NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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NATURE OF OPERATIONS AND LIQUIDITY
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Cinedigm Corp. ("Cinedigm," the "Company," "we," "us," or similar pronouns) was incorporated in Delaware on March 31, 2000. We are (i) a leading distributor and aggregator of independent movie, television and other short form content managing a library of distribution rights to thousands of titles and episodes released across digital, physical, theatrical, home and mobile entertainment platforms and (ii) a leading servicer of digital cinema assets in over
12,000
movie screens in both North America and several international countries.
Change of Reportable Segments
We previously had four reportable segments. As of April 1, 2018, information that our Chief Operating Decision Maker ("CODM") regularly reviews, for purposes of evaluating Company performance has been aggregated due to the winding down of Cinedigm Digital Funding I, LLC ("CDF I"). As a result, the Company reassessed and decided to revise its determination of
the reportable segments. We now present our results of operations in two reportable segments as follows: (1) Cinema Equipment Business and (2) Content and Entertainment Business (“Content & Entertainment” or "CEG"). See Note 9 -
Segment Information
for detailed descriptions of our segments. We have retrospectively recast the results of operations for the reportable segments for all periods presented.
Liquidity
We have incurred consolidated net losses of
$16.3 million
and
$18.5 million
for the years ended March 31, 2019 and 2018, respectively. We have an accumulated deficit of
$395.8 million
as of
March 31, 2019
. In addition, we have significant debt related contractual obligations for the year ended March 31, 2019 and beyond. As of March 31, 2019 we have net debt obligations of
$43.3 million
that is current and negative working capital of
$48.8 million
.
The 2013 Notes (as defined in Note 5 -
Notes Payable
) of
$5.0 million
were paid in full by October 18, 2018 prior to their maturity date of October 21, 2018.
The Second Lien Loans (as defined in Note 5 -
Notes Payable
) mature on June 30, 2019. On June 28, 2019, the Company entered into a consent agreement with lenders of the Second Lien Loans to an extension of the Second Lien Loans pursuant to which (i) the Company paid half of the outstanding principal amount plus accrued interest to date, and (ii) the maturity date of the remaining outstanding principal amount of the Second Lien Loans was extended to September 30, 2019. On July 10, 2019, the Company paid $3.0 million of the outstanding Second Lien Loans and will obtain additional capital from or through Bison Capital Holding Limited or an affiliate thereof ("Bison") for final payment of the remaining outstanding balances of the Second Lien Loans. See Note 5 -
Notes Payable
.
The
$10.0 million
note payable ("2018 Loan") to Bison Global Investment SPC due July 20, 2019 is guaranteed by Bison Entertainment and Media Group ("BEMG"). On July 20, 2018, the Company also entered into a side letter (the “Letter”) with BEMG, where BEMG agreed to guarantee the payment directly to Bison Global of any amount due if (i) the 2018 Loan matures prior to June 28, 2021 or (ii) Bison Global demands payment of the 2018 Loan, in whole or in part, prior to maturity.
On July 12, 2019, the Company and Bison Global Investment SPC for and on behalf of Global Investment SPC-Bison Global No. 1, another affiliate of Bison (“Bison Global”), entered into a termination agreement (the “Termination Agreement”) with respect to the $10.0 million 2018 Loan. Pursuant to the Termination Agreement, the accrued and unpaid interest on such outstanding principal amount will be paid in cash to Bison Global no later than September 30, 2019. Contemporaneously with the Termination Agreement, the Company entered into a convertible promissory note (“Bison Convertible Note”) with Bison Global for $10.0 million.
The Bison Convertible Note has a term ending on March 4, 2020, and bears interest at 5% per annum. The principal is payable upon maturity, in cash or in shares of our Class A common stock, par value $0.001 per share (the “Common Stock”), or a combination of cash and Common Stock, at the Company’s option. The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan.
The Bison Convertible Note, offset by the concurrent payoff and termination of the 2018 Loan, did not result in any increase to the Company’s outstanding debt balance.
On July 9, 2019, the Company entered into a common stock purchase agreement (the “Stock Purchase Agreement”) with Bison Entertainment and Media Group (“BEMG”), an affiliate of Bison Capital Holding Company Limited, which, through an affiliate, is the majority holder of our Class A common stock, pursuant to which the Company agreed to sell to BEMG a total of 2,000,000 shares of Common Stock (the “SPA Shares”), for an aggregate purchase price in cash of $3.0 million priced at $1.50 per share. The sale of the SPA Shares was consummated on July 9, 2019. The SPA Shares are subject to certain transfer restrictions. The proceeds of the sale of the SPA Shares sold were used for working capital, including the repayment of Second Lien Loans (as defined in Note 5 -
Notes Payable
). In addition, the Company has agreed to enter into a registration rights agreement for the resale of the SPA Shares.
On October 9, 2018, the Company issued a subordinated convertible note (the “Convertible Note”) to MingTai Investment LP
(the “Lender”) for $5.0 million. All proceeds from the Convertible Note were used to pay the $5.0 million 2013 Notes described above. See Note 5 -
Notes Payable
. The Convertible Note bears interest at 8% and matures on October 9, 2019
with two one year extensions at the Company's option.
