Cineverse Corp 10-Q for FY2023 Q1
Cineverse Corp. (CNVS)
About this 10-Q
Cineverse Corp filed this 10-Q on August 16, 2022, covering the quarter ended June 30, 2022 (FY2023 Q1).
Headline figures
Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $13.59M
- down 9.5% from $15.02M a year earlier
- Net loss
- $5.99M
- compared with net income of $5.19M a year earlier
- Diluted EPS
- -$0.03
- compared with $0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the fiscal period ended:
For the transition period from _____ to _____
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company | Emerging Growth Company |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes ☐ No
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
As of August 9, 2022,
CINEDIGM CORP.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CINEDIGM CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
| June 30, 2022 | March 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Inventory | ||||||||
| Unbilled revenue | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Equity investment in A Metaverse Company, a related party, at fair value | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current portion of deferred consideration on purchase of business | ||||||||
| Current portion of earnout consideration on purchase of business | ||||||||
| Operating lease liabilities | ||||||||
| Current portion of deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Deferred consideration on purchase – net of current portion | ||||||||
| Earnout consideration on purchase – net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Other long-term liabilities | - | |||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 6) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity of Cinedigm Corp. | ||||||||
| Deficit attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
1
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for share and per share data)
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Costs and expenses: | ||||||||
| Direct operating (excludes depreciation and amortization shown below) | ||||||||
| Selling, general and administrative | ||||||||
| Bad debt expense | ||||||||
| Depreciation and amortization of property and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Total operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Gain on forgiveness of PPP loan and extinguishment of note payable | - | |||||||
| Change in fair value of equity investment in A Metaverse Company, a related party | ( | ) | ||||||
| Other expense, net | ( | ) | ( | ) | ||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax benefit | - | |||||||
| Net income (loss) | ( | ) | ||||||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Net income (loss) attributable to controlling interests | ( | ) | ||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||
| Net income (loss) attributable to common stockholders | $ | ( | ) | $ | ||||
| Net income (loss) per Class A common stock attributable to common stockholders - basic: | $ | ( | ) | $ | ||||
| Weighted average number of Class A common stock outstanding: basic | ||||||||
| Net income (loss) per Class A common stock attributable to common stockholders - diluted: | $ | ( | ) | $ | ||||
| Weighted average number of Class A common stock outstanding: diluted | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
2
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Other comprehensive (loss) income: foreign exchange translation | ( | ) | ||||||
| Comprehensive income (loss) | ( | ) | ||||||
| Less: comprehensive income attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Comprehensive income (loss) attributable to controlling interests | $ | ( | ) | $ | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
CINEDIGM CORP.
CONSDENSED CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY
(Unaudited)
(In thousands, except share data)
| Series A Preferred Stock | Class A Common Stock | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ Equity | Non-Controlling | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | (Deficit) | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with a business combination | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
See accompanying & Notes to Condensed Consolidated Financial Statements
4
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY
(Unaudited)
(In thousands, except share data)
| Series A Preferred Stock | Class A Common Stock | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ Equity | Non-Controlling | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | (Deficit) | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends accrued | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization of property and equipment and amortization of intangible assets | ||||||||
| Impairment of prepaid advances | ||||||||
| Changes in fair value of equity investment in A Metaverse Company | ( | ) | ||||||
| Gain from forgiveness of PPP loan | - | ( | ) | |||||
| Provision for doubtful accounts | ||||||||
| Stock-based compensation | ||||||||
| Interest expense for deferred consideration | ||||||||
| Interest expense for earnout consideration | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Unbilled revenue | ( | ) | ( | ) | ||||
| Prepaids and other current assets, and other long-term assets | ||||||||
| Accounts payable, accrued expenses, and other liabilities | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchase of a business | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payment of notes payable | ( | ) | ( | ) | ||||
| Payment under revolving credit agreement, net | ( | ) | ||||||
| Net cash used in by financing activities | ( | ) | ( | ) | ||||
| Net change in cash, cash equivalents, and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
6
CINEDIGM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND LIQUIDITY
Cinedigm Corp. (“Cinedigm,”
the “Company,” “we,” “us,” or similar pronouns) was incorporated in Delaware on March 31, 2000.
We report our financial results in two primary segments as follows: (1) cinema equipment business and (2) content and entertainment business (“Content & Entertainment” or “CEG”). The cinema equipment business segment consists of the non-recourse, financing vehicles and administrators for our digital cinema equipment (the “Systems”) installed in movie theatres throughout North America and Australia. It also provides fee-based support to music and movie screens as well as directly to exhibitors and other third-party customers in the form of monitoring, billing, collection and verification services. Our Content & Entertainment segment operates in: (1) ancillary market aggregation and distribution of entertainment content and (2) branded and curated over-the-top (“OTT”) digital network business providing entertainment channels and applications.
Risks and Uncertainties
Liquidity
We have incurred net losses historically
and have net loss of $
We believe the combination of: (i) our cash and cash equivalent balances at June 30, 2022 and (ii) expected cash flow from operations, will be sufficient for our operations and capital needs, for at least twelve months from the filing of this report. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
Our consolidated financial statements include the accounts of Cinedigm and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Investments in which we do not have a controlling interest or are not the primary beneficiary, but have the ability to exert significant influence, are accounted for under the equity method of accounting. Noncontrolling interests for which we have been determined to be the primary beneficiary are consolidated and recorded as net loss attributable to noncontrolling interest. See Note 3 - Other Interests to the Consolidated Financial Statements for a discussion of our noncontrolling interests.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include the accrual of digital revenue, accounts receivable reserves, return reserves, inventory reserves, recovery of advances, assessment of goodwill impairment, intangible asset impairment and estimated amortization lives, fair value for asset acquisitions and business combinations, valuation allowances for income taxes and stock awards. Actual results could differ from these estimates.
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.
Cash and cash equivalents consisted of the following:
| As of | ||||||||
| (in thousands) | June 30, 2022 | March 31, 2022 | ||||||
| Cash and Cash Equivalents | $ | $ | ||||||
EQUITY INVESTMENT IN A METAVERSE COMPANY, A RELATED PARTY
On February 14, 2020, the Company
acquired an approximately
On April 10, 2020, the Company
purchased an additional
8
The Company has accounted for these investments 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 made an irrevocable election to apply the fair value option under ASC 825-10, Financial Instruments, as it relates to its equity investment in Metaverse.
On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted, the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse’s stock valuation is based on an evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs.
ACCOUNTS RECEIVABLE
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 record accounts receivable, long-term in connection with activation fees that we earn from our Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rate.
ADVANCES
Advances, which are recorded
within prepaid and other current assets on the consolidated balance sheets, represent amounts prepaid to studios or content producers
for which we provide content distribution services. We evaluate advances regularly for recoverability and record impairment charges for
amounts that we expect may not be recoverable as of the consolidated balance sheet date. Impairments and accelerated amortization related
to advances were $
PROPERTY AND EQUIPMENT
Property and equipment 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 | ||||
| Internal use software | ||||
| Digital cinema projection systems | ||||
| Machinery and equipment | ||||
| Furniture and fixtures |
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 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.
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Repair and maintenance costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized. Upon the sale or other disposition of any property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss on disposal is included in the consolidated statements of operations.
