UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal period ended: June 30, 2021

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number: 001-31810

 

Cinedigm Corp.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3720962
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
237 West 35th Street, Suite 605, New York, NY   10001
(Address of principal executive offices)   (Zip Code)

 

(212) 206-8600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on
which registered
CLASS A COMMON STOCK, PAR VALUE $0.001 PER SHARE   CIDM   NASDAQ GLOBAL MARKET

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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 ☐   Non-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, 167,932,971 shares of Class A Common Stock, $0.001 par value, were outstanding.

 

 

 

 

CINEDIGM CORP.

TABLE OF CONTENTS

 

    Page
  PART I - FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets at June 30, 2021 (Unaudited) and March 31, 2021 1
  Unaudited Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2021 and 2020 2
  Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months ended June 30, 2021 and 2020 3
  Unaudited Condensed Consolidated Statements of (Deficit) Equity for the Three Months June 30, 2021 and 2020 4
  Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2021 and 2020 6
  Notes to the Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 4. Controls and Procedures 42
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 44
Item 1A. Risk Factors 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
Item 3. Defaults Upon Senior Securities 44
Item 4. Mine Safety Disclosures 44
Item 5. Other Information 44
Item 6. Exhibits 45
Exhibit Index 45
Signatures 46

 

i

 

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   $ 13,355     $ 16,849  
Accounts receivable, net     27,145       21,093  
Inventory, net     142       166  
Unbilled revenue     1,672       1,377  
Prepaid and other current assets     2,856       3,657  
Total current assets     45,150       43,142  
Restricted cash     1,000       1,000  
Equity investment in Starrise, a related party, at fair value     6,777       6,443  
Property and equipment, net     2,922       3,500  
Right-of-use assets     66       100  
Intangible assets, net     12,213       9,860  
Goodwill     10,738       8,701  
Other long-term assets     1,771       2,700  
Total assets   $ 80,637     $ 75,446  
LIABILITIES AND EQUITY                
Current liabilities                
Accounts payable and accrued expenses   $ 50,213     $ 46,627  
Current portion of notes payable
(see Note 6)
    387       1,956  
Current portion of notes payable, non-recourse (see Note 6)     3,031       7,786  
Current portion of deferred consideration on purchase of a business     465       -  
Operating lease liabilities     58       87  
Current portion of deferred revenue     449       924  
Total current liabilities     54,603       57,380  
PPP Loan    
-
      2,152  
Deferred consideration on purchase of a business - net of current portion     1,515      
-
 
Operating lease liabilities, noncurrent     8       13  
Other long-term liabilities    
-
      19  
Total liabilities     56,126       59,564  
Commitments and contingencies (see Note 8)    
 
     
 
 
Stockholders’ equity                
Preferred stock, 15,000,000 shares authorized; Series A 10% - $0.001 par value per share; 20 shares authorized; and 7 shares issued and outstanding at June 30, 2021 and March 31, 2021. Liquidation preference of $3,648     3,559       3,559  
Common stock, $0.001 par value; Class A stock 200,000,000 and 200,000,000 shares authorized at June 30, 2021 and March 31, 2021, respectively; 169,114,525 and 167,542,404 shares issued and 167,800,689 and 166,228,568 shares outstanding at June 30, 2021 and March 31, 2021, respectively     166       164  
Additional paid-in capital     502,848       499,272  
Treasury stock, at cost; 1,313,836 Class A common shares at June 30, 2021 and March 31, 2021     (11,603 )     (11,603 )
Accumulated deficit     (468,982 )     (474,080 )
Accumulated other comprehensive loss     (122 )     (68 )
Total stockholders’ equity of Cinedigm Corp.     25,866       17,244  
Deficit attributable to noncontrolling interest     (1,355 )     (1,362 )
Total equity     24,511       15,882  
Total liabilities and equity   $ 80,637     $ 75,446  

 

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   $ 15,015     $ 6,018  
Costs and expenses:                
Direct operating (excludes depreciation and amortization shown below)     4,631       2,679  
Selling, general and administrative     6,043       3,840  
Provision for doubtful accounts     71      
-
 
