Board of Directors, as further described in the Company's Current Report on Form 8-K filed with the
SECon April 19, 2022. The Strategic Review Committee of the Board was also dissolved in connection with these changes. In connection with the Company's entry into the Voting and Support Agreement, Redwood permanently waived the "Early Termination Payment" by the Company (or an affiliate) to Redwood that could have resulted from a provision in that certain Tax Receivable Agreement dated as of October 22, 2021("TRA"), which would have been triggered upon the change to the Board's composition. Additionally, under the Voting and Support Agreement, the Company and Redwood agreed, in connection with the consummation of a Transaction, to (a) terminate the TRA upon the consummation of a Transaction and (b) waive all claims under the TRA with such waiver being effective upon the consummation of such Transaction. On May 10, 2022, the Company entered into a merger agreement with Chicken Soup for the Soul Entertainment, Inc.("CSE"), pursuant to which, the Company will become a wholly owned subsidiary of CSSE. As a result, additional borrowings under the Sixth Amendment Incremental Revolving Facility became available upon the Company's entry into the merger agreement with CSSE provided, that the CSSE merger agreement contains an interim covenant that restricts outstanding borrowings by the Company under the Sixth Amendment Incremental Revolving Facility to a maximum of $45.0 million. See Note 17: Subsequent Events in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q for additional information regarding the CSSE merger.
For a more in-depth discussion of the Sixth Amendment, see Note 6: Debt in Redbox’s Notes to the Summary Consolidated Financial Statements included elsewhere in this Form 10-Q.
If the Company is unable to implement one or more of the contemplated strategic alternatives, or if the CSSE merger agreement is terminated (and is not replaced by another Acceptable Purchase Agreement), or consummation of the CSSE merger does not occur on or before
October 31, 2022(or such later date as HPS may agree) an event of default will occur under the Credit Agreement, and the Company could continue to experience adverse pressures on its relationships with counterparties whoare critical to its business, its ability to access the capital markets, its ability to execute on its operational and strategic goals and its business, prospects, results of operations and liquidity generally. There can be no assurance as to when or whether the implementation of one or more of the Company's strategic initiatives will be successful, or as to the effects the failure to take action may have on the Company's business, its ability to achieve its operational and strategic goals or its ability to finance its business or refinance its indebtedness. A failure to address these matters, will have a material adverse effect on the Company's business, prospects, results of operations, liquidity and financial condition, and its ability to service or refinance its corporate debt as it becomes due.
Selected financial data and key indicators
The selected consolidated financial data below should be read in conjunction with the following MD&A and the condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-
Q. Allreferences to rentals and net rental revenue presented within MD&A include physical and On Demand rentals and revenue, unless otherwise noted, respectively. Management uses these non-GAAP financial measures internally for strategic decision-making, forecasting future results, and evaluating current performance. Management believes that the non-GAAP financial measures (i.e., Adjusted EBITDA) provide a more consistent comparison of its operating results and trends for the periods presented. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provides a more complete understanding of factors and trends affecting its business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the 29
corresponding measures calculated in accordance with GAAP. Refer to "Use of Non-GAAP Measures" below for discussion of this measure and related reconciliation. Key Financial Measures March 31, Dollars in thousands 2022 2021 Total net revenue
$ 63,227 $ 76,730Product cost $ 27,290 $ 28,248Gross margin $ 35,937 $ 48,482Gross margin % 56.8 % 63.2 % Adjusted EBITDA $ (13,538) $ 1,302
Adjusted EBITDA as a % of net revenue (21.4) % 1.7 %
Loss before income taxes
$ (40,848) $ (36,474)Net loss $ (40,874) $ (27,195)Retail footprint Ending number of kiosks 37,791 39,257 Ending number of locations 32,160 33,068 Physical Theatrical Titles Released in Period 22 7
Absent the effects of the COVID-19 pandemic in 2020, 2021 and into 2022, the Company has generally experienced seasonality in its rentals and revenue. Historically, greater demand over the holiday season typically results in higher rentals November through January. April has usually been a low rental month due, in part, to retail release timing in connection with the Academy Awards that historically has provided stronger content and resulted in higher rentals in March. September and October have been low rental months due, in part, to the beginning of the school year and the introduction of the new fall television season. Significant recurring events, such as the
Olympics, also have a negative impact on rentals as they compete with customer viewing interest for movie content and affect retail release timing, which aims to avoid such events. The effects of the COVID-19 pandemic in 2020 and 2021 have continued to disrupt the Company's typical seasonal patterns into 2022.
