Cineverse Corp 10-Q for FY2020 Q3
Cineverse Corp. (CNVS)
10-Q
2020-02-14
For: 2019-12-31
View Original
Added on
April 10, 2026
About this 10-Q
Cineverse Corp filed this 10-Q on February 14, 2020, covering the quarter ended December 31, 2019 (FY2020 Q3).
Headline figures
Quarter ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $11.51M
- down 21.4% from $14.64M a year earlier
- Net loss
- $2.17M
- compared with a net loss of $3.26M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal period ended: December 31, 2019
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 000-31810
___________________________________
Cinedigm Corp.
(Exact name of registrant as specified in its charter)
___________________________________
Delaware | 22-3720962 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
45 West 36th Street, 7th Floor, New York, NY | 10018 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 206-8600
(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 |
CLASS A COMMON STOCK, PAR VALUE $0.001 PER SHARE | CIDM | NASDAQ GLOBAL MARKET |
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. | Yes x No o |
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). | Yes x No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. | |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company x | Emerging Growth Company o | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | Yes o No x | |||||
o 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 February 12, 2020, 40,290,640 shares of Class A Common Stock, $0.001 par value, were outstanding.
CINEDIGM CORP.
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | ||
Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |
Condensed Consolidated Balance Sheets at December 31, 2019 (Unaudited) and March 31, 2019 | ||
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended December 31, 2019 and 2018 | ||
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended December 31, 2019 and 2018 | ||
Unaudited Condensed Consolidated Statement of Deficit for the Three and Nine Months ended December 31, 2019 and 2018 | ||
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended December 31, 2019 and 2018 | ||
Notes to the Condensed Consolidated Financial Statements (Unaudited) | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 4. | Controls and Procedures | |
PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
Exhibit Index | ||
Signatures | ||
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CINEDIGM CORP.CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
December 31, 2019 | March 31, 2019 | ||||||
ASSETS | (Unaudited) | ||||||
Current assets | |||||||
Cash and cash equivalents | $ | 14,474 | $ | 17,872 | |||
Accounts receivable, net | 40,902 | 35,510 | |||||
Inventory, net | 598 | 673 | |||||
Unbilled revenue | 1,682 | 2,336 | |||||
Prepaid and other current assets | 9,458 | 8,488 | |||||
Total current assets | 67,114 | 64,879 | |||||
Restricted cash | 1,000 | 1,000 | |||||
Property and equipment, net | 9,442 | 14,047 | |||||
Right-of-use assets | 1,765 | — | |||||
Intangible assets, net | 7,518 | 9,686 | |||||
Goodwill | 8,701 | 8,701 | |||||
Other long-term assets | 171 | 526 | |||||
Total assets | $ | 95,711 | $ | 98,839 | |||
LIABILITIES AND DEFICIT | |||||||
Current liabilities | |||||||
Accounts payable and accrued expenses | $ | 80,985 | $ | 68,707 | |||
Current portion of notes payable, including unamortized debt discount of $690 and $1,436 respectively (see Note 5) | 38,310 | 43,319 | |||||
Operating lease liabilities | 926 | — | |||||
Current portion of deferred revenue | 1,640 | 1,687 | |||||
Total current liabilities | 121,861 | 113,713 | |||||
Notes payable, non-recourse, net of current portion and unamortized debt issuance costs and debt discounts of $955 and $1,495 respectively (see Note 5) | 11,604 | 19,132 | |||||
Operating lease liabilities, noncurrent | 918 | — | |||||
Deferred revenue, net of current portion | 1,338 | 2,357 | |||||
Other long-term liabilities | 127 | 205 | |||||
Total liabilities | 135,848 | 135,407 | |||||
Commitments and contingencies (see Note 7) | |||||||
Stockholders’ deficit | |||||||
Preferred stock, 15,000,000 shares authorized; Series A 10% - $0.001 par value per share; 20 shares authorized; and 7 shares issued and outstanding at December 31, 2019 and March 31, 2019. Liquidation preference of $3,648 | 3,559 | 3,559 | |||||
Common stock, $0.001 par value; Class A stock 60,000,000 shares authorized at December 31, 2019 and March 31, 2019; 41,105,917 and 36,992,433 shares issued and 39,792,081 and 35,678,597 shares outstanding at December 31, 2019 and March 31, 2019, respectively | 40 | 36 | |||||
Additional paid-in capital | 375,489 | 368,531 | |||||
Treasury stock, at cost; 1,313,836 Class A common shares at December 31, 2019 and March 31, 2019 | (11,603 | ) | (11,603 | ) | |||
Accumulated deficit | (406,378 | ) | (395,814 | ) | |||
Accumulated other comprehensive income | 35 | 10 | |||||
Total stockholders’ deficit of Cinedigm Corp. | (38,858 | ) | (35,281 | ) | |||
Deficit attributable to noncontrolling interest | (1,279 | ) | (1,287 | ) | |||
Total deficit | (40,137 | ) | (36,568 | ) | |||
Total liabilities and deficit | $ | 95,711 | $ | 98,839 | |||
See accompanying Notes to Condensed Consolidated Financial Statements
3
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for share and per share data)
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues | $ | 11,512 | $ | 14,643 | $ | 31,556 | $ | 41,465 | |||||||
Costs and expenses: | |||||||||||||||
Direct operating (excludes depreciation and amortization shown below) | 5,726 | 5,246 | 13,425 | 12,287 | |||||||||||
Selling, general and administrative | 2,997 | 6,425 | 13,834 | 19,455 | |||||||||||
(Recovery) provision for doubtful accounts | (5 | ) | 113 | 321 | 1,245 | ||||||||||
Depreciation and amortization of property and equipment | 1,594 | 2,074 | 4,977 | 6,239 | |||||||||||
Amortization of intangible assets | 589 | 1,397 | 2,178 | 4,187 | |||||||||||
Total operating expenses | 10,901 | 15,255 | 34,735 | 43,413 | |||||||||||
Income (loss) from operations | 611 | (612 | ) | (3,179 | ) | (1,948 | ) | ||||||||
Interest expense, net | (1,618 | ) | (2,593 | ) | (5,713 | ) | (7,860 | ) | |||||||
Other expense, net | (1,019 | ) | (12 | ) | (1,187 | ) | (40 | ) | |||||||
Loss from operations before income taxes | (2,026 | ) | (3,217 | ) | (10,079 | ) | (9,848 | ) | |||||||
Income tax expense | (136 | ) | (55 | ) | (210 | ) | (194 | ) | |||||||
Net loss | (2,162 | ) | (3,272 | ) | (10,289 | ) | (10,042 | ) | |||||||
Net (income) loss attributable to noncontrolling interest | (7 | ) | 14 | (8 | ) | 38 | |||||||||
Net loss attributable to controlling interests | (2,169 | ) | (3,258 | ) | (10,297 | ) | (10,004 | ) | |||||||
Preferred stock dividends | (89 | ) | (89 | ) | (267 | ) | (267 | ) | |||||||
Net loss attributable to common stockholders | $ | (2,258 | ) | $ | (3,347 | ) | $ | (10,564 | ) | $ | (10,271 | ) | |||
Net loss per Class A common stock attributable to common stockholders - basic and diluted: | |||||||||||||||
Net loss attributable to common stockholders | $ | (0.05 | ) | $ | (0.09 | ) | $ | (0.26 | ) | $ | (0.27 | ) | |||
Weighted average number of Class A common stock outstanding: basic and diluted | 42,418,641 | 38,033,756 | 40,745,114 | 37,793,845 | |||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net loss | $ | (2,162 | ) | $ | (3,272 | ) | $ | (10,289 | ) | $ | (10,042 | ) | ||||
Other comprehensive income: foreign exchange translation | (3 | ) | 25 | 25 | 41 | |||||||||||
Comprehensive loss | (2,165 | ) | (3,247 | ) | (10,264 | ) | (10,001 | ) | ||||||||
Less: comprehensive (income) loss attributable to noncontrolling interest | (7 | ) | 14 | (8 | ) | 38 | ||||||||||
Comprehensive loss attributable to controlling interests | $ | (2,172 | ) | $ | (3,233 | ) | $ | (10,272 | ) | $ | (9,963 | ) | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
CINEDIGM CORP.
CONSOLIDATED STATEMENTS OF DEFICIT
(Unaudited)
(In thousands, except share data)
Series A Preferred Stock | Class A Common Stock | Treasury | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders' Deficit | Non-Controlling Interest | Total Deficit | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balances as of March 31, 2019 | 7 | $ | 3,559 | 35,678,597 | $ | 36 | 1,313,836 | $ | (11,603 | ) | $ | 368,531 | $ | (395,814 | ) | $ | 10 | $ | (35,281 | ) | $ | (1,287 | ) | $ | (36,568 | ) | ||||||||||||||
Foreign exchange translation | — | — | — | — | — | — | — | — | 6 | 6 | — | 6 | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 11 | — | — | 11 | — | 11 | ||||||||||||||||||||||||||||
Preferred stock dividends paid with common stock | — | — | 45,390 | — | — | — | 89 | (89 | ) | — | — | — | — | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (5,033 | ) | — | (5,033 | ) | (6 | ) | (5,039 | ) | ||||||||||||||||||||||||
Balances as of June 30, 2019 | 7 | 3,559 | 35,723,987 | 36 | 1,313,836 | (11,603 | ) | 368,631 | (400,936 | ) | 16 | (40,297 | ) | (1,293 | ) | (41,590 | ) | |||||||||||||||||||||||
Foreign exchange translation | — | — | — | — | — | — | — | — | 22 | 22 | — | 22 | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 178 | — | — | 178 | — | 178 | ||||||||||||||||||||||||||||
Issuance of Class A common stock | — | — | 3,900,000 | 4 | — | — | 5,846 | — | — | 5,850 | — | 5,850 | ||||||||||||||||||||||||||||
Preferred stock dividends paid with common stock | — | — | 65,749 | — | — | — | 89 | (89 | ) | — | — | — | — | |||||||||||||||||||||||||||
Fair value of conversion feature in connection with convertible note | — | — | — | — | — | — | 478 | — | — | 478 | — | 478 | ||||||||||||||||||||||||||||
Net (loss) income | — | — | — | — | — | — | — | (3,095 | ) | — | (3,095 | ) | 7 | (3,088 | ) | |||||||||||||||||||||||||
Balances as of September 30, 2019 | 7 | 3,559 | 39,689,736 | 40 | 1,313,836 | (11,603 | ) | 375,222 | (404,120 | ) | 38 | (36,864 | ) | (1,286 | ) | (38,150 | ) | |||||||||||||||||||||||
Foreign exchange translation | — | — | — | — | — | — | — | — | (3 | ) | (3 | ) | — | (3 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 178 | — | — | 178 | — | 178 | ||||||||||||||||||||||||||||
Preferred stock dividends paid with common stock | — | — | 102,345 | — | — | — | 89 | (89 | ) | — | — | — | — | |||||||||||||||||||||||||||
Net (loss) income | — | — | — | — | — | — | — | (2,169 | ) | — | (2,169 | ) | 7 | (2,162 | ) | |||||||||||||||||||||||||
Balances as of December 31, 2019 | 7 | $ | 3,559 | 39,792,081 | $ | 40 | 1,313,836 | $ | (11,603 | ) | $ | 375,489 | $ | (406,378 | ) | $ | 35 | $ | (38,858 | ) | $ | (1,279 | ) | $ | (40,137 | ) | ||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
6
CINEDIGM CORP.
CONSOLIDATED STATEMENTS OF DEFICIT
(Unaudited)
(In thousands, except share data)
Series A Preferred Stock | Class A Common Stock | Treasury | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Deficit | Non-Controlling Interest | Total Deficit | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balances as of March 31, 2018 | 7 | $ | 3,559 | 34,948,139 | $ | 35 | 1,313,836 | $ | (11,603 | ) | $ | 366,223 | $ | (379,225 | ) | $ | (38 | ) | $ | (21,049 | ) | $ | (1,255 | ) | $ | (22,304 | ) | |||||||||||||
Foreign exchange translation | — | — | — | — | — | — | — | — | 4 | 4 | — | 4 | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 86 | — | — | 86 | — | 86 | ||||||||||||||||||||||||||||
Preferred stock dividends paid with common stock | — | — | 64,194 | — | — | — | 89 | (89 | ) | — | — | — | — | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (3,267 | ) | — | (3,267 | ) | (16 | ) | (3,283 | ) | ||||||||||||||||||||||||
Balances as of June 30, 2018 | 7 | 3,559 | 35,012,333 | 35 | 1,313,836 | (11,603 | ) | 366,398 | (382,581 | ) | (34 | ) | (24,226 | ) | (1,271 | ) | (25,497 | ) | ||||||||||||||||||||||
Foreign exchange translation | — | — | — | — | — | — | — | — | 12 | 12 | — | 12 | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 317 | — | — | 317 | — | 317 | ||||||||||||||||||||||||||||
Preferred stock dividends paid with common stock | — | — | 56,869 | — | — | — | 89 | (89 | ) | — | — | — | — | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (3,479 | ) | — | (3,479 | ) | (8 | ) | (3,487 | ) | ||||||||||||||||||||||||
Balances as of September 30, 2018 | 7 | 3,559 | 35,069,202 | 35 | 1,313,836 | (11,603 | ) | 366,804 | (386,149 | ) | (22 | ) | (27,376 | ) | (1,279 | ) | (28,655 | ) | ||||||||||||||||||||||
Issuance of shares for asset acquisition | — | — | 137,667 | — | — | — | 106 | — | — | 106 | — | 106 | ||||||||||||||||||||||||||||
Foreign exchange translation | — | — | — | — | — | — | — | — | 25 | 25 | — | 25 | ||||||||||||||||||||||||||||
Issuance of common stock for third party professional services | — | — | 225,862 | 1 | — | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||
Fair value of conversion feature in connection with convertible note | — | — | — | — | — | — | 270 | — | — | 270 | — | 270 | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 361 | — | — | 361 | — | 361 | ||||||||||||||||||||||||||||
Issuance of restricted stock to employees | — | — | 10,000 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Preferred stock dividends paid with common stock | — | — | 74,335 | — | — | — | 89 | (89 | ) | — | — | — | — | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (3,258 | ) | — | (3,258 | ) | (14 | ) | (3,272 | ) | ||||||||||||||||||||||||
Balances as of December 31, 2018 | 7 | $ | 3,559 | 35,517,066 | $ | 36 | 1,313,836 | $ | (11,603 | ) | $ | 367,630 | $ | (389,496 | ) | $ | 3 | $ | (29,871 | ) | $ | (1,293 | ) | $ | (31,164 | ) | ||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
7
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended December 31, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (10,289 | ) | $ | (10,042 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation and amortization of property and equipment and amortization of intangible assets | 7,155 | 10,426 | |||||
Amortization of debt issuance costs included in interest expense | 992 | 1,377 | |||||
Provision for doubtful accounts | 321 | 1,245 | |||||
Recovery for inventory reserve | (460 | ) | (49 | ) | |||
Stock-based compensation and expenses | 367 | 764 | |||||
Accretion and PIK interest expense added to note payable | 1,189 | 1,316 | |||||
Changes in operating assets and liabilities; | |||||||
Accounts receivable | (5,713 | ) | (2,010 | ) | |||
Inventory | 535 | 209 | |||||
Unbilled revenue | 654 | 4,853 | |||||
Prepaids and other current assets | (381 | ) | 1,169 | ||||
Accounts payable and accrued expenses | 12,014 | (1,718 | ) | ||||
Deferred revenue | (1,066 | ) | (1,207 | ) | |||
Net cash provided by operating activities | 5,318 | 6,333 | |||||
Cash flows from investing activities: | |||||||
Purchases of property and equipment | (367 | ) | (1,068 | ) | |||
Purchases of intangible assets | (10 | ) | (111 | ) | |||
Net cash used in investing activities | (377 | ) | (1,179 | ) | |||
Cash flows from financing activities: | |||||||
Payment of notes payable | (15,413 | ) | (18,539 | ) | |||
Proceeds under revolving credit agreement | 1,224 | 7,574 | |||||
Proceeds from issuance of convertible note and notes payable | — | 5,000 | |||||
Net proceeds from issuance of common stock | 5,850 | — | |||||
Net cash used in financing activities | (8,339 | ) | (5,965 | ) | |||
Net change in cash and cash equivalents | (3,398 | ) | (811 | ) | |||
Cash, cash equivalents, and restricted cash at beginning of period | 18,872 | 18,952 | |||||
Cash, cash equivalents, and restricted cash at end of period | $ | 15,474 | $ | 18,141 | |||
See accompanying Notes to Condensed Consolidated Financial Statements
8
CINEDIGM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share information)
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 are (i) a leading distributor and aggregator of independent movie, television and other short form content managing a library of distribution rights to thousands of titles and episodes released across digital, physical, theatrical, home and mobile entertainment platforms and (ii) a leading servicer of digital cinema assets for over 12,000 movie screens in both North America and several international countries.
Liquidity
We have incurred net losses historically and have an accumulated deficit of $406.4 million and negative working capital of $54.7 million as of December 31, 2019. We may continue to generate net losses for the foreseeable future. In addition, we have significant debt-related contractual obligations as of December 31, 2019 and beyond.
The Second Lien Loans (as defined in Note 5 - Notes Payable) were to mature on June 30, 2019. On June 28, 2019, the Company entered into a consent agreement with lenders of the Second Lien Loans to an extension of the Second Lien Loans pursuant to which (i) the Company paid down a portion of the outstanding principal amount plus accrued interest to date, and (ii) the maturity date of the remaining outstanding principal amount of the Second Lien Loans was extended to September 30, 2019.
On July 30, 2019, one of the lenders, signed a waiver to defer the receipt of the portion of the outstanding principal amount on the Second Lien Loans agreed to be paid no later than September 30, 2019.