On July 3, 2019, the Company entered into an amendment (the “EWB Amendment”) to the Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between the Company, East West Bank and the Guarantors named therein (the “EWB Credit Agreement”). The EWB Amendment reduced the size of the facility to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, extended the maturity date to June 30, 2020 and excluded Future Today Inc and any of its future subsidiaries (in connection with the previously announced agreement to acquire Future Today Inc) from requirements to become Guarantors. In connection with the EWB Amendment, three of our subsidiaries became Guarantors under the EWB Credit Agreement.
We believe the combination of: (i) our cash and cash equivalent balances at March 31, 2019, (ii) expected cash flows from operations, and (iii) the support or availability of funding from Bison and other parties (iv) and the financing transactions that occurred in July, 2019, will be sufficient to satisfy our liquidity and capital requirements for at least one year from the issuance date of the March 31, 2019 Consolidated Financial Statements. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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, intangible asset impairment and estimated amortization lives and valuation allowances for income taxes. 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 5 -
Notes Payable
for information about our restricted cash balances.
Cash, cash equivalents, and restricted cash consisted of the following:
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As of
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(in thousands)
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March 31, 2019
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March 31, 2018
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Cash and Cash Equivalents
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$
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17,872
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$
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17,952
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Restricted Cash
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1,000
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1,000
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$
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18,872
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$
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18,952
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ACCOUNTS RECEIVABLE
We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates.
UNBILLED RECEIVABLES
Unbilled receivables represents amounts for which invoices have not yet been sent to clients.
ADVANCES
Advances, which are recorded within prepaid and other current assets within 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 was
$1.3 million
and
$3.6 million
for the years ended March 31, 2019 and
2018
, respectively.
INVENTORY, NET
Inventory consists of finished goods of Company owned physical DVD and Blu-ray Disc titles and is stated at the lower of cost (determined based on weighted average cost) or market. We identify inventory items to be written down for obsolescence based on their sales status and condition. We write down discontinued or slow moving inventories based on an estimate of the markdown to retail price needed to sell through our current stock level of the inventories.
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:
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Computer equipment and software
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3 - 5 years
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Digital cinema projection systems
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10 years
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Machinery and equipment
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3 - 10 years
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Furniture and fixtures
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3 - 6 years
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Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Maintenance and repair 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.
ACCOUNTING FOR DERIVATIVE ACTIVITIES
Derivative financial instruments are recorded at fair value. Changes in the fair value of derivative financial instruments are either recognized in accumulated other comprehensive loss (a component of stockholders' deficit) or in the consolidated statements of operations depending on whether the derivative qualifies for hedge accounting. We entered into an interest rate cap transaction during the fiscal year ended March 31, 2013 to limit our exposure to interest rates on the Prospect Loan which . matured March 31, 2018. We have not sought hedge accounting treatment for the interest rate cap and therefore, changes in its value are recorded in the consolidated statements of operations.
FAIR VALUE MEASUREMENTS
The fair value measurement disclosures are grouped into three levels based on valuation factors:
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Level 1 – quoted prices in active markets for identical investments
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•
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Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs)
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•
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Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments)
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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 following tables summarize the levels of fair value measurements of our financial assets and liabilities as of
March 31, 2019
and 2018:
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(In thousands)
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Level 1
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Level 2
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Level 3
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Total
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Restricted cash
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$
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1,000
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|
|
$
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—
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$
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—
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|
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$
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1,000
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Our cash and cash equivalents, accounts receivable, unbilled revenue and accounts payable and accrued expenses are financial instruments that are recorded at cost in the consolidated balance sheets because the estimated fair values of these financial instruments approximate their carrying amounts due to their short-term nature. At
March 31, 2019
and
2018
, the estimated fair value of our fixed rate debt approximated its carrying amount. We estimated the fair value of debt based upon current interest rates available to us at the respective balance sheet dates for arrangements with similar terms and conditions. Based on borrowing rates currently available to us for loans with similar terms, the fair value of the variable rate debt is $33.7 million, and capital lease obligations approximates fair value.
IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS
We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset's fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. During the years ended
March 31, 2019
and 2018, no impairment charge was recorded in 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.
We are permitted to make a qualitative assessment of whether goodwill is impaired, or opt to bypass the qualitative assessment, and proceed directly to performing a quantitative impairment test, whereby the fair value of a reporting unit is compared with its carrying amount and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
For reporting units where we decide to perform a quantitative testing approach in order to test goodwill, a determination of the fair value of our reporting units is required and is based, among other things, on estimates of future operating performance of the reporting unit and/or the component of the entity being valued. This impairment test includes the projection and discounting of cash flows, analysis of our market factors impacting the businesses we operate and estimating the fair values of tangible and intangible assets and liabilities. Estimating future cash flows and determining their present values are based upon, among other things, certain assumptions about expected future operating performance and appropriate discount rates determined by us.
The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses projections of financial performance for a five-year period. The most significant assumptions used in the discounted cash flow methodology are the discount rate and expected future revenues and gross margins, which vary among reporting units. The market participant based weighted average cost of capital for each unit gives consideration to factors including, but not limited to, capital structure, historic and projected financial performance, industry risk and size.
In determining fair value of the Content and Entertainment ("CEG") reporting unit, 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. The assumptions for the goodwill impairment test should not be construed as earnings guidance or long-term projections. Our cash flow assumptions are based on internal projections of adjusted EBITDA for the CEG reporting unit. For the year ended March 31, 2019 and 2018, we assumed a market-based weighted average cost of capital of
17%
and
19%
, respectively, to discount cash flows for our CEG segment and used a blended federal and state tax rate of approximately
20%
as of March 31, 2019 and 2018, respectively. Based on such assumptions, the estimated fair value of the CEG reporting unit as
calculated for goodwill testing purposes exceeded its carrying value, and therefore there was no goodwill impairment charge
for the years ended March 31, 2019 and 2018.