Components of operating results
The Company generates revenue primarily through fees charged to rent or purchase a movie both physically and digitally. Revenue is presented net of promotional offerings provided to its consumers and any subsequent refunds. Revenue also consists of fees the Company earns in its service business for servicing and merchandising other kiosk businesses, digital advertising through its media network business, as well as licensing fees it generates from selling downstream rights to subscription streaming services through its
Product Cost primarily represents the amortization of the Company's physical content library and digital revenue sharing or licensing costs. Amortization of the content library is calculated using rental decay curves based on historical performance of movies over their useful lives. Given the steepness of the rental decay curve, amortization on most of the content library is recorded on an accelerated basis with substantially all of the amortization expense recognized within the first year after a title's release. The physical content library costs mainly include (1) the costs paid to studios and other vendors to acquire content including revenue share as applicable, (2) costs incurred to label, sort, and ship content to the Company's kiosks for merchandising, (3) costs incurred to destroy content after use if required under contractual arrangements with studios and (4) indirect taxes, if applicable. For content the Company expects to sell, it determines an estimated salvage value. Content salvage values are estimated based on the historical sales activity. The cost of each title is capitalized and amortized to its estimated salvage value. The rental decay curves and salvage value of the Company's content library are periodically reviewed and evaluated. For movies acquired through the Company's
Redbox Entertainmentlabel, costs include (1) the costs to acquire content, (2) manufacturing costs and (3) supply chain costs. These costs are capitalized as they are incurred and amortized in proportion to the current year's revenue as a percentage of management's estimate of total ultimate revenue, not to exceed the life of the acquired rights. Ultimate revenue estimates are periodically reviewed and adjustments, if any, will result in changes to amortization rates. 30
The digital content costs mainly include (1) the costs paid to studios and other vendors to acquire or offer digital content, including revenue share or licensing fees, for our ad-supported offerings, and (2) the revenue share costs paid to studios for transactional titles.
Direct Operating expense accounts primarily for (1) commissions the Company pays to its retailers, (2) credit card fees, (3) operations support to both merchandise and service its kiosks, and (4) consumer electronic device royalties, licensing and digital rights management fees and content delivery network fees for delivery of On Demand content.
Marketing expenses represent the cost of online and offline marketing and public relations efforts in national and regional advertising. The Company's marketing efforts consist of various media programs, such as e-mail, text, mobile applications, social media, the Company's loyalty program and digital advertising. However, the Company also leverages the visibility provided by its expansive network of approximately 38,000 kiosks and partnership programs with retailers and consumer goods manufacturers to attract and retain new customers.
Stock-based compensation expense
Stock-based compensation expense represents compensation costs related to Redbox’s stock plan and Redwood Holdco’s management incentive plan.
General and administrative
General and administrative expenses consist primarily of executive management, business development, finance, management information systems, human resources, legal, facilities, risk management and administrative support for operations.
Depreciation and amortization
Depreciation and other expenses consist of depreciation charges on the Company's installed kiosks as well as on computer equipment, leasehold improvements, and capitalizable costs for automobile leases and internally developed software related primarily to its customer-facing products. Amortization expenses are related to the amortization of intangible assets. For further information on amortization, see Note 4:
Goodwilland Other Intangible Assets in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. 31
Results of operations for the three months ended
March 31, 2022 vs 2021 YTD Dollars in thousands 2022 2021 $ % Net revenue
$ 63,227 $ 76,730 $ (13,503)(17.6) % Product cost 27,290 28,248 958 3.4 % Gross margin $ 35,937 $ 48,482 $ (12,545)(25.9) % Gross margin % 56.8 % 63.2 % (6.4) % Operating expenses: Direct operating 30,005 33,024 3,019 9.1 % Marketing 4,022 3,284 (738) (22.5) %
Stock-based compensation expense 1,808 566
(1,242) n.m. General and administrative 23,203 13,309 (9,894) (74.3) % Depreciation and amortization 25,090 27,526 2,436 8.8 % Operating (loss) income (48,191) (29,227) (18,964) (64.9) % Interest and other income (expense), net: Interest and other income (expense), net 7,343 (7,247) 14,590 n.m. Total interest and other income (expense), net 7,343 (7,247) 14,590 n.m. Loss before income taxes (40,848) (36,474) (4,374) (12.0) % Income tax expense (benefit) 26 (9,279) (9,305) (100.3) % Net loss
$ (40,874) $ (27,195) $ (13,679)(50.3) % Adjusted EBITDA(1) $ (13,538) $ 1,302 $ (14,840)n.m. Ending number of kiosks 37,791 39,257 (1,466) (3.7) % Physical Theatrical Titles Released in Period 22 7 15 n.m. n.m. not meaningful
(1) See “Use of Non-GAAP Measures” below for a discussion of this measure and
Three months completed
Net Revenue. Net revenue was
