Cineverse Corp 10-Q for FY2022 Q1
Cineverse Corp. (CNVS)
About this 10-Q
Cineverse Corp filed this 10-Q on September 9, 2021, covering the quarter ended June 30, 2021 (FY2022 Q1).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $15.02M
- up 149.5% from $6.02M a year earlier
- Net income
- $5.19M
- compared with a net loss of $19.86M a year earlier
- Diluted EPS
- $0.03
- compared with -$0.21 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the fiscal period ended:
For the transition period from _____ to _____
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company | Emerging Growth Company |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes ☐ No
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
As of August 25, 2021,
CINEDIGM CORP.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CINEDIGM CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
| June 30, 2021 | March 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Unbilled revenue | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Restricted cash | ||||||||
| Equity investment in Starrise, a related party, at fair value | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current portion of notes payable (see Note 6) | ||||||||
| Current portion of notes payable, non-recourse (see Note 6) | ||||||||
| Current portion of deferred consideration on purchase of a business | - | |||||||
| Operating lease liabilities | ||||||||
| Current portion of deferred revenue | ||||||||
| Total current liabilities | ||||||||
| PPP Loan | ||||||||
| Deferred consideration on purchase of a business - net of current portion | ||||||||
| Operating lease liabilities, noncurrent | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 8) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity of Cinedigm Corp. | ||||||||
| Deficit attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
1
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for share and per share data)
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | $ | ||||||
| Costs and expenses: | ||||||||
| Direct operating (excludes depreciation and amortization shown below) | ||||||||
| Selling, general and administrative | ||||||||
| Provision for doubtful accounts | ||||||||
| Depreciation and amortization of property and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Total operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Gain on forgiveness of PPP loan and extinguishment of note payable | ||||||||
| Change in fair value of equity investment in Starrise, a related party | ( | ) | ||||||
| Other expense, net | ( | ) | ( | ) | ||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax benefit | ||||||||
| Net income (loss) | ( | ) | ||||||
| Net (income) loss attributable to noncontrolling interest | ( | ) | ||||||
| Net income (loss) attributable to controlling interests | ( | ) | ||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | ) | ||||
| Net income (loss) per Class A common stock attributable to common stockholders - basic: | $ | $ | ( | ) | ||||
| Weighted average number of Class A common stock outstanding: basic | ||||||||
| Net income (loss) per Class A common stock attributable to common stockholders - diluted: | $ | $ | ( | ) | ||||
| Weighted average number of Class A common stock outstanding: diluted | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
2
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Other comprehensive loss: foreign exchange translation | ( | ) | ( | ) | ||||
| Comprehensive income (loss) | ( | ) | ||||||
| Less: comprehensive (income) loss attributable to noncontrolling interest | ( | ) | ||||||
| Comprehensive income (loss) attributable to controlling interests | $ | $ | ( | ) | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
CINEDIGM CORP.
CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY
(Unaudited)
(In thousands, except share data)
| Series A Preferred Stock | Class A
Common Stock | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ Equity | Non-Controlling | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | (Deficit) | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Stock issued in connection with the SPA with certain investors, net | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock in connection with the Starrise transaction, a related party | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Contributed capital under the Starrise transaction, a related party | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock in connection with settlement of second lien loan | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants for Class A common stock | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
CINEDIGM CORP.
CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY
(Unaudited)
(In thousands, except share data)
| Series A Preferred Stock | Class A
Common Stock | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ Equity | Non-Controlling | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | (Deficit) | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with a business combination | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | — | — | ( | ) | — | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
Three Months Ended June 30, |
||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization of property and equipment and amortization of intangible assets | ||||||||
| Changes in fair value of equity investment in Starrise | ( |
) | ||||||
| Gain from forgiveness of PPP loan and extinguishment of note payable | ( |
) | ( |
) | ||||
| Loss from sale of property and equipment | ( |
) | ||||||
| Amortization of debt issuance costs included in interest expense | ||||||||
| Provision for doubtful accounts | ||||||||
| Recovery for inventory reserve | ( |
) | ( |
) | ||||
| Stock-based compensation | ||||||||
| Accretion and PIK interest expense added to note payable | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Inventory | ||||||||
| Unbilled revenue | ( |
) | ||||||
| Prepaids and other current assets, and other long-term assets | ||||||||
| Accounts payable, accrued expenses, and other liabilities | ( |
) | ||||||
| Deferred revenue | ( |
) | ( |
) | ||||
| Net cash provided by (used in) operating activities | ( |
) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( |
) | ( |
) | ||||
| Purchase of a business | ( |
) | ||||||
| Sale of equity investment in Starrise | ||||||||
| Net cash (used in) provided by investing activities | ( |
) | ||||||
| Cash flows from financing activities: | ||||||||
| Payment of notes payable | ( |
) | ( |
) | ||||
| (Payment) proceeds under revolving credit agreement, net | ( |
) | ||||||
| Proceeds from PPP Loan | ||||||||
| Proceeds from issuance of Class A common stock, net | ||||||||
| Net cash (used in) provided by financing activities | ( |
) | ||||||
| Net change in cash, cash equivalents, and restricted cash | ( |
) | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
6
CINEDIGM CORP.
NOTES TO 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 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 (“Streaming”) and (ii)
a servicer of digital cinema assets (“Systems”) for over
Risks and Uncertainties
The COVID-19 pandemic and related economic repercussions created significant volatility and uncertainty impacting the Company’s results for the period. As part of our Content & Entertainment business, the Company sells DVDs and Blu-ray discs at brick-and-mortar stores. Due to the lingering effects of the COVID-19 pandemic in the quarter ended June 30, 2021, the sale of physical discs through our retail partners declined although this was partially offset by digital purchases of physical product and increases in streaming views. As part of our Cinema Equipment business, the Company earns revenue when movies are exhibited in theatres. As vaccines became readily available and COVID cases decreased, major studios began to test consumer confidence by releasing blockbusters in the theatrical venues during the quarter ended June 30, 2021. This test period encouraged theatre re-openings and proved commercial viability for theatrical distribution of tentpole films. Films released during this period saw an uptick in box office revenue compared to the previous 12 months; however, box office results remained below pre-Covid expectations due to limited seating capacities and shortened windows for release on streaming platforms such as premium video on demand (“PVOD”) and subscription video on demand (“SVOD”). To the extent films are not shown in theatres, we do not earn revenue.
Liquidity
We have incurred net losses historically and have
an accumulated deficit of $
Sale of Cinematic Equipment
On March 17, 2021, the Company entered into two
separate agreements for the sale of cinematic equipment to American Multi-Cinema, Inc. (“AMC”), the agreements included the
sale in tranches of a total of
7
Equity Investment in a Related Party
Borrowings
On June 22, 2021, the maturity date of the East West Credit Facility (as defined in Note 6 - Notes Payable) with East West Bank was extended from June 30, 2021 to September 28, 2021.
On April 15, 2020, the Company received $
Upon a series
of payments between April 30 and July 9, 2021, the Company paid in full the Prospect loan non-recourse debt amount by paying an aggregate
principal amount of $
We believe the combination of: (i) our cash and cash equivalent balances at June 30, 2021, (ii) expected cash flows from operations, and (iii) the capacity under existing arrangements and access to new sources of capital will be sufficient to satisfy our contractual obligations, as well as liquidity for our operational and capital needs, for twelve months from the filing of this document. 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.