Gross amounts of goodwill and accumulated impairment charges that we have recorded are as follows:
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(In thousands)
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Goodwill
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$
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32,701
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Accumulated impairment charges
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(24,000
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)
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Net Goodwill at March 31, 2019 and 2018
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$
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8,701
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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. See Note 3 -
Consolidated Balance Sheet Components
.
DEBT ISSUANCE COSTS
We incur debt issuance costs in connection with long-term debt financings. Such costs are recorded as a direct deduction to notes payable and amortized over the terms of the respective debt obligations using the effective interest rate method. Debt issuance costs recorded in connection with revolving debt arrangements are presented as assets on the consolidated balance sheets and are amortized over the term of the revolving debt agreements using the effective interest rate method.
REVENUE RECOGNITION
Adoption of ASU Topic 606, "Revenue from Contracts with Customers"
The Company adopted Accounting Standards Update ("ASU") Topic 606, Revenue from Contracts with Customers (“Topic 606”), as of April 1, 2018, using the modified retrospective method i.e. by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of deficit at April 1, 2018. Therefore, the comparative information for the years ended prior to April 1, 2018 were not restated to comply with ASC 606. We applied the practical expedient and did not capitalize the incremental costs to obtain a contract if the amortization period for the asset is one year or less. The impact of adopting Topic 606 did not result in a change in accounting treatment for any of the Company’s revenue streams. Refer to Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018 for our revenue recognition accounting policy as it relates to revenue transactions prior to April 1, 2018. The revenue recognition accounting policy described below relates to revenue transactions from April 1, 2018 and thereafter, which are accounted for in accordance with Topic 606.
We determine revenue recognition by:
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identifying the contract, or contracts, with the customer;
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identifying the performance obligations in the contract;
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determining the transaction price;
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•
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allocating the transaction price to performance obligations in the contract; and
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•
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recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.
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We recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the services provided, sales of physical products (DVD’s and Blu-ray) or when the content is available for subscription on the digital platform or available on the point-of-sale for transactional and VOD services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes is recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.
Payment terms and conditions vary by customer and typically provide net
30
to
90
day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. We have in the past entered into arrangements in connection with activation fees due from our digital cinema equipment (the “Systems”) deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
Cinema Equipment Business
Virtual print fees (“VPFs”) are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Cinedigm Digital Funding I, LLC. ("Phase 1 DC") and to Access Digital Cinema Phase 2 Corp. (“Phase 2 DC”) when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase 1 DC based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period in which the digital title first plays on a System for general audience viewing in a digitally equipped movie theatre, as Phase 1 DC’s and Phase 2 DC’s performance obligations have been substantially met at that time.
Phase 2 DC’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other
cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related to the variable consideration, i.e. the one-time bonus and determined that it is not probable to conclude at this point in time, that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we have begun, and expect to continue, to pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan. Cinedigm completed the sale of 321 digital projection Systems for an aggregate sales price of approximately $3.7 million, and recognized revenue of $2.8 million, during the year ended March 31, 2019.
Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.
Exhibitors who purchased and own Systems using their own financing in the Cinema Equipment Business paid us an upfront activation fee of approximately
$2.0 thousand
per screen (the “Exhibitor-Buyer Structure”). Upfront activation fees were recognized in the period in which these Systems were delivered and ready for content, as we had no further obligations to the customer after that time and collection was reasonably assured. In addition, we recognize activation fee revenue of between
$1.0 thousand
and
$2.0 thousand
on Phase 2 DC Systems and for Systems installed by CDF2 Holdings, a related party, (See Note 3 -
Other Interests
) upon installation and such fees are generally collected upfront upon installation. Our services segment manages and collects VPFs on behalf of exhibitors, for which it earns an administrative fee equal to
10%
of the VPFs collected.
The Cinema Equipment Business earns an administrative fee of approximately
5%
of VPFs collected and, in addition, earns an incentive service fee equal to
2.5%
of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPF’s and the performance obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on screens utilizing our Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding VPF fees are due from the movie studios and distributors.
Content & Entertainment Business
CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand ("VOD"), and physical goods (e.g. DVD and Blu-ray Discs). Fees earned are typically based on the gross amounts billed to our customers less the amounts owed to the media studios or content producers under distribution agreements, and gross media sales of owned or licensed content. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance obligations include the delivery of content for subscription on the digital platform, shipment of DVD and Blu-ray Discs, or make available at point-of-sale for transactional and VOD services. Revenue is recognized at the point in time when the performance obligation is satisfied which is when the content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Revenue is recognized after deducting the reserves for product returns and other allowances, which are accounted for as variable consideration.
Reserves for product returns and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
CEG also has contracts for the theatrical distribution of third party feature movies and alternative content. CEG’s distribution fee revenue and CEG's participation in box office receipts is recognized at the time a feature movie and alternative content are viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature movies’ or alternative content’s theatrical release date.
Principal Agent Considerations
We determine whether revenue should be reported on a gross or net basis based on each revenue stream. Key indicators that we use in evaluating gross versus net treatment include, but are not limited to, the following:
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which party is primarily responsible for fulfilling the promise to provide the specified good or service; and
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which party has discretion in establishing the price for the specified good or service.