Depreciation and amortization of property and equipment     649       1,524  
Amortization of intangible assets     847       590  
Total operating expenses     12,241       8,633  
Income (loss) from operations     2,774       (2,615 )
Interest expense, net     (144 )     (1,290 )
Gain on forgiveness of PPP loan and extinguishment of note payable     2,178       23  
Change in fair value of equity investment in Starrise, a related party     334       (15,794 )
Other expense, net     (11 )     (194 )
Income (loss) before income taxes     5,131       (19,870 )
Income tax benefit     63      
-
 
Net income (loss)     5,194       (19,870 )
Net (income) loss attributable to noncontrolling interest     (7 )     14  
Net income (loss) attributable to controlling interests     5,187       (19,856 )
Preferred stock dividends     (89 )     (89 )
Net income (loss) attributable to common stockholders   $ 5,098     $ (19,945 )
Net income (loss) per Class A common stock attributable to common stockholders - basic:   $ 0.03     $ (0.21 )
Weighted average number of Class A common stock outstanding: basic     167,940,285       94,416,684  
Net income (loss) per Class A common stock attributable to common stockholders - diluted:   $ 0.03     $ (0.21 )
Weighted average number of Class A common stock outstanding: diluted     171,257,356       94,416,684  

   

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)   $ 5,194     $ (19,870 )
Other comprehensive loss: foreign exchange translation     (54 )     (80 )
Comprehensive income (loss)     5,140       (19,950 )
Less: comprehensive (income) loss attributable to noncontrolling interest     (7 )     14  
Comprehensive income (loss) attributable to controlling interests   $ 5,133     $ (19,936 )

 

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     7     $ 3,559       61,937,593     $ 62       1,313,836     $ (11,603 )   $ 400,784     $ (410,904 )   $ 92     $ (18,010 )   $ (1,277 )   $ (19,287 )
Foreign exchange translation          
           
           
     
     
      (80 )     (80 )    
      (80 )
Stock issued in connection with the SPA with certain investors, net          
      10,666,666       11            
      7,139                   7,150             7,150  
Issuance of Class A common stock in connection with the Starrise transaction, a related party          
      29,855,081       30            
      11,016      
     
      11,046      
      11,046  
Contributed capital under the Starrise transaction, a related party          
           
           
      17,187      
     
      17,187      
      17,187  
Issuance of stock in connection with settlement of second lien loan          
      329,501      
           
      757      
     
      757      
      757  
Exercise of warrants for Class A common stock          
      236,899      
           
      301      
     
      301      
      301  
Stock-based compensation          
           
           
      177      
     
      177      
      177  
Preferred stock dividends paid with common stock          
      267,079      
           
      89       (89 )    
     
     
     
 
Net loss          
           
           
     
      (19,856 )    
      (19,856 )     (14 )     (19,870 )
Balances as of June 30, 2020     7       3,559       103,292,819       103       1,313,836       (11,603 )     437,450       (430,849 )     12       (1,328 )     (1,291 )     (2,619 )

 

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     7     $ 3,559       166,228,568     $ 164       1,313,836     $ (11,603 )   $ 499,272     $ (474,080 )   $ (68 )   $ 17,244     $ (1,362 )   $ 15,882  
Foreign exchange translation          
           
           
     
     
      (54 )     (54 )    
      (54 )
Stock-based compensation          
      35,714      
           
      983      
     
      983      
      983  
Issuance of common stock in connection with a business combination          
      1,483,129       2            
      2,504                   2,506             2,506  
Preferred stock dividends paid with common stock          
      53,278      
           
      89       (89 )    
           
     
 
Net income          
           
           
     
      5,187             5,187       7       5,194  
Balances as of June 30, 2021     7       3,559       167,800,689       166       1,313,836       (11,603 )     502,848       (468,982 )     (122 )     25,866       (1,355 )     24,511  

 

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)   $ 5,194     $ (19,870 )
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     1,496       2,114  
Changes in fair value of equity investment in Starrise     (334 )     15,794  
Gain from forgiveness of PPP loan and extinguishment of note payable     (2,178 )     (23 )
Loss from sale of property and equipment    
      (16 )
Amortization of debt issuance costs included in interest expense    
      233  
Provision for doubtful accounts     71      
 