9
IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED 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. During the three months ended June 30, 2022 and 2021, no impairment charge was recorded from operations for long-lived assets or finite-lived assets.
INTANGIBLE ASSETS
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. During the three months ended June 30, 2022 and 2021, no impairment charge was recorded from operations for intangible assets.
Amortization expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
| Trademark | ||||
| Content Library | ||||
| Customer Relationships | ||||
| Tradename | ||||
| Supplier Agreements | ||||
| Advertiser relationships and Channel | ||||
| Software | |
The Company’s intangible assets included the following on June 30, 2022:
| Cost Basis | Accumulated Amortization |
Impairment | Net | |||||||||||||
| Trademark | $ | $ | ( | ) | $ | |||||||||||
| Content Library | ( | ) | ||||||||||||||
| Customer Relationships | ( | ) | ( | ) | ||||||||||||
| Tradename | ( | ) | ||||||||||||||
| Theatre Relationship | ( | ) | ||||||||||||||
| Patents | ( | ) | ||||||||||||||
| Supplier Agreements | ( | ) | ||||||||||||||
| Advertiser relationships and Channel | ( | ) | ||||||||||||||
| Software | ( | ) | ||||||||||||||
| Total Intangible Assets | $ | $ | ( | ) | $ | ( | ) | |||||||||
The Company’s intangible assets included the following on March 31, 2022:
| Cost Basis | Accumulated Amortization |
Impairment | Net | |||||||||||||
| Trademark | $ | $ | ( | ) | $ | |||||||||||
| Content Library | ( | ) | ||||||||||||||
| Customer Relationships | ( | ) | ( | ) | ||||||||||||
| Tradename | ( | ) | ||||||||||||||
| Theatre Relationship | ( | ) | ||||||||||||||
| Patents | ( | ) | ||||||||||||||
| Supplier Agreements | ( | ) | ||||||||||||||
| Advertiser relationships and Channel | ( | ) | ||||||||||||||
| Software | ( | ) | ||||||||||||||
| Total Intangible Assets | $ | $ | ( | ) | $ | ( | ) | |||||||||
10
Below is the amortization expense per year for the intangible assets:
| Total | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
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) |
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.
The equity
investment in Metaverse is in Hong Kong dollars and was translated into US dollars as of June 30, 2022 and 2021 at an exchange rate of
The following tables summarize the levels of fair value measurements of our financial assets and liabilities as of June 30, 2022 and March 31, 2022:
As of June 30, 2022
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Equity investment in Metaverse, at fair value | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Current portion of earnout consideration on purchase of a business | $ | $ | $ | $ | ||||||||||||
| Long term portion of earnout consideration on purchase of a business | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
11
As of March 31, 2022
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Equity investment in Metaverse, at fair value | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Current portion of earnout consideration on purchase of a business | $ | $ | $ | $ | ||||||||||||
| Long term portion of earnout consideration on purchase of a business | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Our cash and cash equivalents, accounts receivable, unbilled revenue and accounts payable and accrued expenses are financial instruments and are recorded at cost in the consolidated balance sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature.
ASSET ACQUISITIONS
An asset acquisition is an acquisition of an asset, or a group of assets, that does not meet the definition of a business. Asset acquisitions are accounted for by using the cost accumulation model whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values.
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, 2022 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, 2022 and 2021.
12
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| As of | ||||||||
| (In thousands) | June 30, 2022 | March 31, 2022 | ||||||
| Accounts payable | $ | $ | ||||||
| Amounts due to producers | ||||||||
| Accrued compensation and benefits | ||||||||
| Accrued taxes (refund) payable | ( | ) | ( | ) | ||||
| Accrued other expenses | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
| As of | ||||||||
| (In thousands) | June 30, 2022 | March 31, 2022 | ||||||
| Non-trade accounts receivable | $ | $ | ||||||
| Advances | ||||||||
| Due from producers | ||||||||
| Prepaid insurance | ||||||||
| Other prepaid expenses | ||||||||
| Total prepaid and other current assets | $ | $ | ||||||
Impairments
and accelerated amortization related to advances were $
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. We have in the past entered into arrangements in connection with activation fees due from our System deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
13
Cinema Equipment Business
Our Cinema Equipment Business consists of financing vehicles and administrators for Systems installed nationwide in our first deployment
phase (“Phase I Deployment”) to theatrical exhibitors and for Systems installed domestically and internationally in our second
deployment phase (“Phase II Deployment”).
We retain ownership of our Systems
and the residual cash flows related to the Systems in Phase I Deployment after the end of the
For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees (“VPFs”) from motion picture studios and distributors and Alternative Content Fees (“ACFs”) from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, “Services”).
VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to us with respect to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period the title first plays for general audience viewing in a digital projector equipped movie theatre. The Phase 1 Deployment’s and Phase 2 Deployments performance obligations for revenue recognition are met at this time.
Phase II Deployment’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related to the variable consideration, that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.
Under the terms of our standard
cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the
licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive
one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale
of the Systems to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the Systems and Cinedigm received
the sale proceeds. Such sales were originally contemplated as the conclusion of the digital cinema deployment plan. Total system revenue
was $
Exhibitors who purchased and
own Systems using their own financing in Phase II of the Cinema Equipment Business paid us an upfront activation fee of approximately
$
14
The Cinema Equipment Business
earns an administrative fee of approximately
Content & Entertainment Business
CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand (“VOD” or “OTT Streaming and Digital”), and physical goods (e.g., DVDs and Blu-ray Discs) (“Physical Revenue” or “Base Distribution Business”). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance obligations include the delivery of content for transactional, subscription and ad supported/free ad-supported streaming TV (“FAST”) on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the content is available for subscription on the digital platform (the company’s digital content is considered functional IP), at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical revenue from the sale of physical goods is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.
Reserves for potential sales returns of physical goods and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
CEG also has contracts for the theatrical distribution of third party feature movies and alternative content. CEG’s distribution fee revenue and CEG’s participation in box office receipts are recognized at the time a feature movie and alternative content are viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature movies’ or alternative content’s theatrical release date.
The Company follows the five-step model established by ASC 606 when preparing its assessment of revenue recognition
Principal Agent Considerations
Revenue earned by our CEG business 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 cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.
15
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.
Our CEG segment 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.
We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates.
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, even if amounts are refundable.
Deferred revenue pertaining to our Content & Entertainment Business includes amounts related to the sale of DVDs with future release dates.
Deferred revenue relating to our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms.
The
ending deferred revenue balance, including current and non-current balances, as of June 30, 2022 was $
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.
Disaggregation of Revenue
The Company disaggregates revenue into different revenue categories for the Cinema Equipment and CEG Businesses. The Cinema Equipment Business revenue categories are: Phase I Deployment revenue, Phase II Deployment revenue, Services, and Digital System Sales, and the Content & Entertainment Business revenue categories are: Base Distribution Business and OTT Streaming and Digital.