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Based on our evaluation of the above indicators, we concluded that there were no changes to our gross versus net reporting from previous GAAP.
Shipping and Handling
Shipping and handling costs are incurred to move physical goods (e.g. DVD and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.
Contract Liabilities
We generally record a receivable related to revenue when we have an unconditional right to invoice and receive payment, and we record deferred revenue (contract liability) when cash payments are received or due in advance of our performance, even if amounts are refundable.
We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
Our CEG segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. Reserves for product returns and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. Sales returns and allowances are reported as a reduction of revenues.
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 CEG includes amounts related to the sale of DVD’s 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 opening balance and ending balance of deferred revenue, including current and non-current balances as of April 1, 2018 and March 31, 2019 were
$5.7 million
and
$4.0 million
, respectively. For the twelve months ended March 31, 2019, the additions to our deferred revenue balance were primarily due to cash payments received or due in advance of satisfying performance obligations, while the reductions to our deferred revenue balance were primarily due to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business.
During the year ended March 31, 2019,
$4.1 million
of revenue was recognized that was included in the deferred revenue balance at the beginning of the year. As of March 31, 2019, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is
$4.0 million
. We expect to recognize approximately
$1.7 million
of this balance over the next 12 months, and the remainder thereafter.
Disaggregation of Revenue
The Company disaggregates revenue into different revenue categories for the Cinema Equipment and CEG Businesses. The Cinema Equipment Business revenue categories are: Phase I Deployment revenue, Phase II Deployment revenue and Services, and the CEG Business revenue categories are: Base Distribution Business and OTT Streaming and Digital.
The following tables present the Company's revenue categories for the twelve months ended March 31, 2019 (in thousands):
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Twelve Months Ended
March 31, 2019
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Cinema Equipment Business:
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Phase I Deployment
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9,302
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Phase II Deployment
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8,651
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Services
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5,487
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Digital System Sales
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2,759
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Total Cinema Equipment Business revenue
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$
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26,199
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Content & Entertainment Business:
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Base Distribution Business
|
|
$
|
17,639
|
|
OTT Streaming and Digital
|
|
9,696
|
|
Total Content & Entertainment Business revenue
|
|
$
|
27,335
|
|
|
|
|
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, marketing and direct personnel costs.
ADVERTISING
Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. For the fiscal years
ended
March 31, 2019
and
2018
, we recorded advertising costs of
$23 thousand
and
$300 thousand
, respectively.
STOCK-BASED COMPENSATION
Employee and director stock-based compensation expense related to our stock-based awards was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Direct operating
|
|
$
|
—
|
|
|
$
|
60
|
|
Selling, general and administrative
|
|
1,576
|
|
|
2,219
|
|
Total stock-based compensation expense
|
|
$
|
1,576
|
|
|
$
|
2,279
|
|
During the year ended
March 31, 2019
, the Company granted
2,277,830
stock appreciation rights ("SARs") to its executives of which
815,220
SARs were forfeited due to the terminations of two executives during the year ended March 31, 2019. The SARs were granted under the Company's 2017 Equity Incentive Plan (the "2017 Plan"). There was
$566 thousand
of stock-based compensation recorded for the year ended March 31, 2019 relating to these SARs.
Total SARs outstanding are as follows:
|
|
|
|
|
|
|
Twelve Months Ended
March 31, 2019
|
SARs Outstanding March 31, 2018
|
|
—
|
|
Issued
|
|
2,277,830
|
|
Forfeited
|
|
(815,220
|
)
|
Total SARs Outstanding March 31, 2019
|
|
1,462,610
|
|
On July 26, 2018, the Company granted
1,941,402
units of performance stock units ("PSUs") to certain executives and employees under the 2017 Plan. The total PSUs represent the maximum number of units eligible to vest at the end of the performance period. The awards vest in
two
tranches: one at each of March 31, 2019 and March 31, 2020, based on the Company achieving certain financial targets at each period. The Company engaged an outside consulting firm to provide valuation services relating to estimating the fair value of these PSUs each reporting period. Based on their analysis as of March 31, 2019, using the Monte Carlo simulation technique, the estimated per unit fair value of the PSU's, was
$0.83
. There was
$744 thousand
of stock-based compensation recorded for the year ended March 31, 2019, related to these PSUs. During the year ended March 31, 2019, 550,818 PSUs were forfeited due to employee terminations.
Total PSUs outstanding are as follows:
|
|
|
|
|
|
|
Twelve Months Ended
March 31, 2019
|
PSUs Outstanding March 31, 2018
|
|
—
|
|
Issued
|
|
1,941,402
|
|
Forfeited
|
|
(550,818
|
)
|
Total PSUs Outstanding March 31, 2019
|
|
1,390,584
|
|
There were
225,862
and
174,942
shares of
Class A common stock issued
to the board of directors for years ended March 31, 2019 and 2018, respectively, constituting payment of the stock portion of board service retainer fee. There was
$262 thousand
of stock-based compensation recorded for the years ended March 31, 2019 and 2018, respectively, related to the board of directors.
There were
10,000
restricted shares awarded to an employee during the twelve months ended March 31, 2019, at a weighted average price of
$1.52
, all of which were unvested and outstanding as of March 31, 2019. Stock-based compensation recorded in the year ended March 31, 2019 was
$4 thousand
related to these awards. No restricted shares were awarded during the fiscal year ended March 31, 2018.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carryforwards and for differences between the carrying amounts of existing assets and liabilities and their respective tax bases.