Recovery for inventory reserve     (34 )     (328 )
Stock-based compensation     983       177  
Accretion and PIK interest expense added to note payable    
      176  
Changes in operating assets and liabilities, net of acquisitions:                
Accounts receivable     (6,103 )     8,236  
Inventory     58       473  
Unbilled revenue     (295 )     191  
Prepaids and other current assets, and other long-term assets     1,730       1,135  
Accounts payable, accrued expenses, and other liabilities     3,508       (11,527 )
Deferred revenue     (475 )     (503 )
Net cash provided by (used in) operating activities     3,621       (3,738 )
Cash flows from investing activities:                
Purchases of property and equipment     (41 )     (79 )
Purchase of a business     (750    
  
 
Sale of equity investment in Starrise    
      587  
Net cash (used in) provided by investing activities     (791 )     508  
Cash flows from financing activities:                
Payment of notes payable     (4,755 )     (7,754 )
(Payment) proceeds under revolving credit agreement, net     (1,569 )     3,388  
Proceeds from PPP Loan    
      2,152  
Proceeds from issuance of Class A common stock, net    
      7,451  
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  
Cash, cash equivalents, and restricted cash at beginning of period     17,849       15,294  
Cash, cash equivalents, and restricted cash at end of period   $ 14,355     $ 17,301  

 

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 6,200 movie screens in both North America and several international countries.

 

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 $469.0 million and negative working capital of $9.5 million as of June 30, 2021. Net cash provided by operating activities for the three months ended June 30, 2021 was $3.6 million. We may continue to generate net losses for the foreseeable future. In addition, we had debt-related contractual obligations as of 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. Based on these conditions, the Company entered into the following transactions described below:

 

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 of $5.6 million. A portion of the total proceeds has been utilized to eliminate the remaining Prospect notes payable.

 

7

 

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.

 

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.

 

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   $ 13,355     $ 16,849  
Restricted Cash     1,000       1,000  
    $ 14,355     $ 17,849  

 

EQUITY INVESTMENT IN STARRISE, A RELATED PARTY

 

On February 14, 2020, the Company acquired an approximately 11.5% interest in Starrise Media Holdings Limited (“Starrise”), a leading publicly traded Chinese entertainment company whose ordinary shares are listed on the Stock Exchange of Hong Kong. The Company acquired such interest as a strategic investment and in a private transaction from a shareholder of Starrise that is related to our major shareholders. When we acquired the Starrise stock, our then-majority affiliated stockholders also maintained a significant beneficial interest in Starrise. Upon consummation of the transaction on February 14, 2020, the Company recorded an initial investment of approximately $25.1 million, which is the fair market value of the Starrise shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company’s common stock of $11.2 million, valued as of the date of the issuance of the Class A common stock of the Company. The difference in value of shares received in Starrise and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital.

 

9

 

On April 10, 2020, the Company purchased an additional 15% interest in Starrise in a private transaction from shareholders of Starrise that are affiliated with the major shareholder of the Company. The Company recorded an additional equity investment of approximately $28.2 million, which is the fair market value of the Starrise shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company’s common stock of $11.0 million, valued at the date of the issuance of the Class A common stock of the Company. The difference in the value of shares received in Starrise and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital. This transaction was also recorded as an equity investment in Starrise.

 

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 $6.7 million and $6.4 million, respectively, resulting in a change in fair value of approximately $0.3 million and $15.8 million for the three months ended June 30, 2021 and 2020 respectively, on our consolidated statement of operations. At June 30, 2021 and March 31, 2021, the Company owned 362,307,397 shares or 26% of Starrise.

 

NON-MONETARY TRANSACTIONS

 

During the three months ended June 30, 2020, the Company entered into agreements with certain vendors to transfer 9,006,215 Starrise shares to satisfy outstanding liabilities with these vendors. Upon the sale of the Starrise shares by the vendors, with certain restrictions on sales unless the Company gives consent to sell, if the proceeds do not satisfy the amount due to the vendor, the Company is liable for the balance owed. There were no such transactions during the three months ended June 30, 2021.

 

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 $0.2 million and $0.2 million, respectively, for the three months ended June 30, 2021 and 2020.