$63.2 million, a decrease of $13.5 millionor 17.6%, compared to net revenues of $76.7 millionfor the three months ended March 31, 2021. Beginning in March 2020, physical movie rentals were negatively impacted by the COVID-19 global pandemic due to a significant decline in new movie releases available to consumers resulting from broad-based movie theater closures and a material slowdown in new productions. The impacts of 2020 continued into 2021 and the first three months of 2022 as studios continued to either delay the release of new movies into future periods or experimented with alternative release strategies, including selling movies directly to streaming services, which resulted in fewer titles being released at the kiosk. The first quarter of 2022 was further impacted by the Omicron variant, which continued to disrupt customer rental behavior. The total number of theatrical and Direct-to-Video (DTV) titles released during the three months ended March 31, 2022were essentially flat with 58 in the first quarter of 2022, down one title from 59 in the first quarter of 2021. Of these totals, theatrical releases were 22 compared to 7 in the same prior year period. Physical units purchased in the quarter were 29.9% lower due to the quality of content released compared to the same quarter in the prior year, and as a result physical rentals declined 36.9%. In addition, the weakness in theatrical releases negatively impacted the performance of the digital transactional business. New and consistent content available for consumers was still well below 2019 (pre-COVID) levels which adversely impacted consumer rental patterns. As a result of temporary theater closures during the COVID-19 pandemic, studios and content producers either delayed the release of movies into future periods or experimented with alternative release strategies, including direct sales to streaming services, day-and-date releases, and PVOD releases, all of which altered the typical window cadence. The Company expects studios to return to a more normal release slate with new release content building throughout 2022 as the pandemic subsides, however, titles may continue to shift as the year progresses. The decrease in physical rentals in the Legacy Business was partially offset by a 3.8% increase in rental revenue per physical revenue. Partially offsetting the decline in revenue was strong growth in the Company's Digital business, specifically its media network business and ad-supported services (AVOD and FLTV), along with continued strong growth in the Company's kiosk servicing business.
Product cost. The cost of the product was
32 Table of Contents
Gross margin. The gross margin was
Gross margin as a percentage of net revenue decreased to 56.8% for the three months ended
March 31, 2022as compared to 63.2% for the same period in 2021, reflecting increased upfront costs for certain theatrical titles coupled with lower net revenue. Direct Operating Expenses. Direct Operating expenses were $30.0 million, a decrease of $3.0 millionor 9.1%, compared to the same period in 2021 due to lower variable expenses including credit cards fees and retailer revenue share expenses. Marketing Expenses. Marketing expenses increased by 22.5% to $4.0 millionfor the three months ended March 31, 2022as compared to $3.3 millionfor the same period in 2021 reflecting increased investments in the Company's Digital Business. Stock-Based Compensation Expense. Stock-based compensation expense was $1.8 millionfor the three months ended March 31, 2022compared to $0.6 millionfor the same period in 2021, primarily due to the equity award granted in connection with the Redbox Equity Plan. General and Administrative Expenses. General and administrative expenses were $23.2 million, an increase of $9.9 millionor 74.3%, compared to $13.3 millionfor the same period in 2021. The $9.9 millionincrease reflects $3.8 millionin severance and related costs in connection with the reduction in force, $3.1 millionin legal and advisory expenses incurred as the Company explores strategic alternatives, as well as public company costs, which did not occur in the prior year period, including $1.4 millionin directors' and officers' liability insurance along with increases in accounting advisory and audit fees. Depreciation and Amortization. Depreciation and amortization decreased by 8.8% to $25.1 millionfor the three months ended March 31, 2022as compared to $27.5 millionfor the same period in 2021 due to certain kiosks reaching the end of their depreciable useful lives along with reduced capital expenditure spend. Operating Loss. Operating loss for the three months ended March 31, 2022was $48.2 millioncompared to an operating loss of $29.2 millionfor the same period in 2021. The decrease is primarily driven by the net revenue decrease as described above along with increased general and administrative and marketing expenses. Net Loss. Net loss was $40.9 millionfor the three months ended March 31, 2022, as compared to a net loss of $27.2 millionfor the same period in 2020. The decline is due to the decrease in operating income as discussed above and a lower income tax benefit, partially offset by a $13.8 millionpretax gain from the change in fair value on the Company's warrant liabilities. Adjusted EBITDA. Adjusted EBITDA was ($13.5) million, a decrease of $14.8 million, compared to Adjusted EBITDA of $1.3 millionfor the same period in 2021. The decline is due to decreases in net revenue in the Company's Legacy Business along with increased general and administrative and marketing costs as a public company and from investing in our Digital Business, partially offset by strong growth in the Company's Digital Business along with a decrease in product and direct operating costs due to variable direct cost savings. Segment Discussion Legacy Business Results Three Months Ended March 31, March 31, 2022 vs 2021 Dollars in thousands 2022 2021 $ % Net revenue $ 48,767 $ 67,637 $ (18,870)(27.9) % Adjusted EBITDA (15,553) 334 (15,887) n.m Adjusted EBITDA margin (31.9) % 0.5 % n.m
Physical Theatrical Titles Released 22 7 15
Physical Rentals (in thousands) 11,195 17,754 (6,559) (36.9) % Net revenue per physical rental
$ 3.29 $ 3.17 $ 0.12
3.8 % 33 Table of Contents
Net Revenue. Net revenue was