8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
Our consolidated financial statements include the accounts of Cinedigm and its wholly owned and majority owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Investments in which we do not have a controlling interest or are not the primary beneficiary, but have the ability to exert significant influence, are accounted for under the equity method of accounting. Noncontrolling interests for which we have been determined to be the primary beneficiary are consolidated and recorded as net loss attributable to noncontrolling interest. See Note 4 - Other Interests to the Consolidated Financial Statements for a discussion of our noncontrolling interests.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include the adequacy of accounts receivable reserves, return reserves, inventory reserves, recovery of advances, assessment of goodwill impairment, long-lived and finite-lived assets impairment and estimated amortization lives, fair value for asset acquisitions and business combinations, valuation allowances for income taxes and stock awards. Actual results could differ from these estimates.
CASH, 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 6- Notes Payable for information about our restricted cash balances.
Cash, cash equivalents, and restricted cash consisted of the following:
| As of | ||||||||
| (in thousands) | June 30, 2021 | March 31, 2021 | ||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Restricted Cash | ||||||||
| $ | $ | |||||||
EQUITY INVESTMENT IN STARRISE, A RELATED PARTY
On February 14, 2020, the Company acquired an
approximately
9
On April 10, 2020, the Company purchased an additional
The Company has accounted for these investments under the equity method of accounting as the Company can exert significant influence over Starrise with its direct ownership and affiliation with the Company’s majority shareholders. The Company has made an irrevocable election to apply the fair value option under ASC 825-10, Financial Instruments, as it relates to its equity investment in Starrise. The Company’s investment in Starrise is marked to market and recorded at fair value. The stock is traded on the Hong Kong Stock exchange with readily available pricing that is classified as Level 1 in the fair value hierarchy. The Company has established a policy that consistently uses either the closing price of last active trades or the latest bid price when there is no active trades, unadjusted at the last day of each reporting period, as the most relevant and representative input to the Level 1 fair value measures of its investment holdings.
As of June 30, 2021 and March 31, 2021, the value
of our equity investment in Starrise, using the readily determinable fair value inputs from the market pricing of the Stock Exchange of
Hong Kong, was approximately $
NON-MONETARY TRANSACTIONS
During the three months ended June 30, 2020,
the Company entered into agreements with certain vendors to transfer
There was no gain or loss resulting from these transactions for the three months ended June 30, 2020.
ACCOUNTS RECEIVABLE
We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
We record accounts receivable, long-term in connection with activation fees that we earn from our digital cinema equipment (the “Systems”) deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rate.
ADVANCES
Advances, which are recorded within prepaid and
other current assets on the consolidated balance sheets, represent amounts prepaid to studios or content producers for which we provide
content distribution services. We evaluate advances regularly for recoverability and record impairment charges for amounts that we expect
may not be recoverable as of the consolidated balance sheet date. Impairments and accelerated amortization related to advances were $
10
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
| Computer equipment and software | ||||
| Internal use software | ||||
| Digital cinema projection systems | ||||
| Machinery and equipment | ||||
| Furniture and fixtures |
We capitalize costs associated with software developed or obtained for internal use when the preliminary project stage is completed, and it is determined that the software will provide significantly enhanced capabilities and modifications. These capitalized costs are included in property and equipment and include external direct cost of services procured in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with, and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended use. Once the software is ready for its intended use, the costs are amortized over the useful life of the software. Post-configuration training and maintenance costs are expensed as incurred.
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Repair and maintenance costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized. Upon the sale or other disposition of any property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss on disposal is included in the consolidated statements of operations.
FAIR VALUE MEASUREMENTS
The fair value measurement disclosures are grouped into three levels based on valuation factors:
| ● | Level 1 – quoted prices in active markets for identical investments |
| ● | Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs) |
| ● | Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments) |
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.
The equity investment in Starrise is in Hong Kong
dollars and was translated into US dollars as of June 30, 2021 and March 31, 2021 at an exchange rate of
The following tables summarize the levels of fair value measurements of our financial assets and liabilities as of June 30, 2021 and March 31, 2021:
| As of June 30, 2021 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Restricted cash | $ | $ | $ | $ | ||||||||||||
| Equity investment in Starrise, at fair value | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| As of March 31, 2021 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Restricted cash | $ | $ | $ | $ | ||||||||||||
| Equity investment in Starrise, at fair value | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
11
Our cash and cash equivalents, accounts receivable,
unbilled revenue and accounts payable and accrued expenses are financial instruments and are recorded at cost in the consolidated balance
sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature.
At June 30, 2021 and March 31, 2021, 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 consolidated 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 $
IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS
We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset’s fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. During the three months ended June 30, 2021 and 2020, 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.
The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test.
No goodwill impairment charge was recorded in the three months ended June 30, 2021 and 2020.
Gross amounts of goodwill and accumulated impairment charges that we have recorded are as follows:
| (In thousands) | ||||
| Goodwill, net at March 31, 2021 | $ | |
||
| Goodwill from business combination – see Note 5 | ||||
| Goodwill , net at June 30, 2021 | $ | |||
12
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. |
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 video on demand services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes are recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.
Payment terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less.
Cinema Equipment Business
Our Cinema Equipment Business consists of financing
vehicles and administrators for
We retain ownership of our digital cinema equipment (the “Systems”) and the residual cash flows related to the Systems in Phase I Deployment after the end of the 10-year deployment payment period.
For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees (“VPFs”) from motion picture studios and distributors and Alternative Content Fees (“ACFs ”) from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, “Services”).
VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period the title first plays for general audience viewing in a digital projector equipped movie theatre. The Phase 1 Deployment’s and Phase 2 Deployments performance obligations for revenue recognition are met at this time.
13
Phase II Deployment’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related to the variable consideration, i.e., the one-time bonus and determined that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.
Under the terms of our standard cinema equipment
licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement,
after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms;
or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems
to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the systems and is predicated on Cinedigm’s
receipt of sale proceeds. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan. Cinedigm
completed the sale of 650 and 30 digital projection Systems, respectively, for an aggregate sales price of approximately $
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 $
The Cinema Equipment Business earns an administrative
fee of approximately
Content & Entertainment Business
CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand (“VOD” or “OTT Streaming and Digital”), and physical goods (e.g., DVDs and Blu-ray Discs) (“Physical Revenue” or “Base Distribution Business”). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance obligations include the delivery of content for transactional, subscription and ad supported/free ad-supported streaming TV (“FAST”) on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the performance obligation is satisfied which is when the content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical Revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.
14
Physical goods 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 for each revenue stream based on the transfer of control of goods and services. Key indicators that we use in evaluating gross versus net treatment include, but are not limited to, the following:
| ● | which party is primarily responsible for fulfilling the promise to provide the specified good or service; and |
| ● | which party has discretion in establishing the price for the specified good or service. |
Shipping and Handling
Shipping and handling costs are incurred to move physical goods (e.g., DVDs and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.
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 is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates.
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.
15
The ending deferred revenue balance, including
current and non-current balances, as of June 30, 2021 was $
During the three months ended June 30, 2021 and
2020, $
Participations and royalties payable
When we use third parties to distribute company owned content, we record participations payable, which represent amounts owed to the distributor under revenue-sharing arrangements. When we provide content distribution services, we record accounts payable and accrued expenses to studios or content producers for royalties owed under licensing arrangements. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers.
Disaggregation of Revenue
The Company disaggregates revenue into different revenue categories for the Cinema Equipment and CEG Businesses. The Cinema Equipment Business revenue categories are: Phase I Deployment revenue, Phase II Deployment revenue, Services, and Digital System Sales, and the Content & Entertainment Business revenue categories are: Base Distribution Business and OTT Streaming and Digital.