 

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     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  

 

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 7.8 and 7.8 Hong Kong Dollars to 1 US Dollar, respectively. The fair value of this equity investment is measured by the unadjusted market pricing of Starrise on the Stock Exchange of Hong Kong.

 

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   $ 1,000     $
    $
    $ 1,000  
Equity investment in Starrise, at fair value     6,777      
     
      6,777  
    $ 7,777     $
     
    $ 7,777  

 

As of March 31, 2021                        
                         
(in thousands)   Level 1     Level 2     Level 3     Total  
Restricted cash   $ 1,000     $
    $
    $ 1,000  
Equity investment in Starrise, at fair value     6,443      
     
      6,443  
    $ 7,443     $
    $
    $ 7,443  

 

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 $3.0 million and lease obligations approximates fair value.

 

IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS

 

We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset’s fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. During the three months 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   $  8,701  
Goodwill from business combination – see Note 5     2,037    
Goodwill  , net at June 30, 2021   $ 10,738  

 

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 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.

 

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 $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.

 

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/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 $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.

 

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   $ 91     $ 31  
Phase II Deployment     386       398  
Services     179       100  
Digital System Sales     5,575       76  
Total Cinema Equipment Business revenue   $ 6,231     $ 605  
                 
Content & Entertainment Business:                
Base Distribution Business   $ 1,778     $ 2,157  
OTT Streaming and Digital     7,006       3,256  
Total Content & Entertainment Business revenue   $ 8,784     $ 5,413  

 

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 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded. The Company has no uncertain tax positions.

 

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 2,003,235 shares for the three months ended June 30, 2021, respectively, were included in the computations of diluted earnings per share. The calculation of diluted net income per share for the three months ended June 30, 2021 does not include the impact of 9,616,429 potentially dilutive shares relating to stock options, stock appreciation rights, and warrants as their impact would have been anti-dilutive.

 

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 3,940,138 shares as of June 30, 2020, respectively, were excluded from the computations of loss per share as their impact would have been anti-dilutive.

 

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 100% of the common equity of CDF2 Holdings, LLC (“CDF2 Holdings”), which was created for the purpose of capitalizing on the conversion of the exhibition industry from film to digital technology. CDF2 Holdings assists its customers in procuring the equipment necessary to convert their systems to digital technology by providing financing, equipment, installation and related ongoing services.

 

CDF2 Holdings is a Variable Interest Entity (“VIE”), as defined in Accounting Standards Codification Topic 810 (“ASC 810”), “Consolidation.” ASC 810 requires the consolidation of VIEs by an entity that has a controlling financial interest in the VIE which entity is thereby defined as the primary beneficiary of the VIE. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, among other factors. Although we indirectly, wholly own CDF2 Holdings, we, a third party that also has a variable interest in CDF2 Holdings, and an independent third party manager must mutually approve all business activities and transactions that significantly impact CDF2 Holdings’ economic performance. We have therefore assessed our variable interests in CDF2 Holdings and determined that we are not the primary beneficiary of CDF2 Holdings. As a result, CDF2 Holdings’ financial position and results of operations are not consolidated in our financial position and results of operations. In completing our assessment, we identified the activities that we consider most significant to the economic performance of CDF2 Holdings and determined that we do not have the power to direct those activities, and therefore we account for our investment in CDF2 Holdings under the equity method of accounting.

 

As of 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 $0.4 million and $0.3 million as of June 30, 2021 and March 31, 2021, respectively, which are included in accounts receivable, net on the accompanying consolidated balance sheets.

 

The accompanying Consolidated Statements of Operations include $77 thousand and $9 thousand of digital cinema servicing revenue from CDF2 Holdings for the three months ended June 30, 2021 and 2020, respectively.

 

Total Stockholders’ Deficit of CDF2 Holdings at June 30, 2021 and March 31, 2021 was $49.6 million and $46.3 million, respectively. We have no obligation to fund the operating loss or the stockholders’ deficit beyond our initial investment of $2.0 million and, accordingly, our investment in CDF2 Holdings as of June 30, 2021 and March 31, 2021 is carried at $0.

 

18

 

Majority Interest in CONtv

 

We own an 85% interest in CON TV, LLC, a worldwide digital network that creates original content, and sells and distributes on-demand digital content on the Internet and other consumer digital distribution platforms, such as gaming consoles, set-top boxes, handsets, and tablets.