$48.8 million, a decrease of $18.9 millionor 27.9%, compared to net revenue of $67.6 millionfor the three months ended March 31, 2021. Physical movie rentals continue to be negatively impacted by the COVID-19 global pandemic due to a material decline in new movie releases available to consumers compared to pre-COVID levels. Redbox is currently in the process of building content available at the kiosk and new content available for consumers adversely impacting consumer rental patterns. Studios either delayed the release of new movies into future periods or experimented with alternative release strategies, including selling movies directly to streaming services, which resulted in fewer titles being released at the kiosk. The total number of theatrical and Direct-to-Video (DTV) titles released during the three months ended March 31, 2022were essentially flat with 58 in the first quarter of 2022, down one title from 59 in the first quarter of 2021. Of these totals, theatrical releases were 22 compared to 7 in the same prior year period. Physical units purchased in the quarter were 29.9% lower due to the quality of content released compared to the same quarter in the prior year, and as a result physical rentals declined 36.9%. Further, during the quarter, the Company experienced persistent periods of time with no new releases driving inconsistency in customer rental patterns. The Company expects studios to return to a more normal release slate with new release content building throughout 2022 as the pandemic subsides. The decrease in physical rentals in the Legacy Business was partially offset by a 3.8% increase in rental revenue per physical revenue. Legacy segment revenue also benefited from strong growth in the Company's kiosk servicing business. As COVID-19 restrictions ease, the Company expects studios to continue to sell titles directly to streaming services from time to time, but may be less likely going forward with the reopening of theatrical exhibitors and the opportunity to achieve higher returns for both studios and artists. The Company expects new release content to build back throughout 2022 if the pandemic subsides; however, title release dates will continue to shift and change as the year progresses and the Company does not have control over title release timing. The Company is offsetting some of the impact from titles sold exclusively to subscription services by building out a library of content via its Redbox Entertainmentlabel. Redbox Entertainmenttitles are available physically and digitally on Redbox platforms and will also be monetized across other platforms. Adjusted EBITDA. Adjusted EBITDA was ($15.6) million, a decrease of $15.9 million, compared to Adjusted EBITDA of $0.3 millionfor the three months ended March 31, 2021. The decrease in Adjusted EBITDA is primarily driven by the decrease in net revenue discussed above along with increased general and administrative expenses, partially offset by a decrease in product costs and direct operating costs. The Company's Legacy Business includes corporate general and administrative expenses, which includes technology and public company costs, along with corporate overhead expenses related to our Digital Business. Digital Business Results Three Months Ended March 31, March 31, 2022 vs 2021 Dollars in thousands 2022 2021 $ % Net revenue $ 14,460 $ 9,093 $ 5,36759.0 % Adjusted EBITDA 2,015 968 1,047 108.2 % Adjusted EBITDA margin 13.9 % 10.6 % 330 pts
Net Revenue. Net revenue was
$14.5 million, an increase of $5.4 millionor 59.0%, compared to $9.1 millionfor the same period in the prior year, reflecting strong growth in the Company's media network business and ad-supported services (AVOD and FLTV). Redbox transactional On Demand revenue was down slightly for the period compared to the prior year reflecting a decline in transactions, due to fewer high quality tent-pole releases in the quarter as well as studios releasing titles theatrically and on their owned platforms simultaneously. The lower transactions were partially offset by increased revenue per transaction. Adjusted EBITDA. Adjusted EBITDA was $2.0 million, an increase of $1.0 million, compared to $1.0 millionduring 2021 reflecting increased revenue, partially offset by increased marketing costs. The Digital Business includes expenses directly attributable to this business.
Use of Non-GAAP Measures
The Company defines EBITDA as net income before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA adjusts EBITDA by excluding the results of business optimization costs, one-time non-recurring costs, new business start-up costs, restructuring related costs and stock-based compensation expense. Neither EBITDA nor Adjusted EBITDA are presented in accordance with GAAP. 34 Table of Contents The Company uses EBITDA and Adjusted EBITDA for operational and financial decision-making and believes these measures are useful in eliminating certain items to focus on what it deems to be indicators of operating performance. EBITDA and Adjusted EBITDA are also used by many of the Company's investors, securities analysts, and other interested parties in evaluating operational and financial performance as well as debt service capabilities. The Company believes that the presentation of EBITDA and Adjusted EBITDA provides useful information to investors by allowing an understanding of key measures that the Company uses internally for operational decision-making, budgeting, and assessing performance. EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be considered as a substitute for net income, cash flows from operating activities, or other income or cash flow statement data. These measures have limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of the Company's results as reported under GAAP. Investors should review the Company's financial statements and publicly filed reports in their entirety and not rely on any single financial measure. Because non-GAAP financial measures are not standardized, EBITDA and Adjusted EBITDA, as defined by Redbox, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare the Company's use of these non-GAAP financial measures with those used by other companies.