The following tables present the Company’s revenue categories for the three months ended June 30, 2021 and 2020 (in thousands):
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cinema Equipment Business: | ||||||||
| Phase I Deployment | $ | $ | ||||||
| Phase II Deployment | ||||||||
| Services | ||||||||
| Digital System Sales | ||||||||
| Total Cinema Equipment Business revenue | $ | $ | ||||||
| Content & Entertainment Business: | ||||||||
| Base Distribution Business | $ | $ | ||||||
| OTT Streaming and Digital | ||||||||
| Total Content & Entertainment Business revenue | $ | $ | ||||||
DIRECT OPERATING COSTS
Direct operating costs consist of operating costs such as cost of goods sold, fulfillment expenses, shipping costs, property taxes and insurance on Systems, royalty expenses, impairments of advances, and marketing and direct personnel costs.
16
STOCK-BASED COMPENSATION
The Company issues stock-based awards to employees and non-employees, generally in the form of restricted stock units and performance stock units. The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock units and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. The Company measures the compensation expense of employee and nonemployee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period during which the employee and nonemployee is required to provide service in exchange for the award. The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term. The Company’s estimates of these assumptions are primarily based on the trading price of the Company’s stock, historical data, peer company data and judgment regarding future trends and factors.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carryforwards and for differences between the carrying amounts of existing assets and liabilities and their respective tax bases.
Valuation allowances are established when management is unable to conclude that it is more likely than not that some portion, or all, of the deferred tax asset will ultimately be realized. The Company is primarily subject to income taxes in the United States.
The Company
accounts for uncertain tax positions in accordance with an amendment to ASC Topic 740-10, Income Taxes (Accounting
for Uncertainty in Income Taxes), which clarified the accounting for uncertainty in tax positions. This amendment provides that the
tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not”
to be sustained were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits
of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not”
threshold, the largest amount of tax benefit that is more than
NET INCOME/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 |
Stock issued and treasury stock repurchased during the period are weighted for the portion of the period that they are outstanding. 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 income for the three months ended
June 30, 2021, and therefore the impact of potentially dilutive common shares from outstanding stock options, stock appreciation rights,
and warrants, totaling
We incurred net losses for the three months ended
June 30, 2020, and therefore the impact of potentially dilutive common shares from outstanding stock options and warrants, totaling
17
COMPREHENSIVE LOSS
As of the three months ended June 30, 2021 and 2020, comprehensive loss consisted of net loss and foreign currency translation adjustments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted
On December 18, 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The update also simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to improve consistent application. The amendment in this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance on April 1, 2021 and the adoption of this ASU did not have a material impact on our consolidated financial statements.
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 fiscal 2023. The Company is currently evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.
4. OTHER INTERESTS
Investment in CDF2 Holdings
We indirectly own
CDF2 Holdings is a Variable Interest Entity (“VIE”), as defined in Accounting Standards Codification Topic 810 (“ASC 810”), “Consolidation.” ASC 810 requires the consolidation of VIEs by an entity that has a controlling financial interest in the VIE which entity is thereby defined as the primary beneficiary of the VIE. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, among other factors. Although we indirectly, wholly own CDF2 Holdings, we, a third party that also has a variable interest in CDF2 Holdings, and an independent third party manager must mutually approve all business activities and transactions that significantly impact CDF2 Holdings’ economic performance. We have therefore assessed our variable interests in CDF2 Holdings and determined that we are not the primary beneficiary of CDF2 Holdings. As a result, CDF2 Holdings’ financial position and results of operations are not consolidated in our financial position and results of operations. In completing our assessment, we identified the activities that we consider most significant to the economic performance of CDF2 Holdings and determined that we do not have the power to direct those activities, and therefore we account for our investment in CDF2 Holdings under the equity method of accounting.
As of June 30, 2021 and March 31, 2021, our maximum
exposure to loss, as it relates to the non-consolidated CDF2 Holdings entity, represents accounts receivable for service fees under a
master service agreement with CDF2 Holdings. Such accounts receivable was $
The accompanying Consolidated Statements of Operations
include $
Total Stockholders’ Deficit of CDF2 Holdings
at June 30, 2021 and March 31, 2021 was $
18
Majority Interest in CONtv
We own an
5. BUSINESS COMBINATION
Stock Purchase Agreement
| Purchase Price | ||||
| Purchase Price | $ | |||
| Total purchase price | $ | |||
| Allocation of purchase price | ||||
| Developed technology | ||||
| Goodwill | ||||
| Total allocation of purchase price | $ | |||
The developed technology acquired in this transaction
has a useful life of
Below is the amortization expense per year for the developed technology
acquired in the business combination:
| 2022 (remaining) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| 2031 | ||||
| 2032 | ||||
| Total | $ |
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6. NOTES PAYABLE
Notes payable consisted of the following:
| June 30, 2021 | March 31, 2021 | |||||||||||||||
| (In thousands) | Current Portion | Long Term Portion | Current Portion | Long Term Portion | ||||||||||||
| Prospect Loan | $ | $ | $ | $ | ||||||||||||
| Total non-recourse notes payable | ||||||||||||||||
| Total non-recourse notes payable, net of unamortized debt issuance costs and debt discounts | $ | $ | $ | $ | ||||||||||||
| Credit Facility | $ | $ | $ | $ | ||||||||||||
| PPP Loan | ||||||||||||||||
| Total recourse notes payable | ||||||||||||||||
| Total recourse notes payable, net of unamortized debt issuance costs and debt discounts | $ | $ | $ | $ | ||||||||||||
| Total notes payable, net of unamortized debt issuance costs | $ | $ | $ | $ | ||||||||||||
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” or the “Term Loan Agreement”)
with Prospect Capital Corporation (“Prospect”), pursuant to which DC Holdings borrowed $
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 June 30, 2021, and March 31, 2021, the debt
service fund had a balance of $
On March 4, 2021, Cinedigm DC Holdings, LLC (“CDCH”),
Access Digital Media, Inc., Access Digital Cinema Phase 2, Corp., Christie/AIX, Inc., Cinedigm Digital Funding I, LLC, certain Lenders,
and Prospect Capital Corporation, as administrative agent and collateral agent, entered into Amendment No. 3 (the “Amendment”)
to the Term Loan Agreement dated February 28, 2013. Under the Amendment, the maturity date of the loan under the Term Loan Agreement was
extended to March 31, 2022. As a condition to the effectiveness of the Amendment, CDCH paid $
20
The Prospect Loan matures on March 31, 2022 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:
| ● |
| ● |
| ● |
| ● |
| ● |
| ● | 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 $
The Prospect Loan contains customary representations, warranties, affirmative covenants, negative covenants and events of default.
With a series of payments between April 30 and July 9, 2021, the Company paid in full the Prospect Loan non-recourse debt amount by paying an aggregate principal amount of $7.8 million. Pre-payment of the Prospect Loan is permissible without penalty. See Note 11 – Subsequent Events.