The following tables present the Company’s revenue categories for the three months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cinema Equipment Business: | ||||||||
| Phase I Deployment | $ | $ | ||||||
| Phase II Deployment | ||||||||
| Services | ||||||||
| Digital System Sales | ||||||||
| Total Cinema Equipment Business revenue | $ | $ | ||||||
| Content & Entertainment Business: | ||||||||
| Physical Revenue | $ | $ | ||||||
| OTT Streaming and Digital | ||||||||
| Total Content & Entertainment Business revenue | $ | $ | ||||||
16
Concentrations
DIRECT OPERATING COSTS
Direct operating costs consist of operating costs such as 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 and performance stock units. 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 consolidated statements of operations and comprehensive 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 and nonemployee is required to provide service in exchange for the award. The fair values of options and stock appreciation rights 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 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.
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
17
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
Basic and diluted net loss per common share has been calculated as follows:
| Basic net income (loss) per common share attributable to common stockholders | = | Net loss attributable to common stockholders |
| Weighted average number of common stock outstanding during the period |
| Diluted net income (loss) per common share attributable to common stockholders | = | Net loss attributable to common stockholders |
| Weighted average number of common stock outstanding during the period plus potential dilutive shares |
Stock issued and treasury stock repurchased or reacquired during the period are weighted for the portion of the period that they are outstanding.
We
incurred a net loss for the three months ended June 30, 2022, and therefore the impact of potentially dilutive common shares from outstanding
stock options and warrants, totaling
We
had a net income for the three months ended June 30, 2021, and therefore the impact of potentially dilutive common shares from outstanding
stock options, stock appreciation rights, and warrants, totaling
COMPREHENSIVE LOSS
For the three months ended June 30, 2022 and 2021, comprehensive loss consisted of net loss and foreign currency translation adjustments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which provides new guidance regarding the measurement and recognition of credit impairment for certain financial assets. Such guidance will impact how the Company determines its allowance for estimated uncollectible receivables and evaluates its available-for-sale investments for impairment. ASU 2016-13 is effective for the Company in the first quarter of fiscal 2023. The Company is currently evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.
3. OTHER INTERESTS
Investment in CDF2 Holdings
We indirectly own
CDF2 Holdings is a Variable Interest Entity (“VIE”), as defined in Accounting Standards Codification Topic 810 (“ASC 810”), “Consolidation.” ASC 810 requires the consolidation of VIEs by an entity that has a controlling financial interest in the VIE which entity is thereby defined as the primary beneficiary of the VIE. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, among other factors. Although we indirectly, wholly own CDF2 Holdings, we, a third party that also has a variable interest in CDF2 Holdings, and an independent third party manager must mutually approve all business activities and transactions that significantly impact CDF2 Holdings’ economic performance. We have therefore assessed our variable interests in CDF2 Holdings and determined that we are not the primary beneficiary of CDF2 Holdings. As a result, CDF2 Holdings’ financial position and results of operations are not consolidated in our financial position and results of operations. In completing our assessment, we identified the activities that we consider most significant to the economic performance of CDF2 Holdings and determined that we do not have the power to direct those activities, and therefore we account for our investment in CDF2 Holdings under the equity method of accounting.
18
As of June 30, 2022 and March
31, 2022, our maximum exposure to loss, as it relates to the non-consolidated CDF2 Holdings entity, represents accounts receivable for
service fees under a master service agreement with CDF2 Holdings. Such accounts receivable was $
The accompanying Consolidated
Statements of Operations include $(
Total Stockholders’ Deficit
of CDF2 Holdings at June 30, 2022 and March 31, 2022 was $
Majority Interest in CONtv
We own an
Investment in Roundtable
On March 15, 2022, the Company
entered into a stock purchase agreement with Roundtable Entertainment Holdings, Inc. (“Roundtable”) pursuant to which the
Company purchased
4. STOCKHOLDERS’ EQUITY (DEFICIT)
COMMON STOCK
Authorized Common Stock
As of June 30, 2022 the number of
shares of Common Stock authorized for issuance was
During the three months ended
June 30, 2022, the Company issued
PREFERRED STOCK
Cumulative dividends in arrears
on preferred stock were $
TREASURY STOCK
We have treasury stock, at cost,
consisting of
19
CINEDIGM’S EQUITY INCENTIVE PLANS
Stock Based Compensation Awards
Awards issued under our 2000
Equity Incentive Plan (the “2000 Plan”) may be in any of the following forms (or a combination thereof) (i) stock option awards;
(ii) stock appreciation rights; (iii) stock or restricted stock or restricted stock units; or (iv) performance awards. The 2000 Plan provides
for the granting of incentive stock options (“ISOs”) with exercise prices not less than the fair market value of our Common
Stock on the date of grant. ISOs granted to shareholders having more than
In connection with the grants
of stock options and shares of restricted stock under the 2000 Plan, we and the participants have executed stock option agreements and
notices of restricted stock awards setting forth the terms of the grants. The 2000 Plan provided for the issuance of up to
As
of June 30, 2022, there were
Options outstanding under the 2000 Plan as of June 30, 2022 is as follows:
| As of June 30, 2022 | ||||||||||||||||
| Range of Prices | Options Outstanding | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | ||||||||||||
| $ | $ | $ | ||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
An analysis of all options exercisable under the 2000 Plan as of June 30, 2022 is presented below:
| Options Exercisable | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | |||||||||||
| $ | ||||||||||||||
In August 2017, the Company adopted
the 2017 Equity Incentive Plan (the “2017 Plan). The 2017 Plan replaced the 2000 Plan, and applies to employees and directors of,
and consultants to, the Company. The 2017 Plan provided for the issuance of up to
On October 23, 2020, the Company
amended its 2017 Plan to increase the number of shares authorized for issuance thereunder from
On October 11, 2021, the Company
amended its 2017 Plan to increase the number of shares authorized for issuance thereunder from
20
Stock appreciation rights outstanding under the 2017 Plan as of June 30, 2022 is as follows:
| As of June 30, 2022 | ||||||||||||||||
| Range of Prices | SARs Outstanding | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | ||||||||||||
| $ | $ | $ | ||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
An analysis of all stock appreciation rights exercisable under the 2017 Plan as of June 30, 2022 is presented below:
| SAR Exercisable | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | |||||||||||
| $ | - | |||||||||||||
Total SARs outstanding are as follows:
| Year Ended June 30, 2022 | ||||
| SARs Outstanding March 31, 2022 | ||||
| Issued | ||||
| Forfeited | ||||
| Total SARs Outstanding June 30, 2022 | ||||
Following is the activity for performance stock unit awards:
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Unvested balance at March 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Unvested balance at June 30, 2022 | $ | |||||||
During
the three months ended June 30, 2022,
Employee and director stock-based compensation expense related to our stock-based awards was as follows:
| Three Months Ended June 30, | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
| Selling, general and administrative | $ | $ | ||||||
| $ | $ | |||||||
There
was $
21
There
was $
OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN
In
October 2013, we issued options outside of the 2000 Plan to
WARRANTS
The following table presents information about outstanding warrants to purchase shares of our Common Stock as of June 30, 2022. All of the outstanding warrants are fully vested and exercisable.
| Recipient | Amount outstanding | Expiration | Exercise price per share | |||||||||
| 5-year Warrant issued to Bison Entertainment and Media Group(” BEMG”) in connection with a term loan agreement | $ | |||||||||||
5. COMMITMENTS AND CONTINGENCIES
We operate from leased properties under non-cancelable operating lease agreements, certain of which contain escalating lease clauses.