Adjusted EBITDA is calculated as follows:
Three Months Ended March 31, Dollars in thousands 2022 2021 Net loss
$ (40,874) $ (27,195)Depreciation and amortization 25,090 27,526 Interest and other (income) expense, net (7,343) 7,247 Income tax expense (benefit) 26 (9,279) EBITDA (23,101) (1,701) Adjustments to EBITDA: Business optimization(a) - 550 One-time non-recurring(b) 3,743 364 New business start-up costs(c) - 171 Restructuring related(d) 4,012 1,352 Stock-based compensation expense 1,808 566 Adjusted EBITDA $ (13,538) $ 1,302
(a) Business optimization costs include employee retention costs,
as well as consulting fees for certain projects.
Includes costs related to project costs and initiatives, as well as bank charges,
legal and other fees related to the Company’s (b) debt financing activities. In the three months ended
explores strategic alternatives.
(c) Includes the costs of supporting the Company’s On Demand and AVOD offerings, as well as
with costs related to the Company’s media service and network activities.
(d) Restructuring costs include items such as severance
and the costs incurred related to the removal of the kiosks.
Cash and capital resources
The Company's primary sources of liquidity are from cash on hand, cash flow generated from operations, and amounts available under its Revolving Credit Facility. Redbox has been exploring a number of potential strategic alternatives with respect to the Company's corporate or capital structure and seeking financing to fund operations and one-time restructuring costs. The Company is executing on a series of previously announced restructuring actions and initiatives to improve its efficiency and reduce its cost structure, including, but not limited to, (i) optimizing its kiosk network and (ii) executing a workforce reduction across its supply chain and corporate teams. However, the risks and uncertainties related to the ongoing adverse effects of the COVID-19 pandemic on the Company's operating results, together with the Company's recurring operating losses, accumulated deficit and negative working capital, raise substantial doubt about our ability to continue as a going concern. There can be no assurance as to when or whether the implementation of one or more of the Company's strategic initiatives will be successful, or as to the effects the failure to take action 35 Table of Contents
could have on the Company’s activities, its ability to achieve its operational and strategic objectives or its ability to finance its activities or refinance its debt.
The Company has taken and continues to take steps to reduce expenses and manage working capital to preserve available cash. These actions include, but are not limited to:
? manage working hours spent in the field and maintenance operations according to
inventory levels and demand;
? extend payment terms with suppliers;
? delay hiring for non-critical roles;
? delaying the schedule of annual salary increases;
? reduce long-term incentive compensation; and
? limit capital expenditure.
March 31, 2022, the Company's cash, cash equivalents and restricted cash decreased $4.8 millionto $13.7 millionfrom the December 31, 2021balance of $18.5 million. As of March 31, 2022, amounts outstanding under the Company's Term Loan Facility and revolving credit facilities were $310.0 millionand $36.4 million, respectively. As of March 31, 2022there was no remaining availability under the Company's Senior Revolving Credit Facility. As described more fully below, on April 15, 2022, the Company entered into a Sixth Amendment to its Credit Agreement. For additional information see Note 6: Debt in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. Senior Facilities Redbox Automated Retail, LLC("RAR") is party to a credit agreement (as amended, the "Credit Agreement"). The Credit Agreement was first entered into on October 20, 2017, and has subsequently been amended by an Incremental Assumption and Amendment Agreement (the "Amendment") dated September 7, 2018, a second amendment (the "Second Amendment") dated September 30, 2020, a third amendment (the "Third Amendment") dated December 28, 2020, a fourth amendment (the "Fourth Amendment") dated January 29, 2021, a fifth amendment (the "Fifth Amendment") dated May 16, 2021, and a consent to the Fifth Amendment dated October 11, 2021, and a sixth amendment (the "Sixth Amendment"), dated as of April 15, 2022. As of March 31, 2022, RAR's Senior Facilities will mature on April 20, 2024, and subsequent to the Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, consent thereto and Sixth Amendment consisted of:
? a senior B term loan facility (the “B term loan”), in an initial aggregate
principal amount of
? a senior B-1 term loan facility (the “B-1 Term Loan”), in an original
aggregate principal amount of
? a senior B-2 term loan facility (the “B-2 Term Loan”), in an original
aggregate principal amount of
a senior revolving credit facility, in an aggregate principal amount of up to
were terminated under the Sixth Amendment and such amounts, if
repaid, cannot be re-borrowed); and
? an additional senior revolving credit facility, in aggregate principal
amount up to
The Term Loan B was made available to RAR immediately upon closing of the Credit Agreement and was used in part to retire all