The following table summarizes the activity related to the Prospect Loan:
| As of | ||||||||
| (In thousands) | June 30, 2021 | March 31, 2021 | ||||||
| Prospect Loan, at issuance | $ | $ | ||||||
| PIK Interest | ||||||||
| Payments to date | ( | ) | ( | ) | ||||
| Prospect Loan, gross | $ | $ | ||||||
| Less unamortized debt issuance costs and debt discounts | ||||||||
| Prospect Loan, net | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Total long term portion | $ | $ | ||||||
Credit Facility and Cinedigm Revolving Loans
On March 30, 2018, the Company entered into 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 “Credit Facility”) for a maximum of $
Interest under the Credit Facility is due monthly
at a rate elected by the Company of either
21
As of June 30, 2021 and March 31, 2021, there was
$
PPP Loan
On April 15, 2020, the Company received $
7. STOCKHOLDERS’ EQUITY
COMMON STOCK
During the three months ended June 30, 2021, we
issued
PREFERRED STOCK
Cumulative dividends in arrears on preferred stock
were $
TREASURY STOCK
We have treasury stock, at cost, consisting of
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
22
In connection with the grants of stock options
and shares of restricted stock under the 2000 Plan, we and the participants have executed stock option agreements and notices of restricted
stock awards setting forth the terms of the grants. The 2000 Plan provided for the issuance of up to
As of June 30, 2021, there were
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 did 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
On October 23, 2020, the Company amended its 2017
Equity Incentive Plan to increase the number of shares authorized for issuance thereunder from
The analysis of all options outstanding under the 2000 Plan as of June 30, 2021 is as follows:
| As of June 30, 2021 | ||||||||||||||||||
| Range of Prices | Options Outstanding | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | ||||||||||||||
| $ | | | $ | | $ | |||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
An analysis of all options exercisable under the 2000 Plan as of June 30, 2021 is presented below:
| Options Exercisable | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | |||||||||||
| $ | — | |||||||||||||
Employee and director stock-based compensation expense related to our stock-based awards was as follows:
| Three Months Ended June 30, | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| Selling, general and administrative | $ | $ | ||||||
| $ | $ | |||||||
23
During the three months ended June 30, 2021, the
Company granted
Grant Date: May 23, 2021 – June 21, 2021
Maturity Date: May 23, 2031 – June 21, 2031
Fair value of class A common stock on grant date:
$
Volatility:
Discount rate:
There was $
Total SARs outstanding are as follows:
| Three Months Ended June 30, 2021 | ||||
| SARs Outstanding March 31, 2021 | ||||
| Issued | ||||
| Forfeited | ( | ) | ||
| Total SARs Outstanding June 30, 2021 | ||||
There was $
There
was $
OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN
In October 2013, we issued options outside of
the 2000 Plan to
WARRANTS
The following table presents information about outstanding warrants to purchase shares of our Class A common stock as of June 30, 2021. All of the outstanding warrants are fully vested and exercisable.
| Recipient | Amount outstanding | Expiration | Exercise price per share | |||||||
| Strategic management service provider | $ | | ||||||||
| Warrants issued in connection with Convertible Notes exchange transaction | $ | |||||||||
| 5-year Warrant issued to BEMG in connection with a term loan agreement | $ | |||||||||
24
8. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is party to any other claim or litigation the outcome of which, if determined adversely to the Company, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
We operate from leased properties under non-cancelable operating lease agreements, certain of which contain escalating lease clauses.
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.
The table below presents the lease-related assets and liabilities recorded on the balance sheet as of June 30, 2021
| (In thousands) | Classification on the Balance Sheet | June 30, 2021 | ||||
| Assets | ||||||
| Noncurrent | Operating lease right-of-use asset | $ | ||||
| Liabilities | ||||||
| Current | Operating leases - current portion | |||||
| Noncurrent | Operating leases - long-term portion | |||||
| Total operating lease liabilities | $ | |||||
Lease Costs
The table below presents certain information related to lease costs for leases:
| Year Ended | ||||
| (In thousands) | June 30, 2021 | |||
| Operating lease cost | $ | |||
| Total lease cost | $ | |||
Other Information
The table below presents supplemental cash flow information related to leases:
| Year Ended | ||||
| (In thousands) | June 30, 2021 | |||
| Cash paid for amounts included in the measurement of lease liabilities | ||||
| Operating cash flows used for operating leases | $ | |||
9. SUPPLEMENTAL CASH FLOW INFORMATION
| Three Months Ended June 30, | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| Cash interest paid | $ | $ | ||||||
| noncash investing and financing activities: | ||||||||
| Accrued dividends on preferred stock | ||||||||
| Issuance of Class A common stock for payment of accrued preferred stock dividends | ||||||||
| Issuance of Class A common stock to Starrise, a related party | ||||||||
| Contributed capital under the Starrise transaction, a related party | ||||||||
| Settlement of second lien loan with Class A common stock | ||||||||
| Issuance of Class A common stock for business combination | ||||||||
| Starrise shares used to pay down vendors | ||||||||
| Forgiveness of PPP loan | ||||||||
| Deferred consideration in purchase of a business | ||||||||
| Preferred stock dividends paid with common stock | — | |||||||
25
10. SEGMENT INFORMATION
We operate in
| Operations of: | Products and services provided: | |
| Cinema Equipment Business | Financing vehicles and administrators for
We retain ownership of the Systems and the residual cash flows related to the Systems in Phase I Deployment after the repayment of all non-recourse debt at the expiration of exhibitor master license agreements. For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business segment also provides monitoring, collection, verification and management services to this segment, as well as to exhibitors who purchase their own equipment, and also collects and disburses VPFs from motion picture studios, distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors (collectively, “Services”). | |
| Content & Entertainment Business | Leading independent streaming company of content and channels. We collaborate with producers and other content owners to market, source, curate and distribute independent content to targeted and under-served audiences in theatres and homes, and via mobile and emerging platforms. |
The following tables present certain financial information related to our reportable segments and Corporate:
| As of June 30, 2021 | ||||||||||||||||||||||||
| (In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non- Recourse | Notes Payable | Operating lease liabilities | ||||||||||||||||||
| Cinema Equipment Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Content & Entertainment Business | ||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| As of March 31, 2021 | ||||||||||||||||||||||||
| (In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non- Recourse | Notes Payable | Operating lease liabilities | ||||||||||||||||||
| Cinema Equipment Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Content & Entertainment Business | ||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Statements of Operations | ||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of corporate overhead | ( | ) | ||||||||||||||
| Provision for doubtful accounts | ||||||||||||||||
| Depreciation and amortization of property and equipment | ( | ) | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
26
The following employee and director stock-based compensation expense related to our stock-based awards is included in the above amounts as follows:
| (In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
| Statements of Operations | ||||||||||||||||
Three Months Ended June 30, 2020 (in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of corporate overhead | ( | ) | ||||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The following employee and director stock-based compensation expense related to our stock-based awards is included in the above amounts as follows:
| Cinema Equipment Business | Content & Entertainment | Corporate | Consolidated | |||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation | $ | — | $ | $ | $ | |||||||||||
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11. INCOME TAXES
We
calculate income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions. We recorded an
income tax benefit (expense) of approximately $
Our effective
tax rate for the three months ended June 30, 2021 and 2020 was negative
On March
27, 2020, the
12. SUBSEQUENT EVENT
Prospect Loan Payment
Upon
a series of payments between April 30 and July 9, 2021 ,
the Company paid in full the Prospect loan non-recourse debt amount by paying an aggregate principal amount of $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes included elsewhere in this report.
This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “estimates,” and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
OVERVIEW
Since our inception, we have played a significant role in the digital distribution revolution that continues to transform the media landscape. In addition to our pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, we have become a leading distributor of independent content, both through organic growth and acquisitions. We distribute products for major brands such as the Hallmark Channel, Televisa, ITV, Nelvana, ZDF, Konami, NFL, NHL 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, Tubi, Roku, Pluto TV, 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 North America and several international countries. It also provides fee-based support to over 6,200 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. The reduction in VPF revenue on cinema equipment business systems approximately coincided with the conclusion of certain of our non-recourse debt obligations and, therefore, the reduced cash outflows related to such non-recourse debt obligations partially offset the reduced VPF revenue since November 2017.
Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the systems and is predicated on Cinedigm’s receipt of sale proceeds. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan.
We are structured so that our cinema equipment business segment operates independently from our Content & Entertainment business. As of June 30, 2021, we had approximately $3.0 million of non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We had approximately $3.0 million of outstanding debt principal, as of June 30, 2021 that is attributable to our Content & Entertainment and Corporate segments.