The Company leases office space under an operating lease. The Company’s portfolio of leases is primarily related to real estate and since most of our leases do not provide a readily determinable implicit rate, the Company estimated its incremental borrowing rate to discount the lease payments based on information available at either the implementation date of Topic 842 or at lease commencement for leases entered into thereafter.
The table below presents the lease-related assets and liabilities recorded on the balance sheet as of June 30, 2022 and March 31, 2022:
| (In thousands) | Classification on the Balance Sheet | June 30, 2022 | March 31, 2022 |
|||||||
| Assets | ||||||||||
| Noncurrent | Operating lease right-of-use asset | $ | $ | |||||||
| Liabilities | ||||||||||
| Current | Operating leases – current portion | |||||||||
| Noncurrent | Operating leases – long-term portion | |||||||||
| Total operating lease liabilities | $ | $ | ||||||||
Lease Costs
The table below presents certain information related to lease costs for leases:
| Three Months Ended | Three Months Ended | |||||||
| (In thousands) | June 30, 2022 | June 30, 2021 | ||||||
| Operating lease cost | $ | $ | ||||||
| Total lease cost | $ | $ | ||||||
22
Other Information
The table below presents supplemental cash flow information related to leases:
| Three Months Ended | Three Months Ended | |||||||
| (In thousands) | June 30, 2022 | June 30, 2021 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities | | |||||||
| Operating cash flows used for operating leases Hyde Park Agreement | $ | $ | ||||||
On January 5, 2022, the Company
entered into a letter agreement with Hyde Park Entertainment, Inc. (“Hyde Park”), pursuant to which the Company and Hyde Park
are collaborating on the development, production and/or distribution of a project based on the novel Audition by Ryu
Murakami (the “Audition Project”). Each of the Company and Hyde Park owns
6. SUPPLEMENTAL CASH FLOW INFORMATION AND DISCLOSURE OF NON-CASH INVESTMENTING AN FINANCING ACTIVITY
| Three Months Ended June 30, | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
| Cash interest paid | $ | $ | ||||||
| Income taxes paid | ||||||||
| Accrued dividends on preferred stock | ||||||||
| Issuance of Class A common stock for payment of preferred stock dividends | ||||||||
| Issuance of Class A common stock for business combination | ||||||||
| Deferred consideration in purchase of a business | ||||||||
| Earnout consideration in purchase of a business | ||||||||
7. SEGMENT INFORMATION
We operate in
| Operations of: | Products and services provided: | |
| Cinema Equipment Business | Financing vehicles and administrators for
We retain ownership of the Systems and the residual cash flows related to the Systems in Phase I Deployment after the repayment of all non-recourse debt at the expiration of exhibitor master license agreements. For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business segment also provides monitoring, collection, verification and management services to this segment, as well as to exhibitors who purchase their own equipment, and also collects and disburses VPFs from motion picture studios, distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors (collectively, “Services”). |
23
| Content & Entertainment Business | Leading independent streaming company of content and channels. We collaborate with producers and other content owners to market, source, curate and distribute independent content to targeted and under-served audiences in theatres and homes, and via mobile and emerging platforms. |
The following tables present certain financial information related to our reportable segments and Corporate:
| As of June 30, 2022 | ||||||||||||||||||||||||
| (In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non- Recourse | Notes Payable | Operating lease liabilities | ||||||||||||||||||
| Cinema Equipment Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Content & Entertainment Business | ||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| As of March 31, 2022 | ||||||||||||||||||||||||
| (In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non- Recourse | Notes Payable | Operating lease liabilities | ||||||||||||||||||
| Cinema Equipment Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Content & Entertainment Business | — | |||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Statements of Operations | ||||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of corporate overhead | ( | ) | ||||||||||||||
| Provision for (recovery of) doubtful accounts | ||||||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
24
The following employee and director stock-based compensation expense related to our stock-based awards is included in the above amounts as follows:
| (In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | - | |||||||||||||||
| Total stock-based compensation | $ | $ | - | $ | $ | |||||||||||
| Statements of Operations | ||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of corporate overhead | ( | ) | ||||||||||||||
| Provision for doubtful accounts | ||||||||||||||||
| Depreciation and amortization of property and equipment | ( | ) | ||||||||||||||
| Amortization of intangible assets | — | |||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
The following employee and director stock-based compensation expense related to our stock-based awards is included in the above amounts as follows:
| (In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
8. INCOME TAXES
We
calculate income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions. We recorded an income
tax benefit (expense) of approximately
Our
effective tax rate for the three months ended June 30, 2022 and 2021 was
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes included elsewhere in this report.
This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “estimates,” and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
OVERVIEW
Since our inception, we have played a significant role in the digital distribution revolution that continues to transform the media landscape. In addition to our pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, we have become a leading distributor of independent content, both through organic growth and acquisitions. We distribute products for major brands such as Hallmark, Televisa, ITV, Nelvana, ZDF, Konami, NFL, and Scholastic, as well as leading international and domestic content creators, movie producers, television producers and other short-form digital content producers. We collaborate with producers, major brands and other content owners to market, source, curate and distribute quality content to targeted audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to Apple iTunes, Amazon Prime, Netflix, Hulu, Xbox, Pluto, Tubi and most video-on-demand (“VOD”) and free ad-supported television (“FAST”) streaming platforms, as well as (ii) physical goods, including DVD and Blu-ray Discs.
We report our financial results in two primary segments as follows: (1) cinema equipment business and (2) content and entertainment business (“Content & Entertainment” or “CEG”). The cinema equipment business segment consists of the non-recourse, financing vehicles and administrators for our digital cinema equipment (the “Systems”) installed in movie theatres throughout North America and Australia. It also provides fee-based support to over 1,082 movie screens as well as directly to exhibitors and other third-party customers in the form of monitoring, billing, collection and verification services. Our Content & Entertainment segment operates in: (1) ancillary market aggregation and distribution of entertainment content and (2) branded and curated over-the-top (“OTT”) digital network business providing entertainment channels and applications.
Beginning in December 2015, certain of our cinema equipment began to reach the conclusion of their 10-year deployment payment period with certain distributors and, therefore, Virtual Print Fee (“VPF”) revenues ceased to be recognized on such Systems, related to such distributors. Furthermore, because the Phase I Deployment installation period ended in November 2007, a majority of the VPF revenue associated with the Phase I Deployment Systems has ended. The reduction in VPF revenue on cinema equipment business systems approximately coincided with the conclusion of certain of our non-recourse debt obligations and, therefore, the reduced cash outflows related to such non-recourse debt obligations partially offset the reduced VPF revenue since November 2017.
Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan.
We are structured so that our cinema equipment business segment operates independently from our Content & Entertainment business. As of June 30, 2022, we had approximately $0.0 million of non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We have approximately $0.0 million of outstanding debt principal, as of June 30, 2022 that is attributable to our Content & Entertainment and Corporate segments.
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Risks and Uncertainties
The COVID-19 pandemic and related economic repercussions created significant volatility and uncertainty impacting the Company’s results for the period. As part of our Content & Entertainment business, the Company sells DVDs and Blu-ray discs at brick-and-mortar stores.
Liquidity
We have incurred net losses historically and net loss for the three months ended June 30, 2022 of $6.0 million. As of June 30, 2022, we had an accumulated deficit of $478.4 million and negative working capital of $7.6 million. Net cash used in operating activities for the three months ended June 30, 2022 was $1.2 million. Based on these and prior conditions, the Company entered into the following transactions described below.