During the nine months ended December 31, 2019, the Company paid $3.4 million of the outstanding Second Lien Loans and expects to obtain additional capital from or through Bison Capital Holding Limited or an affiliate thereof ("Bison") for final payment of the remaining outstanding balances. On October 24, 2019, the Company entered into a consent agreement to extend the maturity date to November 30, 2019. On January 8, 2020, the Company entered into another consent agreement to extend the maturity date to February 17, 2020. There were no consent fees paid for these consent agreements. See Note 5 - Notes Payable and Note 10 - Subsequent Events.
The $10.0 million note payable ("2018 Loan") to Bison Global Investment SPC due July 20, 2019 is guaranteed by Bison Entertainment and Media Group ("BEMG"). On July 20, 2018, the Company also entered into a side letter (the “Letter”) with BEMG, where BEMG agreed to guarantee the payment directly to Bison Global of any amount due if (i) the 2018 Loan matures prior to June 28, 2021 or (ii) Bison Global demands payment of the 2018 Loan, in whole or in part, prior to maturity.
On July 12, 2019, the Company and Bison Global Investment SPC for and on behalf of Global Investment SPC-Bison Global No. 1, another affiliate of Bison (“Bison Global”), entered into a termination agreement (the “Termination Agreement”) with respect to the $10.0 million 2018 Loan. Contemporaneously with the Termination Agreement, the Company entered into a convertible promissory note (“Bison Convertible Note”) with Bison Global for $10.0 million.
The Bison Convertible Note has a term ending on March 4, 2020, and bears interest at 5% per annum. The principal is payable upon maturity, in cash or in shares of our Class A common stock, par value $0.001 per share (the “Common Stock” or "Class A common stock"), or a combination of cash and Common Stock, at the Company’s option. The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan. The Company expects to enter into an agreement with Bison to extend the Bison Convertible Note or convert it to equity in March 2020. See Note 5 - Notes Payable.
The Bison Convertible Note, offset by the concurrent payoff and termination of the 2018 Loan, did not result in any increase to the Company’s outstanding debt balance.
On July 9, 2019, the Company entered into a common stock purchase agreement (the “July Stock Purchase Agreement”) with BEMG where 2,000,000 shares of Common Stock (the “ July SPA Shares”), for an aggregate purchase price in cash of $3.0 million priced at $1.50 per share was sold to BEMG. The SPA Shares are subject to certain transfer restrictions. The proceeds of
9
the sale of the July SPA Shares sold were used for working capital purposes and the repayment of Second Lien Loans (as defined in Note 5 - Notes Payable). In addition, the Company agreed to enter into a registration rights agreement for the resale of the July SPA Shares.
On August 2, 2019, the Company entered into another common stock purchase agreement (the "August Stock Purchase Agreement") with BEMG, where the Company sold to BEMG a total of 1,900,000 shares of Common Stock (the “August SPA Shares”), for an aggregate purchase price in cash of $2.9 million priced at $1.50 per share. The August SPA Shares are subject to certain transfer restrictions. The proceeds of the sale of the August SPA Shares sold were used for working capital purposes. In addition, the Company agreed to enter into a registration rights agreement for the resale of the August SPA Shares.
On October 9, 2018, the Company issued a subordinated convertible note (the “Convertible Note”) to MingTai Investment LP (the “Lender”) for $5.0 million. All proceeds from the Convertible Note were used to pay the $5.0 million 2013 Notes described above. See Note 5 - Notes Payable. The Convertible Note bears interest at 8% and matures on October 9, 2019 with one additional year extension at the Company's option. On October 9, 2019, the Company exercised its option to extend for an additional year. The new maturity date of the Convertible Note is October 9, 2020.
On July 3, 2019, the Company entered into an amendment (the “EWB Amendment”) to the Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between the Company, East West Bank and the Guarantors named therein (the “EWB Credit Agreement”). The EWB Amendment reduced the size of the facility to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, and extended the maturity date to June 30, 2020. In connection with the EWB Amendment, three of our subsidiaries became Guarantors under the EWB Credit Agreement.
On July 26, 2019, the previously announced Agreement and Plan of Merger, dated as of March 14, 2019, among the Company, C&F Merger Sub, Inc., a wholly-owned subsidiary of the Company, Future Today Inc, Alok Ranjan and Vikrant Mathur (individually and as Stockholder Representative) and the Company Stockholders identified therein, was amended (the “Merger Amendment”). Pursuant to the Merger Amendment, among other things, the parties (x) extended the End Date and exclusivity period to July 31, 2019, (y) provided for payment of a non-refundable deposit of $500,000 by the Company, and (z) provided the Company with the unilateral right to extend the End Date and exclusivity period to August 14, 2019 upon making an additional non-refundable deposit of $500,000. Any non-refundable deposit(s) made prior to closing will be credited against the purchase price at closing. On July 31, 2019, the Company exercised its right to extend to August 14, 2019. Effective January 1, 2020, the Agreement and Plan of Merger was terminated. See Note 10 - Subsequent Events. Because of the termination of the Merger Agreement, $1.0 million deposit of purchase price was forfeited and written off during the three months ended December 31, 2019.
On October 9, 2019, the Company elected to extend the term of the Convertible Note with Ming Tai Investment LP to mature the Convertible Note on October 9, 2020. The Convertible Note is for $5.0 million and bears interest at 8%. See Note 5 - Notes Payable.
On January 13, 2020, Bison Entertainment Investment Limited, the Company’s majority stockholder, signed a written consent approving the acquisition by the Company of shares of Starrise Media Limited, a leading Chinese entertainment company, from two of Starrise’s stockholders. The Company mailed a definitive information statement to its stockholders in late January. The Company closed on the purchase of 162,162,162 Starrise shares and issued 21,646,604 shares of Common Stock as consideration therefor on February 14, 2020, and expects to close on the remainder of the Starrise shares as soon as practicable.
We believe the combination of: (i) our cash and cash equivalent balances at December 31, 2019, (ii) expected cash flows from operations, and (iii) the support or availability of funding from Bison and its related parties and other capital resources and financing will be sufficient to satisfy our contractual obligations, operational and liquidity and capital requirements to February 2021. 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
The accompanying condensed consolidated financial statements are unaudited and include the accounts of the Company, its wholly owned and majority owned subsidiaries, and reflect all normal and recurring adjustments necessary for the fair presentation of its consolidated financial position, results of operations and cash flows. All material inter-company accounts and transactions 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 Condensed Consolidated Financial Statements for a discussion of our noncontrolling and majority 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 adequacy of accounts receivable reserves, return reserves, inventory reserves, recovery of advances, assessment of goodwill impairment, intangible asset impairment and estimated amortization lives and valuation allowances for income taxes. Actual results could differ from these estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the respective interim periods are not necessarily indicative of the results expected for the full year. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
SIGNIFICANT ACCOUNTING POLICES
The significant accounting policies used in the preparation of these condensed consolidated financial statements for the three and nine months ended December 31, 2019 are consistent with those disclosed in Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019 except as noted below.
RECLASSIFICATIONS
Certain amounts in the prior year consolidated balance sheet has been reclassified to conform to the presentation of the current period.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
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. Our Prospect Loan (as defined below) requires that we maintain specified cash balances that are restricted to repayment of interest thereunder. See Note 5 - Notes Payable for information about our restricted cash balances.
Cash, cash equivalents, and restricted cash consisted of the following:
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As of | |||||||
(in thousands) | December 31, 2019 | March 31, 2019 | |||||
Cash and Cash Equivalents | $ | 14,474 | $ | 17,872 | |||
Restricted Cash | 1,000 | 1,000 | |||||
$ | 15,474 | $ | 18,872 | ||||
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 Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates.
ADVANCES
Advances, which are recorded within prepaid and other current assets on the condensed 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 $0.3 million and $0.3 million, respectively for the three months ended December 31, 2019 and 2018. Impairments and accelerated amortization related to advances were $0.7 million and $0.9 million, respectively for the nine months ended December 31, 2019 and 2018.
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 | 3 - 5 years |
Digital cinema projection systems | 10 years |
Machinery and equipment | 3 - 10 years |
Furniture and fixtures | 3 - 6 years |
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 condensed consolidated statements of operations.
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.
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The following tables summarize the levels of fair value measurements of our financial assets and liabilities as of December 31, 2019 and March 31, 2019:
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Restricted cash | $ | 1,000 | $ | — | $ | — | $ | 1,000 | ||||||||
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 condensed consolidated balance sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature. At December 31, 2019 and March 31, 2019, the estimated fair value of our fixed rate debt approximated its carrying amounts. We estimated the fair value of debt based upon current interest rates available to us at the respective balance sheet dates for arrangements with similar terms and conditions. Based on borrowing rates currently available to us for loans with similar terms, the fair value of the variable rate debt is $13.1 million, and capital lease obligations approximates fair value.
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 and nine months ended December 31, 2019 and 2018, no impairment charge was recorded from operations for long-lived assets or finite-lived assets.
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.
No goodwill impairment charge was recorded in the three and nine months ended December 31, 2019 and 2018.
Gross amounts of goodwill and accumulated impairment charges that we have recorded are as follows:
(In thousands) | ||||
Goodwill | $ | 32,701 | ||
Accumulated impairment charges | (24,000 | ) | ||
Goodwill at December 31, 2019 and March 31, 2019 | $ | 8,701 | ||
REVENUE RECOGNITION
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. |
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We recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the services provided, sales of physical products (DVDs 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 VOD 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 digital cinema equipment (the “Systems”) 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
Virtual print fees (“VPFs”) are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Cinedigm Digital Funding I, LLC. ("Phase 1 DC") and to Access Digital Cinema Phase 2 Corp. (“Phase 2 DC”) when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase 1 DC 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 in which the digital title first plays on a System for general audience viewing in a digitally equipped movie theatre, as Phase 1 DC’s and Phase 2 DC’s performance obligations have been substantially met at that time.
Phase 2 DC’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 2 DC 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 2 DC 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 not 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 have begun, and expect to continue, to pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan. During the three and nine months ended December 31, 2019, there was $0.2 million and $1.2 million, respectively, of digital System sales revenue for the sale of 24 and 136 digital projection Systems, 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 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 2 DC 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 segment 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 VPF’s and the performance obligation is satisfied at that time the related VPF fees are due which is at the time
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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.
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"), and physical goods (e.g. DVD and Blu-ray Discs). Fees earned are typically based on the gross amounts billed to our customers less the amounts owed to the media studios or content producers under distribution agreements, and gross media sales of owned or licensed content. 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 subscription on the digital platform, shipment of DVD and Blu-ray Discs, or make available at point-of-sale for transactional and VOD services. 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. Revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.
Reserves 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 is 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. |
Based on our evaluation of the above indicators, we concluded that there were no changes to our gross versus net reporting from legacy GAAP.
Shipping and Handling
Shipping and handling costs are incurred to move physical goods (e.g. DVD 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.
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.
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 are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. Sales returns and allowances are reported as a reduction of revenues.
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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. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
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 December 31, 2019 was $3.0 million. For the three months ended December 31, 2019, 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.
During the three and nine months ended December 31, 2019, $1.3 million and $3.4 million, respectively of revenue was recognized that was included in the deferred revenue balance at the beginning of the period. As of December 31, 2019, the aggregate amount of contract revenue allocated to unsatisfied performance obligations was $3.0 million. We expect to recognize approximately $1.6 million of this balance over the next 12 months, and the remainder thereafter.
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, 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 and nine months ended December 31, 2019:
(in thousands):
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Cinema Equipment Business: | |||||||||||||||
Phase I Deployment | $ | 1,402 | $ | 2,156 | $ | 4,797 | $ | 7,424 | |||||||
Phase II Deployment | 444 | 1,754 | 1,326 | 8,191 | |||||||||||
Services | 1,043 | 1,410 | 3,378 | 4,311 | |||||||||||
Digital System Sales | 240 | — | 1,266 | — | |||||||||||
Total Cinema Equipment Business revenue | $ | 3,129 | $ | 5,320 | $ | 10,767 | $ | 19,926 | |||||||
Content & Entertainment Business: | |||||||||||||||
Base Distribution Business | $ | 5,286 | $ | 6,565 | $ | 11,944 | $ | 14,298 | |||||||
OTT Streaming and Digital | 3,097 | 2,758 | 8,845 | 7,241 | |||||||||||
Total Content & Entertainment Business revenue | $ | 8,383 | $ | 9,323 | $ | 20,789 | $ | 21,539 | |||||||
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STOCK-BASED COMPENSATION
Employee and director stock-based compensation expense related to our stock-based awards was as follows:
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Selling, general and administrative | $ | 178 | $ | 361 | $ | 367 | $ | 763 | ||||||||
$ | 178 | $ | 361 | $ | 367 | $ | 763 | |||||||||
During the three months and nine months ended December 31, 2019, the Company did not grant any stock appreciation rights ("SARs"). During the three months ended December 31, 2018, the Company granted 1,222,830 SARs to a Company executive. There were 2,277,830 SARs granted to our Chief Executive Officer and other executives during the nine months ended December 31, 2018 of which 815,220 SARs were forfeited due to the terminations of two executives during the year ended March 31, 2019.
The SARs were granted under the Company's 2017 Equity Incentive Plan (the "2017 Plan"). There was $111 thousand and $332 thousand of stock-based compensation recorded for the three and nine months ended December 31, 2019, respectively relating to these SARs. There was $178 thousand and $282 thousand stock-based compensation recorded for the three and nine months ended December 31, 2018.
Total SARs outstanding are as follows:
Nine Months Ended December 31, 2019 | |||
SARs Outstanding March 31, 2019 | 1,462,610 | ||
Issued | — | ||
Forfeited | — | ||
Total SARs Outstanding December 31, 2019 | 1,462,610 | ||
On July 26, 2018, the Company granted 1,941,402 units of performance stock units ("PSUs") to certain executives and employees under the 2017 Plan. The total units represent the maximum number of units eligible to vest at the end of the performance period. The awards vest in two tranches; one at each of March 31, 2019 and March 31, 2020, based on the Company achieving certain financial targets at each period. The Company engaged an outside consulting firm to provide valuation services relating to estimating the fair value of these PSUs each reporting period. Based on their analysis as of December 31, 2019 using the Monte Carlo simulation technique, the estimated per unit fair value of the PSU's, was $0.00 based on the projections. The Company recorded a cumulative adjustment of $166 thousand of stock-based compensation in the nine months ended December 31, 2019.
The PSUs outstanding are as follows:
Nine Months Ended December 31, 2019 | |||
PSUs Outstanding March 31, 2019 | 1,390,584 | ||
Forfeited | (29,275 | ) | |
Total PSUs Outstanding December 31, 2019 | 1,361,309 | ||
There was $2 thousand and $4 thousand of stock-based compensation recorded in the three and nine months ended December 31, 2019, respectively, related to employees' restricted stock awards.
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INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carryforwards and for differences between the carrying amounts of existing assets and liabilities and their respective tax bases.
Valuation allowances are established when management is unable to conclude that it is more likely than not that some portion, or all, of the deferred tax asset will ultimately be realized. The Company is primarily subject to income taxes in the United States.
The Company accounts for uncertain tax positions in accordance with an amendment to ASC Topic 740-10, Income Taxes (Accounting for Uncertainty in Income Taxes), which clarified the accounting for uncertainty in tax positions. This amendment provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is "more-likely-than-not" to be sustained were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is more than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded. The Company has no uncertain tax positions.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
Basic and diluted net loss per common share has been calculated as follows:
Basic and diluted net loss per common share attributable to common stockholders = | Net loss attributable to common stockholders |
Weighted average number of common stock outstanding during the period | |
Shares issued and any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.
We incurred net losses for the three and nine months ended December 31, 2019 and 2018, and therefore the impact of potentially dilutive common shares from outstanding stock options and warrants, totaling 4,066,172 shares and 5,043,341 shares as of December 31, 2019 and 2018, respectively, and 9,999,999 shares from the convertible notes issued on October 9, 2018 and on July 12, 2019, were excluded from the computations of loss per share, as their impact would have been anti-dilutive.
COMPREHENSIVE LOSS
As of the three and nine months ended December 31, 2019 and 2018, comprehensive loss consisted of net loss and foreign currency translation adjustments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently adopted
In February, 2016, the Financial Accounting Standards Board ("FASB") issued guidance amending the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. On April 1, 2019, the Company adopted the new leasing standard using the prospective transaction method. See Note 7- Commitments and Contingencies for further details.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. The Company adopted the guidance as of April 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.
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Not yet adopted
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 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 100% of the common equity of CDF2 Holdings, LLC ("CDF2 Holdings"), which was created for the purpose of capitalizing on the conversion of the exhibition industry from film to digital technology. CDF2 Holdings assists its customers in procuring the equipment necessary to convert their systems to digital technology by providing financing, equipment, installation and related ongoing services.
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.
As of December 31, 2019 and March 31, 2019, 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 $0.5 million and $0.4 million as of December 31, 2019 and March 31, 2019 which are included in accounts receivable, net on the accompanying condensed consolidated balance sheets.
The accompanying Condensed Consolidated Statements of Operations include $0.3 million and $0.9 million of digital cinema servicing revenue from CDF2 Holdings for each of the three months and nine months ended December 31, 2019 and 2018, respectively.
Total Stockholders' Deficit of CDF2 Holdings at December 31, 2019 and March 31, 2019 was $30.1 million and $28.9 million, respectively. We have no obligation to fund the operating loss or the stockholders' deficit beyond our initial investment of $2.0 million and, accordingly, our investment in CDF2 Holdings as of December 31, 2019 and March 31, 2019 is carried at $0.
Majority Interest in CONtv
We own an 85% interest in CON TV, LLC, a worldwide digital network that creates original content, and sells and distributes on-demand digital content on the Internet and other consumer digital distribution platforms, such as gaming consoles, set-top boxes, handsets, and tablets.