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Risks and Uncertainties
The COVID-19 pandemic and related economic repercussions created significant volatility and uncertainty impacting the Company’s results for the period. As part of our Content & Entertainment business, the Company sells DVDs and Blu-ray discs at brick-and-mortar stores. With the closure of non-essential retail stores beginning in the spring of 2020, the sale of physical discs through our retail partners declined although this was partially offset by digital purchases of physical product. As part of our Cinema Equipment business, the Company earns revenue when movies are exhibited in theatres. As vaccines became readily available and COVID cases decreased, major studios began to test consumer confidence by releasing blockbusters in the theatrical venues during the quarter ended June 30, 2021. This test period encouraged theatre re-openings and proved commercial viability for theatrical distribution of tentpole films. Films released during this period saw an uptick in box office revenue compared to the previous 12 months; however, box office results remained below pre-Covid expectations due to limited seating capacities and shortened windows for release on streaming platforms such as premium video on demand (“PVOD”) and subscription video on demand (“SVOD”). To the extent films are not shown in theatres, we do not earn revenue.
Longer term, there may be a shift in consumer preference towards digital consumption over theatrical viewing. Studios may reduce their theatrical slates to tentpoles and certain genres releasing other content directly on their own streaming services. If fewer movies are released theatrically, this shift to digital viewing reduces revenue opportunities for virtual print fees and sales of digital cinema equipment. While the Company has been encouraged by the pace of mass vaccinations, spikes or the emergence of new variants could require future closures, which impact the Cinema Equipment business.
In connection to the CEG business, if larger branded companies choose to make their content available earlier on their own streaming platforms, this could limit our ability monetize this content on a transactional digital basis, as consumers can access it via the company’s streaming platform. However, most content suppliers including filmmakers and producers, do not have their own streaming platforms and rely on us for distribution through our digital home entertainment business and OTT digital networks. As a result, this risk is limited, and our digital distribution capabilities and digital networks provide us with the opportunity to take advantage of this consumer shift towards digital consumption.
Over the last year and a half, the COVD-19 pandemic resulted in a film and TV production slow-down. Independent producers and filmmakers had to either suspend or delay their productions due to rising infection rates and the high costs of appropriate COVID-19 production protocols. As a result, there are fewer available films to acquire, so our pipeline for content could be negatively impacted. As well, with the rise of new variants, productions may be at risk again of shutting down or being delayed, which would further limit available content.
The COVID-19 pandemic has also resulted in an acceleration of cord-cutting, and, as more consumers move away from cable, this could lead to a decrease in cable TV VOD revenues, as well as a decrease in licensing fees as Pay One window budgets get shifted from licensing and towards originals. However, given the overall shift towards digital consumption, these risks may be offset by increased revenues from transactional, subscription and ad supported/FAST platforms, including our own owned and operated digital network business.
Liquidity
We have incurred net losses historically and have an accumulated deficit of $469.0 million and negative working capital of $9.5 million as of June 30, 2021. We may continue to generate net losses for the foreseeable future. In addition, we have debt-related contractual obligations as of June 30, 2021 and beyond. Based on these conditions, the Company entered into the following transactions:
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Capital Raises
On February 2, 2021, the Company entered into a Securities Purchase Agreement with a single institutional investor for the purchase and sale of 5,600,000 shares of Class A common stock at a purchase price of $1.25 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on July 10, 2020 (File No. 333-239710) and an applicable prospectus supplement. The closing of the sale occurred on February 5, 2021. The aggregate gross proceeds for the sale was approximately $7.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agent but before paying the Company’s estimated offering expenses, was approximately $6.5 million.
In July 2020, we entered into an At-the-Market sales agreement (the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”) and B. Riley FBR, Inc. (“B. Riley” and, together with A.G.P., the “Sales Agents”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on Nasdaq at the time of the sale of such shares. The Company is not obligated to sell any shares under the ATM Sales Agreement. Any sales of shares made under the ATM Sales Agreement will be made pursuant to an effective registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on July 10, 2020 (File No. 333-239710), for an aggregate offering price of up to $30 million. During the quarter ended June 30, 2021, we did not sell any shares of Common Stock under the ATM Sales Agreement.
On July 16, 2020, the Company entered into a securities purchase agreement with certain investors for the purchase and sale of 7,213,334 shares of Class A common stock, par value $0.001 per share, at a purchase price of $1.50 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on July 10, 2020 (File No. 333-239710) and an applicable prospectus supplement. The closing of the sale occurred on July 20, 2020. The aggregate gross proceeds for the sale was approximately $10.8 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company’s estimated offering expenses, is approximately $10.1 million.
On May 20, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain investors (the “Investors”) for the purchase and sale of 10,666,666 shares of the Class A common stock, at a purchase price of $0.75 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on May 14, 2020 (File No. 333-238183) and an applicable prospectus supplement. The closing of the sale occurred on May 22, 2020. The aggregate gross proceeds for the sale was $8.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company’s estimated offering expenses, were approximately $7.1 million.
As of June 30, 2021, there is still approximately $38.0 million remaining unsold under our shelf registration.
Sale of Cinematic Equipment
On March 17, 2021, the Company entered into two separate agreements for the sale of cinematic equipment to American Multi-Cinema, Inc. (“AMC”), the agreements included the sale in tranches of a total of 2,369 cinematic projectors starting in March 2021 throughout January 2023 for a total cash consideration of $10.8 million. As of June 30, 2021, the Company executed the sale of the second tranche and recognized revenue for $5.6 million. A portion of the total proceeds has been utilized to eliminate the remaining Prospect notes payable.
Equity Investment in a Related Party
As previously announced, on December 27, 2019, the Company entered into, and on February 14, 2020 amended, (see Note 2 - Summary of Significant Accounting Policies), a stock purchase agreement (as so amended, the “Stock Purchase Agreement”) with BeiTai Investment LP (“BeiTai”), a related party for accounting purposes of Cinedigm and Aim Right Ventures Limited (“Aim Right”), two shareholders of Starrise Media Holdings Limited, a leading Chinese entertainment company (“Starrise”), to buy from them an aggregate of 410,901,000 outstanding Starrise ordinary shares (the “Share Acquisition”). On February 14, 2020, the Company purchased 162,162,162 of the Starrise ordinary shares from BeiTai and issued BeiTai 21,646,604 shares of its Class A common stock in consideration. The Starrise shares received were valued at approximately $25 million and the Company issued shares that were valued at approximately $11.2 million. On April 10, 2020, the Company, in accordance with the terms of the Stock Purchase Agreement, terminated its obligation to purchase Starrise ordinary shares from Aim Right under the December 27, 2019 stock purchase agreement.
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On April 10, 2020, the Company entered into another stock purchase agreement (the “April Stock Purchase Agreement”) with five (5) shareholders of Starrise-Bison Global Investment SPC - Bison Global No. 1 SP, Huatai Investment LP, Antai Investment LP, Mingtai Investment LP and Shangtai Asset Management LP, all of which are related parties to the Company to buy an aggregate of 223,380,000 outstanding Starrise ordinary shares from them and for the Company to issue to them an aggregate of 29,855,081 shares of its Class A common stock as consideration therefor (the “April Share Acquisition”). On April 15, 2020, the April Share Acquisition was consummated and this transaction was also recorded as an equity investment in Starrise.
Starrise’s ordinary shares (HK 1616) are listed on the main board of the Stock Exchange of Hong Kong Limited. Based on the closing price of HKD 0.13 per share on August 26, 2021, calculated at an exchange rate of 7.8 Hong Kong Dollars to 1 US dollar, the market value of Cinedigm’s ownership in Starrise ordinary shares was approximately $6.1 million.
Borrowings
On June 22, 2021, the maturity date of the East West Credit Facility (as defined in Note 6 - Notes Payable) with East West Bank was extended from June 30, 2021 to September 28, 2021.