Valuation allowances are established when management is unable to conclude that it is more likely than not that some portion, or all, of the deferred tax asset will ultimately be realized. The Company is primarily subject to income taxes in the United States.
The Company accounts for uncertain tax positions in accordance with an amendment to ASC Topic 740-10,
Income Taxes
(Accounting for Uncertainty in Income Taxes)
, which clarified the accounting for uncertainty in tax positions. This amendment provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is "more-likely-than-not" to be sustained were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is more than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded. The Company has no uncertain tax positions.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
Basic and diluted net loss per common share has been calculated as follows:
|
|
|
Basic and diluted net loss per common share attributable to common shareholders =
|
Net loss attributable to common shareholders
|
Weighted average number of common stock shares
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. The shares repurchased in connection with the forward stock purchase transaction discussed in Note 6 -
Stockholders' Deficit
were considered repurchased for the purposes of calculating net loss per share and therefore the calculation of weighted average shares outstanding excluded 1,179,138 shares. During the year ended March 31, 2018, the Company settled these shares and included them in the calculation of weighted average shares outstanding for the years ended March 31, 2019 and 2018, respectively.
Shares issued and any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.
We incurred net losses for the fiscal years
ended
March 31, 2019
and
2018
and therefore, the impact of potentially dilutive common shares from outstanding stock options and warrants totaling
4,195,371
shares and
2,890,824
shares as of March 31, 2019 and 2018, respectively, and
3,333,333
shares from the convertible note issued October 9, 2018, were excluded from the computation of net loss per share for the fiscal years ended
March 31, 2019
and
2018
, respectively, as their impact would have been anti-dilutive.
COMPREHENSIVE LOSS
As of
March 31, 2019
and
2018
, comprehensive loss consisted of net loss and foreign currency translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. The Company expects to adopt the provisions of this guidance on April 1, 2019 using an optional transition method with a cumulative effect adjustment to accumulated deficit and not restatement comparative periods presented.
We plan to adopt the standard in effective April 1, 2019. We will take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification and elect the accounting policy election to utilize the short-term lease exemption, whereby leases with a team of 12 months or less will not follow the recognition and measurement requirements of the new standard.
We expect adoption of the new standard will result in the recording of right-of-use assets and lease liabilities of approximately $
2.4
million and $
2.5
million, respectively, as of April 1, 2019. We do not believe the new standard will have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.
In preparation for the adoption of the standard, the Company has implemented internal controls to enable the preparation of financial information and disclosures including the assessment of the impact of the standard.
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 2020, with early adoption permitted in the first quarter of 2019. The Company is currently evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation -
Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under The new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
On August 29, 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software
(Subtopic 350-40)
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
This new guidance, which was early adopted by the Company, requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The adoption of this guidance did not have a material impact on the Company's
consolidated financial statements.
|
|
3.
|
CONSOLIDATED BALANCE SHEET COMPONENTS
|
ACCOUNTS RECEIVABLE
Accounts receivable, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Trade receivables
|
|
$
|
40,039
|
|
|
$
|
41,188
|
|
Allowance for doubtful accounts
|
|
(4,529
|
)
|
|
(3,060
|
)
|
Total accounts receivable, net
|
|
$
|
35,510
|
|
|
$
|
38,128
|
|
PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Non-trade accounts receivable, net
|
|
$
|
2,658
|
|
|
$
|
4,459
|
|
Advances
|
|
4,051
|
|
|
4,485
|
|
Due from producers
|
|
687
|
|
|
318
|
|
Prepaid insurance
|
|
419
|
|
|
480
|
|
Other prepaid expenses
|
|
673
|
|
|
755
|
|
Total prepaid and other current assets
|
|
$
|
8,488
|
|
|
$
|
10,497
|
|
PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Leasehold improvements
|
|
$
|
268
|
|
|
$
|
268
|
|
Computer equipment and software
|
|
5,454
|
|
|
3,859
|
|
Digital cinema projection systems
|
|
336,471
|
|
|
360,633
|
|
Machinery and equipment
|
|
490
|
|
|
553
|
|
Furniture and fixtures
|
|
146
|
|
|
151
|
|
|
|
342,829
|
|
|
365,464
|
|
Less - accumulated depreciation and amortization
|
|
(328,782
|
)
|
|
(343,981
|
)
|
Total property and equipment, net
|
|
$
|
14,047
|
|
|
$
|
21,483
|
|
Total depreciation and amortization of property and equipment was
$8.1 million
and
$12.4 million
for the years ended
March 31, 2019
and
2018
, respectively. Amortization of capital leases included in depreciation and amortization of property and equipment was
$0
and
$0.2 million
for the years ended
March 31, 2019
and
2018
, respectively.