$280.0 millionof the Company's existing debt and to settle closing costs associated with the new Term Loan B totaling $19.5 millionof which $4.6 millionwas paid to Apollo Global Securities, LLC, an affiliate of Apollo, for services provided in connection with the financing. The balance of the Term Loan B proceeds were used towards a dividend, occurring on the same day, with total dividend of $160.0 millionto equity holders of RAR. Additionally, at the execution of the new Credit Agreement, RAR wrote-off unamortized deferred financing costs of $21.7 millionrelated to the extinguishment of the entire debt under the prior credit agreement. 36 Table of Contents On September 7, 2018, RAR entered into an Incremental Assumption and Amendment Agreement (the "Amendment") to the Credit Agreement. The Amendment provided for, among other things, (i) an incremental Term B-1 Loan ("Term Loan B-1") in an original aggregate principal amount of $85.8 millionand (ii) the payment of one or more restricted payments to shareholders of RAR in an aggregate amount not to exceed $115.0 million. The proceeds received from the Amendment along with cash flow from the business were used towards a dividend distribution to equity holders of RAR totaling $115.0 millionthat was paid within five business days of September 7, 2018, and to pay fees and expenses in connection with the Amendment totaling $3.7 million. The additional loan under Term Loan B-1 had terms identical to the original Term Loan B, except to account for the incremental principal amount within the quarterly amortization payment schedule and to reset call protection on the Term Loan B-1.
December 28, 2020, RAR entered into a third amendment to its Credit Agreement (the "Third Amendment"). The amendment deferred the December 2020amortization payment to March 2021. As of December 31, 2020, RAR's Senior Facilities matured on October 20, 2022, and subsequent to the Amendment, Second Amendment and Third Amendment consisted of:
? a senior B term loan facility, in an initial aggregate principal amount of
? a B-1 senior term loan facility, in an initial aggregate principal amount
? a senior revolving credit facility, in an aggregate principal amount of up to
In addition, under the Fourth Amendment, RAR incurred an incremental first lien term loan B-2 facility (the "Term Loan B-2") in an aggregate principal amount of
$25.0 millionwhich was provided by New Outerwall, Inc.The loan was subsequently assigned to Aspen Parent, Inc., an affiliate of Apollo and therefore a related party of the Company. Pursuant to the Fourth Amendment, interest is payable on the Senior Facilities entirely in cash or, for a specified period, could be paid by increasing the principal amount of the Senior Facilities (PIK Interest), or through a combination of cash and PIK interest, subject to certain liquidity thresholds. Borrowings under the Senior Facilities bear interest at a rate at RAR's option, either (a) a London Interbank Offer Rate ("LIBOR") determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% floor in the case of term loans or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the prime rate quoted by The Wall Street Journal (or another national publication selected by the administrative agent) and (iii) the one-month adjusted LIBOR plus 1.00% per annum, in each case plus an applicable margin. The applicable margin for borrowings under the Senior Facilities is 7.25% with respect to Eurocurrency Borrowings (increasing to 8.25% if PIK Interest is paid) and 6.25% with respect to ABR Borrowings (increasing to 7.25% if PIK Interest is paid). In addition to paying interest on outstanding principal under the Senior Facilities, RAR is required to pay a commitment fee at a rate equal to 0.50% per annum to the lenders in respect of the unutilized commitments thereunder. RAR is also required to pay customary agency fees. In connection with the Business Combination, on May 16, 2021, RAR entered into another amendment to its Credit Agreement (the "Fifth Amendment"). The Fifth Amendment, which became effective upon consummation of the Business Combination, provided consent to the planned Business Combination and among other things, extended the Senior Facilities maturity date to October 2023and subordinated the Term Loan B-2 to the Term Loan B and the Term Loan B-1. In addition, among other things, concurrently with the consummation of the Business Combination, (i) $15.0 millionof cash proceeds from the Business Combination were used to pay down outstanding borrowings under the Revolving Credit Facility and (ii) $35.0 millionof cash proceeds from the Business Combination were used to pay down outstanding borrowings under the Term Loan B and the Term Loan B-1. On October 11, 2021, RAR entered into a consent to the Fifth Amendment to make certain additional changes to the Credit Agreement, which became effective upon consummation of the Business Combination, including extending the maturity date of the Senior Facilities to April 20, 2024and extending the PIK interest option until December 31, 2022(subject to a minimum pro forma liquidity). 37