 

5. BUSINESS COMBINATION

 

Stock Purchase Agreement

 

On May 12, 2021, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with FoundationTV, Inc. (“FoundationTV”), to buy all of FoundationTV´s issued and outstanding stock in consideration of an aggregate of $5.2 million, of which $0.7 million was paid in cash and 1,483,129 shares of Class A common stock, which were valued at $2.5 million, were issued at closing stock price of $1.69 on the closing date of June 9, 2021, and an additional $2.0 million will be paid in eight equal installments of one installment on each six month anniversary of closing over forty-eight months, and a final lump sum payment of $225 thousand on the four year anniversary of the closing; reduced by $0.2 million settlement of a prior relationship. The Stock Purchase Agreement contained certain conditions to closing, including that the Company obtain approval of its stockholders, applicable lenders, and regulatory authorities, as applicable, and representations and warranties and covenants as are customary for transactions of this type. On June 9, 2021, the FoundationTV acquisition was consummated. The Company incurred transaction cost $36 thousand during the three months ended June 30, 2021. As of June 30, 2021, the deferred consideration is presented according to the agreed-upon cash payments, including a $0.5 million short-term payable and a long-term payable for $1.5 million.

 

Purchase Price      
Purchase Price   $ 5,237  
Total purchase price   $ 5,237  
         
Allocation of purchase price        
Developed technology     3,200  
Goodwill     2,037  
Total allocation of purchase price   $ 5,237  

 

The developed technology acquired in this transaction has a useful life of 10 years. Due to proximately of the closing date to the end of the quarter, the Company did not record any amortization expense during the three months ended June 30, 2021 related to the developed technology acquired in the business combination.

 

Below is the amortization expense per year for the developed technology acquired in the business combination:

 

2022 (remaining)   $ 240  
2023     320  
2024     320  
2025     320  
2026     320  
2027     320  
2028     320  
2029     320  
2030     320  
2031     320  
2032     80  
Total   $ 3,200  

 

19

 

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   $ 3,031     $
    $ 7,786     $
 
Total non-recourse notes payable     3,031      
      7,786      
 
Total non-recourse notes payable, net of unamortized debt issuance costs and debt discounts   $ 3,031     $
    $ 7,786     $
 
Credit Facility   $ 387     $
    $ 1,956     $
 
PPP Loan    
     
     
      2,152  
Total recourse notes payable     387      
      1,956       2,152  
Total recourse notes payable, net of unamortized debt issuance costs and debt discounts   $ 387     $
    $ 1,956     $ 2,152  
Total notes payable, net of unamortized debt issuance costs   $ 3,418     $
    $ 9,742     $ 2,152  

 

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 $70.0 million. The Prospect Loan bears interest at LIBOR plus 9.0% (with a 2.0% LIBOR floor), which is payable in cash, and at an additional 2.50% to be accrued as an increase to the aggregate principal amount of the Prospect Loan until the Prospect Loan is paid off, at which time all accrued interest will be payable in cash.

 

Collections of DC Holdings accounts receivable are deposited into accounts designated to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the Prospect Loan. On a quarterly basis, if there is excess cash flow, it is used for prepayment of the Prospect Loan. We also maintain a debt service fund under the Prospect Loan for future principal and interest payments. As of June 30, 2021, and March 31, 2021, the debt service fund had a balance of $1.0 million, which is classified as part of restricted cash on our Consolidated Balance Sheets.

 

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 $3,500,000 to Prospect to reduce the outstanding principal amount of the Loan.

 

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:

 

  5.0% of the principal amount prepaid between the second and third anniversaries of issuance;

 

  4.0% of the principal amount prepaid between the third and fourth anniversaries of issuance;

 

  3.0% of the principal amount prepaid between the fourth and fifth anniversaries of issuance;

 

  2.0% of the principal amount prepaid between the fifth and sixth anniversary of issuance;

 

  1.0% of the principal amount prepaid between the sixth and seventh anniversaries of issuance; and

 

  No penalty if the balance of the Prospect Loan, including accrued interest, is prepaid thereafter.