INTANGIBLE ASSETS
Intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
(In thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Useful Life (years)
|
Trademarks
|
|
$
|
271
|
|
|
$
|
(252
|
)
|
|
$
|
19
|
|
|
3
|
|
Customer relationships and contracts
|
|
21,969
|
|
|
(13,366
|
)
|
|
8,603
|
|
|
3-15
|
|
Theatre relationships
|
|
550
|
|
|
(481
|
)
|
|
69
|
|
|
10-12
|
|
Content library
|
|
20,410
|
|
|
(19,415
|
)
|
|
995
|
|
|
3-6
|
|
|
|
$
|
43,200
|
|
|
$
|
(33,514
|
)
|
|
$
|
9,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
(In thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Useful Life (years)
|
Trademarks
|
|
$
|
121
|
|
|
$
|
(112
|
)
|
|
$
|
9
|
|
|
3
|
|
Customer relationships and contracts
|
|
21,969
|
|
|
(11,260
|
)
|
|
10,709
|
|
|
3-15
|
|
Theatre relationships
|
|
550
|
|
|
(435
|
)
|
|
115
|
|
|
10-12
|
|
Content library
|
|
19,767
|
|
|
(15,947
|
)
|
|
3,820
|
|
|
5-6
|
|
Favorable lease agreement
|
|
1,193
|
|
|
(1,193
|
)
|
|
—
|
|
|
4
|
|
|
|
$
|
43,600
|
|
|
$
|
(28,947
|
)
|
|
$
|
14,653
|
|
|
|
|
Amortization expense related to intangible assets was
$5.6 million
for the years ended
March 31, 2019
and
2018
, respectively.
Based on identified intangible assets that are subject to amortization as of
March 31, 2019
, we expect future amortization expense for each period to be as follows:
|
|
|
|
|
|
|
(In thousands) Fiscal years ending March 31,
|
|
|
2020
|
|
$
|
2,777
|
|
2021
|
|
2,351
|
|
2022
|
|
1,281
|
|
2023
|
|
645
|
|
2024
|
|
645
|
|
Thereafter
|
|
1,987
|
|
Total
|
|
$
|
9,686
|
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Accounts payable
|
|
$
|
38,393
|
|
|
$
|
35,032
|
|
Participations and royalties payable
|
|
22,611
|
|
|
25,788
|
|
Accrued compensation and benefits
|
|
3,098
|
|
|
2,276
|
|
Accrued taxes payable
|
|
322
|
|
|
352
|
|
Interest payable
|
|
96
|
|
|
130
|
|
Accrued restructuring and transition expenses
|
|
—
|
|
|
505
|
|
Accrued other expenses
|
|
4,187
|
|
|
5,142
|
|
Total accounts payable and accrued expenses
|
|
$
|
68,707
|
|
|
$
|
69,225
|
|
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 March 31, 2019 and 2018, 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 receivables were
$0.4 million
as of March 31, 2019 and 2018, respectively, which are included within our accounts receivable, net on the accompanying consolidated balance sheets.
During the years ended March 31, 2019 and 2018, we received
$1.1 million
and
$1.2 million
, respectively, in aggregate revenues through digital cinema servicing fees from CDF2 Holdings, which are included in our revenues on the accompanying consolidated statements of operations.
Total Stockholder's Deficit of CDF2 Holdings at March 31, 2019 and 2018 was
$28.9 million
and
$26.3 million
, respectively. We have no obligation to fund the operating loss or the stockholder's deficit beyond our initial investment of
$2.0 million
and accordingly, our investment in CDF2 Holdings is carried at
$0
as of March 31, 2019 and 2018.
Majority Interest in CONtv
We own
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.
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
As of March 31, 2018
|
(In thousands)
|
|
Current Portion
|
|
Long Term Portion
|
|
Current Portion
|
|
Long Term Portion
|
Prospect Loan
|
|
$
|
—
|
|
|
$
|
20,627
|
|
|
$
|
—
|
|
|
$
|
39,710
|
|
KBC Facilities
|
|
—
|
|
|
—
|
|
|
154
|
|
|
—
|
|
P2 Vendor Note
|
|
—
|
|
|
—
|
|
|
336
|
|
|
—
|
|
P2 Exhibitor Notes
|
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
Total non-recourse notes payable
|
|
—
|
|
|
20,627
|
|
|
512
|
|
|
39,710
|
|
Less: Unamortized debt issuance costs and debt discounts
|
|
—
|
|
|
(1,495
|
)
|
|
—
|
|
|
(2,140
|
)
|
Total non-recourse notes payable, net of unamortized debt issuance costs and debt discounts
|
|
$
|
—
|
|
|
$
|
19,132
|
|
|
$
|
512
|
|
|
$
|
37,570
|
|
|
|
|
|
|
|
|
|
|
|
Bison note payable
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,000
|
|
Second Secured Lien Notes
|
|
11,132
|
|
|
—
|
|
|
—
|
|
|
10,560
|
|
Credit Facility
|
|
18,623
|
|
|
—
|
|
|
—
|
|
|
8,227
|
|
Convertible Note
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2013 Notes
|
|
—
|
|
|
—
|
|
|
5,000
|
|
|
—
|
|
Total recourse notes payable
|
|
44,755
|
|
|
—
|
|
|
5,000
|
|
|
28,787
|
|
Less: Unamortized debt issuance costs and debt discounts
|
|
(1,436
|
)
|
|
—
|
|
|
(225
|
)
|
|
(3,352
|
)
|
Total recourse notes payable, net of unamortized debt issuance costs and debt discounts
|
|
$
|
43,319
|
|
|
$
|
—
|
|
|
$
|
4,775
|
|
|
$
|
25,435
|
|
Total notes payable, net of unamortized debt issuance costs
|
|
$
|
43,319
|
|
|
$
|
19,132
|
|
|
$
|
5,287
|
|
|
$
|
63,005
|
|
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, the KBC Facilities, the 2013 Term Loans, the P2 Vendor Note and the P2 Exhibitor Notes.