On April 15, 2020, the Company received $2.2 million from East West Bank, the Company’s existing lender, pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 10, 2022 (the “PPP Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the PPP Maturity Date. The Company used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act and could be subject to repayment. On July 7, 2021, the Company received notification from the Lender that the U.S. Small Business Administration had approved the Company’s PPP Loan forgiveness application for the entire PPP Loan amount and accrued interest effective as of June 30, 2021. The forgiveness of the PPP Loan was recognized as a gain of $2.2 million during the Company’s fiscal quarter ending June 30, 2021.
Upon a series of payments between April 30 and July 9, 2021, the Company paid in full the Prospect loan non-recourse debt amount by paying an aggregate principal amount of $7.8 million. Pre-payment of the Prospect loan was permissible without penalty.
We believe the combination of: (i) our cash and cash equivalent balances at June 30, 2021, (ii) expected cash flows from operations, and (iii) the capacity under existing arrangements and access to new sources of capital will be sufficient to satisfy our contractual obligations, as well as liquidity for our operational and capital needs, for twelve months from the filing of this document. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
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Our significant accounting policies are discussed in Note 2 - Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, Financial Statements and Supplementary Data, of this Quarterly Report on Form 10-Q. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our board of directors.
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 | ||
| Internal use software | 5 years | ||
| Digital cinema projection systems | 10 years | ||
| Machinery and equipment | 3-10 years | ||
| Furniture and fixtures | 3-6 years |
Leasehold improvements are being amortized over the shorter of the lease term or the estimated useful life of the improvement. Maintenance and repair costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized.
Software developed or purchased for internal use by the Company is capitalized and amortized over its estimated useful life. Changes in these estimates could result in impairment in the value of the asset.
Useful lives are determined based on an estimate of either physical or economic obsolescence, or both. During the three months ended June 30, 2021 and 2020, we have neither made any revisions to estimated useful lives, nor recorded any impairment charges on our property, equipment and internal use software.
FAIR VALUE ESTIMATES
Goodwill, Finite-Lived Assets and Long-Lived Assets
We evaluate our goodwill for impairment in the fourth quarter of each fiscal year (as of March 31), or whenever events or changes in circumstances indicate the fair value of a reporting unit is below its carrying amount. The determination of whether or not goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting units. 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 our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that the conclusion regarding whether goodwill is impaired could change and result in future goodwill impairment charges that could have a material adverse effect on our consolidated financial position or results of operations.
The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test.
The quantitative test involves comparing the estimated fair value of a reporting unit with its respective book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, an impairment loss is recognized in an amount equal to the excess.
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The Company tests for goodwill impairment annually at March 31. During the three months ended June 30, 2021 and 2020, there were no impairment charges recorded on goodwill. In 2021, we elected to conduct a qualitative goodwill assessment and in 2020 we conducted a quantitative goodwill assessment. In determining fair value, we used various assumptions, including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects, economic or market trends and any regulatory changes that may occur. We estimated the fair value of the reporting unit using a net present value methodology, which is dependent on significant assumptions related to estimated future discounted cash flows, discount rates and tax rates. Certain of the estimates and assumptions that we used in determining the value of our CEG reporting unit are discussed in Note 2 - Summary of Significant Accounting Policies.
We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. The assessment for recoverability is based primarily on our ability to recover the carrying value of its long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the assets the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset’s fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows.
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. |
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 video on demand services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes are recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.
Payment terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. We have in the past entered into arrangements in connection with activation fees due from our System deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
Cinema Equipment Business
Our Cinema Equipment Business consists of financing vehicles and administrators for 2,519 Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 3,025 Systems installed domestically and internationally in our second deployment phase (“Phase II Deployment”).
We retain ownership of our digital cinema equipment (the “Systems”) and the residual cash flows related to the Systems in Phase I Deployment after the end of the 10-year deployment payment period.
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For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees (“VPFs”) from motion picture studios and distributors and ACFs from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, “Services”).
VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period in which the digital title first plays on a System for general audience viewing in a digitally equipped movie theatre, as Phase I Deployment’s and Phase II Deployment’s performance obligations have been substantially met at that time.
Phase II Deployment’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related to the variable consideration, i.e., the one-time bonus and determined that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.
Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the systems and is predicated on Cinedigm’s receipt of sale proceeds. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan. Cinedigm completed the sale of 650 and 30 digital projection Systems, respectively, for an aggregate sales price of approximately $5.6 million and $195.0 thousand, and recognized revenue of $5.6 million and $76.2 thousand, during the three months ended June 30, 2021 and 2020, 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 II Deployment Systems and for Systems installed by CDF2 Holdings, a related party, (See Note 4 - Other Interests) upon installation and such fees are generally collected upfront upon installation. Our services division manages and collects VPFs on behalf of exhibitors, for which it earns an administrative fee equal to 10% of the VPFs collected.
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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 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” or “OTT Streaming and Digital”), and physical goods (e.g., DVDs and Blu-ray Discs) (“Physical Revenue” or “Base Distribution Business”). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance obligations include the delivery of content for transactional, subscription and ad supported/FAST on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the performance obligation is satisfied which is when the content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical Revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.
Physical goods 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 for each revenue stream based on the transfer of control of goods and services. Key indicators that we use in evaluating gross versus net treatment include, but are not limited to, the following:
| ● | which party is primarily responsible for fulfilling the promise to provide the specified good or service; and |
| ● | which party has discretion in establishing the price for the specified good or service. |
Shipping and Handling
Shipping and handling costs are incurred to move physical goods (e.g., DVDs and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.
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.
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We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
Our CEG segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. Reserves for product returns and other allowances is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates. 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 June 30, 2021 was $0.4 million. For the three months ended June 30, 2021 and 2020, respectively, 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 months ended June 30, 2021 and 2020, $0.5 million and $0.6 million, respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the period. As of June 30, 2021, the aggregate amount of contract revenue allocated to unsatisfied performance obligations was $0.4 million. We expect to recognize this balance in full by September 30, 2021.
Participations and royalties payable
When we use third parties to distribute company owned content, we record participations payable, which represent amounts owed to the distributor under revenue-sharing arrangements. When we provide content distribution services, we record accounts payable and accrued expenses to studios or content producers for royalties owed under licensing arrangements. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers.
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BUSINESS COMBINATIONS
A business combination is an acquisition of business. Business combination are accounted by allocating the purchase price of the business across the assets acquired from the business and assumed liabilities.
Results of Operations for the Three Months Ended June 30, 2021 and 2020
Revenues
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2021 | 2020 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 6,231 | $ | 605 | $ | 5,626 | 930 | % | ||||||||
| Content & Entertainment | 8,784 | 5,413 | 3,371 | 62 | % | |||||||||||
| $ | 15,015 | $ | 6,018 | $ | 8,997 | 149 | % | |||||||||
The revenues in the Content & Entertainment Business segment increased by 62% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase is attributed to continued growth in new release transactional sales, the addition of several new streaming channels, and an expansion of the Company's distribution with new and existing Smart TV platforms. In addition, the Company deployed new advertising technology from our streaming partner Amagi, which had a material impact on the Company's advertising fill and CPM rates. The revenues in the Cinema Equipment Business segment increased by 930% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Cinema Equipment Business segment increased primarily due to contractually standard terms of digital projector sales to related exhibitors in the Cinedigm deployments.
Direct Operating Expenses
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2021 | 2020 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 257 | $ | 182 | $ | 75 | 41 | % | ||||||||
| Content & Entertainment | 4,374 | 2,497 | 1,877 | 75 | % | |||||||||||
| $ | 4,631 | $ | 2,679 | $ | 1,952 | 73 | % | |||||||||
The increase in direct operating expenses in the three months ended June 30, 2021 for the Cinema Equipment Business compared to the prior period was primarily due to an increase in property tax obligations for the Cinedigm owned projector assets. The increase in direct operating expenses in the three months ended June 30, 2021 for the Content & Entertainment Business compared to the prior period was primarily due to higher royalty expenses and an increase in infrastructure and personnel costs offset by a decrease in manufacturing and fulfillment of physical sales.