 

The Prospect Loan is secured by, among other things, a first priority pledge of the stock of CDF2 Holdings, our wholly owned unconsolidated subsidiary, the stock of AccessDM, owned by DC Holdings, and the stock of our Phase 2 DC subsidiary, and is also guaranteed by AccessDM and Phase 2 DC. We provide limited financial support to the Prospect Loan not to exceed $1.5 million per year in the event financial performance does not meet certain defined benchmarks.

 

The Prospect Loan contains customary representations, warranties, affirmative covenants, negative covenants and events of default.

 

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   $ 70,000     $ 70,000  
PIK Interest     6,397       6,397  
Payments to date     (73,366 )     (68,611 )
Prospect Loan, gross   $ 3,031     $ 7,786  
Less unamortized debt issuance costs and debt discounts    
     
 
Prospect Loan, net     3,031       7,786  
Less current portion     (3,031 )     (7,786 )
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 $19.0 million in revolving loans outstanding at any one time with a maturity date of March 31, 2020, which may be extended for two successive one-year periods at the sole discretion of the lender, subject to certain conditions.

 

Interest under the Credit Facility is due monthly at a rate elected by the Company of either 0.5% plus Prime Rate or 3.25% above LIBOR Rate established by the lender.

 

21

 

As of June 30, 2021 and March 31, 2021, there was $0.4 million and $2.0 million outstanding, respectively, and there was $8.1 million available, under the Credit Facility based on the Company’s borrowing base as of June 30, 2021. On July 3, 2019, the Company entered into the EWB Amendment to the Credit Facility. The EWB Amendment reduced the size of the facility to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, and extended the maturity date to June 30, 2020. In connection with the EWB Amendment, three of our subsidiaries became Guarantors under the Credit Facility. On June 25, 2020, the Company signed amendment No. 4 with East West Bank to extend the maturity of the Credit Facility to June 30, 2021 and waive events of default provisions. On June 22, 2021, the maturity date of the Credit Facility was extended to September 28, 2021. During this extension period, until an amendment is entered into, we are not able to access any additional borrowings under the Credit Facility.   

 

PPP Loan

 

On April 15, 2020, the Company received $2.2 million from East West Bank, the Company’s existing lender. 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 June 30, 2021.

 

7. STOCKHOLDERS’ EQUITY

 

COMMON STOCK

 

During the three months ended June 30, 2021, we issued 1,536,407 shares of Class A common stock which consists of the issuance of Class A common stock for business combination, the issuances of Class A common stock preferred stock dividends, and SARs awards.

 

PREFERRED STOCK

 

Cumulative dividends in arrears on preferred stock were $0.1 million and $0.1 million as of June 30, 2021 and March 31, 2021. In May 2021, we paid the preferred stock dividends in arrears in the form of 53,278 shares of Class A common stock.

 

TREASURY STOCK

 

We have treasury stock, at cost, consisting of 1,313,836 shares of Class A common stock at June 30, 2021 and March 31, 2021.

 

CINEDIGM’S EQUITY INCENTIVE PLANS

 

Stock Based Compensation Awards

 

Awards issued under our 2000 Equity Incentive Plan (the “2000 Plan”) may be in any of the following forms (or a combination thereof) (i) stock option awards; (ii) stock appreciation rights; (iii) stock or restricted stock or restricted stock units; or (iv) performance awards. The 2000 Plan provides for the granting of incentive stock options (“ISOs”) with exercise prices not less than the fair market value of our Class A Common Stock on the date of grant. ISOs granted to shareholders having more than 10% of the total combined voting power of the Company must have exercise prices of at least 110% of the fair market value of our Class A Common Stock on the date of grant. ISOs and non-statutory stock options granted under the 2000 Plan are subject to vesting provisions, and exercise is subject to the continuous service of the participant. The exercise prices and vesting periods (if any) for non-statutory options are set at the discretion of our compensation committee. On November 1, 2017, upon the consummation of the initial equity investment in Cinedigm by Bison, as a result of which there was a change of control of the Company, all stock options (incentive and non-statutory) and shares of restricted stock were vested immediately and the options became fully exercisable.

 

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 2,380,000 shares of Class A Common Stock to employees, outside directors and consultants.