4. INCOME TAXES
We calculate income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions. For each of the three months ended December 31, 2019 and 2018, we recorded income tax expense of approximately $0.1 million. We calculate income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions. For each of the nine months ended December 31, 2019 and 2018, we recorded income tax expense of approximately $0.2 million. We have not recorded tax benefits on our loss before income taxes because we have provided for a full valuation allowance that
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offsets potential deferred tax assets resulting from net operating loss carry forwards, reflecting our inability to use such loss carry forwards.
Our effective tax rate for the nine months ended December 31, 2019 and 2018 was negative 2.0%.
5. NOTES PAYABLE
Notes payable consisted of the following:
December 31, 2019 | March 31, 2019 | |||||||||||||||
(In thousands) | Current Portion | Long Term Portion | Current Portion | Long Term Portion | ||||||||||||
Prospect Loan | $ | — | $ | 12,559 | $ | — | $ | 20,627 | ||||||||
Total non-recourse notes payable | — | 12,559 | — | 20,627 | ||||||||||||
Less: Unamortized debt issuance costs and debt discounts | — | (955 | ) | — | (1,495 | ) | ||||||||||
Total non-recourse notes payable, net of unamortized debt issuance costs and debt discounts | $ | — | $ | 11,604 | $ | — | $ | 19,132 | ||||||||
Bison Note Payable | $ | — | $ | — | $ | 10,000 | $ | — | ||||||||
Bison Convertible Note | 10,000 | |||||||||||||||
Second Lien Loans | 8,113 | — | 11,132 | — | ||||||||||||
Credit Facility | 15,887 | — | 18,623 | — | ||||||||||||
Convertible Note | 5,000 | — | 5,000 | — | ||||||||||||
Total recourse notes payable | 39,000 | — | 44,755 | — | ||||||||||||
Less: Unamortized debt issuance costs and debt discounts | (690 | ) | — | (1,436 | ) | — | ||||||||||
Total recourse notes payable, net of unamortized debt issuance costs and debt discounts | $ | 38,310 | $ | — | $ | 43,319 | $ | — | ||||||||
Total notes payable, net of unamortized debt issuance costs | $ | 38,310 | $ | 11,604 | $ | 43,319 | $ | 19,132 | ||||||||
Non-recourse debt is generally defined as debt whereby the lenders’ sole recourse with respect to defaults, is limited to the value of the asset, which is collateral for the debt. Certain of our subsidiaries are liable with respect to, and their assets serve as collateral for, certain indebtedness for which our assets and the assets of our other subsidiaries that are not parties to the transaction are generally not liable. We have referred to this indebtedness as "non-recourse debt" because the recourse of the lenders is limited to the assets of specific subsidiaries. Such indebtedness includes the Prospect Loan.
Prospect Loan
In February 2013, our DC Holdings, AccessDM and Phase 2 DC subsidiaries entered into a term loan agreement (the “Prospect Loan”) with Prospect Capital Corporation (“Prospect”), pursuant to which DC Holdings borrowed $70.0 million. The Prospect Loan bears interest at LIBOR plus 9.0% (with a 2.0% LIBOR floor), which is payable in cash, and at an additional 2.50% to be accrued as an increase to the aggregate principal amount of the Prospect Loan until the 2013 Credit Agreement is paid off, at which time all accrued interest will be payable in cash.
Collections of DC Holdings accounts receivable are deposited into accounts designated to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the Prospect Loan. On a quarterly basis, if there is excess cash flow, it is used for prepayment of the Prospect Loan. We also maintain a debt service fund under the Prospect Loan for future principal and interest payments. As of December 31, 2019, and March 31, 2019, the debt service fund had a balance of $1.0 million, which is classified as part of restricted cash on our Condensed Consolidated Balance Sheets.
The Prospect Loan matures on March 31, 2021 and may be accelerated upon a change in control (as defined in the agreement) or other events of default as set forth therein and would be subject to mandatory acceleration upon insolvency of DC Holdings. We are permitted to pay the full outstanding balance of the Prospect Loan at any time after the second anniversary of the initial borrowing, subject to the following prepayment penalties:
• | 5.0% of the principal amount prepaid between the second and third anniversaries of issuance; |
• | 4.0% of the principal amount prepaid between the third and fourth anniversaries of issuance; |
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• | 3.0% of the principal amount prepaid between the fourth and fifth anniversaries of issuance; |
• | 2.0% of the principal amount prepaid between the fifth and sixth anniversary of issuance; |
• | 1.0% of the principal amount prepaid between the sixth and seventh anniversaries of issuance; and |
• | No penalty if the balance of the Prospect Loan, including accrued interest, is prepaid thereafter. |
The Prospect Loan is secured by, among other things, a first priority pledge of the stock of CDF2 Holdings, our wholly owned unconsolidated subsidiary, the stock of AccessDM, owned by DC Holdings, and the stock of our Phase 2 DC subsidiary, and is also guaranteed by AccessDM and Phase 2 DC. We provide limited financial support to the Prospect Loan not to exceed $1.5 million per year in the event financial performance does not meet certain defined benchmarks.
The Prospect Loan contains customary representations, warranties, affirmative covenants, negative covenants and events of default.
The following table summarizes the activity related to the Prospect Loan:
As of | ||||||||
(In thousands) | December 31, 2019 | March 31, 2019 | ||||||
Prospect Loan, at issuance | $ | 70,000 | $ | 70,000 | ||||
PIK Interest | 4,778 | 4,778 | ||||||
Payments to date | (62,219 | ) | (54,151 | ) | ||||
Prospect Loan, net | 12,559 | 20,627 | ||||||
Less current portion | — | — | ||||||
Total long term portion | $ | 12,559 | $ | 20,627 | ||||
Bison Note Payable
As discussed in Note 1 - Nature of Operations and Liquidity, the Company entered into a loan with Bison for $10.0 million and issued Warrants to purchase 1,400,000 shares of the Company's Class A common stock. See Note 6 - Stockholders' Deficit for further discussion of the warrants.
The loan was made in accordance with the Stock Purchase Agreement between the Company and Bison Entertainment Investment Limited, another affiliate of Bison, entered into on June 29, 2017.
On July 20, 2018, the Company entered into a term loan agreement (the “2018 Loan Agreement”) with Bison Global Investment SPC, pursuant to which the Company borrowed from Bison Global $10.0 million (the “2018 Loan”). The 2018 Loan has a one (1) year term that may be extended by mutual agreement of Bison Global and the Company and bears interest at 5% per annum, payable quarterly in cash. On July 12, 2019, we entered into a Termination Agreement for the 2018 Loan and at the same time entered into a $10.0 million Bison Convertible Note with Bison Global.
$10.0 Million Loan converted into Convertible Note
The Bison Convertible Note has a term ending on March 4, 2020, and bears interest at 5% per annum. The principal is due on March 4, 2020, in cash or in shares of Common Stock, or a combination of cash and Common Stock, at the Company’s option. The Bison Convertible Note is convertible at the Company's option, at any time prior to payment in full of the principal balance and all accrued interest of the note, to convert this note in whole or in part, into fully paid and nonassessable shares of the Company's Class A common stock. The Bison Convertible Note is Convertible into 6,666,666 shares of Company's Class A common stock, based on initial conversion price of $1.50 per share.
As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to additional paid-in-capital) of $478 thousand. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value of similar non-convertible debt; the debt is being amortized to interest expense using the effective interest method over the term of the note.
The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan.
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The Bison Convertible Note, offset by the concurrent payoff and termination of the 2018 Loan, did not result in any increase to the Company’s outstanding debt balance. The Company expects to enter into an agreement with Bison to extend the Bison Convertible Note or convert it to equity in March 2020.
Second Lien Loans
On July 14, 2016, we entered into a Second Lien Loan Agreement (the “Second Lien Loan Agreement”), under which we may borrow up to $15.0 million (the “Second Lien Loans”), subject to certain limitations imposed on us regarding the number of shares that we may issue in connection with the loans. As of December 31, 2019 we have an outstanding balance of $8.1 million which includes $4.0 million borrowed from Ronald L. Chez, at that time a member of the Board of Directors. Mr. Chez resigned from the Board of Directors in April 2017, and became a strategic advisor to the Company. The Second Lien Loans bear interest at 12.75%, payable 7.5% in cash and 5.25% in cash or in kind at our option. Before the June 30, 2019 maturity date, on June 28, 2019, the Company entered into a consent agreement with lenders of the Second Lien Loans to an extension of the Second Lien Loans pursuant to which (i) the Company paid down a portion of the outstanding principal amount plus accrued interest to date, and (ii) the maturity date of the remaining outstanding principal amount of the Second Lien Loans was extended to September 30, 2019.
On July 30, 2019, one of the lenders, signed a waiver to defer the receipt of the portion of the outstanding principal amount and the Second Lien Loans agreed to be paid no later than September 30, 2019.
In addition, under the terms of the Second Lien Loan Agreement, we are required to issue 98,000 shares of our Class A common stock for every $1.0 million borrowed, subject to pro rata adjustments. As of December 31, 2019, we have issued 906,450 shares of Class A common stock cumulatively under the Second Lien Loan Agreement. There were no shares issued in the three and nine months ended December 31, 2019. The Second Lien Loans may be prepaid without premium or penalty and contain customary covenants, representations and warranties. The obligations under the Second Lien Loans are guaranteed by certain of our existing and future subsidiaries. We have pledged substantially all of our assets, except those assets related to our digital cinema deployment business, to secure payment on the Second Lien Loans.
During the nine months ended December 31, 2019, the Company paid $3.4 million of the outstanding Second Lien Loans and expects to obtain additional capital from or through Bison Capital Holding Limited or an affiliate thereof ("Bison") for final payment of the remaining outstanding balances of the Second Lien Loans. On October 24, 2019, the Company entered into a consent agreement to extend the maturity date to November 30, 2019. On January 8, 2020, the Company entered into another consent agreement to extend the maturity date to February 17, 2020. There were no consent fees paid for these consent agreements. See Note 10 - Subsequent Events.
Credit Facility and Cinedigm Revolving Loans
On March 30, 2018, the Company entered into a Credit Facility with a retail bank for a maximum of $19.0 million in revolving loans outstanding at any one time with a maturity date of March 31, 2020, which may be extended for two successive one-year periods at the sole discretion of the lender, subject to certain conditions.
Interest under the Credit Facility is due monthly at a rate elected by the Company of either 0.5% plus Prime Rate or 3.25% above LIBOR Rate established by the lender.
As of December 31, 2019 and March 31, 2019, there was $15.9 million and $18.6 million outstanding, respectively, and there was no additional availability, under the Credit Facility based on the Company's borrowing base as of December 31, 2019. On July 3, 2019, the Company entered into the EWB Amendment to the Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between the Company, East West Bank and the Guarantors named therein. The EWB Amendment reduced the size of the facility to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, and extended the maturity date to June 30, 2020. In connection with the EWB Amendment, three of our subsidiaries became Guarantors under the EWB Credit Agreement.
Convertible Note
On October 9, 2018, the Company issued a Convertible Note for $5.0 million. All proceeds from the Convertible Note were used to pay the $5.0 million 2013 Notes described below. The $5.0 million in aggregate principal bears interest at 8% and
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matures on October 9, 2019 with two one year extensions at the Company's option. On October 9, 2019, the Company extended the note for one additional year and the new maturity date of the Convertible Note is October 9, 2020. The Convertible Note is convertible into 3,333,333 shares of the Company's Class A common stock, based on initial conversion price of $1.50 per share.
The Convertible Note is convertible at the option of the Lender, or the Company, at any time prior to payment in full of the principal balance, and all accrued interest of this Convertible Note in whole, or in part, into fully paid and non-assessable shares of Company’s Class A common stock at the conversion rate of $1.50.
Upon conversion prior to maturity by the Lender, or the Company, we may elect to settle such conversion in shares of our Class A common stock, cash or a combination thereof. Upon the maturity date, the Company has the option to pay in Class A common shares convertible at the greater of the closing price of the Class A common stock or $1.10. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to additional paid-in capital) of $270 thousand. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value similar non-convertible debt; the debt discount is being amortized to interest expense using the effective interest method over the one year term of the Convertible Note.
6. STOCKHOLDERS’ DEFICIT
COMMON STOCK
During the nine months ended December 31, 2019, we issued 4,113,484 shares of Class A common stock in connection with the sale of 3,900,000 shares of our Class A common stock and the issuance of Class A common stock for preferred stock dividends. See Note - 8 Supplemental Cash Flow Disclosure.
PREFERRED STOCK
Cumulative dividends in arrears on preferred stock were $0.1 million as of December 31, 2019 and 2018. In January 2020, we paid the preferred stock dividends in arrears in the form of 124,622 shares of Class A common stock.
TREASURY STOCK
We have treasury stock, at a cost, consisting of 1,313,836 shares of Class A common stock at each of December 31, 2019 and March 31, 2019.
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 Class A Common Stock on the date of grant. ISOs granted to shareholders having more than 10% of the total combined voting power of the Company must have exercise prices of at least 110% of the fair market value of our Class A Common Stock on the date of grant. ISOs and non-statutory stock options granted under the 2000 Plan are subject to vesting provisions, and exercise is subject to the continuous service of the participant. The exercise prices and vesting periods (if any) for non-statutory options are set at the discretion of our compensation committee. On November 1, 2017, upon the consummation of the transactions pursuant to the Stock Purchase Agreement, as a result of which there was a change of control of the Company, all stock options (incentive and non-statutory) and shares of restricted stock were vested immediately and the options became fully exercisable.
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 2,380,000 shares of Class A Common Stock to employees, outside directors and consultants.
As of December 31, 2019, there were 274,116 stock options outstanding in the Plan with weighted average exercise price of $15.00 and a weighted average contract life of 3.36 years. As of March 31, 2019, there were 300,315 shares outstanding in the Plan with weighted average exercise price of $14.87 and a weighted average contract life of 3.79 years.
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In August 2017, the Company adopted 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 2,108,270 shares of Class A common stock, in the form of various awards, including stock options, stock appreciation rights, stock, restricted stock, restricted stock units, performance awards and cash awards. The Compensation Committee of the Company’s Board of Directors (the “Board”) is authorized to administer the 2017 Plan and make grants thereunder. The approval of the 2017 Plan does not affect awards already granted under the 2000 Plan. On December 4, 2019, upon shareholder approval, the 2017 Plan was amended to increase the maximum number of shares of Class A common stock authorized for issuance thereunder from 2,108,270 shares to 4,098,270.
An analysis of all options outstanding under the 2000 Plan as of December 31, 2019 is as follows:
As of December 31, 2019 | |||||||||||||
Range of Prices | Options Outstanding | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | |||||||||
$1.16 - $7.40 | 5,000 | 5.50 | $ | 7.40 | $ | — | |||||||
$13.70 - $24.40 | 261,616 | 3.37 | 14.71 | — | |||||||||
$30.00 - $ 50.00 | 7,500 | 1.63 | 30.00 | — | |||||||||
274,116 | $ | — | |||||||||||
An analysis of all options exercisable under the 2000 Plan as of December 31, 2019 is presented below:
Options Exercisable | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | ||||||
As of December 31, 2019 | 2,251,725 | 3.36 | $15.00 | $ | — | ||||
OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN
In October 2013, we issued options outside of the Plan to 10 individuals who became employees as a result of a business combination. The employees received options to purchase an aggregate of 62,000 shares of our Class A Common Stock at an exercise price of $17.50 per share. The options are fully vested as of October 2017 and expire 10 years from the date of grant, if unexercised. As of December 31, 2019, 12,500 of such options remained outstanding.
In December 2010, we issued options to purchase 450,000 shares of Class A Common Stock outside of the Plan as part of our Chief Executive Officer's initial employment agreement with the Company. Such options have exercise prices per share between $15.00 and $50.00, were vested as of December 2013 and will expire in December 2020. As of December 31, 2019, all such options remained outstanding.
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WARRANTS
The following table presents information about outstanding warrants to purchase shares of our Class A common stock as of December 31, 2019. All of the outstanding warrants are fully vested and exercisable.
Recipient | Amount outstanding | Expiration | Exercise price per share | ||||
Strategic management service provider | 52,500 | July 2021 | $17.20 - $30.00 | ||||
Warrants issued to Ronald L. Chez in connection with the Second Lien Loans | 206,768 | July 2023 | $1.34 - $1.57 | ||||
Warrants issued in connection with Convertible Notes exchange transaction | 207,679 | December 2021 | $1.54 | ||||
5-year Warrant issued to BEMG in connection with a term loan agreement | 1,400,000 | December 2022 | $1.80 | ||||
The warrants issued in connection with the Second Lien Loans (See Note 5 - Notes Payable) to Ronald L. Chez, at the time a member of our Board of Directors, contain a cashless exercise provision and customary anti-dilution rights.
7. COMMITMENTS AND CONTINGENCIES
We operate from leased properties under non-cancelable operating lease agreements, certain of which contain escalating lease clauses.
During the first quarter of 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted the standard using the modified retrospective approach with an effective date as of April 1, 2019. The Company did not apply the new standard to comparative periods and therefore, those amounts are not presented below.
The Company elected the package of three practical expedients. As such, the Company did not reassess whether expired or existing contracts are or contain a lease and did not need to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases. The Company did not elect the hindsight practical expedient. The land easement practical expedient was not applicable to the Company. Also, the Company has elected to take the practical expedient to not separate lease and non-lease components for all asset classes. The Company made an accounting policy election to continue not to recognize leases with durations of twelve months or less on the consolidated balance sheet.
The Company leases office space under operating leases. 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.