Selling, General and Administrative Expenses
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2021 | 2020 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 429 | $ | 549 | $ | (120 | ) | (22 | )% | |||||||
| Content & Entertainment | 2,818 | 1,895 | 923 | 33 | % | |||||||||||
| Corporate | 2,796 | 1,396 | 1,400 | 100 | % | |||||||||||
| $ | 6,043 | $ | 3,840 | $ | 2,203 | 57 | % | |||||||||
Selling, general and administrative expenses for the three months ended June 30, 2021 increased by $2.2 million primarily due to a $1.3 million increase in bonus incentive expense and stock-based compensation to management and employees, $0.3 million for additional personnel, $0.4 million for legal and accounting fees related to securities reporting and consulting, and $0.2 for remote-working equipment and computer expense.
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Bad Debt expense
The bad debt expense was $71 thousand and $0 for the three months ended June 30, 2021 and 2020, respectively. These amounts are related to Cinema Equipment Business and Content & Entertainment accounts that are uncollectable.
Depreciation and Amortization Expense on Property and Equipment
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2021 | 2020 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 507 | 1,403 | (896 | ) | (64 | )% | |||||||||
| Content & Entertainment | 143 | 103 | 40 | 39 | % | |||||||||||
| Corporate | (1 | ) | 18 | (19 | ) | (106 | )% | |||||||||
| $ | 649 | $ | 1,524 | $ | (875 | ) | (57 | )% | ||||||||
Depreciation and amortization expense decreased in our Cinema Equipment Business Segment as the majority of our digital cinema projection systems reached the conclusion of their ten-year useful lives during the year ended March 31, 2021 leading to a lower fixed asset balance to be depreciated in the three months ended June 30, 2021. Corporate and Content & Entertainment depreciation and amortization expense is lower due to the write off of leasehold improvements with the closing of the Los Angeles office.
Interest expense, net
| For the Three Months Ended June 30, | ||||||||||||||||
| ($ in thousands) | 2021 | 2020 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 133 | $ | 578 | $ | (445 | ) | (77 | )% | |||||||
| Content & Entertainment | - | - | - | - | % | |||||||||||
| Corporate | 11 | 712 | (701 | ) | (98 | )% | ||||||||||
| $ | 144 | $ | 1,290 | $ | (1,146 | ) | (89 | )% | ||||||||
Interest expense in the Cinema Equipment Business segment decreased primarily as a result of reduced debt balances compared to the prior period on the Prospect Term Loan. Interest expense in our Corporate segment decreased as a result of lower loan balances from our Credit Facility, Second Lien Loans and the conversion of the Bison Convertible Note and the Mingtai Convertible Note into shares of Class A common stock in the prior period.
Income Tax Expense
We recorded an income tax benefit of $63 thousand for the three months ended June 30, 2021. We recorded income tax expense of approximately $0 for the three months ended June 30, 2020.
Our effective tax rate for the three months ended June 30, 2021 and 2020 was negative 1.2% and zero, respectively.
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, change in fair value on equity investment in Starrise and certain other items.
Consolidated Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the three months ended June 30, 2021 increased by $5.7 million compared to the three months ended June 30, 2020. Adjusted EBITDA from our Cinema Equipment Business segment increased primarily due to contractually standard terms of digital projector sales to related exhibitors in the Cinedigm deployments. Adjusted EBITDA from the Content & Entertainment business and Corporate segment decreased by $46 thousand for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, due to the growth of Streaming & Digital expenses based on higher volume for streaming due to the pandemic and adding additional channels and content compared to the prior period.
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.
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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.
Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:
| For the Three Months Ended June 30, |
||||||||
| ($ in thousands) | 2021 | 2020 | ||||||
| Net income (loss) | $ | 5,194 | $ | (19,870 | ) | |||
| Add Back: | ||||||||
| Income tax benefit | (63 | ) | - | |||||
| Depreciation and amortization of property and equipment | 649 | 1,524 | ||||||
| Amortization of intangible assets | 847 | 590 | ||||||
| Gain on forgiveness of PPP loan and extinguishment of note payable | (2,178 | ) | - | |||||
| Interest expense, net | 144 | 1,290 | ||||||
| Change in fair value on equity investment in Starrise | (334 | ) | 15,794 | |||||
| Acquisition, integration and other expense | 173 | 299 | ||||||
| Provision for doubtful accounts | 71 | - | ||||||
| Stock-based compensation | 983 | 177 | ||||||
| Net income (loss) attributable to noncontrolling interest | (7 | ) | 14 | |||||
| Adjusted EBITDA | $ | 5,479 | $ | (182 | ) | |||
| Adjustments related to the Cinema Equipment Business | ||||||||
| Depreciation and amortization of property and equipment | $ | (507 | ) | $ | (1,403 | ) | ||
| Amortization of intangible assets | - | (8 | ) | |||||
| Stock-based compensation and expenses | - | - | ||||||
| Acquisition, integration and other expense | (11 | ) | - | |||||
| Provision for doubtful accounts | (27 | ) | - | |||||
| Income from operations | (4,912 | ) | 1,661 | |||||
| Adjusted EBITDA from non-cinema equipment business | $ | 22 | $ | 68 | ||||
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included herein.
Changes in our cash flows were as follows:
| For the Three Months Ended June 30, | ||||||||
| ($ in thousands) | 2021 | 2020 | ||||||
| Net cash provided (used in) by operating activities | $ | 3,621 | $ | (3,738 | ) | |||
| Net cash used in investing activities | (791 | ) | (508 | ) | ||||
| Net cash (used in) provided by financing activities | (6,324 | ) | 5,237 | |||||
| Net change in cash, cash equivalents, and restricted cash | $ | (3,494 | ) | $ | 2,007 | |||
As of June 30, 2021, we had cash, cash equivalents, and restricted cash balances of $14.4 million.
As of June 30, 2020, we had cash, cash equivalents, and restricted cash balances of $17.3 million.
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For the three months ended June 30, 2021, net cash provided by operating activities is primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, including other changes in working capital. Additionally, during the three months ended June 30, 2021, the Company paid down $8.1 million to vendors at both CEG and Corporate. Cash received from VPFs declined from the previous period as Phase I Deployment Systems in our Cinema Equipment Business reached the conclusion of their deployment payment periods with certain major studios. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. As vaccines became readily available and COVID cases decreased Major Studios began to schedule tentpole releases in theatres to test consumer confidence during the three months ended June 30, 2021. During this test period, box office revenue remained below pre-COVID pandemic results due to limited seat capacities and the shortening of theatrical window before the streaming debut on streaming platforms. Because our digital cinema business earns a VPF when a movie is first played on a system, the temporary theatre closures resulting from the COVID-19 pandemic resulted in reduced revenues. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and lower in the other two quarters as we pay royalties on such revenues. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months. For the three months ended June 30, 2021 revenues from the sale of digital projections Systems was $5.6 million.
For the three months ended June 30, 2020, 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 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.
For the three months ended June 30, 2021, cash flows used in investing activities consisted of purchases of property and equipment of $0.04 million and the purchase of a business of $1.0 million related to the business combination for FoundationTV.
For the three months ended June 30, 2020, Cash flows provided by investing activities consisted of proceeds from the sale of Starrise shares of $0.6 million and purchases of property, equipment and internal use software.
For the three months ended June 30, 2021, cash flows used in financing activities consisted of payments of approximately $4.8 million in notes payable and $1.6 million in Credit Facility repayments.