 

As of June 30, 2021, there were 261,587 stock options outstanding in the 2000 Plan with weighted average exercise price of $14.99 and a weighted average contract life of 1.86 years. As of March 31, 2021, there were 261,587 shares pursuant to stock options outstanding in the Plan with weighted average exercise price of $14.99 and a weighted average contract life of 2.11 years.

 

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 2,108,270 shares to 4,098,270.

 

On October 23, 2020, the Company amended its 2017 Equity Incentive Plan to increase the number of shares authorized for issuance thereunder from 4,098,270 to 14,098,270.

 

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)  
  $7.40 - $13.69        5,000                4.00     $                             7.40     $
                           -
 
  $13.70 - $24.40       249,087       1.87       14.69      
-
 
  $24.41 - 30.00       7,500       0.13       30.00      
-
 
          261,587                     $
-
 

 

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)
 
  261,587       1.86     $ 14.99        

 

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   $ 983     $ 177  
    $ 983     $ 177  

 

23

 

During the three months ended June 30, 2021, the Company granted 584,000 stock appreciation rights (“SARs”). The SARs were granted under the Company’s 2017 Equity Incentive Plan (the “2017 Plan). All SARs issued have an exercise price equal to the fair value of the Company’s Class A common stock on the date of grant and a maturity date of 10 years. The SARs were valued on the grant date utilizing an option pricing model, as follows:

 

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: $1.29 - $1.37

 

Volatility: 94.56% - 94.63%

 

Discount rate: 1.50% - 1.63%

 

There was $856 thousand and $110 thousand of stock-based compensation recorded for the three months ended June 30, 2021 and 2020, respectively, relating to these SARs.

 

Total SARs outstanding are as follows:

 

    Three Months
Ended
June 30,
2021
 
SARs Outstanding March 31, 2021     9,154,933  
Issued     584,000  
Forfeited     (91,875 )
Total SARs Outstanding June 30, 2021     9,647,058  

  

There was $1 thousand and $1 thousand of stock-based compensation recorded for the three months ended June 30, 2021 and 2020, respectively, related to employees’ restricted stock awards.

 

There was $126 thousand and $66 thousand of stock-based compensation for the three months ended June 30, 2021 and 2020, respectively, related to board of directors.   During the three months ended June 30, 2021 the company issued 35,714 shares to the board of directors.

 

OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN

 

In October 2013, we issued options outside of the 2000 Plan to 10 individuals who became employees as a result of a business combination. The employees received options to purchase an aggregate of 62,000 shares of our Class A Common Stock at an exercise price of $17.50 per share. The options were fully vested as of October 2017 and expire 10 years from the date of grant, if unexercised. As of June 30, 2021, 12,500 of such options remained outstanding.

  

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     52,500     July 2021   $ 17.20 - 30.00  
Warrants issued in connection with Convertible Notes exchange transaction     246,019     December 2021   $ 1.30  
5-year Warrant issued to BEMG in connection with a term loan agreement     1,400,000     December 2022   $ 1.80  

 

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   $ 66  
Liabilities            
Current   Operating leases - current portion     58  
Noncurrent   Operating leases - long-term portion     8  
Total operating lease liabilities       $ 66  

 

Lease Costs

 

The table below presents certain information related to lease costs for leases:

 

    Year Ended  
(In thousands)   June 30,
2021
 
Operating lease cost   $ 22  
Total lease cost   $ 22  

 

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     22  
Operating cash flows used for operating leases   $ 22  

 

9. SUPPLEMENTAL CASH FLOW INFORMATION

 

    Three Months Ended
June 30,
 
(In thousands)   2021     2020  
Cash interest paid   $ 663     $ 25  
noncash investing and financing activities:                
Accrued dividends on preferred stock     89       89  
Issuance of Class A common stock for payment of accrued preferred stock dividends    
      89  
Issuance of Class A common stock to Starrise, a related party    
      11,046  
Contributed capital under the Starrise transaction, a related party    
      17,187  
Settlement of second lien loan with Class A common stock    
      757  
Issuance of Class A common stock for business combination     2,506      
 
Starrise shares used to pay down vendors    
      335  
Forgiveness of PPP loan     2,152      
 
Deferred consideration in purchase of a business     1,980      
 
Preferred stock dividends paid with common stock     89        

 

25

 

10. SEGMENT INFORMATION

 

We operate in two reportable segments: Cinema Equipment Business and Content & Entertainment Business. Our segments were determined based on the economic characteristics of our products and services, our internal organizational structure, the manner in which our operations are managed and the criteria used by our CODM to evaluate performance, which is generally the segment’s operating income (loss) before depreciation and amortization.