April 15, 2022, RAR entered into a sixth amendment to its Credit Agreement (the "Sixth Amendment") (capitalized terms used herein are defined in the Amended Credit Agreement). Pursuant to the Sixth Amendment, an additional $50.0 millionin financing under the Credit Agreement will be made available to the Company subject to certain conditions, the proceeds of which will be used to make payments in accordance with the Budget Plan and pay certain fees and expenses. At entry into the Sixth Amendment, borrowings were limited to no more than $15.0 millionin the aggregate. During April 2022, the Company borrowed the available $15.0 millionunder its Revolving Credit Facility. Pursuant to the Sixth Amendment, additional borrowings would become available if, by no later than May 10, 2022(the "Signing Deadline Date"), the Company entered into a valid and binding definitive purchase agreement for the sale of all or substantially all of the assets, or all of the equity interests of the Company (the "Company Sale"), and which purchase agreement either (i) provided for the payment in full (principal and interest) of the Senior Facilities other than the Term B-2 Loans or (ii) otherwise was in form and substance reasonably acceptable to the Administrative Agent. Pursuant to the Merger Agreement, the Company Sale shall be consummated not later than October 31, 2022. The details of the Sixth Amendment are discussed in Note 6: Debt in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. On May 10, 2022, the Company entered into a merger agreement with Chicken Soup for the Soul Entertainment, Inc.("CSSE"), pursuant to which, the Company will become a wholly owned subsidiary of CSSE. As a result, additional borrowings under the Sixth Amendment Incremental Revolving Facility became available upon the Company's entry into the merger agreement with CSSE. See Note 17: Subsequent Events in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q for additional information regarding the CSSE merger.
Minimum principal amortization payments required under the senior facilities from
Repayment Dollars in thousands Amount 2022
$ 38,3942023 - 2024 271,562 Total $ 309,956
In addition, the Senior Facilities require RAR to prepay outstanding term loans, subject to certain exceptions, with:
a certain percentage provided for in the Credit Agreement governing the Senior
? RAR annual excess cash facilities, as defined in the Senior
a certain percentage of the net cash proceeds of certain non-ordinary courses
? sales of assets, other disposals of property or certain claims, in each
cases subject to certain exceptions and reinvestment rights; and
? the net cash proceeds of any issue or formation of debt, other than
proceeds of debt authorized under the senior facilities.
RAR may voluntarily repay outstanding loans that are funded solely by internally generated cash from business operations under the Senior Facilities at any time, without prepayment premium or penalty, except customary "breakage" costs with respect to LIBOR rate loans. All obligations under the Senior Facilities are unconditionally guaranteed by each of RAR's existing and future direct and indirect material, wholly- owned domestic subsidiaries, subject to certain exceptions, and the direct parent of RAR. The obligations are secured by a pledge of substantially all of RAR's assets and those of each guarantor, including capital stock of the subsidiary guarantors and 65% of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to certain exceptions, and its capital stock owned by RAR's direct parent. Such security interests consist of a first-priority lien with respect to the collateral. For additional information regarding the Senior Facilities, see Note 6: Debt in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. 38 Table of Contents
Union revolving credit facility
December 29, 2020, Redbox Entertainment, LLCentered into a four-year, $20.0 millionrevolving credit facility with Union Bank (the "Union Revolving Credit Facility"). The facility is used exclusively to pay for minimum guarantees, license fees and related distribution expenses for original content obtained under the Company's Redbox Entertainmentlabel. Borrowings outstanding under the Union Revolving Credit Facility as of March 31, 2022and December 31, 2021were $4.1 millionand $4.6 million, respectively. Borrowings under the Union Revolving Credit Facility bear interest at either the alternate base rate or LIBOR (based on an interest period selected by the Company of one month, three months or six months) in each case plus a margin. The alternate base rate loans bear interest at a per annum rate equal to the greatest of (i) the base rate in effect on such day, (ii) the federal funds effective rate in effect on such day plus 1/2 of 1.0%, and (iii) daily one month LIBOR plus 1.0%. The revolving credit facility borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin of 0.50%. The borrowing interest rate for the Union Revolving Credit Facility was 4.25% as of March 31, 2022and December 31, 2021, respectively. On April 15, 2022, the Company agreed, pursuant to the Voting and Support Agreement (as more fully described in Note 1: Basis of Presentation in Redbox's Notes to Condensed Consolidated Financial Statements), to (i) permanently reduce a portion of its revolving commitment under its Union Revolving Credit Facility in an amount equal to $10.6 million(and the Company made such reduction) and (ii) among other agreements, refrain from borrowing under the Union Revolving Credit Facility without the consent of Aspenand Redwood Holdco, LP(other than with respect to certain scheduled borrowings and borrowings to cover interest, fees and expenses).