Capital Raises
On May 20, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain investors (the “Investors”) for the purchase and sale of 10,666,666 shares of the Common Stock, at a purchase price of $0.75 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on May 14, 2020 (File No. 333-238183) and an applicable prospectus supplement. The closing of the sale occurred on May 22, 2020. The aggregate gross proceeds for the sale was $8.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company’s estimated offering expenses, were approximately $7.1 million.
In July 2020, we entered into an At-the-Market sales agreement (the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”) and B. Riley FBR, Inc. (“B. Riley” and, together with A.G.P., the “Sales Agents”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on Nasdaq at the time of the sale of such shares. The Company is not obligated to sell any shares under the ATM Sales Agreement. Any sales of shares made under the ATM Sales Agreement will be made pursuant the 2020 Shelf Registration Statement, for an aggregate offering price of up to $30 million. Net proceeds from such sales totaled $18.6 million. No sales under the ATM Sales Agreement were made during the three months ended June 30, 2022.
On July 16, 2020, the Company entered into a securities purchase agreement with certain investors for the purchase and sale of 7,213,334 shares of Common Stock, par value $0.001 per share, at a purchase price of $1.50 per share, in a registered direct offering, pursuant to the 2020 Shelf Registration Statement and an applicable prospectus supplement. The closing of the sale occurred on July 20, 2020. The aggregate gross proceeds for the sale was approximately $10.8 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company’s estimated offering expenses, is approximately $10.1 million.
On February 2, 2021, the Company entered into a Securities Purchase Agreement with a single institutional investor for the purchase and sale of 5,600,000 shares of Common Stock at a purchase price of $1.25 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on July 10, 2020 (File No. 333-239710) (the “2020 Shelf Registration Statement”) and an applicable prospectus supplement. The closing of the sale occurred on February 5, 2021. The aggregate gross proceeds for the sale was approximately $7.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agent but before paying the Company’s estimated offering expenses, was approximately $6.5 million.
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In October 2021, we entered into a Common Stock Purchase Agreement (the “Equity Line Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital, LLC (“B. Riley Principal Capital”). Pursuant to the Equity Line Purchase Agreement, the Company has the right to sell to B. Riley Principal Capital up to the lesser of (i) $50,000,000 of newly issued shares of Common Stock and (ii) the Exchange Cap (as defined in the Equity Line Purchase Agreement), from time to time during the 24-month period from and after the October 21, 2021. Sales of Common Stock pursuant to the Equity Line Purchase Agreement, and the timing of any sales, are solely at the option of the Company, and the Company is under no obligation to sell any securities to B. Riley Principal Capital under the Equity Line Purchase Agreement. As consideration for B. Riley Principal Capital’s commitment to purchase shares of Common Stock at the Company’s direction upon the terms and subject to the conditions set forth in the Equity Line Purchase Agreement, upon execution of the Equity Line Purchase Agreement, the Company issued 210,084 shares of Common Stock to B. Riley Principal Capital (the “Commitment Shares”). The purchase price of the shares of Common Stock that we elect to sell to B. Riley Principal Capital pursuant to the Equity Line Purchase Agreement will be determined by reference to the volume weighted average price of the Common Stock (“VWAP”) during the applicable purchase date, less a fixed 5% discount to such VWAP. Pursuant to the Registration Rights Agreement, the Company filed a Registration Statement on Form S-1 that was declared effective by the Securities and Exchange Commission on October 21, 2021 (File No. 333-260210) for the resale by B. Riley Principal Capital of up to 25,210,084 shares of Common Stock (including the Commitment Shares) acquired pursuant to the Equity Line Purchase Agreement. During the year ended March 31, 2022, we sold 5,300,000 shares of Common Stock under the Equity Line Purchase Agreement. Net proceeds from such sales totaled $12.4 million. No sales under the Equity Line Purchase Agreement were made during the three months ended June 30, 2022.
As of June 30, 2022, there is still approximately $38.0 million available under the 2020 Shelf Registration Statement, and $37.6 million available under the Equity Line Purchase Agreement, to raise additional capital.
Sale of Cinematic Equipment
On March 17, 2021, the Company entered into two separate agreements (the “AMC Equipment Purcahse Agreements”) for the sale of cinematic equipment to American Multi-Cinema, Inc. (“AMC”). The agreement included the sale in tranches of a total of 2,369 cinematic projectors starting in March 2021 throughout January 2023 for a total cash consideration of $10.8 million. As of June 30, 2022, the Company recognized revenue for $10.3 million. A portion of the total proceeds was utilized to pay off the remaining Prospect note payable.
Equity Investment in a Related Party
On February 14, 2020, the Company acquired an approximately 11.5% interest in A Metaverse Company (“Metaverse”), a leading publicly traded Chinese entertainment company, formerly Starrise Media Holdings Limited, whose ordinary shares are listed on the Stock Exchange of Hong Kong. The Company acquired such interest as a strategic investment and in a private transaction from a shareholder of Metaverse that is related to our major shareholder. Our major shareholder also maintains a significant beneficial interest ownership in Metaverse. Upon consummation of the transaction on February 14, 2020, the Company recorded an initial investment of approximately $25.1 million, which is the fair market value of the Metaverse shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company’s common stock of $11.2 million, valued as of the date of the issuance of the Common Stock of the Company. The difference in value of shares received in Metaverse and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital.
On April 10, 2020, the Company purchased an additional 15% interest in Metaverse in a private transaction from shareholders of Metaverse that are affiliated with the major shareholder of the Company. The Company recorded an additional equity investment of approximately $28.2 million, which is the fair market value of the Metaverse shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company’s common stock of $11.0 million, valued at the date of the issuance of the Common Stock of the Company. The difference in the value of shares received in Metaverse and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital. This transaction was also recorded as an equity investment in Metaverse.
The Company has accounted for these investments 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 made an irrevocable election to apply the fair value option under ASC 825-10, Financial Instruments, as it relates to its equity investment in Metaverse.
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On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse’s stock valuation is based on a evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs. As the value of the investment in Metaverse is being determined by an offer to purchase the shares from an independent third party, the value of the investment may need to be reduced or fully written off should the offer be rescinded.
We believe the combination of: (i) our cash and cash equivalent balances at June 30, 2022 and (ii) expected cash flow from operations will be sufficient for our operations and capital needs, for at least twelve months from the filing of this report. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 2 – Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 1, Condensed Consolidated Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our board of directors.
FAIR VALUE ESTIMATES
Goodwill, Intangible and Long-Lived Assets
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.
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. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. The assessment for recoverability is based primarily on our ability to recover the carrying value of its 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 assets 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.
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During the three months ended June 30, 2022 and 2021, no impairment charge was recorded to intangible assets.
Investment in Metaverse
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) |
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.
During the three months ended June 30, 2022 and 2021, the company recorded a charge of $1,256 and ($334) in the company’s investment in Metaverse.