 

Operations of:   Products and services provided:
Cinema Equipment Business  

Financing vehicles and administrators for 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 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   $
    $
    $ 14,038     $ 387     $
    $ 1  
Content & Entertainment Business     12,213       10,738       50,534      
     
      40  
Corporate    
     
      16,065      
      3,031       25  
Total   $ 12,213     $ 10,738     $ 80,637     $ 387     $ 3,031     $ 66  

 

    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   $
    $
    $ 13,169     $ 7,786     $
    $ 1  
Content & Entertainment Business     9,858       8,701       42,733      
     
      69  
Corporate     2      
      19,544      
      4,108       30  
Total   $ 9,860     $ 8,701     $ 75,446     $ 7,786     $ 4,108     $ 100  

 

    Statements of Operations  
    Three Months Ended June 30, 2021  
    (in thousands)  
    Cinema
Equipment
Business
    Content & Entertainment
Business
    Corporate     Consolidated  
Revenues   $ 6,231     $ 8,784     $
    $ 15,015  
Direct operating (exclusive of depreciation and amortization shown below)     257       4,374      
      4,631  
Selling, general and administrative     429       2,818       2,796       6,043  
Allocation of corporate overhead     99       660       (759 )    
 
Provision for doubtful accounts     27       44      
      71  
Depreciation and amortization of property and equipment     507       143       (1 )     649  
Amortization of intangible assets    
      845       1       847  
Total operating expenses     1,319       8,884       2,037       12,241  
Income (loss) from operations   $ 4,912     $ (100 )   $ (2,037 )   $ 2,774  

 

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    
      166       817       983  
Total stock-based compensation   $
    $ 166     $ 817     $ 983  

 

    Statements of Operations  
   

Three Months Ended June 30, 2020

(in thousands)

 
    Cinema
Equipment
Business
    Content & Entertainment     Corporate     Consolidated  
Revenues   $ 605     $ 5,413     $
    $ 6,018  
Direct operating (exclusive of depreciation and amortization shown below)     182       2,497      
      2,679  
Selling, general and administrative     549       1,895       1,396       3,840  
Allocation of corporate overhead     124       784       (908 )    
 
Depreciation and amortization of property and equipment     1,403       103       18       1,524  
Amortization of intangible assets     8       582      
      590  
Total operating expenses     2,266       5,861       506       8,633  
Income (loss) from operations   $ (1,661 )   $ (488 )   $ (506 )   $ (2,615 )

 

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    
      26       151       177  
Total stock-based compensation   $     $ 26     $ 151     $ 177  

 

27

 

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 $63 thousand and zero for the three months ended June 30, 2021 and 2020, respectively. We have not recorded tax benefits on our loss before income taxes because we have provided for a full valuation allowance that offsets potential deferred tax assets resulting from net operating loss carry forwards, reflecting our inability to use such loss carry forwards.

 

Our effective tax rate for the three months ended June 30, 2021 and 2020 was negative 1.2% and zero, respectively.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense; class life changes to qualified improvements (in general, from 39 years to 15 years); and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. The Company has evaluated the new tax provisions of the CARES Act and determined the impact to be either immaterial or not applicable.

 

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 $7.8 million, with $3.1 million having been paid subsequent to the period. Pre-payment of the Prospect loan was permissible without penalty.

 

 

28

 

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.

 

38

 

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.

 

39

 

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.

 

40

 

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.

 

41

 

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.

 

42

 

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.

 

43

 

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.

 

44

 

ITEM 6. EXHIBITS

 

EXHIBIT INDEX

 

Exhibit
Number
  Description of Document
10.1   Letter from East West Bank dated June 22, 2021.
31.1   Officer’s Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Officer’s Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   Inline XBRL Instance Document.
101.SCH   Inline XBRL Taxonomy Extension Schema Document.
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

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

 

 

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