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The table below presents the lease-related assets and liabilities recorded on the balance sheet as of December 31, 2019
(In thousands) | Classification on the Balance Sheet | December 31, 2019 | |||
Assets | |||||
Noncurrent | Operating lease right-of-use asset | $ | 1,765 | ||
Liabilities | |||||
Current | Operating leases - current portion | $ | 926 | ||
Noncurrent | Operating leases - long -term portion | 918 | |||
Total operating lease liabilities | $ | 1,844 | |||
Weighted-average remaining lease term in years | 1.89 | ||||
Weighted-average discount rate (1) | 5.10 | % | |||
(1) Upon adoption of the new lease standard, discount rates used for existing leases were established at April 1, 2019. | |||||
Lease Costs | |||||||
The table below presents certain information related to lease costs for leases: | |||||||
Three Months Ended | Nine Months Ended | ||||||
(In thousands) | December 31, 2019 | ||||||
Operating lease cost | $ | 319 | $ | 775 | |||
Total lease cost | $ | 319 | $ | 775 | |||
Other Information | |||||||
The table below presents supplemental cash flow information related to leases: | |||||||
Three Months Ended | Nine Months Ended | ||||||
(In thousands) | December 31, 2019 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | |||||||
Operating cash flows used for operating leases | $ | 324 | $ | 767 | |||
Undiscounted Cash Flows | ||||
The table below reconciles the undiscounted cash flows for the remaining years on the leases to the lease liabilities recorded on the balance sheet as of December 31, 2019. | ||||
(In thousands) | Operating Leases | |||
2020 (remaining 3 months) | $ | 262 | ||
2021 | 1,053 | |||
2022 | 617 | |||
2023 | 13 | |||
Thereafter | — | |||
Total minimum lease payments | $ | 1,945 | ||
Less: Interest | (101 | ) | ||
Present value of lease liabilities | $ | 1,844 | ||
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8. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended December 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Cash interest paid | $ | 3,934 | $ | 6,627 | ||||
Accrued dividends on preferred stock | 89 | 89 | ||||||
Issuance of Class A common stock for payment of preferred stock dividends | 267 | 267 | ||||||
Right-of-use assets and operating lease liability recorded upon adoption of ASU 842, net | 90 | — | ||||||
Amounts accrued in connection with addition of property and equipment | 232 | — | ||||||
9. SEGMENT INFORMATION
We operate in two reportable segments: Cinema Equipment Business and Content & Entertainment Business, or CEG. Our segments were determined based on the economic characteristics of our products and services, our internal organizational structure, the manner in which our operations are managed and the criteria used by our CODM to evaluate performance, which is generally the segment's operating income (loss) before depreciation and amortization.
Operations of: | Products and services provided: |
Cinema Equipment Business | Financing vehicles and administrators for 3,367 Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 4,976 Systems installed domestically and internationally in our second deployment phase (“Phase II Deployment”). 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 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”). |
Content & Entertainment Business | Leading distributor of independent content, and collaborates with producers and other content owners to market, source, curate and distribute independent content to targeted and profitable 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 December 31, 2019 | |||||||||||||||||||||||
(In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non-Recourse | Notes Payable | Operating lease liabilities | |||||||||||||||||
Cinema Equipment Business | $ | 34 | $ | — | $ | 37,939 | $ | 11,604 | $ | — | $ | 927 | |||||||||||
Content & Entertainment Business | 7,477 | 8,701 | 54,987 | — | — | 189 | |||||||||||||||||
Corporate | 7 | — | 2,785 | — | 38,310 | 728 | |||||||||||||||||
Total | $ | 7,518 | $ | 8,701 | $ | 95,711 | $ | 11,604 | $ | 38,310 | $ | 1,844 | |||||||||||
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As of March 31, 2019 | |||||||||||||||||||||||
(In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non-Recourse | Notes Payable | Operating lease liabilities | |||||||||||||||||
Cinema Equipment Business | $ | 69 | $ | — | $ | 42,958 | $ | 19,132 | $ | — | $ | — | |||||||||||
Content & Entertainment Business | 9,607 | 8,701 | 51,531 | — | — | — | |||||||||||||||||
Corporate | 10 | — | 4,350 | — | 43,319 | — | |||||||||||||||||
Total | $ | 9,686 | $ | 8,701 | $ | 98,839 | $ | 19,132 | $ | 43,319 | $ | — | |||||||||||
Statements of Operations | |||||||||||||||||
Three Months Ended December 31, 2019 | |||||||||||||||||
(Unaudited, in thousands) | |||||||||||||||||
Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||||
Revenues | $ | 3,129 | $ | 8,383 | $ | — | $ | 11,512 | |||||||||
Direct operating (exclusive of depreciation and amortization shown below) | 312 | 5,414 | — | 5,726 | |||||||||||||
Selling, general and administrative | 536 | 2,294 | 167 | 2,997 | |||||||||||||
Allocation of corporate overhead | 200 | 1,249 | (1,449 | ) | — | ||||||||||||
Recovery for doubtful accounts | (5 | ) | — | — | (5 | ) | |||||||||||
Depreciation and amortization of property and equipment | 1,475 | 77 | 42 | 1,594 | |||||||||||||
Amortization of intangible assets | 11 | 576 | 2 | 589 | |||||||||||||
Total operating expenses | 2,529 | 9,610 | (1,238 | ) | 10,901 | ||||||||||||
Income (loss) from operations | $ | 600 | $ | (1,227 | ) | $ | 1,238 | $ | 611 | ||||||||
Employee and director stock-based compensation expense related to the Company’s stock-based awards was $0.2 million for the three months ended December 31, 2019.
(In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
Direct operating | $ | — | $ | — | $ | — | $ | — | |||||||||
Selling, general and administrative | — | 26 | 152 | 178 | |||||||||||||
Total stock-based compensation | $ | — | $ | 26 | $ | 152 | $ | 178 | |||||||||
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Statements of Operations | ||||||||||||||||
Three Months Ended December 31, 2018 | ||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||
Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
Revenues | $ | 5,320 | $ | 9,323 | $ | — | $ | 14,643 | ||||||||
Direct operating (exclusive of depreciation and amortization shown below) | 505 | 4,741 | — | 5,246 | ||||||||||||
Selling, general and administrative | 448 | 3,499 | 2,478 | 6,425 | ||||||||||||
Allocation of Corporate overhead | 378 | 989 | (1,367 | ) | — | |||||||||||
Provision (recovery) for doubtful accounts | 141 | (28 | ) | — | 113 | |||||||||||
Depreciation and amortization of property and equipment | 1,942 | 87 | 45 | 2,074 | ||||||||||||
Amortization of intangible assets | 11 | 1,385 | 1 | 1,397 | ||||||||||||
Total operating expenses | 3,425 | 10,673 | 1,157 | 15,255 | ||||||||||||
Income (loss) from operations | $ | 1,895 | $ | (1,350 | ) | $ | (1,157 | ) | $ | (612 | ) | |||||
Employee and director stock-based compensation expense related to the Company’s stock-based awards was $0.4 million for the three months ended December 31, 2018.
(In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
Direct operating | $ | — | $ | — | $ | — | $ | — | |||||||||
Selling, general and administrative | 3 | 96 | 262 | 361 | |||||||||||||
Total stock-based compensation | $ | 3 | $ | 96 | $ | 262 | $ | 361 | |||||||||
Statements of Operations | ||||||||||||||||
Nine Months Ended December 31, 2019 | ||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||
Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
Revenues | $ | 10,767 | $ | 20,789 | $ | — | $ | 31,556 | ||||||||
Direct operating (exclusive of depreciation and amortization shown below) | 908 | 12,517 | — | 13,425 | ||||||||||||
Selling, general and administrative | 1,636 | 8,109 | 4,090 | 13,834 | ||||||||||||
Allocation of corporate overhead | 605 | 3,785 | (4,390 | ) | — | |||||||||||
Provision (recovery) for doubtful accounts | 322 | (1 | ) | — | 321 | |||||||||||
Depreciation and amortization of property and equipment | 4,612 | 239 | 126 | 4,977 | ||||||||||||
Amortization of intangible assets | 34 | 2,140 | 4 | 2,178 | ||||||||||||
Total operating expenses | 8,117 | 26,789 | (170 | ) | 34,735 | |||||||||||
Income (loss) from operations | $ | 2,650 | $ | (6,000 | ) | $ | 170 | $ | (3,179 | ) | ||||||
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Employee and director stock-based compensation expense related to the Company’s stock-based awards was $0.4 million for the nine months ended December 31, 2019.
(In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
Direct operating | $ | — | $ | — | $ | — | $ | — | ||||||||
Selling, general and administrative | (6 | ) | 29 | 344 | 367 | |||||||||||
Total stock-based compensation | $ | (6 | ) | $ | 29 | $ | 344 | $ | 367 | |||||||
Statements of Operations | ||||||||||||||||
Nine Months Ended December 31, 2018 | ||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||
Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
Revenues | $ | 19,926 | $ | 21,539 | $ | — | $ | 41,465 | ||||||||
Direct operating (exclusive of depreciation and amortization shown below) | 1,227 | 11,060 | — | 12,287 | ||||||||||||
Selling, general and administrative | 1,446 | 11,219 | 6,790 | 19,455 | ||||||||||||
Allocation of Corporate overhead | 1,167 | 3,042 | (4,209 | ) | — | |||||||||||
Provision (recovery) for doubtful accounts | 1,384 | (139 | ) | — | 1,245 | |||||||||||
Depreciation and amortization of property and equipment | 5,844 | 256 | 139 | 6,239 | ||||||||||||
Amortization of intangible assets | 34 | 4,149 | 4 | 4,187 | ||||||||||||
Total operating expenses | 11,102 | 29,587 | 2,724 | 43,413 | ||||||||||||
Income (loss) from operations | $ | 8,824 | $ | (8,048 | ) | $ | (2,724 | ) | $ | (1,948 | ) | |||||
Employee and director stock-based compensation expense related to the Company’s stock-based awards was $0.8 million for the nine months ended December 31, 2018.
(In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
Direct operating | $ | — | $ | — | $ | — | $ | — | ||||||||
Selling, general and administrative | 8 | 161 | 594 | 763 | ||||||||||||
Total stock-based compensation | $ | 8 | $ | 161 | $ | 594 | $ | 763 | ||||||||
10. SUBSEQUENT EVENTS
Effective January 1, 2020, the Company entered into a Second Amendment to the AVOD License Agreement (the “Second Amendment”) with Future Today, Alok Ranjan and Vikrant Mathur. Pursuant to the Second Amendment, (i) the Company and Future Today will expand their licensing relationship by adding new content to the existing agreement pursuant to which Future Today currently licenses content from Cinedigm Entertainment Corp., and (ii) the Agreement and Plan of Merger dated as of March 14, 2019 among the Company, C&F Merger Sub, Inc. (“C&F”), Future Today, Alok Ranjan and Vikrant Mathur (individually and as Stockholder Representative) and the Company Stockholders identified therein, as amended by Amendment No. 1 (the “Merger Agreement”) was terminated. Pursuant to the Merger Agreement, the Company had agreed to acquire Future Today through a merger with C&F. Because of the termination of the Merger Agreement, $1.0 million deposit of purchase price was forfeited and written off during the three months ended December 31, 2019.
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On January 8, 2020, the Company entered into a consent agreement with lenders of the Second Lien Loans to extend the maturity date to February 17, 2020.
On January 13, 2020, Bison Entertainment Investment Limited, the Company’s majority stockholder, signed a written consent approving the issuance of 54,850,103 shares of Common Stock in exchange for the acquisition by the Company of 410,901,000 shares of Starrise Media Limited, a leading Chinese entertainment company, from two of Starrise’s stockholders pursuant to a Stock Purchase Agreement dated December 27, 2019 (the "Starrise Agreement"). The Company mailed a definitive information statement to its stockholders in late January. On February 14, 2020, the parties to the Starrise Agreement amended it to provide for multiple closings. The Company closed on the purchase of 162,162,162 Starrise shares and issued 21,646,604 shares of Common Stock as consideration therefor on February 14, 2020, and expects to close on the remainder of the Starrise shares as soon as practicable.
On February 14, 2020, the Company filed a Certificate of Amendment to the Fifth Amended and Restated Certificate of Incorporation, pursuant to which the number of shares of Class A common stock authorized for issuance was increased to 150,000,000 shares.
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 document.
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 over 12,000 movie screens from using traditional analog film prints to digital distribution, we have become a leading distributor of independent content, through both organic growth and acquisitions. We distribute products for major brands such as the Discovery Networks, National Geographic 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, iTunes, Amazon Prime, Netflix, Hulu, Xbox, PlayStation, and cable video-on-demand ("VOD"), and (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) media 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 the United States and Canada and in Australia and New Zealand. It also provides fee-based support to over 12,000 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 is a market leader 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 Fees ("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. As of December 31, 2019, all
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of our 3,384 systems from the Phase I Deployment phase of our cinema equipment business segment had ceased to earn a significant portion of VPF revenue from certain major studios, although various other studios, consisting mostly of small independent studios, will continue to pay VPFs through December 2020. We expect to continue to earn such ancillary revenue from the cinema equipment segment through December of 2020; however, such amounts are expected to be significantly less material to our consolidated financial statements. 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 have begun, and expect to continue, to 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 cinema business segment operates independently from our Content & Entertainment business. As of December 31, 2019, we had approximately $12.6 million of non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We also have approximately $39.0 million of outstanding debt principal, as of December 31, 2019, that is attributable to our Content & Entertainment and Corporate segments.
On July 26, 2019, the previously announced Agreement and Plan of Merger, dated as of March 14, 2019, among the Company, C&F Merger Sub, Inc., a wholly-owned subsidiary of the Company, Future Today Inc, Alok Ranjan and Vikrant Mathur (individually and as Stockholder Representative) and the Company Stockholders identified therein, was amended. Pursuant to the Merger Amendment, among other things, the parties (x) extended the End Date and exclusivity period to July 31, 2019, (y) provided for payment of a non-refundable deposit of $500,000 by the Company, and (z) provided the Company with the unilateral right to extend the End Date and exclusivity period to August 14, 2019 upon making an additional non-refundable deposit of $500,000. Any non-refundable deposit(s) made prior to closing will be credited against the purchase price at closing. On July 31, 2019, the Company exercised its right to extend to August 14, 2019. On January 14, 2020, the Company terminated the Merger Agreement with Future Today. See Note 10 - Subsequent Events. Because of the termination of the Merger Agreement, $1.0 million deposit of purchase price was forfeited and written off during the three months ended December 31, 2019.
On January 13, 2020, Bison Entertainment Investment Limited, the Company’s majority stockholder, signed a written consent approving the issuance of 54,850,103 shares of Common Stock in exchange for the acquisition by the Company of 410,901,000 shares of Starrise Media Limited, a leading Chinese entertainment company, from two of Starrise’s stockholders pursuant to a Stock Purchase Agreement dated December 27, 2019 (the "Starrise Agreement"). The Company mailed a definitive information statement to its stockholders in late January. On February 14, 2020, the parties to the Starrise Agreement amended it to provide for multiple closings.The Company closed on the purchase of 162,162,162 Starrise shares and issued 21,646,604 shares of Common Stock as consideration therefor on February 14, 2020, and expects to close on the remainder of the Starrise shares as soon as practicable.
Results of Operations for the Three Months Ended December 31, 2019 and 2018
Revenues
Three Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 3,129 | $ | 5,320 | $ | (2,191 | ) | (41 | )% | |||||
Content & Entertainment Business | 8,383 | 9,323 | (940 | ) | (10 | )% | ||||||||
$ | 11,512 | $ | 14,643 | $ | (3,131 | ) | (21 | )% | ||||||
Revenues generated by our Cinema Equipment Business segment decreased primarily as a result of the reduced number of Systems earning VPF revenue and commissions for Phase I and Phase II Deployment Systems. The Phase I Deployment Systems deployment period ended for major studios during the fiscal year ended March 31, 2018 and Phase II Deployment Systems deployment period for major studios ended in November 2018, which combined, contributed to the decrease in revenues.
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Revenues in the Content & Entertainment Business segment decreased mainly due to lower sales volume of owned and licensed products offset by higher distributed fees.
Direct Operating Expenses
Three Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 312 | $ | 505 | $ | (193 | ) | (38 | )% | |||||
Content & Entertainment Business | 5,414 | 4,741 | 673 | 14 | % | |||||||||
$ | 5,726 | $ | 5,246 | $ | 480 | 9 | % | |||||||
Increase in direct operating expenses in the three months ended December 31, 2019 for the Content & Entertainment Business compared to the prior period was primarily due to an increase in our royalty and freight expenses. Royalty-based deals performed better than in the prior period which increased the royalty expense. Freight expense increased as we had an increase in liquidation sales compared to prior period. In addition, real estate taxes for the equipment in the Cinema Equipment Business went down, approximately $0.2 million, as a result of lower depreciated assets which resulted in lower direct operating costs.
Selling, General and Administrative Expenses
Three Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 536 | $ | 448 | $ | 88 | 20 | % | ||||||
Content & Entertainment Business | 2,294 | 3,499 | (1,205 | ) | (34 | )% | ||||||||
Corporate | 167 | 2,478 | (2,311 | ) | (93 | )% | ||||||||
$ | 2,997 | $ | 6,425 | $ | (3,428 | ) | (53 | )% | ||||||
Selling, general and administrative expenses for the three months ended December 31, 2019 decreased primarily due to a $0.8 million decrease in personnel related expenses, as a result of our cost cutting initiatives, a decrease of $1.1 million due to reversal of the bonus accrual, a decrease of $0.8 million in legal and consulting services as a result of cost cutting initiatives, and a decrease of $0.2 million each of stock based compensation and travel related expenses.
Depreciation and Amortization Expense on Property and Equipment
Three Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 1,475 | $ | 1,942 | $ | (467 | ) | (24 | )% | |||||
Content & Entertainment Business | 77 | 87 | (10 | ) | (11 | )% | ||||||||
Corporate | 42 | 45 | (3 | ) | (7 | )% | ||||||||
$ | 1,594 | $ | 2,074 | $ | (480 | ) | (23 | )% | ||||||
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 fiscal years 2019 and 2018.