REVENUE RECOGNITION
Adoption of ASU Topic 606, “Revenue from Contracts with Customers”
We determine revenue recognition by:
| ● | identifying the contract, or contracts, with the customer; |
| ● | identifying the performance obligations in the contract; |
| ● | determining the transaction price; |
| ● | allocating the transaction price to performance obligations in the contract; and |
| ● | recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services. |
We recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the services provided, sales of physical products (DVD’s and Blu-ray Discs) or when the content is available for subscription on the digital platform or available on the point-of-sale for transactional and video on demand services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes are recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.
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. We have in the past entered into arrangements in connection with activation fees due from our System deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
Cinema Equipment Business
Our Cinema Equipment Business consists of financing vehicles and administrators for 434 Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 648 Systems installed domestically and internationally in our second deployment phase (“Phase II Deployment”).
We retain ownership of our Systems and the residual cash flows related to the Systems in Phase I Deployment after the end of the 10-year deployment payment period.
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For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees (“VPFs”) from motion picture studios and distributors and Alternative Content Fees (“ACFs”) from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, “Services”).
VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period the title first plays for general audience viewing in a digital projector equipped movie theatre. The Phase 1 Deployment’s and Phase 2 Deployments performance obligations for revenue recognition are met at this time.
Phase II Deployment’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related to the variable consideration, i.e., the one-time bonus and determined that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.
Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the Systems and Cinedigm received the sale proceeds. Such sales were originally contemplated as the conclusion of the digital cinema deployment plan. Total system revenue was $1.2 million and $5.6 million, during the three months ended June 30, 2022 and 2021, respectively. Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.
Exhibitors who purchased and own Systems using their own financing in Phase II of the Cinema Equipment Business paid us an upfront activation fee of approximately $2.0 thousand per screen (the “Exhibitor-Buyer Structure”). Upfront activation fees were recognized in the period in which these Systems were delivered and ready for content, as we had no further obligations to the customer after that time and collection was reasonably assured. In addition, we recognize activation fee revenue of between $1.0 thousand and $2.0 thousand on Phase II Deployment Systems and for Systems installed by CDF2 Holdings, a related party, (See Note 3 – Other Interests) upon installation and such fees are generally collected upfront upon installation. Our services division manages and collects VPFs on behalf of exhibitors, for which it earns an administrative fee equal to 10% of the VPFs collected.
The Cinema Equipment Business earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service fee equal to 2.5% of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPFs and the performance obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on screens utilizing our Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding VPF fees are due from the movie studios and distributors.
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Content & Entertainment Business
CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand (“VOD” or “OTT Streaming and Digital”), and physical goods (e.g., DVDs and Blu-ray Discs) (“Physical Revenue” or “Base Distribution Business”). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance obligations include the delivery of content for transactional, subscription and ad supported/free ad-supported streaming TV (“FAST”) on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the performance obligation is satisfied, which is when the content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.
Physical goods reserved for sales returns and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
CEG also has contracts for the theatrical distribution of third party feature movies and alternative content. CEG’s distribution fee revenue and CEG’s participation in box office receipts are recognized at the time a feature movie and alternative content are viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature movies’ or alternative content’s theatrical release date.
Principal Agent Considerations
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 cost of goods sold 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.
Our CEG segment 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.
We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates.
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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, even if amounts are refundable.
Deferred revenue pertaining to our Content & Entertainment Business includes amounts related to the sale of DVDs with future release dates.
Deferred revenue relating to our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms.
The ending deferred revenue balance, including current and non-current balances, as of June 30, 2022 was $0.4 million. For the three months ended June 30, 2022, the additions to our deferred revenue balance were primarily due to cash payments received or due in advance of satisfying performance obligations, while the reductions 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.
ASSET ACQUISITIONS
An asset acquisition is an acquisition of an asset, or a group of assets, that does not meet the definition of a business as substantially all of the fair value of the gross assets acquired are concentrated in a single or group of similar, identifiable assets. Asset acquisitions are accounted for by using the cost accumulation model whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on a relative fair value basis. Determining and valuing intangible assets requires judgment.
BUSINESS COMBINATIONS
The Company accounts for acquisitions in accordance with FASB ASC 805, “Business Combinations” (“ASC 805”), and goodwill in accordance with ASC 350, “Intangibles — Goodwill and Other” (“ASC 350”). The excess of the purchase price over the estimated fair value of net assets acquired in a business combination is recorded as goodwill. ASC 805 specifies criteria to be used in determining whether intangible assets acquired in a business combination must be recognized and reported separately from goodwill. Amounts assigned to goodwill and other identifiable intangible assets are based on independent appraisals or internal estimates.
ASC 805 defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date the acquirer achieves control. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquirer (if any) at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the acquirer to recognize contingent consideration (if any) at the acquisition date, measured at its fair value at that date.
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Results of Operations for the Fiscal Three Months Ended June 30, 2022 and 2021
Revenues
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 1,427 | $ | 6,231 | $ | (4,804 | ) | (77 | )% | |||||||
| Content & Entertainment Business | 12,163 | 8,784 | 3,379 | 38 | % | |||||||||||
| $ | 13,590 | $ | 15,015 | $ | (1,425 | ) | (9 | )% | ||||||||
Revenues generated by our Cinema Equipment Business segment decreased as a result of the lower system revenue and eligible VPF systems. Total system revenue recognized was $1.2 million and $5.6 million, during the quarter ended June 30, 2022 and 2021, respectively. An increase in Blockbuster content released during the period ending June 30, 2022 showed a return to pre-pandemic results; however, this was offset by an 80% decrease in eligible VPF systems for the same period last year. Revenue in the Content & Entertainment Business segment increased by 38% for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021. The increase is consistent with the addition of seven new streaming channels related to Bloody Disgusting and DMR business acquisitions and four managed channel additions of The Country Network, Real Madrid TV, El Rey and The Only Way is Essex as well as an increase in the number of advertising partners
Direct Operating Expenses
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 144 | $ | 257 | $ | (113 | ) | (44 | )% | |||||||
| Content & Entertainment Business | 7,212 | 4,374 | 2,838 | 65 | % | |||||||||||
| $ | 7,356 | $ | 4,631 | $ | 2,725 | 59 | % | |||||||||
The decrease in direct operating expenses in the quarter ended June 30, 2022 for the Cinema Equipment Business compared to the prior period was primarily due to a decrease in property taxes as a result of system sales. The increase in direct operating expenses in the three months ended June 30, 2022 for the Content & Entertainment Business compared to the prior year was primarily due to $0.2 million higher license and royalty costs, $0.3 million increase related to DVD manufacturing and fulfillment, $0.7 million higher content and production costs related to continued growth in revenue and distribution, $0.3 million higher personnel and contractors, and $0.2 million related to the film restoration, conversion and website content production costs. Additionally, $0.8 million in Software as a service (“SaaS”) expense resulted from the DMR acquisition was realized during the three months ended June 30, 2022.
Selling, General and Administrative Expenses
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 1,071 | $ | 429 | $ | 642 | 150 | % | ||||||||
| Content & Entertainment Business | 3,783 | 2,818 | 965 | 34 | % | |||||||||||
| Corporate | 4,961 | 2,796 | 2,165 | 77 | % | |||||||||||
| $ | 9,815 | $ | 6,043 | $ | 3,772 | 62 | % | |||||||||
Selling, general and administrative expenses for the quarter ended June 30, 2022 increased by $3.7 million primarily due to $2.2 million increase in personnel costs from the acquisitions of Screambox, DMR and Bloody Disguising, $0.7 million in legal expenses primarily related to a legal settlement , and $0.5 million in professional consulting services.
