ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
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.
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.
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.
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.
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
|
|
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
|
|
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.
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.
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.
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.
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.
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.
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
|
|
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.
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.
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.
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
|
|
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
|
|
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
|
|
|
|
—
|
|
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
|
|
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
|
|
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.