Interest expense, net
Three Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 640 | $ | 1,160 | $ | (520 | ) | (45 | )% | |||||
Corporate | 978 | 1,433 | (455 | ) | (32 | )% | ||||||||
$ | 1,618 | $ | 2,593 | $ | (975 | ) | (38 | )% | ||||||
Interest expense in the Cinema Equipment Business segment decreased primarily as a result of reduced debt balances compared to the prior period, primarily due to the payoff of our KBC facilities, P2 Vendor Note, and the reduction of the Prospect Term
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Loan. Interest expense in our Corporate Segment decreased as a result of lower loan balances from our Credit Facility and Second Lien Loans.
Income Tax Expense
We recorded income tax expense of approximately $0.1 million for each of the three months ended December 31, 2019 and 2018 in our Cinema Equipment Business and Corporate segments for state income taxes.
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.
Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the three months ended December 31, 2019 decreased by $0.9 million, or 24%, compared to the three months ended December 31, 2018. Adjusted EBITDA loss from our non-cinema equipment business was $0.6 million for the three months ended December 31, 2019 compared to negative $0.3 million for the three months ended December 31, 2018. The decrease in Adjusted EBITDA compared to the prior period primarily reflects lower revenue in our cinema equipment business, offset by decrease in selling, general and administrative expense.
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 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:
Three Months Ended December 31, | ||||||||
($ in thousands) | 2019 | 2018 | ||||||
Net loss | $ | (2,162 | ) | $ | (3,272 | ) | ||
Add Back: | ||||||||
Income tax expense | 136 | 55 | ||||||
Depreciation and amortization of property and equipment | 1,594 | 2,074 | ||||||
Amortization of intangible assets | 589 | 1,397 | ||||||
Interest expense, net | 1,618 | 2,593 | ||||||
Other expense, net | 777 | 366 | ||||||
Stock-based compensation and expenses | 178 | 361 | ||||||
Net loss attributable to noncontrolling interest | (7 | ) | 14 | |||||
Adjusted EBITDA | $ | 2,723 | $ | 3,588 | ||||
Adjustments related to the Cinema Equipment Business | ||||||||
Depreciation and amortization of property and equipment | $ | (1,475 | ) | $ | (1,942 | ) | ||
Amortization of intangible assets | (11 | ) | (11 | ) | ||||
Stock-based compensation and expenses | — | (3 | ) | |||||
Income from operations | (600 | ) | (1,895 | ) | ||||
Adjusted EBITDA from non-cinema equipment business | $ | 637 | $ | (263 | ) | |||
Results of Operations for the Nine Months Ended December 31, 2019 and 2018
Revenues
Nine Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 10,767 | $ | 19,926 | $ | (9,159 | ) | (46 | )% | |||||
Content & Entertainment Business | 20,789 | 21,539 | (750 | ) | (3 | )% | ||||||||
$ | 31,556 | $ | 41,465 | $ | (9,909 | ) | (24 | )% | ||||||
Revenues generated by our Cinema Equipment Business segment decreased primarily as a result of the reduced number of Systems earning VPF revenue and commissions for Phase I and Phase II Deployment Systems. The Phase I Deployment Systems deployment period ended for major studios during the fiscal year ended March 31, 2018 and Phase II Deployment Systems deployment period for major studios ended in November 2018, which combined, contributed to the decrease in revenues.
Revenues in the Content & Entertainment Business segment decreased mainly due to lower sales volume of owned and licensed products offset by higher distributed fees.
Direct Operating Expenses
Nine Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 908 | $ | 1,227 | $ | (319 | ) | (26 | )% | |||||
Content & Entertainment Business | 12,517 | 11,060 | 1,457 | 13 | % | |||||||||
$ | 13,425 | $ | 12,287 | $ | 1,138 | 9 | % | |||||||
Increase in direct operating expenses in the nine months ended December 31, 2019 compared to the prior period was mainly due to an increase in royalty and freight expenses of approximately 1.1 million. Royalty-based deals performed better than the
35
prior period which increased the royalty expense. Freight expense increased as we had an increase in liquidation sales compared to prior period. In addition, real estate taxes for the equipment in the Cinema Equipment Business went down, approximately $0.3 million, as a result of lower depreciated assets which resulted in lower direct operating costs.
Selling, General and Administrative Expenses
Nine Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 1,636 | $ | 1,446 | $ | 190 | 13 | % | ||||||
Content & Entertainment Business | 8,108 | 11,219 | (3,111 | ) | (28 | )% | ||||||||
Corporate | 4,090 | 6,790 | (2,700 | ) | (40 | )% | ||||||||
$ | 13,834 | $ | 19,455 | $ | (5,621 | ) | (29 | )% | ||||||
Selling, general and administrative expenses for the nine months ended December 31, 2019 decreased primarily due to a $2.0 million decrease in personnel related expenses, as a result of our cost cutting initiatives, a decrease of $1.0 million due to a reversal of bonus accrual, a decrease of $0.7 million in legal and consulting services as a result of our cost cutting initiatives, a decrease of approximately $0.8 million in marketing spend in our OTT business, a decrease of $0.2 million in travel related expenses, and a decrease of $0.4 million in stock-based compensation.
Depreciation and Amortization Expense on Property and Equipment
Nine Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 4,612 | $ | 5,844 | $ | (1,232 | ) | (21 | )% | |||||
Content & Entertainment Business | 239 | 256 | (17 | ) | (7 | )% | ||||||||
Corporate | 126 | 139 | (13 | ) | (9 | )% | ||||||||
$ | 4,977 | $ | 6,239 | $ | (1,262 | ) | (20 | )% | ||||||
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 fiscal years 2019 and 2018.
Interest expense, net
Nine Months Ended December 31, | ||||||||||||||
($ in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||
Cinema Equipment Business | $ | 2,159 | $ | 3,786 | $ | (1,627 | ) | (43 | )% | |||||
Corporate | 3,554 | 4,074 | (520 | ) | (13 | )% | ||||||||
$ | 5,713 | $ | 7,860 | $ | (2,147 | ) | (27 | )% | ||||||
Interest expense in the Cinema Equipment Business segment decreased primarily as a result of reduced debt balances compared to the prior period, primarily due to the payoff of our KBC facilities, P2 Vendor Note, and the reduction of the Prospect Term Loan. Interest expense in our Corporate Segment decreased as a result of lower loan balances from our Credit Facility and Second Lien Loans.
Income Tax Expense
We recorded less than $0.2 million of income tax expense for the nine months ended December 31, 2019 and 2018 in our Cinema Equipment Business and Corporate segments for state income taxes.
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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.
Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the nine months ended December 31, 2019 decreased by $4.9 million, or 51%, compared to the nine months ended December 31, 2018. Adjusted EBITDA loss from our non-cinema equipment business was negative $2.6 million for the nine months ended December 31, 2019 compared to negative $5.1 million for the nine months ended December 31, 2018. The increase in Adjusted EBITDA compared to the prior period primarily reflects lower Selling, General and Administrative Expenses.
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 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:
Nine Months Ended December 31, | ||||||||
($ in thousands) | 2019 | 2018 | ||||||
Net loss | (10,289 | ) | (10,042 | ) | ||||
Add Back: | ||||||||
Income tax expense | 210 | 194 | ||||||
Depreciation and amortization of property and equipment | 4,977 | 6,239 | ||||||
Amortization of intangible assets | 2,178 | 4,187 | ||||||
Interest expense, net | 5,713 | 7,860 | ||||||
Other expense, net | 1,536 | 394 | ||||||
Stock-based compensation and expenses | 367 | 763 | ||||||
Net loss attributable to noncontrolling interest | (8 | ) | 38 | |||||
Adjusted EBITDA | $ | 4,684 | $ | 9,633 | ||||
Adjustments related to the Cinema Equipment Business | ||||||||
Depreciation and amortization of property and equipment | $ | (4,612 | ) | $ | (5,844 | ) | ||
Amortization of intangible assets | (34 | ) | (34 | ) | ||||
Stock-based compensation and expenses | 7 | (8 | ) | |||||
Income from operations | (2,650 | ) | (8,824 | ) | ||||
Adjusted EBITDA from non-cinema equipment business | $ | (2,605 | ) | $ | (5,077 | ) | ||
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 consolidated 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.
There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K, filed with the SEC on July 16, 2019, except the accounting policy changes detailed in Note 2 of our condensed consolidated financial statements as a result of the adoption of the new leasing standard.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included herein.
Liquidity and Capital Resources
We incurred consolidated net loss of $10.3 million and $10.0 million for the nine months ended December 31, 2019 and 2018, respectively. We have an accumulated deficit of $406.4 million, and negative working capital of $54.7 million, as of December 31, 2019. In addition, we have significant debt-related contractual obligations as of December 31, 2019 and beyond.
We have incurred net losses each year since we commenced our operations. Since our inception, we have financed our operations substantially through the private placement of shares of our common and preferred stock, the issuance of promissory notes, our initial public offering and subsequent private and public offerings, notes payable and common stock used to fund various acquisitions.
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We may continue to generate net losses in the future primarily due to depreciation and amortization, interest on notes payable, 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. The restrictions imposed by our debt agreements may limit our ability to obtain financing, make it more difficult to satisfy our debt obligations or require us to dedicate a substantial portion of our cash flow to payments on our existing debt obligations. The Prospect Loan requires certain screen turn performance from certain of our Cinema Equipment Business subsidiaries. While such restrictions may reduce the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements, we do not have similar restrictions imposed upon our CEG business. We may seek to raise additional capital as 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.
In accordance with the Stock Purchase Agreement, on December 29, 2017, the Company entered into a loan agreement with BEMG, pursuant to which the Company borrowed $10.0 million (the “2017 Loan”). The maturity date was June 28, 2021 with interest at 5% per annum, payable quarterly in cash. The 2017 Loan is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the 2017 Loan were used for working capital and general corporate purposes. As part of this 2017 Loan, the Company also issued warrants to BEMG to purchase 1,400,000 shares of the Company’s Class A common stock (the “Warrants”). The 2017 Loan was paid in full on July
20, 2018.
On July 20, 2018, we entered into the 2018 Loan. The 2018 Loan has a one (1) year term that may be extended by mutual agreement of Bison Global and the Company and bears interest at 5% per annum, payable quarterly in cash. On July 12, 2019, we entered into a Termination Agreement for the 2018 Loan and at the same time entered into a $10.0 million Convertible Promissory Note. See Note 5 - Notes Payable.
On October 9, 2018, the Company issued a subordinated convertible note (the “Convertible Note”) to MingTai Investment LP (the “Lender”) for $5.0 million from the Lender. All proceeds from the Convertible Note was used to pay the $5.0 million 2013 Notes described in Note 5 - Notes Payable.
On July 9, 2019, the Company entered into the July Stock Purchase Agreement with BEMG, an affiliate of Bison Capital Holding Company Limited, which, through an affiliate, is the majority holder of our Class A common stock, pursuant to which the Company agreed to sell to BEMG a total of 2,000,000 July SPA Shares, for an aggregate purchase price in cash of $3.0 million priced at $1.50 per share. The sale of the July SPA Shares was consummated on July 9, 2019. The July SPA Shares are subject to certain transfer restrictions. The proceeds of the sale of the July SPA Shares sold were used for working capital, including the repayment of Second Lien Loans (as defined in Note 5 - Notes Payable). In addition, the Company has agreed to enter into a registration rights agreement for the resale of the July SPA Shares.
On August 2, 2019, the Company entered into the August Stock Purchase Agreement with BEMG, pursuant to which the Company agreed to sell to BEMG a total of 1,900,000 August SPA Shares, for an aggregate purchase price in cash of $2.9 million priced at $1.50 per share. The sale of the August SPA Shares was consummated on August 2, 2019. The August SPA Shares are subject to certain transfer restrictions. The proceeds of the sale of the August SPA Shares sold were used for working capital. In addition, the Company has agreed to enter into a registration rights agreement for the resale of the August SPA Shares.
The Second Lien Loans (as defined in Note 5 - Notes Payable) were to mature on June 30, 2019. On June 28, 2019, the Company entered into a consent agreement with lenders of the Second Lien Loans to an extension of the Second Lien Loans pursuant to which (i) the Company paid down a portion of the outstanding principal amount plus accrued interest to date, and (ii) the maturity date of the remaining outstanding principal amount of the Second Lien Loans was extended to September 30, 2019. The Company paid a consent fee in total of $56 thousand to the lenders in connection with the consent.
On July 30, 2019, Ronald L. Chez, one of the lenders, signed a waiver to defer the receipt of the portion of his outstanding amount and agreed to be paid no later than September 30, 2019. The company paid him a consent fee of $80 thousand for this waiver.
During the nine months ended December 31, 2019, the Company paid $3.4 million of the outstanding Second Lien Loans and expects to obtain additional capital from or through Bison Capital Holding Limited or an affiliate thereof ("Bison") for final payment of the remaining outstanding balances of the Second Lien Loans. On October 24, 2019, the Company entered into a consent agreement to extend the maturity date to November 30, 2019. On January 8, 2020, the Company entered into another
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consent agreement to extend the maturity date to February 17, 2020. There were no consent fees paid for these consent agreements.
Non-Recourse Indebtedness
Our Cinema Equipment Business has historically been financed through a series of non-recourse loans. Certain of the subsidiaries that make up the Cinema Equipment Business have pledged their assets as collateral for, and are liable with respect to, certain indebtedness for which our other subsidiaries and their assets generally are not. We have referred to this indebtedness as "non-recourse debt" because the recourse of the lenders is limited to the assets of specific subsidiaries. Such indebtedness includes the Prospect Loan, the KBC Facilities, the 2013 Term Loans, the P2 Vendor Note and the P2 Exhibitor Notes. The balance of our non-recourse debt, net of related debt issuance costs, as of December 31, 2019 was $11.6 million for our Cinema Equipment Business segment, which mature as presented in the Contractual Obligations table below. We continue to expect cash flows from our Cinema Equipment Business operations will be sufficient to satisfy our liquidity and contractual requirements that are linked to these operations. Cash flows from our Cinema Equipment Business segment are primarily used for repayment of debt in that segment, and are not readily available to the Company otherwise.
Revolving Credit Agreements
On March 30, 2018, the Company entered into a new Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between the Company, East West Bank ("EWB") and the Guarantors named therein, which are certain subsidiaries of the Company (the "Loan Agreement"). The Loan Agreement provides for a credit facility (the “Credit Facility”) consisting of a maximum of $19.0 million in revolving loans at any one time outstanding and having a maturity date of March 31, 2020, which may be extended for two successive periods of one year each at the sole discretion of the lender so long as certain conditions are met.
Interest is due monthly on the last day of the month based on the rate determined by the Company in prior month of either 0.5% plus Prime Rate or 3.25% above LIBOR Rate established by EWB.
On March 30, 2018, the Company borrowed $8.2 million under the Credit Facility. The proceeds from the Credit Facility were used to pay the $7.8 million outstanding principal and accrued interest under the prior credit agreement. During the year ended March 31, 2019, the Company borrowed an additional $10.4 million under the Credit Facility. As of December 31, 2019, there was $14.7 million outstanding and there was no additional availability under the Credit Facility based on the Company's borrowing base.
On July 3, 2019, the Company entered into the EWB Amendment to the Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between the Company, East West Bank and the Guarantors named therein. The EWB Amendment reduced the size of the facility to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, and extended the maturity date to June 30, 2020. In connection with the EWB Amendment, three of our subsidiaries became Guarantors under the EWB Credit Agreement.
Other Indebtedness
In October 2013, we issued notes to certain investors in the aggregate principal amount of $5.0 million (the "2013 Notes") and warrants to purchase 150,000 shares of Class A Common Stock to such investors. The principal amount outstanding under the 2013 Notes is due on October 21, 2018 and the notes bore interest at 9.0% per annum, payable in quarterly installments. The 2013 Notes were paid in full on October 18, 2018, prior to their maturity date of October 21, 2018.
On October 9, 2018, the Company issued a subordinated convertible note (the “Convertible Note”) to MingTai Investment LP (the “Lender”) for $5.0 million. All proceeds from the Convertible Note were used to pay the $5.0 million 2013 Notes described above. See Note 5 - Notes Payable. The Convertible Note bears interest at 8% and matures on October 9, 20219 with one remaining year extension at the Company's option. On October 9, 2019, the Company extended the note for one additional year and the new maturity date of the Convertible Note is October 9, 2020.
The Convertible Note is convertible into 3,333,333 shares of the Company's Class A common stock, based on initial conversion price of $1.50 per share. The Convertible Note is convertible at the option of the Lender, or the Company, at any time prior to payment in full of the principal balance, and all accrued interest on the Convertible Note in whole, or in part, into fully paid and non-assessable shares of Company’s Class A common stock.
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Upon conversion by the Lender, we may elect to settle such conversion in shares of our Class A common stock, cash or a combination thereof. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to APIC) of $270 thousand. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value similar non-convertible debt; the debt discount is being amortized as additional non-cash interest expense using the effective interest method over the term of the Note.
The $10.0 million note payable to Bison Global Investment SPC due July 20, 2019 is guaranteed by Bison Entertainment and Media Group ("BEMG"). On July 20, 2018, the Company also entered into a side letter (the “Letter”) with BEMG, where BEMG agreed to guarantee the payment directly to Bison Global of any amount due if (i) the 2018 Loan matures prior to June 28, 2021 or (ii) Bison Global demands payment of the 2018 Loan, in whole or in part, prior to maturity.
On October 11, 2019, we received a notice (the “Bid Price Notice”) from the Staff indicating that, based upon the closing bid price of the Company’s Class A common stock for the last 30 consecutive business days, the Company no longer met the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1). The Bid Price Notice did not result in the immediate delisting of the Common Stock from the Nasdaq Global Market.