Prospect Loan
In February 2013, our DC Holdings, AccessDM and Phase 2 DC subsidiaries entered into a term loan agreement (the “Prospect Loan”) with Prospect Capital Corporation (“Prospect”), pursuant to which DC Holdings borrowed
$70.0 million
. The Prospect Loan bears interest at LIBOR plus
9.0%
(with a
2.0%
LIBOR floor), which is payable in cash, and at an additional
2.50%
to be accrued as an increase to the aggregate principal amount of the Prospect Loan until the 2013 Credit Agreement is paid off, at which time all accrued interest will be payable in cash.
Collections of DC Holdings accounts receivable are deposited into accounts designated to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the Prospect Loan. On a quarterly basis, if funds remain after the payment of all such amounts, they are applied to prepay the Prospect Loan. Amounts designated for these purposes, included in cash and cash equivalents on the consolidated balance sheets, totaled
$3.1 million
and
$3.0 million
as of
March 31, 2019
and
2018
, respectively. We also maintain a debt service fund under the Prospect Loan for future principal and interest payments. As of
March 31, 2019
and
2018
, the debt service fund had a balance of
$1.0 million
, which is classified as restricted cash on the consolidated balance sheets.
The Prospect Loan matures on March 31, 2021 and may be accelerated upon a change in control (as defined in the agreement) or other events of default as set forth therein and would be subject to mandatory acceleration upon insolvency of DC Holdings. The Bison transaction did not accelerate the maturity date. 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.
The following table summarizes the activity related to the Prospect Loan:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Prospect Loan, at issuance
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
PIK Interest
|
|
4,778
|
|
|
4,778
|
|
Payments to date
|
|
(54,151
|
)
|
|
(35,068
|
)
|
Prospect Loan, net
|
|
$
|
20,627
|
|
|
$
|
39,710
|
|
Less current portion
|
|
—
|
|
|
—
|
|
Total long term portion
|
|
$
|
20,627
|
|
|
$
|
39,710
|
|
KBC Facilities
In December 2008, we began entering into multiple credit facilities to fund the purchase of Systems to be installed in movie theatres as part of our Phase II Deployment. There were no draws on the KBC Facilities during the fiscal year ended
March 31, 2019
. The KBC Facilities were paid in full during the fiscal year ended March 31, 2019. The following table presents a summary of the KBC Facilities (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Principal Balance
|
Facility
|
|
Credit Facility
|
|
Interest Rate
|
|
Maturity Date
|
|
March 31, 2019
|
|
March 31, 2018
|
3
|
|
|
11,425
|
|
|
3.75
|
%
|
|
March 2019
|
|
—
|
|
|
154
|
|
Bison Note Payable
As discussed in Note 1 - Nature of Operations and Liquidity, the Company entered into a Loan with Bison for
$10.0 million
and issued Warrants to purchase
1,400,000
shares of the Company's Class A Common Stock. See Note 6 -
Stockholders' Deficit
for further discussion of the warrants.
The loan was made in accordance with the Stock Purchase Agreement between the Company and Bison Entertainment Investment Limited, another affiliate of Bison, entered into on June 29, 2017 (the "Stock Purchase Agreement").
The 2018 Loan has a one (
1
) year term that may be extended by mutual agreement of Bison Global and the Company and bears interest at
5%
per annum, payable quarterly in cash. On July 12, 2019, we entered into a Termination Agreement for the 2018 Loan and at the same time entered into a
$10.0 million
Convertible Promissory Note. See Note 12 -
Subsequent Events
.
Second Secured Lien Notes
On July 14, 2016, we entered into a Second Lien Loan Agreement (the “Loan Agreement”), under which we may borrow up to
$15.0 million
(the “Second Lien Loans”), subject to certain limitations imposed on us regarding the number of shares that we may issue in connection with the loans. During the year ended March 31, 2018, we borrowed an aggregate principal amount of
$1.5 million
under the Loan Agreement and had an outstanding balance of
$11.1 million
as of March 31, 2019 which includes
$4.0 million
borrowed from Ronald L. Chez, at that time a member of the Board of Directors. Mr. Chez resigned from the Board of Directors in April 2017, and became a strategic advisor to the Company. The Second Lien Loans mature on June 30, 2019 and bear interest at
12.75%
, payable
7.5%
in cash and
5.25%
in cash or in kind at our option. In addition, under the terms of the Loan Agreement, we are required to issue
98,000
shares of our Class A common stock for every $1 million borrowed, subject to prorata adjustments. As of March 31, 2019, we have issued
906,450
shares of Class A common stock cumulatively under the Second Lien Loan Agreement. There were no shares issued in the year ended March 31, 2019. The Second Lien Loans may be prepaid without premium or penalty and contain customary covenants, representations and warranties. The obligations under the Second Lien Loans are guaranteed by certain of our existing and future subsidiaries. We have pledged substantially all of our assets, except those assets related to our digital cinema deployment business, to secure payment on the Second Lien Loans. On July 10, 2019, the Company paid down
$3.0 million
and entered into a consent agreement with the lenders to extend the maturity date. See Note 12
- Subsequent Events.
Credit Facility and Cinedigm Revolving Loans
On March 30, 2018, the Company entered into a Credit Facility with a retail bank for a maximum of
$19.0 million
in revolving loans outstanding at any one time with a maturity date of March 31, 2020, which may be extended for
two
successive one-year periods at the sole discretion of the lender, subject to certain conditions.