In addition to paying interest on the principal outstanding under Union’s revolving credit facility,
All obligations under Union’s revolving credit facility are guaranteed by all of the company’s direct and indirect wholly owned subsidiaries.
As of the period ended
March 31, 2022, the Company was in compliance with all applicable loan covenants. Historical Cash Flows Three Months Ended March 31, Dollars in thousands 2022 2021
Net cash used in operating activities
$ (14,823) $ (14,110)Net cash used in investing activities (2,832)
Net cash provided by financing activities 12,835
Total change in cash, cash equivalents and restricted cash
Net cash used in operating activities during the three months ended
the decrease in cash flow from operations is mainly explained by the following items:
mainly due to an increase in trade payables; and
? primarily reflecting the pre-tax non-cash gain on the change in fair value on
the warrant liabilities. 39 Table of Contents Investing Activities Investing activities reflect a
$2.8 millionnet use of cash during the three months ended March 31, 2022compared to a $3.5 millionnet use of cash during the three months ended March 31, 2021. The decrease is due to less capital expenditures in 2022 compared to 2021, primarily on the Company's kiosk infrastructure.
Net cash provided by financing activities was
$12.8 millionduring the three months ended March 31, 2022compared to net cash provided by financing activities of $25.8 millionfor the three months ended March 31, 2021. The $13.0 milliondecrease reflects less borrowings on the Company's Senior Facilities.
Contractual payment obligations
The following is a summary of contractual obligations and other commitments as of
March 31, 2022. Also see Note 3: Leases in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q for expected future payments relating to the Company's operating and finance lease liabilities. 2026 & Dollars in thousands 2022 2023 2024 2025 Beyond Total Long-term debt(1) $ 38,394$ - $ 271,562$ - $ - $ 309,956Contractual interest on long-term debt(1) 21,627 25,840 7,932 - - 55,399 Revolving credit facilities(1) 3,145 - 33,223 - - 36,368 Minimum estimated movie content commitments(2) 40,709 8,865 - - - 49,574 Asset retirement obligations(3) - -
- - 9,501 9,501 Other(4) 505 67 - - - 572 Total(5)
$ 104,380 $ 34,772 $ 312,717$ - $ 9,501 $ 461,370
(1) See Note 6: Debt in the Redbox Notes to the condensed consolidated financial statements
Statements included elsewhere in this Form 10-Q.
(2) See note 13: Commitments and contingencies in Redbox’s notes to Condensed
Consolidated Financial Statements included elsewhere in this Form 10-Q. Asset retirement obligations represent estimated amounts the Company is
obligated to pay to return the space occupied by a kiosk to its original state (3) upon removal of a kiosk and are shown to occur in 2025 and
beyond, because the moment of the removal of the kiosks cannot be reasonably determined. the
amount is included as a component of Other long term liabilities on the Condensed Consolidated Balance Sheets.
The balance mainly represents firm commitments for spare parts for kiosk maintenance/repairs/upgrades (4) and information related expenses
Income tax liabilities for uncertain tax positions have been excluded as the (5) Company is unable to make a reasonably reliable estimate of the amount and
period of related future payments. From
Off-balance sheet arrangements
Other than certain contractual arrangements listed above, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. For additional information see Note 13: Commitments and Contingencies in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. 40
Significant Accounting Policies and Estimates
The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in
the United States of Americaand include amounts based on management's prudent judgments and estimates. Actual results may differ from these estimates. Management believes that any reasonable deviation from those judgments and estimates would not have a material impact on the Company's consolidated financial position or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the Condensed Consolidated Statements of Operations and corresponding Condensed Consolidated Balance Sheets accounts would be necessary. These adjustments would be made in future periods. Some of the more significant estimates include goodwill, long-lived assets impairment, content library, and income taxes. For a further discussion of our significant accounting policies, refer to the Company's 2021 Annual Report on Form 10-K.
Recent accounting pronouncements
Accounting guidelines adopted:
February 2016, the FASB issued ASU 2016-02, Leases ("Topic 842" or "ASC 842") related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use ("ROU") assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC 842 as of January 1, 2022, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and not restated comparative periods; rather the effect of the change is recorded at the beginning of the year of adoption. The Company will elect the package of practical expedients permitted under the transition guidance within the new standard, which allows us to carryforward historical lease classification. In addition, we are electing the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Lastly, we elect the short-term lease recognition exemption for our leases. This means for short-term leases, we will not recognize ROU assets and lease liabilities, and this includes not recognizing ROU asset or lease liabilities for existing short-term leases of those assets in transition. In preparation for adoption of the standard, we have implemented internal controls to enable the preparation of financial information. The Company recorded ROU assets of $9.1 millionand lease liabilities for operating leases of $9.4 millionas of January 1, 2022. The standard did not materially impact our consolidated net earnings and had no impact on cash flows. See Note 3: Leases in Redbox's Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.
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