For the three months ended June 30, 2020, cash flows provided by financing activities reflects payments of approximately $7.8 million for the Credit Facility and Prospect Loan, offset by $3.4 million from Credit Facility draw, $7.5 million received in connection with the sale of 10,666,666 shares of Class A common stock and exercise of warrants, and $2.2 million received pursuant to the Payment Protection Program of the Coronavirus Aid, Relief and Economic Security Act.
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.
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Seasonality
Revenues from our Cinema Equipment 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. While CEG benefits from the winter holiday season, we believe the seasonality of motion picture exhibition, is becoming less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout the year.
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 Quarterly Report on Form 10-Q, we hold a 100% equity interest in CDF2 Holdings, which is an unconsolidated variable interest entity (“VIE”), which wholly owns Cinedigm Digital Funding 2, LLC; however, we are not the primary beneficiary of the VIE.
Impact of Inflation
The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse impact on our operating results.
Item 4. CONTROLS AND PROCEDURES
Definition and Limitations of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Operating Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of June 30, 2021. Based on such evaluation, our principal executive officer and principal financial and accounting officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, on a timely basis, and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Operating Officer, as appropriate, to allow timely decisions regarding required disclosures due to the material weaknesses identified in our internal control over financial reporting as of June 30, 2021.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on our evaluation, management concluded that our internal control over financial reporting was not effective as of June 30, 2021 and identified the following material weaknesses:
| ● | Financial Close Process: the Company did not maintain an effective control environment related to the financial close process due to significant turnover of personnel in the accounting function where there was an insufficient complement of personnel, contributing to: |
| ○ | the Company did not design and maintain effective controls over the financial close process including timely and sufficient analysis of certain financial statement account balances; |
| ○ | the Company did not identify and evaluate certain transactions under the appropriate accounting literature; and |
| ○ | the Company did not perform timely and sufficient analysis of certain financial statement account balances as part of the financial close process. |
| ● | Information and Communication Controls: the Company did not design and maintain effective controls regarding significant transaction cycles to ensure policies and procedures designed to mitigate the risks to the achievement of objectives are carried out. |
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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis. As this deficiency created a reasonable possibility that a material misstatement would not be prevented or detected in a timely basis, management concluded that the control deficiency represented a material weakness and accordingly our internal control over financial reporting was not effective as of June 30, 2021. Management concluded that additional formal procedures should be implemented in the financial close and reporting process to ensure that appropriate and timely reviews occur on all financial reporting analysis.
Management also concluded that due to employee turnover within our corporate accounting group as of June 30, 2021, we did not have a sufficient complement of corporate personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting matters completely and accurately.
Remediation. Following identification of this control deficiency, management is implementing modifications to better ensure that the Company has appropriate and timely reviews on all financial reporting analysis. The material weakness in our internal control over financial reporting will not be considered remediated until these modifications are implemented, in operation for a sufficient period of time, tested, and concluded by management to be designed and operating effectively. In addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify our remediation plan. Management will test and evaluate the implementation of these modifications to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material misstatement in the Company’s financial statements.
The steps we took to address the deficiencies identified included:
| ● | we appointed an SVP Finance and Accounting; |
| ● | we have engaged in efforts to restructure accounting processes and revise organizational structures to enhance accurate accounting and appropriate financial reporting; |
| ● | we have hired additional experienced accounting personnel in the corporate office to enhance the application of accounting standards and our financial closing and reporting process; |
| ● | we have engaged external advisors to provide financial accounting and reporting assistance; |
| ● | we will enhance information and communication processes through information technology solutions to ensure that information needed for financial reporting is accurate, complete, relevant and reliable, and communicated in a timely manner; and |
| ● | we plan to engage external advisors to evaluate and document the design and operating effectiveness of our internal control over financial reporting and assist with the remediation and implementation of our internal control function. |
As noted above, we believe that, as a result of management’s in-depth review of its accounting processes, and the additional procedures management has implemented, there are no material inaccuracies or omissions of material fact in this Form 10-Q and, to the best of our knowledge, we believe that the consolidated financial statements in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows in conformity with GAAP.
We and our Board treat the controls surrounding, and the integrity of, our financial statements with the utmost priority. Management is committed to the planning and implementation of remediation efforts to address control deficiencies and any other identified areas of risk. These remediation efforts are intended to both address the identified material weakness and to enhance our overall financial control environment. We are committed to maintaining a strong internal control environment, and we believe the measures described above will strengthen our internal control over financial reporting and remediate the material weakness we have identified. Our remediation efforts have begun, and we will continue to devote significant time and attention to these remedial efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above, which may require additional implementation time.
Changes in Internal Control Over Financial Reporting
There have been no changes, other than our remediation efforts discussed above, in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2021 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, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 9, 2021, the Company acquired all of the issued and outstanding stock of FoundationTV, Inc. (“FoundationTV”). As part of the purchase price for the acquisition of FoundationTV, the Company issued 1,483,129 shares of Class A common stock 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.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
45
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: | September 9, 2021 | By: | /s/ Christopher J. McGurk | |
| Christopher J. McGurk Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | ||||
| Date: | September 9, 2021 | By: | /s/ Gary S. Loffredo | |
| Gary S. Loffredo President, Chief Operating Officer, General Counsel and Secretary (Principal Financial Officer) | ||||
46
Exhibit 10.1
June 22, 2021
Mr. Gary Loffredo
Chief Operating Officer
Cinedigm Corporation
237 West 35th Street, Suite 605
New York, New York 10001
Re: Loan No. 372001061
Dear Mr. Loffredo:
Reference is made to that certain Loan, Guaranty and Security Agreement dated as of March 30, 2018, entered into between Cinedigm Corp. (“Borrower”), the other Loan Parties (together with Borrower, collectively “Loan Parties”), and East West Bank (“Bank”), together with any and all amendments, modifications, riders and attachments thereto (collectively, the “Loan Agreement”) governing certain financial accommodations which Bank has extended to Borrower. All capitalized terms used in this letter shall have the meanings given to them in the Loan Agreement, unless specifically defined herein. Under the terms of the loan documents, your loan is about to mature on June 30, 2021.
In order to provide you smooth uninterrupted service under your credit facility while your request for a maturity extension of your loan to June 30, 2022 is being reviewed, we are pleased to inform you that you have been approved for an extension of the maturity date of your loan to September 28, 2021.
This extension should allow ample time for you to assemble and for us to review the financial information needed to consider your request for a renewal and maturity extension to June 30, 2022.
We appreciate your business and look forward to working with you on your request to renew this loan.
Very truly yours,
| /s/ Robert Mostert, FVP | |
| Robert Mostert, FVP |
135 N. Los Robles Ave., 6th Floor, Pasadena, CA 91101 • Tel. 626.768.6924 • Fax 626.243.9810 • Nasdaq: EWBC
Exhibit 31.1
CINEDIGM CORP.
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: September 9, 2021 | By: | /s/ Christopher J. McGurk |
| Christopher J. McGurk Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) |
Exhibit 31.2
CINEDIGM CORP.
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: September 9, 2021 | By: | /s/ Gary Loffredo |
| Gary Loffredo Chief Operating Officer, President Digital Cinema, General Counsel and Secretary (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CINEDIGM CORP.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Form 10-Q of Cinedigm Corp. (the “Company”) for the period ended June 30, 2021 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: September 9, 2021 | By: | /s/ Christopher J. McGurk |
| Christopher J. McGurk Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) |
Exhibit 32.2
CINEDIGM CORP.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Form 10-Q of Cinedigm Corp. (the “Company”) for the period ended June 30, 2021 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: September 9, 2021 | By: | /s/ Gary Loffredo |
| Gary Loffredo Chief Operating Officer, President Digital Cinema, General Counsel and Secretary (Principal Financial Officer and Principal Accounting Officer) |