The Company actively monitors the price of the Common Stock and will consider all available options to regain compliance with the continued listing standards. The Company may elect to address the deficiency by implementing a reverse stock split if the Board of Directors determines that is the proper course of action. No decision has been made at this time.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided a period of 180 calendar days, or until April 8, 2020, in which to regain compliance with the deficiency. In order to regain compliance with the minimum bid price requirement, the closing bid price of the Common Stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. If the Company does not regain compliance with this requirement by April 8, 2020, the Company may be eligible for an additional 180 calendar day compliance period provided that it meets certain continued listing standards, and provides the Staff with written notice of its intention to cure the deficiency.
On December 18, 2019, we received a Notice from the Listing Qualifications staff of Nasdaq (the “Staff”) indicating that, the Company no longer meets the requirement to maintain a minimum market value of publicly held shares ("MVPHS") of $15.0 million, as set forth in Nasdaq Listing Rule 5450(b)(3)(C).
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until June 15, 2020, in which to regain compliance. In order to regain compliance with the MVPHS, requirement, our MVPHS must be at least $15.0 million for a minimum of ten consecutive business days during this 180-day period. If we do not regain compliance with the bid price requirement by June 15, 2020, we may be eligible for an additional 180 calendar day compliance period. If we do not regain compliance by June 15, 2020, or the termination of any subsequent compliance period, if applicable, the Staff will provide written notification that its common stock may be delisted. At such time, we would be afforded the opportunity for a hearing before a Nasdaq Listing Qualifications Panel (the “Panel”). A request for a hearing would stay any suspension or delisting action pending the issuance of a decision by the Panel following the hearing and the expiration of any extension period granted by the Panel. In that regard, the Panel would have the authority to grant us up to an additional 180-day period in which to regain compliance.
We intend to monitor the MVPHS for our common stock between now and June 15, 2020 and will consider the various available options if its common stock does not trade at a level that is likely to regain compliance.
On January 13, 2020, Bison Entertainment Investment Limited, the Company’s majority stockholder, signed a written consent approving the issuance of shares of Common Stock in exchange for the acquisition by the Company of shares of Starrise Media Limited, a leading Chinese entertainment company, from two of Starrise’s stockholders. The Company mailed a definitive information statement to its stockholders in late January. The Company closed on the purchase of 162,162,162 Starrise shares and issued 21,646,604 shares of Common Stock as consideration therefor on February 14, 2020, and expects to close on the remainder of the Starrise shares as soon as practicable.
In addition, as discussed in more detail in Note 5 - Notes Payable, our debt obligations include certain financial and liquidity covenants and capital requirements, and from time to time, we may need to use available capital resources and raise additional capital to satisfy these covenants and requirements.
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Cash Flows
For the Nine Months Ended December 31, | ||||||||
($ in thousands) | 2019 | 2018 | ||||||
Net cash provided by operating activities | $ | 5,318 | $ | 6,333 | ||||
Net cash used in investing activities | (377 | ) | (1,179 | ) | ||||
Net cash used in financing activities | (8,339 | ) | (5,965 | ) | ||||
Net change in cash and cash equivalents | $ | (3,398 | ) | $ | (811 | ) | ||
As of December 31, 2019, we had cash and restricted cash balances of $15.5 million.
Net cash provided by operating activities is primarily driven by loss from operations, excluding non-cash expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, offset by changes in working capital. Cash received from VPFs declined from the previous period as Phase I and Phase II Deployment Systems in our Cinema Equipment Business reached the conclusion of their deployment payment period 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. 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.
Cash flows used in investing activities mainly consisted of purchases of property and equipment.
For the nine months ended December 31, 2019, cash flows used in financing activities reflects payments of $8.1 million for the 2013 Prospect Loan, net payments of approximately $2.7 million for the Credit Facility, and $3.3 million for the Second Lien Loans offset by $5.8 million received in connection with the sale of 3,900,000 shares of our Common Stock.
We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, interest on our debt obligations, 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. The restrictions imposed by the terms of our debt obligations may limit our ability to obtain financing, make it more difficult to satisfy our debt obligations or require us to dedicate a substantial portion of our cash flow to payments on our existing debt obligations. 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 segment 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. Our CEG segment benefits from the winter holiday season, and as a result, revenues in the segment are typically highest in our fiscal third quarter; however, we believe the seasonality of motion picture exhibition is becoming less pronounced as the motion picture studios are releasing movies 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 operating leases in the ordinary course of business, which are disclosed above in the table of our significant contractual obligations, and CDF2 Holdings, LLC ("CDF2 Holdings"), our wholly-owned unconsolidated subsidiary. As discussed further in Note 3 - Other Interests to the Condensed Consolidated Financial Statements included in Item 1 of this 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.
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Item 4. CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only reasonable assurance, not absolute assurance, that the objective of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Because of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
The management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of December 31, 2019. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during this fiscal quarter 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, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The 21,646,604 shares of Common Stock issued as consideration for the acquisition of Starrise ordinary shares on February 14, 2020 were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits are listed in the Exhibit Index on page 46 herein.
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EXHIBIT INDEX
Exhibit Number | Description of Document | |
3.1 | ‑‑ | |
10.1 | ‑‑ | |
10.2 | ‑‑ | |
31.1 | ‑‑ | |
31.2 | ‑‑ | |
32.1 | ‑‑ | |
32.2 | ‑‑ | |
101.INS | ‑‑ | XBRL Instance Document. |
101.SCH | ‑‑ | XBRL Taxonomy Extension Schema. |
101.CAL | ‑‑ | XBRL Taxonomy Extension Calculation. |
101.DEF | ‑‑ | XBRL Taxonomy Extension Definition. |
101.LAB | ‑‑ | XBRL Taxonomy Extension Label. |
101.PRE | ‑‑ | XBRL Taxonomy Extension Presentation. |
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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: | February 14, 2020 | By: | /s/ Christopher J. McGurk |
Christopher J. McGurk Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | |||
Date: | February 14, 2020 | By: | /s/ Gary S. Loffredo |
Gary S. Loffredo Chief Operating Officer, President Digital Cinema, General Counsel and Secretary (Principal Financial Officer) | |||
47
FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CINEDIGM CORP.
OF
CINEDIGM CORP.
Gary Loffredo, Secretary of the herein named Corporation, hereby certifies that:
1.The present name of the corporation (hereinafter called the “Corporation”) is Cinedigm Corp. The original name of the Corporation was Access Colo, Inc.
2.The date of filing of the Fourth Amended and Restated Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is November 14, 2003. The date of filing of the Third Amended and Restated Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is November 21, 2001. The date of filing of the Second Amended and Restated Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is October 19, 2001. The date of filing of the Restated Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is August 14, 2001. The date of filing the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is March 31, 2000.
3.The provisions of the Fourth Amended and Restated Certificate of Incorporation of the Corporation are hereby amended, restated and integrated into the single instrument that is hereinafter set forth, and that is entitled the Fifth Amended and Restated Certificate of Incorporation of the Corporation without any further amendments other than the amendments herein certified (the “Fifth Amended and Restated Certificate of Incorporation”).
4.This Fifth Amended and Restated Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. Prompt written notice of the adoption of the amendment herein certified has been given to those stockholders who have not consented in writing thereto, as provided in Section 228 of the General Corporation Law of the State of Delaware.
5.The Certificate of Incorporation, as amended and restated herein, shall, at the effective time of this Fifth Amended and Restated Certificate of Incorporation, read as follows:
FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CINEDIGM CORP.
FIRST: Name: The name of the Corporation is: Cinedigm Corp.
SECOND: Address: The address of the Corporation’s registered office in the State of Delaware is 251 Little Falls Drive, Wilmington, Delaware, County of New Castle 19808. The name of the agent at such address is Corporation Service Company.
THIRD: Purpose: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.
FOURTH: Capitalization:
Section 4.1 Authorized Shares.
The total number of shares of capital stock that the Corporation shall have authority to issue is seventy-five million (75,000,000) shares as follows: (i) sixty million (60,000,000) shares of common stock, of which sixty million (60,000,000) shares shall be Class A Common Stock, par value $0.001 per share (the “Class A Common Stock”); and (ii) fifteen million (15,000,000) shares of preferred stock, par value $0.001 per share (the “Preferred Stock”) of which twenty (20) shares shall be “Series A Preferred Stock,” and 14,999,980 of which the Board of Directors shall have the authority by resolution or resolutions to fix all of the powers, preferences and rights, and the qualifications, limitations and restrictions of the Preferred Stock permitted by the Delaware General Corporation Law and to divide the Preferred Stock into one or more class and/or classes and designate all of the powers, preferences and rights, and the qualifications, limitations and restrictions of each class permitted by the Delaware General Corporation Law.
Section 4.2 Class A Common Stock.
Except as otherwise provided by law or this Fifth Amended and Restated Certificate of Incorporation, as amended from time to time (this “Certificate of Incorporation”), the holders of the Class A Common Stock shall be entitled to one vote per share on all matters to be voted on by the stockholders of the Corporation.
Section 4.3 Series A Preferred Stock
Section 4.3.1. Dividend Rights. The holders of Series A Preferred Stock shall be entitled to receive dividends, but only out of funds that are legally available therefor, at the rate of 10% of the Series A Original Issue Price (as defined below) per annum on each outstanding share of Series A Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). The original issue price of the Series A Preferred Stock shall be $500,000 per share (the “Series A Original Issue Price”). For any share of Series A Preferred Stock, such dividends shall begin to accrue commencing upon the first date such share is issued and becomes outstanding (the “Original Issue Date”) and shall be payable in cash or, at the Corporation’s option, by converting the cash amount of such dividends into Class A common stock, par value $0.001 per share (the “Class A Common Stock”), based on the value of the Class A Common Stock equal to (i) so long as the sum of the number of shares of Class A Common Stock issued by the Corporation that would be integrated with the other shares of Class A Common Stock issued under this Paragraph 1 under the rules of the NASDAQ Stock Market plus the number of shares of Class A Common Stock issued under this Paragraph 1 does not exceed 5,366,529 shares (as shall be adjusted for stock splits), the price determined by the daily volume weighted average price per share of the Class A Common Stock on its principal trading market as reported by Bloomberg Financial L.P. (the “VWAP”) for the five (5) day Trading Day (as defined below) period ending on the Trading Day (as defined below) immediately preceding the Dividend Payment Date (as defined below), of the Corporation, and (ii) thereafter, the greater of the Book Value Per Share (as defined below) or Market Value Per Share (as defined below) (the greater of those two amounts, the “Market Price”), as measured on the Original Issue Date for the initial issuance of shares of Series A Preferred Stock in connection with any shares of Series A Preferred Stock that would be integrated under the rules of the NASDAQ Stock Market. The dividends shall be payable in arrears (a) first, on the earlier of (x) September 30, 2010 or (y) the last day of the calendar quarter during which the Corporation ceases to be contractually prohibited from paying such dividends, and thereafter (b) quarterly on the last day of each calendar quarter beginning in the calendar quarter following such initial dividend payment date and continuing until such shares of Series A Preferred Stock are redeemed (each, a “Dividend Payment Date”), provided, that, if any such Dividend Payment Date is not a Business Day (as defined below), then any such dividend shall be payable on the next Business Day. Such dividends shall accrue day-by-day and shall be cumulative, whether or not declared by the Board of Directors and whether or not there shall be funds legally available for the payment of dividends. The term “Business Day” means any day other than a Saturday, a Sunday or a day on which banking institutions in the New York, New York are authorized or required by law to be closed. Until it has paid all dividends on the Series A Preferred Stock as contemplated in this Certificate of Designations, the Corporation may not pay dividends on the Common Stock or any other stock of the Corporation hereafter created that is junior in terms of dividend rights, redemption or liquidation preference to the Series A Preferred Stock (together with the Common Stock, “Junior Stock”). The term “Trading Day” means any day on which the Class A Common Stock is traded on its principal market; provided that the “Trading Day” shall not include any day on which the principal market is open for trading for less than 4.5 hours. The terms “Book Value Per Share” and “Market Value Per Share” shall be determined in accordance with the rules of The NASDAQ Stock Market, as in effect on the date of this Certificate of Designations.
Section 4.3.2. Voting Rights. Except as otherwise provided herein or as required by law, the holders of Series A Preferred Stock will not have the right to vote on matters brought before the stockholders of the Corporation.
Section 4.3.3. Liquidation Rights. Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Junior Stock, subject to the rights of any series of Preferred Stock that may from time-to-time come into existence and which is expressly senior to the rights of the Series A Preferred Stock, the holders of Series A Preferred Stock shall be entitled to be paid in cash out of the assets of the Corporation an amount per share of Series A Preferred Stock equal to 100% of the Series A Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), plus accrued but unpaid dividends (the “Liquidation Preference”), for each share of Series A Preferred Stock held by each such holder. If, upon any such liquidation, dissolution, or winding up, the assets of the Corporation shall be insufficient to make payment in full of the Liquidation Preference to all holders of Series A Preferred Stock, then such assets shall be distributed among the holders of Series A Preferred Stock at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled.
Section 4.3.4. Conversion Rights. Except as otherwise provided herein or as required by law, the holders of Series A Preferred Stock will have no rights with respect to the conversion of the Series A Preferred Stock into shares of Class A Common Stock or any other security of the Corporation.
Section 4.3.5. Redemption. The Series A Preferred Stock may be redeemed by the Corporation at any time after the second anniversary of the Original Issue Date (the “Redemption Date”) upon thirty (30) days advance written notice (a “Notice of Redemption”) to the holder, for a price equal to One Hundred and Ten Percent (110%) of the Liquidation Preference (which Liquidation Preference shall include, for avoidance of doubt, all accrued but unpaid dividends payable to the holder of the Series A Preferred Stock for the period between the Notice of Redemption and the Redemption Date) (the “Callable Amount”), payable in cash or, at the Corporation’s option, so long as the closing price of the Class A Common Stock is $2.18 or higher (as shall be adjusted for stock splits) for at least (90) consecutive Trading Days ending on the Trading Day immediately prior to the Notice of Redemption, by converting such Callable Amount into Class A Common Stock at the Market Price, as measured on the Original Issue Date for the initial issuance of shares of Series A Preferred Stock in connection with any shares of Series A Preferred Stock that would be integrated under the rules of the NASDAQ Stock Market. The Corporation will indicate on a Notice of Redemption whether the Corporation will redeem the Series A Preferred Stock to be so redeemed in cash or, if so permitted under the immediately preceding sentence, in Class A Common Stock.
Section 4.3.6. Amendment. None of the powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock as provided in this Certificate of Designations or in the Certificate of Incorporation shall be amended in any manner that would alter or change the powers, preferences, rights or privileges of the holders of Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least four-fifths of the outstanding shares of Series A Preferred Stock, voting as a separate class.
FIFTH: Voting: The holders of the Common Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation for each share held by such holders in accordance with Section 4 hereof.
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: In furtherance and not in limitation of the powers conferred by statute, the board of directors of the Corporation is expressly authorized to adopt, amend or repeal the by-laws of the Corporation.
EIGHTH: Meetings of stockholders may be held within or without the State of Delaware, as the by-laws of the Corporation may provide. The books of the Corporation may be kept (subject to any provision contained in any statute) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors of the Corporation or in the by-laws of the Corporation. Elections of directors need not be by written ballot unless the by-laws of the Corporation shall so provide.
NINTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in any manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.
TENTH: The Corporation shall indemnify, to the fullest extent now or hereafter permitted by law, each director, officer or other authorized representative of the Corporation who was or is made a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was an authorized representative of the Corporation, against all expenses (including attorneys’ fees and disbursements), judgments, fines (including excise taxes and penalties) and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding.
A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this provision shall not eliminate or limit the liability of a director to the extent that such elimination or limitation of liability is expressly prohibited by the Delaware General Corporation Law as in effect at the time of the alleged breach of duty by such director.
Any repeal or modification of this Article by the stockholders of the Corporation shall not adversely affect any right or protection existing at the time of such repeal or modification to which any person may be entitled under this Article. The rights conferred by this Article shall not be exclusive of any other right which the Corporation may now or hereafter grant, or any person may have or hereafter acquire, under any statute, provision of this Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. The rights conferred by this Article shall continue as to any person who shall have ceased to be a director or officer of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such person.
For the purposes of this Article, the term “authorized representative” shall mean a director, officer, employee or agent of the Corporation or of any subsidiary of the Corporation, or a trustee, custodian, administrator, committeeman or fiduciary of any employee benefit plan established and maintained by the Corporation or by any subsidiary of the Corporation, or a person who is or was serving another Corporation, partnership, joint venture, trust or other enterprise in any of the foregoing capacities at the request of the Corporation.
Executed on October 31, 2017
/s/ Gary Loffredo
Gary Loffredo, Secretary
Gary Loffredo, Secretary
CERTIFICATE OF AMENDMENT
TO
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CINEDIGM CORP.
The undersigned, being the Chairman and CEO of Cinedigm Corp., a Delaware corporation (the “Corporation”), pursuant to Section 242 of the General Corporation Law of the State of Delaware, as amended (the “DGCL”), does hereby certify as follows:
1. | Pursuant to a unanimous written consent of the Board of Directors of the Corporation (the “Board”), the Board adopted resolutions (the “Amending Resolutions”) to amend the Fifth Amended and Restated Certificate of Incorporation of the Corporation, as filed with the Delaware Secretary of State on October 31, 2017 (the “Certificate of Incorporation”); | |
2. | Pursuant to a written consent of the holder of the majority of the Corporation’s outstanding Class A Common Stock, par value $0.001 per share, in accordance with Sections 228 and 242 of the DGCL, the holders of the Corporation’s outstanding capital stock approved the Amending Resolutions; and | |
3. | The Amending Resolutions were duly adopted in accordance with Section 242 of the DGCL. | |
NOW, THEREFORE, to effect the Amending Resolutions, Section 4.1 of the Certificate of Incorporation shall be deleted in its entirety and replaced as follows:
“Section 4.1 Authorized Shares.