Recovery of Doubtful Accounts
Recovery of doubtful accounts was $3 thousand and $0.1 million for the fiscal three months ended June 30, 2022 and 2021, respectively.
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Depreciation and Amortization Expense on Property and Equipment
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 117 | 507 | (390 | ) | (77 | )% | |||||||||
| Content & Entertainment Business | 138 | 143 | (5 | ) | (3 | )% | ||||||||||
| Corporate | 1 | (1 | ) | 2 | (200 | )% | ||||||||||
| $ | 256 | $ | 649 | $ | (393 | ) | (61 | )% | ||||||||
Depreciation and amortization expense decreased in our Cinema Equipment Business Segment as the majority of our digital cinema projection systems reached the conclusion of their ten-year useful lives during the quarter ended June 30, 2022 and 2021
Amortization of intangible assets
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||||
| Content & Entertainment Business | 637 | 845 | (208 | ) | (25 | )% | ||||||||||
| Corporate | 107 | 1 | 106 | 10600 | % | |||||||||||
| $ | 744 | $ | 846 | $ | (102 | ) | (12 | )% | ||||||||
Corporate and Content & Entertainment Business amortization expense on intangible assets is $111 thousand lower due Customer Contracts asset being fully amortized, saving $0.4 million, partially offset by $0.2 million higher amortization expense related to the DMR acquisition and Cinedigm India.
Interest expense, net
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | - | $ | 133 | $ | (133 | ) | (100 | )% | |||||||
| Content & Entertainment Business | - | - | - | - | % | |||||||||||
| Corporate | 133 | 11 | 122 | 1109 | % | |||||||||||
| $ | 133 | $ | 144 | $ | (11 | ) | (8 | )% | ||||||||
Interest expense in our Corporate segment increased as a result of deferred and earnout consideration accretion related to the acquisition of Bloody Disgusting, FoundationTV and DMR.
Changes in fair value in Metaverse
On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse’s stock valuation is based on an evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs.
Income Tax Benefit
We recorded income tax expense of $0 for the three months ended June 30, 2022. We recorded an income tax benefit of approximately $63 thousand for the three months ended June 30, 2021.
Our effective tax rate for the three months ended June 30, 2022 and 2021 was zero and negative 1.2%, respectively.
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Net Income/Loss attributable to common shareholders
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 137 | $ | 4,771 | $ | (4,634 | ) | (97 | )% | |||||||
| Content & Entertainment Business | (2,380 | ) | (108 | ) | (2,272 | ) | (2104 | )% | ||||||||
| Corporate | (3,850 | ) | 435 | (4,285 | ) | (985 | )% | |||||||||
| $ | (6,093 | ) | $ | 5,098 | $ | (11,191 | ) | (220 | )% | |||||||
Adjusted EBITDA
We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items.
Consolidated Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the three months ended June 30, 2022 decreased by $7.7 million compared to the three months ended June 30, 2021. Adjusted EBITDA from our Cinema Equipment Business segment decreased primarily due to a decrease in systems sales and eligible VPF systems. Adjusted EBITDA from the Content & Entertainment Business and Corporate decreased by $2.3 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, due to an increase of $2.8 million in direct operating expense and $3.1 million higher selling, general and administrative expenses, versus previous year despite a $3.4 million increase in Streaming digital revenue, adding channels, and acquisitions, and $0.4 million in one-time acquisition cost adjustments.
Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We use Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe Adjusted EBITDA will also be useful to others, including its stockholders, as a valuable financial metric.
We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net income (loss) from continuing operations as an indicator of operating performance. We also believe that Adjusted EBITDA is a financial measure that is useful both to management and investors when evaluating our performance and comparing our performance with that of our competitors. We also use Adjusted EBITDA for planning purposes and to evaluate our financial performance because Adjusted EBITDA excludes certain incremental expenses or non-cash items, such as stock-based compensation charges, that we believe are not indicative of our ongoing operating performance.
We believe that Adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net loss from continuing operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
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Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:
| For the Three Months Ended June 30, | ||||||||
| ($ in thousands) | 2022 | 2021 | ||||||
| Net income (loss) | $ | (5,987 | ) | $ | 5,194 | |||
| Add Back: | ||||||||
| Income tax (income) expense | - | (63 | ) | |||||
| Depreciation and amortization of property and equipment | 256 | 649 | ||||||
| Amortization of intangible assets | 744 | 847 | ||||||
| (Gain) Loss on extinguishment of note payable | - | (2,178 | ) | |||||
| Interest expense, net | 133 | 144 | ||||||
| Intangible impairment | - | - | ||||||
| Change in fair value on equity investment in Metaverse | 1,256 | (334 | ) | |||||
| Other expense, net | 396 | 173 | ||||||
| Recovery of doubtful accounts | 3 | 71 | ||||||
| Stock-based compensation and expenses | 980 | 983 | ||||||
| Net income (loss) attributable to noncontrolling interest | (18 | ) | (7 | ) | ||||
| Adjusted EBITDA | $ | (2,237 | ) | $ | 5,479 | |||
| Adjustments related to the Cinema Equipment Business | ||||||||
| Depreciation and amortization of property and equipment | (117 | ) | $ | (507 | ) | |||
| Amortization of intangible assets | - | - | ||||||
| Stock-based compensation and expenses | - | - | ||||||
| Other expense | (11 | ) | (11 | ) | ||||
| Recovery of doubtful accounts | (3 | ) | (27 | ) | ||||
| Income from operations | 11 | (4,912 | ) | |||||
| Adjusted (negative EBITDA) from Content & Entertainment Business and Corporate | $ | (2,357 | ) | $ | 22 | |||
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included herein.
Cash flow
Changes in our cash flows were as follows:
| For the Three Months Ended June 30, | ||||||||
| ($ in thousands) | 2022 | 2021 | ||||||
| Net cash (used in) provided by operating activities | $ | (1,198 | ) | $ | 3,621 | |||
| Net cash used in investing activities | (61 | ) | (791 | ) | ||||
| Net cash used in financing activities | (284 | ) | (6,324 | ) | ||||
| Net decrease in cash and cash equivalents | $ | (1,543 | ) | $ | (3,494 | ) | ||
As of June 30, 2022, we had cash and cash equivalents balances of $11.5 million.
As of June 30, 2021, we had cash, cash equivalents, and restricted cash balances of $14.4 million.
For the three months ended June 30, 2022, net cash provided by operating activities is primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, gain on extinguishment of note payable, including other changes in working capital. Additionally, during the three months ended June 30, 2022, the Company increased accounts payable by $5.4 million to vendors. Accounts receivable increased due to growth in streaming and acquisitions of Bloody Disgusting, Screambox and DMR. Cash received from VPFs decreased from the previous period in alignment with the decrease in eligible VPF systems. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and seasonally lower in the other two quarters. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months.
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For the three months ended June 30, 2021, net cash provided by operating activities is primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, including other changes in working capital. Additionally, during the three months ended June 30, 2021, the Company paid down $8.1 million to vendors at both CEG and Corporate. Cash received from VPFs declined from the previous period as Phase I Deployment Systems in our Cinema Equipment Business reached the conclusion of their deployment payment periods with certain major studios. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. This was further impacted by the decrease in eligible VPF systems. Because our digital cinema business earns a VPF when a movie is first played on a system, the reduction of eligible VPF systems resulted in reduced revenues. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and lower in the other two quarters as we pay royalties on such revenues. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months. For the three months ended June 30, 2022 revenues from the sale of digital projections Systems was $1.2 million.
For the three months ended June 30, 2022, cash flows used in investing activities consisted of purchases of property and equipment of $0.1 million.
For the three months ended June 30, 2021, cash flows used in investing activities consisted of purchases of property and equipment of $40 thousand and the purchase of a business of $1.0 million related to the business combination for FoundationTV.
For the three months ended June 30, 2022, cash flows provided by financing activities consisted of payments of approximately $0.3 million in notes payable.
For the three months ended June 30, 2021, cash flows used in financing activities consisted of payments of approximately $4.8 million in notes payable and $1.6 million in Credit Facility repayments.
Contractual Obligations
The following table summarizes our significant contractual obligations as of June 30, 2022:
| Payments Due | ||||||||||||||||||||
| Contractual Obligations (in thousands) | Total | 2023 | 2024 & 2025 | 2026 & 2027 | Thereafter | |||||||||||||||
| Operating lease obligations | $ | 682 | $ | 193 | $ | 489 | $ | — | $ | — | ||||||||||
We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, marketing and promotional activities and content acquisition and marketing costs. Certain of these costs, including costs of content acquisition, marketing and promotional activities, could be reduced if necessary. We feel we are adequately financed for at least the next twelve months; however, we may need to raise additional capital for working capital as deemed necessary. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity.
Seasonality
Revenues from our Cinema Equipment Business derived from the collection of VPFs from motion picture studios are seasonal, coinciding with the timing of releases of movies by the motion picture studios. Generally, motion picture studios release the most marketable movies during the summer and the winter holiday season. The unexpected emergence of a hit movie during other periods can alter the traditional trend. The timing of movie releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter or any other quarter. While CEG benefits from the winter holiday season, we believe the seasonality of motion picture exhibition, is becoming less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout the year.
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Off-balance sheet arrangements
We are not a party to any off-balance sheet arrangements other than as discussed in Note 2 – Summary of Significant Accounting Policies, Basis of Presentation and Consolidation and Note 3 - Other Interests to the Condensed Consolidated Financial Statements (Unaudited) included in Item 1 of this Quarterly Report on Form 10-Q, we hold a 100% equity interest in CDF2 Holdings, which is an unconsolidated variable interest entity (“VIE”), which wholly owns Cinedigm Digital Funding 2, LLC; however, we are not the primary beneficiary of the VIE.
Impact of Inflation
The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse impact on our operating results.
Item 4. CONTROLS AND PROCEDURES
Definition and Limitations of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Operating Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in the Exchange Act), as of June 30, 2022. Based on such evaluation, our principal executive officer and principal financial and accounting officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, on a timely basis, and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures due to the material weaknesses identified in our internal control over financial reporting as of June 30, 2022.
Previously Reported Material Weakness on Internal Control Over Financial Reporting
In the 2022 Form 10-K, filed with the SEC on July 1, 2022, management concluded that our internal control over financial reporting was not effective as of March 31, 2022. In the evaluation, management identified material weaknesses in internal controls related to our financial close and reporting process and information and communication controls. Management also concluded that we did not have a sufficient complement of corporate personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting matters completely and accurately. As a result of this evaluation, management extensively used outside consultants who possessed the appropriate levels of accounting and controls knowledge.
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Remediation. Following identification of this control deficiency, management is implementing modifications to better ensure that the Company has appropriate and timely reviews on all financial reporting analysis. The material weakness in our internal control over financial reporting will not be considered remediated until these modifications are implemented, in operation for a sufficient period of time, tested, and concluded by management to be designed and operating effectively. In addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify our remediation plan. Management will test and evaluate the implementation of these modifications to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material misstatement in the Company’s financial statements.
The steps we took to address the deficiencies identified included:
| ● | we hired a new Chief Financial Officer; |
| ● | we hired a new Executive Vice-President (“EVP”) Accounting; |
| ● | we have engaged in efforts to restructure accounting processes and revise organizational structures to enhance accurate accounting and appropriate financial reporting; |
| ● | we have hired additional experienced accounting personnel in the corporate office to enhance the application of accounting standards and our financial closing and reporting process; |
| ● | we have engaged external advisors to provide financial accounting and reporting assistance; |
| ● | we will enhance information and communication processes through information technology solutions to ensure that information needed for financial reporting is accurate, complete, relevant and reliable, and communicated in a timely manner; and |
| ● | we have engaged external advisors to evaluate and document the design and operating effectiveness of our internal control over financial reporting and assist with the remediation and implementation of our internal control function. |
As noted above, we believe that, as a result of management’s in-depth review of its accounting processes, and the additional procedures management has implemented, there are no material inaccuracies or omissions of material fact in this Form 10-Q and, to the best of our knowledge, we believe that the consolidated financial statements in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows in conformity with GAAP.
We and our Board treat the controls surrounding, and the integrity of, our financial statements with the utmost priority. Management is committed to the planning and implementation of remediation efforts to address control deficiencies and any other identified areas of risk. These remediation efforts are intended to both address the identified material weakness and to enhance our overall financial control environment. We are committed to maintaining a strong internal control environment, and we believe the measures described above will strengthen our internal control over financial reporting and remediate the material weakness we have identified. Our remediation efforts have begun, and we will continue to devote significant time and attention to these remedial efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above, which may require additional implementation time.
Changes in Internal Control Over Financial Reporting
There have been no changes, other than our remediation efforts discussed above, in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CINEDIGM CORP. | ||
| Date: August 15, 2022 | By: | /s/ Christopher J. McGurk |
| Christopher J. McGurk Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | ||
| Date: August 15, 2022 | By: | /s/ John K. Canning |
| John K. Canning Chief Financial Officer (Principal Financial Officer) | ||
43
EXHIBIT 31.1
CERTIFICATION
I, Christopher J. McGurk, certify that:
| 1. | I have reviewed this Form 10-Q of Cinedigm Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: | August 15, 2022 | By: | /s/ Christopher J. McGurk | |
| Christopher J. McGurk | ||||
| Chief Executive Officer and | ||||
| Chairman of the Board of Directors | ||||
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, John K. Canning, certify that:
| 1. | I have reviewed this Form 10-Q of Cinedigm Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Date: | August 15, 2022 | By: | /s/ John K. Canning | |
| John K. Canning | ||||
| Chief Financial Officer (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Form 10-Q of Cinedigm Corp. (the “Company”) for the period ended June 30, 2022 as filed with the SEC (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
| Date: | August 15, 2022 | By: | /s/ Christopher J. McGurk | |
| Christopher J. McGurk | ||||
| Chief Executive Officer and | ||||
| Chairman of the Board of Directors | ||||
| (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Form 10-Q of Cinedigm Corp. (the “Company”) for the period ended June 30, 2022 as filed with the SEC (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
| Date: | August 15, 2022 | By: | /s/ John K. Canning | |
| John K. Canning | ||||
| Chief Financial Officer (Principal Financial Officer) |