The total number of shares of capital stock that the Corporation shall have authority to issue is one hundred sixty five million (165,000,000) shares as follows: (i) one hundred fifty million (150,000,000) shares of common stock, of which one hundred fifty million (150,000,000) shares shall be Class A Common Stock, par value $0.001 per share (the “Class A Common Stock”); and (ii) fifteen million (15,000,000) shares of preferred stock, par value $0.001 per share (the “Preferred Stock”) of which twenty (20) shares shall be “Series A Preferred Stock,” and 14,999,980 of which the Board of Directors shall have the authority by resolution or resolutions to fix all of the powers, preferences and rights, and the qualifications, limitations and restrictions of the Preferred Stock permitted by the Delaware General Corporation Law and to divide the Preferred Stock into one or more class and/or classes and designate all of the powers, preferences and rights, and the qualifications, limitations and restrictions of each class permitted by the Delaware General Corporation Law.”
Except as specifically set forth herein, the Certificate of Incorporation shall not be amended, modified or otherwise altered by this Certificate of Amendment.
* * *
[Signature page follows]
IN WITNESS WHEREOF, the Corporation has caused this Amendment to the Certificate of Incorporation of Cinedigm Corp. to be signed by Christopher J. McGurk, its Chairman & CEO, this 14th day of February, 2020, who acknowledges that the foregoing is the act and deed of the Corporation and that the facts stated herein are true.
By: /s/ Christopher J. McGurk
Name: Christopher J. McGurk
Title: Chairman & CEO
4813-4264-3892 1
EXECUTION VERSION
STOCK PURCHASE AGREEMENT
TABLE OF CONTENTS
Page
Certain Definitions 1 |
Purchase and Sale of the Purchased Shares; Payment 3 |
Purchase and Sale of the Purchased Shares 3 |
Payment 3 |
Closing 3 |
Closing Date 3 |
Share Certificates 3 |
Books and Records 3 |
Representations and Warranties of the Seller 3 |
Ownership of the Purchased Shares 3 |
Power and Authority; Enforceability 4 |
Governmental Approvals 4 |
No Litigation and Investigations 4 |
No Contravention of Laws, Agreements or Organizational Documents 4 |
No Fees 5 |
Outstanding Common Stock 5 |
No Distribution 5 |
Economic Risk 5 |
Accredited Status 5 |
Restricted Securities 6 |
Investigation 6 |
No Reliance 6 |
ERISA 6 |
Representations and Warranties of the Purchaser 6 |
Status 6 |
Power and Authority; Enforceability 6 |
No Contravention of Laws, Agreements or Organizational Documents 7 |
Governmental Approvals 7 |
No Distribution 7 |
Economic Risk 7 |
Accredited Purchaser 7 |
No Reliance 7 |
No Fees 8 |
ERISA 8 |
Conditions to Closing 8 |
Conditions to the Sellers’ Obligation to Close 8 |
Conditions to the Purchaser’s Obligation to Close 9 |
Miscellaneous 9 |
Termination 9 |
Construction 9 |
Expenses 10 |
Governing Law; Jurisdiction 10 |
Waiver of Jury Trial 10 |
Counterparts 10 |
Assignment 10 |
Third Party Beneficiaries 11 |
Entire Agreement 11 |
Amendments 11 |
Severability 11 |
Notices 11 |
Survival 12 |
SCHEDULES
Schedule A | Purchased Shares |
Schedule B | Outstanding Ordinary Shares |
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of December 27, 2019 (this “Agreement”), is made by and among Cinedigm Corp, a Delaware corporation (the “Purchaser”) and the sellers named on Schedule A attached hereto (the “Sellers”).
WHEREAS, the Sellers desire to sell to the Purchaser, and the Purchaser desires to purchase from the Sellers, an aggregate of 410,901,000 ordinary shares (the “Ordinary Shares”) of Starrise Media Holdings Limited (the “Company”) to be allocated between the Sellers in accordance with Schedule A attached hereto (the “Purchased Shares”), subject to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants, agreements and conditions set forth herein, the parties hereby agree as follows:
Section 1.Certain Definitions. As used herein, the following terms shall have the meanings set forth below:
“affiliates” shall mean, with respect to any person, any other person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such person.
“Agreement” shall have the meaning set forth in the Preamble.
“Ancillary Agreements” shall have the meaning set forth in Section 4.2.
“Benefit Plan” shall have the meaning set forth in Section 5.12.
“business day” shall mean any day except Saturday, Sunday or any other day on which commercial banks are closed in the State of New York or Hong Kong.
“Closing” shall have the meaning set forth in Section 3.1.
“Closing Date” shall have the meaning set forth in Section 3.1.
“Common Stock” shall mean the Class A common stock, par value $0.001 per share, of the Purchaser.
“Company” shall have the meaning set forth in the Preamble.
“control” (including the terms “controlled by” and “under common control with”) shall mean, with respect to any person, the possession, directly or indirectly, of the power to direct or cause the direction of the management of policies of such person, whether through the ownership of securities, limited liability company interests, partnership interests, by contract or otherwise.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Governmental Approvals” shall have the meaning set forth in Section 4.3.
“Governmental Authority” shall have the meaning set forth in Section 4.5.
“Law” shall mean all applicable statutes, laws, regulations and orders of, and all applicable restrictions imposed thereunder by, all Governmental Authorities.
“Lien” shall have the meaning set forth in Section 4.5.
“Material Adverse Effect” shall mean a material adverse effect on the assets, properties, results of operations or financial condition of the Company and its Subsidiaries considered as a whole.
“Ordinary Shares” shall have the meaning set forth in the Preamble.
“person” shall mean any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise or entity or any government or political subdivision or any agency, department or instrumentality thereof.
“Purchased Shares” shall have the meaning set forth in the Recitals.
“Purchase Price” shall have the meaning set forth in Section 2.1.
“Purchaser” shall have the meaning set forth in the Preamble.
“Representatives” means with respect to a particular person, any shareholder, member, director, officer, manager, employee, agent, consultant, advisor, accountant, financial advisor, legal counsel or other representative of such person.
“Securities Act” shall mean the Securities Act of 1933, as amended, and the rules and regulations thereunder.
“Sellers” shall have the meaning set forth in the Preamble.
“Subsidiaries” means, with respect to any person, any corporation, limited liability company, partnership, association, trust or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, or trustees thereof is at the time owned or controlled, directly or indirectly, by that person or one or more of the other Subsidiaries of that person or a combination thereof or (ii) if a limited liability company, partnership, association, trust or other business entity (other than a corporation), a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by that person or one or more Subsidiaries of that person or a combination thereof and for this purpose, a person or persons own a majority ownership interest in such a business entity (other than a corporation) if such person or persons shall be allocated a majority of such business entity’s gains or losses or shall be or control any managing director or general partner of such business entity (other than a corporation). The term Subsidiary shall include all Subsidiaries of such Subsidiary.
Section 2. Purchase and Sale of the Purchased Shares; Payment.
2.1 Purchase and Sale of the Purchased Shares. On the terms and subject to the conditions contained in this Agreement, and in reliance on the representations, warranties and covenants contained herein, at the Closing, the Sellers agree to sell, assign, convey, transfer and deliver to the Purchaser or the Purchaser’s designee, and the Purchaser agrees to purchase and accept, or cause its designee to accept, if applicable, the Purchased Shares, free and clear of all Liens, for an aggregate of 54,850,103 shares of Common Stock (the “Purchase Price”), payable as set forth in Section 2.2.
2.2 Payment. The Purchase Price shall be paid in shares of Common Stock. The number of shares of Common Stock to be issued to each Seller will be determined in accordance with Schedule A.
Section 3. Closing.
3.1 Closing Date. Subject to the satisfaction or waiver of the conditions set forth in Section 6 of this Agreement, the closing of the purchase and sale of the Purchased Shares as contemplated by this Agreement (the “Closing”) shall occur on such date as may be mutually agreed upon by the Seller, the Company and the Purchaser in writing (the “Closing Date”).
3.2 Purchased Shares. At the Closing, the Sellers will deliver to the Purchaser instruments of transfer or other appropriate documents satisfactory to the Purchaser indicating proof of transfer of the Purchased Shares to the Purchaser, or its designee, if applicable.
3.3 Books and Records. On the Closing Date, the Sellers shall cause the Company to record, or to a cause its transfer agent or stock registrar for the Ordinary Shares to record, the Purchaser as the record and beneficial holder of the Purchased Shares in the books and records of the Company.
Section 4. Representations and Warranties of the Seller. Each Seller hereby represents and warrants to the Purchaser, severally and not jointly, that on and as of the date hereof:
4.1 Ownership of the Purchased Shares.
(a) The Seller will sell such number of Ordinary Shares such that, together with the other Seller, the full number of Purchased Shares will be available to be sold to the Purchaser, in accordance with Schedule A. The Seller has good, valid and marketable title to, owns of record and beneficially, and is entitled to sell, assign, transfer and deliver to the Purchaser the Seller’s Purchased Shares, on the terms of this Agreement without the consent of any person; provided, however, that if the Seller intends to exercise or convert currently exercisable or convertible securities of the Company in order to acquire some or all of the Purchased Shares to be sold by the Seller, the Seller (i) has good, valid and marketable title to such exercisable or convertible securities, with the current and valid right to exercise or convert such exercisable or convertible securities, (ii) will exercise or convert such exercisable or convertible securities prior to or in connection with the Closing in order to have Seller’s Purchased Shares readily available for Closing, and (iii) at Closing, shall have good, valid and marketable title to, own of record and beneficially, and be entitled to sell, assign, transfer and deliver to the Purchaser the Purchased Shares acquired upon such exercise or conversion, on the terms of this Agreement without the consent of any person. Upon consummation of the transactions contemplated herein, at the Closing, the Purchaser will be vested with good and marketable title in and to the Purchased Shares, free and clear of all Liens (except for any Liens that are created by or imposed thereon by the Purchaser).
(b) The Seller is not party to any commitments, arrangements, rights or agreements providing for the repurchase, redemption or other acquisition of the Purchased Shares, or voting agreements, shareholders agreements, management agreements, pledge agreements, buy-sell agreements, proxies or similar agreements or understandings with respect to the Seller’s Purchased Shares or which restrict or grant any right, preference or privilege with respect to such Purchased Shares, except for any agreements or understandings that will be terminated or cancelled in full as of or prior to the Closing.
4.2 Power and Authority; Enforceability. The Seller has necessary power and authority to execute, deliver and perform its obligations under this Agreement and any required stock power or similar instrument of transfer as other all other documents executed and delivered in connection with this Agreements (the “Ancillary Agreements”); and it has all requisite organizational power and authority and has taken all organizational action necessary in order to execute, deliver and perform its obligations under this Agreement and any Ancillary Agreements to which it is a party. This Agreement, and each Ancillary Agreement to which the Seller is a party, has been duly executed and delivered by the Seller and constitutes a valid and binding agreement of the Seller, enforceable against the Seller in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or affecting creditors’ rights and to general equity principles.
4.3 Governmental Approvals. No material order, consent, approval, license, authorization, or validation of, or notice to, filing, recording or registration with, or exemption by, any Governmental Authority (collectively, “Governmental Approvals”) is required to be made or obtained by the Seller to authorize or is required to be made or obtained by the Seller in connection with the execution, delivery and performance of this Agreement or the Ancillary Agreements.
4.4 No Litigation and Investigations. There are no actions, claims, suits, investigations or proceedings pending, or to the knowledge of Seller, threatened in writing or orally against the Seller or its affiliates, individually or jointly, that (a) relate to the Purchased Shares or (b) challenge the validity or enforceability of the Seller’s obligations under this Agreement.
4.5 No Contravention of Laws, Agreements or Organizational Documents. Neither the execution, delivery and performance of this Agreement and the Ancillary Agreements to which the Seller is a party nor the consummation by the Seller of the transactions contemplated herein or therein, (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any nation or government, any state or other political subdivision thereof, whether foreign, state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government (“Governmental Authority”), in each case in any manner that would be material to the Seller or its affiliates, or that would otherwise materially adversely affect the ability of the Seller to perform its obligations under this Agreement or the Ancillary Agreements to which the Seller is a party, (ii) will conflict with or violate or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default), or loss of a benefit under, any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement to which the Seller or any affiliate of the Seller is a party or by which the Seller or any such affiliate or any of the Seller’s or such affiliate’s property or assets are bound or to which it may be subject, in each case in any manner that would be material to the Seller or such affiliates or that would otherwise materially adversely affect the ability of the Seller to perform its obligations under this Agreement or the Ancillary Agreements to which the Seller is a party, (iii) will result in the creation or imposition of (or the obligation to create or impose) any mortgage, pledge, deed of trust, security interest, encumbrance, UCC-1 financing statement (or amendment thereto), hypothecation, assignment, charge, deposit arrangement, encumbrance, easement, lien (statutory or other), right of first refusal, charge or other adverse claim of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof, and any synthetic or other financing lease having substantially the same economic effect as any of the foregoing) (“Lien”) upon any of the property or assets of the Seller or its affiliates in any manner that would be material to the Seller and its affiliates, or (iv) will violate any provision of the organizational documents of the Seller or, if applicable, its affiliates.
4.6 No Fees. Neither the Seller nor any of its respective officers, directors, employees or other affiliates have employed any broker or finder or incurred any liability for any investment banking fees, brokerage fees, commissions or finders’ fees in connection with the purchase and sale of the Purchased Shares.
4.7 Outstanding Common Stock.
(a) To the Seller’s knowledge, as of the date hereof and prior to the purchase and sale of the Purchased Shares as contemplated by this Agreement, the outstanding Ordinary Shares of the Company and the holders thereof will be as set forth in Schedule B hereto.
(b) Upon or prior to acquisition by the Seller, the relevant Purchased Shares were duly authorized and were validly issued in compliance with all applicable legal requirements and governing documents, are fully paid and non-assessable.
4.8 No Distribution. The Seller is acquiring the Common Stock for investment for the Purchaser’s own account, and not with a view to the distribution thereof by the Purchaser in violation of any applicable securities laws.
4.9 Economic Risk. The Seller acknowledges that it can bear the economic risk of the investment in the Common Stock for an indefinite period of time and has such knowledge and experience in financial and business affairs that it is capable of evaluating the merits and risks of the investment in the Common Stock, and has not relied upon any representations, warranties or agreements in connection therewith other than those expressly set forth in this Agreement.
4.10 Accredited Status. The Seller is an “accredited investor” within the meaning of Rule 501(a) under the Securities Act.
4.11 Restricted Securities. The Seller understands that the Common Stock constitutes “restricted securities” under the U.S. securities laws inasmuch as they are being acquired from the Seller in a transaction not involving a public offering and that under such laws and applicable regulations such Common Stock may be resold without registration under the Securities Act only in certain circumstances. In this connection, the Seller understands the resale limitations imposed by the Securities Act.
4.12 Investigation. To the full satisfaction of the Seller, the Seller has been furnished any materials the Seller has requested relating to the Purchaser and issuance to the Seller of Common Stock as consideration for the purchase of the Purchased Shares, and the Seller has been afforded the opportunity to ask questions of Representatives of the Purchaser concerning the Common Stock.
4.13 No Reliance. Other than the representations and warranties expressly set forth in this Agreement and the Ancillary Agreements, none of the Seller or any of its affiliates, associates, directors, officers, attorneys, accountants, agents, members, managers, partners, employees, stockholders, equity holders or controlling persons is relying upon any information, representation or warranty by the Purchaser, or any of its directors, officers, attorneys, accountants, agents, members, managers, partners, stockholders or employees or any of such persons’ heirs, successors, assigns and controlling persons (if any), in determining whether to invest in the Purchaser, enter into this Agreement or any Ancillary Agreement or consummate the transactions contemplated hereby or thereby and none of the foregoing persons have made any other representation or warranty or advised the Seller concerning an investment in the Purchaser or recommended an investment in the Purchaser to the Seller. The Seller has consulted to the extent deemed appropriate by the Seller with the Seller’s own advisors as to the financial, tax, legal and related matters concerning an investment in the Common Stock and on that basis believes that an investment in the Common Stock is suitable and appropriate for the Seller.
4.14 ERISA. The Seller is not a “benefit plan investor” within the meaning of Section 3(42) of ERISA and the regulations thereunder or under any similar state, local or foreign law or regulation.
Section 5. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Sellers that on and as of the date hereof:
5.1 Status. The Purchaser is in good standing under the laws of the jurisdiction of its organization and has the corporate, partnership or other organizational power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage.
5.2 Power and Authority; Enforceability. The Purchaser has the necessary power and authority to enter into this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. Each person executing and delivering this Agreement and any Ancillary Agreement on behalf of the Purchaser is duly authorized to execute and deliver this Agreement and such Ancillary Agreements on behalf of the Purchaser. The execution and delivery of this Agreement and such Ancillary Agreements by the Purchaser has been duly and validly authorized by all requisite action, and no other proceedings on the part of the Purchaser are necessary to authorize this Agreement and such Ancillary Agreements. This Agreement and such Ancillary Agreements have each been duly and validly executed and delivered by the Purchaser and, assuming the due authorization, execution and delivery by the Sellers, constitutes a legal, valid and binding obligation of the Purchaser, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or affecting creditors’ rights and to general equity principles.
5.3 No Contravention of Laws, Agreements or Organizational Documents. Neither the execution, delivery and performance by the Purchaser of this Agreement and the Ancillary Agreements, nor the consummation by the Purchaser of the transactions contemplated herein or therein, (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any Governmental Authority in any material respect, (ii) will conflict with or violate or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default), or loss of a benefit under any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement to which the Purchaser is a party or by which it or any of its property or assets are bound or to which it may be subject, in each case in any manner that would be material to the Purchaser, or that would otherwise materially adversely affect the ability of the Purchaser to perform its obligations under this Agreement or the Ancillary Agreements, (iii) will result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Purchaser in any manner that would be material to the Purchaser, or (iv) will violate any provision of the organizational documents of the Purchaser.
5.4 Governmental Approvals. Except as shall have been made or obtained on or prior to the Closing, no material Governmental Approvals are required to be made or obtained by the Purchaser to authorize, or are required to be made or obtained by the Purchaser in connection with, (i) the execution, delivery and performance of this Agreement and the Ancillary Agreements or (ii) the validity, binding effect or enforceability of this Agreement and the Ancillary Agreements against the Purchaser.
5.5 No Distribution. The Purchaser is acquiring the Purchased Shares for investment for the Purchaser’s own account, and not with a view to the distribution thereof by the Purchaser in violation of any applicable securities laws.
5.6 Economic Risk. The Purchaser acknowledges that it can bear the economic risk of the investment for an indefinite period of time and has such knowledge and experience in financial and business affairs that it is capable of evaluating the merits and risks of the investment in the Purchased Shares, and has not relied upon any representations, warranties or agreements in connection therewith other than those expressly set forth in this Agreement.
5.7 Accredited Purchaser. The Purchaser is an “accredited investor” within the meaning of Rule 501(a) under the Securities Act.
5.8 No Reliance. Other than the representations and warranties expressly set forth in this Agreement and the Ancillary Agreements, none of the Purchaser or any of its affiliates, associates, directors, officers, attorneys, accountants, agents, members, managers, partners, employees, stockholders, equity holders or controlling persons is relying upon any information, representation or warranty by the Sellers, or any of their directors, officers, attorneys, accountants, agents, members, managers, partners, stockholders or employees or any of such persons’ heirs, successors, assigns and controlling persons (if any), in determining whether to invest in the Company, enter into this Agreement or any Ancillary Agreement or consummate the transactions contemplated hereby or thereby and none of the foregoing persons have made any other representation or warranty or advised the Purchaser concerning an investment in the Company or recommended an investment in the Company to the Purchaser. The Purchaser has consulted to the extent deemed appropriate by the Purchaser with the Purchaser’s own advisors as to the financial, tax, legal and related matters concerning an investment in the Purchased Shares and on that basis believes that an investment in the Purchased Shares is suitable and appropriate for the Purchaser.
5.9 No Fees. None of the Purchaser nor any of its respective officers, directors, employees and affiliates has employed any broker or finder or incurred any liability for any investment banking fees, brokerage fees, commissions or finders’ fees in connection with the purchase and sale of the Purchased Shares.
5.10 ERISA. The Purchaser is not a “benefit plan investor” within the meaning of Section 3(42) of ERISA and the regulations thereunder or under any similar state, local or foreign law or regulation.
Section 6. Conditions to Closing.
6.1 Conditions to the Sellers’ Obligation to Close. The obligation of the Sellers to consummate the purchase and sale of the Purchased Shares contemplated by this Agreement is subject to satisfaction (or written waivers of the Sellers) of the following conditions:
(a) the payment of the Purchase Price by the Purchaser to the Sellers, which may be satisfied by the delivery to the Sellers of an irrevocable instruction letter to the transfer agent for the Common Stock to have the shares of Common Stock constituting the Purchase Price issued to Sellers within five (5) business days, in book entry form unless a paper certificate is requested by any Seller;
(b) the representations and warranties of the Purchaser, as set forth in Section 5 of this Agreement, are true and correct in all material respects as of the Closing Date with the same effect as though made at and as of the Closing Date; provided, however, that those representations and warranties that are specifically made as of a particular calendar date shall be so true and correct as of such date;
(c) the Purchaser has performed and complied in all material respects with all covenants required to be performed by it under this Agreement on or prior to the Closing Date; and
(d) execution and delivery by the Purchaser to the Seller and the Company of a cross receipt in such form as mutually agreed to by the parties hereto.
6.2 Conditions to the Purchaser’s Obligation to Close. The obligation of the Purchaser to consummate the purchase and sale of the Purchased Shares contemplated by this Agreement is subject to satisfaction (or written waiver of the Purchaser) of the following conditions:
(a) delivery by the Sellers to the Purchaser of proof of transfer of the Purchased Shares in accordance with Section 3.2 above;
(b) the representations and warranties of the Sellers, as set forth in Section 4 of this Agreement, are true and correct in all material respects as of the Closing Date with the same effect as though made at and as of the Closing Date; provided, however, that those representations and warranties that are specifically made as of a particular calendar date shall be so true and correct as of such date;
(c) the approval of Purchaser’s stockholders shall have been obtained;
(d) regulatory approval or clearance, as applicable, including without limitation the Nasdaq Stock Market and the Committee on Foreign Investment in the United States, shall have been obtained;
(e) the consent of the Purchaser’s lenders, as applicable, shall have been obtained;
(f) since the date of this Agreement, there shall not have been any Material Adverse Effect, or any event, change, or effect that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(g) Purchaser shall be satisfied that the acquisition of the Purchased Shares will be made in compliance with applicable rules of the Hong Kong Stock Exchange; and
(h) Purchaser’s Board of Directors shall be satisfied as to due diligence performed on the Company, including obtaining a fairness opinion satisfactory to it, if appropriate.
Section 7. Miscellaneous.
7.1 Termination. This Agreement may be terminated and the transactions contemplated hereby shall be abandoned at any time prior to the Closing upon written notice by:
(a) the Purchaser, in the event that any condition set forth in Section 4.1 or Section 6.2 shall not be satisfied, or shall not be reasonably capable of being satisfied, by June 30, 2020 (the “Walk-Away Date”); or
(b) either Seller, in the event that any condition set forth in Section 6.1 shall not be satisfied, or shall not be reasonably capable of being satisfied, by the Walk-Away Date.
7.2 Construction. The headings and titles in this Agreement are included for convenience of reference only and shall not limit or otherwise affect the meaning or interpretation of this Agreement. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement will refer to this Agreement as a whole, including any schedules hereto, and not to any particular provision of this Agreement, and section and subsection references are to this Agreement unless otherwise specified. The words “include” and “including” and words of similar import when used in this Agreement shall be deemed to be followed by the words “without limitation”. The meanings given to terms defined herein will be equally applicable to both the singular and plural forms of such terms. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The terms “dollars” and “$” mean United States dollars. To the extent applicable, dollar figures and other amounts shall be equitably adjusted to reflect splits and combinations of shares and units.
7.3 Expenses. Except to the extent otherwise expressly provided herein, whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost or expense.
7.4 Governing Law; Jurisdiction. This Agreement shall be construed and interpreted in accordance with the internal laws of the State of New York without giving effect to any principle or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the laws of the State of New York. Any claim, action or dispute against any party to this Agreement arising out of or in any way relating to this Agreement shall be brought in the courts of the State of New York located in the City of New York and the County of New York or in the Federal courts of the United States sitting in the City of New York and the County of New York. Each of the Parties hereby irrevocably submits to the exclusive jurisdiction of such courts for the purpose of any such claim, action or dispute; provided that a final judgment in any such claim, action or dispute shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each Party irrevocably waives and unconditionally agrees not to assert, by way of a motion, as a defense, counterclaim or otherwise, in any action or proceeding with respect to this Agreement (a) any objection that it may ever have that the laying of venue of any such claim, action or dispute in any federal or state court located in the above named state or city is improper, (b) any objection that any such claim, action or dispute brought in any of the above named courts has been brought in an inconvenient forum or (c) any claim that it is not personally subject to the jurisdiction of the above named courts.
7.5 Waiver of Jury Trial. EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT.
7.6 Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and may be delivered as originals, by electronic format or otherwise.
7.7 Assignment. This Agreement and the rights hereunder shall not be assignable or transferable by any party without the prior written consent of the other parties. Any assignment or transfer made without such prior written consent shall be null and void. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties and capitalized terms referring to persons and entities shall include their respective successors and assigns.
7.8 Third Party Beneficiaries. Nothing in this Agreement, express or implied, shall give to any person, other than the Sellers and the Purchaser and their respective successors and assigns, any benefit of any legal or equitable right, remedy or claim under this Agreement.
7.9 Entire Agreement. This Agreement and the Ancillary Agreements constitute the entire agreement among the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded in its entirety by this Agreement. Notwithstanding anything to the contrary in this Agreement and the Ancillary Agreements, the Purchaser shall be permitted to make disclosures with respect to announcing or reporting its investment in the Purchased Shares to the extent that such disclosures are required by applicable Law.
7.10 Amendments. Neither this Agreement nor any provision hereof may be amended, modified, changed, discharged or terminated except pursuant to a written agreement entered into by the Sellers and the Purchaser.
7.11 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable Law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms.
7.12 Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed effectively given (i) upon actual delivery to the party to be notified, (ii) one (1) business day after deposit with a recognized overnight delivery service, or (iii) five (5) business days after deposit with the U.S. Postal Service by first class certified or registered mail, postage prepaid, return receipt requested. All notices, requests and other communications will be deemed received pursuant to this Section 7.11 if received prior to 5:00 P.M. in the place of receipt and such day is a business day. Otherwise, any notice or communication will be deemed not to have been received until the next succeeding business day. All such communications shall be addressed to each Seller at the address set forth on such Seller’s signature page or to the Purchaser at the following address (unless another address is so specified in writing by any Party subsequent to the date hereof):
Cinedigm Corp.
45 W. 36th Street
New York, NY 10018
Attn: General Counsel
Telephone: (212) 206-8600
Email: gloffredo@cinedigm.com
with a copy to:
Kelley Drye & Warren LLP
101 Park Avenue
New York, NY 10178
Attn: Jonathan K. Cooperman
Telephone: (212) 808-7534
Email: jcooperman@kelleydrye.com
Attn: Jonathan K. Cooperman
Telephone: (212) 808-7534
Email: jcooperman@kelleydrye.com
7.13 Survival.
(a) All representations and warranties made by the parties hereto in this Agreement shall survive for a period of one year from and after the Closing. Each party acknowledges and agrees that, prior to the Closing, the sole and exclusive remedy of the Purchaser for any breach or inaccuracy of any representation or warranty contained in this Agreement or any certificate or instrument delivered hereunder shall be (assuming that the conditions set forth in Section 6.2 of this Agreement have not been satisfied or waived) refusal to close the transaction contemplated herein.
[Signature Pages to Follow]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
BEITAI INVESTMENT LP,
a Cayman exempt limited partnership
By: /s/ [illegible]
Name:
Title:
Address:
Tel:
Email:
with a copy to:
Address:
Tel:
Email:
US EIN, if any:
AIM RIGHT VENTURES LIMITED,
a BVI Limited Company
a BVI Limited Company
Address: /s/ [illegible]
Tel:
Email:
with a copy to:
Address:
Tel:
Email:
US EIN, if any:
CINEDIGM CORP.
By: /s/ Christopher McGurk
Name: Christopher McGurk
Title: Chairman & CEO
SCHEDULE A
PURCHASED SHARES
Seller | Number of Ordinary Shares to be Sold | Purchase Price (Shares of Common Stock) |
BeiTai Investment LP | * | ** |
Aim Right Ventures Limited | * | ** |
TOTAL | 410,901,000 | 54,850,103 |
*The allocation of the Purchased Shares to be sold by each Seller will be provided to the Purchaser no later than fifteen (15) days prior to Closing.
**The shares of Common Stock to be issued as the Purchase Price will be allocated to the Sellers in the same proportion as the Purchased Shares are allocated between the Sellers.
4834-6737-5534v.5
SCHEDULE B
OUTSTANDING ORDINARY SHARES
OUTSTANDING ORDINARY SHARES
AS OF JUNE 30, 2019
Holder | Number of Ordinary Shares | Approximate % |
Non-Public Shareholders | ||
Excel Orient Limited | 273,609,836 | 19.31% |
Emerge Ventures Limited | 209,000,000 | 14.75% |
Aim Right Ventures Limited | 202,472,656 | 14.29% |
BeiTai Investment LP | 162,162,162 | 11.44% |
Mr. He Han | 14,008,000 | 0.99% |
Public Shareholders | 555,659,164 | 39.22% |
TOTAL | 1,416,811,818 | 100% |
B-1
4834-6737-5534v.5
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
This Amendment No. 1 (this “Amendment”) to the Stock Purchase Agreement (the “Agreement”) is entered into as of February 14, 2020 by and among Cinedigm Corp. a Delaware corporation (the “Purchaser”) and the sellers named on Schedule A attached to the Agreement (the “Sellers”). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Agreement.
RECITALS
WHEREAS, the parties hereto entered into the Agreement, dated as of December 27, 2019, pursuant to which the Purchaser would purchase from the Sellers, and the Sellers would sell to the Purchaser, certain ordinary shares of Starrise media Holdings Limited (the “Company”); and
WHEREAS, the Sellers consist of BeiTai Investment LP (“BeiTai”) and Aim Right Ventures Limited (“Aim Right”); and
WHEREAS, the parties hereto wish to amend the Agreement in certain respects;
NOW, THEREFORE, in consideration of the foregoing and of the representations, warranties, covenants, and agreements contained in this Amendment, the parties, intending to be legally bound, agree as follows:
Section 1. Amendments to the Agreement.
(a) Section 3 is amended and restated in its entirety to read as follows:
“3.1 Closing Date. Subject to the satisfaction or waiver of the conditions set forth in Section 6 of this Agreement, the closing of the purchase and sale of all or portions of the Purchased Shares as contemplated by this Agreement (each, a “Closing”) shall occur on such date or dates as may be mutually agreed upon by the Sellers and the Purchaser (each, a “Closing Date”).
3.2 Purchased Shares. At any Closing, each Seller that is delivering any Purchased Shares will deliver to the Purchaser instruments of transfer or other appropriate documents satisfactory to the Purchaser indicating proof of transfer of the Purchased Shares being transferred at such Closing to the Purchaser, or its designee, if applicable.
3.3 Books and Records. On any Closing Date, each Seller that is delivering any Purchased Shares shall cause the Company to record, or to cause its transfer agent or stock registrar for the Ordinary Shares to record, the Purchase as the record or beneficial, as applicable, holder of the Purchased Shares being transferred at such Closing in the books and records of the Company.”
(b) Schedule A is amended by reflecting that BeiTai shall sell, at a first closing anticipated to occur on February 14, 2020 or such other date as the Purchaser and BeiTai shall agree, 162,162,162 Purchased Shares and that the Purchaser shall issue to BeiTai 21,646,604 shares of Common Stock in consideration therefor.
Section 2. Miscellaneous.
(a) Each party to this Amendment represents and warrants that the execution and delivery by it of this Amendment and the Agreement, as amended hereby, and the performance of its obligations hereunder and thereunder, have been duly authorized by all requisite corporate action on its part and no other corporate authorization or proceedings on its part is required therefor. Each party to this Amendment represents and warrants that (i) this Amendment has been duly executed and delivered by it, and, assuming the due authorization, execution and delivery of this Amendment by the other parties hereto, constitutes the legal, valid and binding obligation of such party, enforceable against it or him, as applicable, in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or affecting creditors’ rights and to general equity principles, (ii) none of the execution, delivery or performance by such party of this Amendment and the Agreement, as amended hereby, in accordance with their terms, nor the consummation by such party of the Transactions, does or shall violate, conflict with, breach or constitute a default under (in each case, with or without the giving of notice, the lapse of time or both) any of the provisions of: (A) any of the or organizational documents of such party; (B) any contract to which such party is a party; (C) any applicable Law; or (D) any permit or order or judgment applicable to such party and (iii) except as expressly set forth in the Agreement, none of the execution, delivery or performance by such party of this Amendment or the Agreement, as amended hereby, in accordance with their terms, nor the consummation by such party of the purchase and sale of the Purchased Shares does or will: (A) require any consent, waiver, approval, authorization, order or permit of, declaration, filing or registration with, other action by, or notification to, any Governmental Authority applicable to such party; or (B) require the consent, waiver, approval, authorization, notification or action of, by or to (as applicable) any other person pursuant to the terms and conditions of any contract in order to avoid any breach, default, violation, termination, modification or prepayment thereunder and to avoid the acceleration or cancellation of any rights or obligations thereunder.
(b) Except as expressly amended hereby, the Agreement shall remain in full force and effect. The Agreement, as amended hereby, is hereby ratified and confirmed. All references in the Agreement to “this Agreement” shall be deemed to refer to the Agreement, as amended hereby.
(c) This Amendment shall be governed by and construed in accordance with the internal laws of the State of New York without giving effect to any principle or rule (whether of the State of New York or any other jurisdiction) that would cause the application of Laws of any jurisdiction other than those of the State of New York.
(d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and may be delivered as originals, by electronic format or otherwise.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above by their respective officers thereunto duly authorized.
CINEDIGM CORP. | |
By: __/s/ Christopher J. McGurk Name: Christopher J. McGurk Title: Chief Executive Officer | |
BEITAI INVESTMENT LP: | |
By: __/s/ illegible____________ Name: Title: | |
AIM RIGHT VENTURES LIMITED | |
By: __/s/illegible_____________ Name: Title: | |
1
CINEDIGM CORP.
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: | February 14, 2020 | By: | /s/ Christopher J. McGurk | |
Christopher J. McGurk Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | ||||
CINEDIGM CORP.
EXHIBIT 31.2
CERTIFICATION
I, Gary Loffredo, 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: | February 14, 2020 | By: | /s/ Gary Loffredo | ||
Gary Loffredo Chief Operating Officer, President Digital Cinema, General Counsel and Secretary (Principal Financial Officer) | |||||
CINEDIGM CORP.
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 December 31, 2019 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: | February 14, 2020 | By: | /s/ Christopher J. McGurk | |
Christopher J. McGurk Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | ||||
CINEDIGM CORP.
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 December 31, 2019 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: | February 14, 2020 | By: | /s/ Gary Loffredo | |
Gary Loffredo Chief Operating Officer, President Digital Cinema, General Counsel and Secretary (Principal Financial Officer) | ||||