Interest under the Credit Facility is due monthly at a rate elected by the Company of either
0.5%
plus Prime Rate or
3.25%
above LIBOR Rate established by the lender.
On March 30, 2018, the Company borrowed
$8.2 million
under the Credit Facility. The proceeds from the Credit Facility were used to pay the
$7.8 million
outstanding principal and accrued interest under the prior credit agreement. During the year ended March 31, 2019, the Company borrowed an additional
$10.4 million
under the Credit Facility. As of March 31, 2019, there was
$18.6 million
outstanding and there was
no
additional availability under the Credit Facility based on the Company's borrowing base. On July 3, 2019, the Company entered into an amendment to the Credit Facility. See Note 12 -
Subsequent Events.
Convertible Note
On October 9, 2018, the Company issued a Convertible Note for
$5.0 million
. All proceeds from the Convertible Note were used to pay the
$5.0 million
2013 Notes described below. The
$5.0 million
in aggregate principal bears interest at
8%
maturing on October 9, 2019 with
two
one year extensions at the Company's option. The Convertible Note is convertible into
3,333,333
shares of the Company's Class A common stock, based on initial conversion price of
$1.50
per share.
The Convertible Note is convertible at the option of the Lender, or the Company, at any time prior to payment in full of the principal balance, and all accrued interest of this Convertible Note in whole, or in part, into fully paid and non-assessable shares of Company’s Class A common stock at the conversion rate of
$1.50
.
Upon conversion prior to maturity by the Lender, or the Company, we may elect to settle such conversion in shares of our Class A common stock, cash or a combination thereof. Upon the maturity date, the Company has the option to pay in Class A common shares convertible at the greater of the closing price of the Class A common stock or
$1.10
. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to additional paid-in capital) of
$270 thousand
. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value similar non-convertible debt; the debt discount is being amortized to interest expense using the effective interest method over the one year term of the Convertible Note.
2013 Notes
In October 2013, we entered into securities purchase agreements with certain investors, pursuant to which we sold notes in the aggregate principal amount of
$5.0 million
(the “2013 Notes”) and warrants to purchase an aggregate of
150,000
shares of Class A Common Stock (the “2013 Warrants”) to such investors. We allocated a fair value of
$1.6 million
to the 2013 Warrants, which was recorded as a discount to the 2013 Notes and is being amortized through the maturity of the 2013 Notes as interest expense.
The principal amount outstanding under the 2013 Notes was due on October 21, 2018 and was paid in full by October 18, 2018, prior to their maturity date of October 21, 2018.
Ronald L. Chez, a former director and a current strategic advisor to the Company, was a holder of
$3.0 million
of the 2013 Notes as of October 18, 2018 and March 31, 2018.
Zvi Rhine, a member of our Board of Directors and a related party, was a holder of
$0.5 million
of the 2013 Notes as of October 18, 2018 and March 31, 2018.
The aggregate principal repayments on our notes payable, including anticipated PIK interest, are scheduled to be as follows (dollars in thousands):
|
|
|
|
|
|
Fiscal years ending March 31,
|
2020
|
|
$
|
44,755
|
|
2021
|
|
20,627
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
2024
|
|
—
|
|
Thereafter
|
|
—
|
|
|
|
$
|
65,382
|
|
COMMON STOCK
During the year ended March 31, 2019, we issued
730,458
shares of Class A common stock in connection with the payment of preferred stock dividends, as compensation to the board of directors, for an asset acquisition and awards to employees. See Note - 8
Supplemental Cash Flow Disclosure
.
PREFERRED STOCK
Cumulative dividends in arrears on the preferred stock were
$0.1 million
as of
March 31, 2019
and
2018
, respectively. In
April 2019
, we paid preferred stock dividends in arrears in the form of
45,390
shares of our Class A common stock.
TREASURY STOCK
We have treasury stock, at a cost, consisting of
1,313,836
shares of Class A common stock at March 31, 2019 and 2018.
CINEDIGM’S EQUITY INCENTIVE PLAN
Stock Based Compensation Awards
Awards issued under our 2000 Equity Incentive Plan (the "2000 Plan") may be in any of the following forms (or a combination thereof) (i) stock option awards; (ii) stock appreciation rights; (iii) stock or restricted stock or restricted stock units; or (iv) performance awards. The 2000 Plan provides for the granting of incentive stock options (“ISOs”) with exercise prices not less than the fair market value of our Class A Common Stock on the date of grant. ISOs granted to shareholders having more than
10%
of the total combined voting power of the Company must have exercise prices of at least
110%
of the fair market value of our Class A Common Stock on the date of grant. ISOs and non-statutory stock options granted under the 2000 Plan are subject to vesting provisions, and exercise is subject to the continuous service of the participant. The exercise prices and vesting
periods (if any) for non-statutory options are set at the discretion of our compensation committee. On November 1, 2017, upon the consummation of the transactions pursuant to the Stock Purchase Agreement, as a result of which there was a change of control of the Company, all stock options (incentive and non-statutory) and shares of restricted stock were vested immediately and the options became fully exercisable.
In connection with the grants of stock options and shares of restricted stock under the 2000 Plan, we and the participants have executed stock option agreements and notices of restricted stock awards setting forth the terms of the grants. The 2000 Plan provided for the issuance of up to
2,380,000
shares of Class A Common Stock to employees, outside directors and consultants.
As of March 31, 2019 there were
300,315
stock options outstanding in the Plan with weighted average exercise price of
$14.87
and a weighted average contract life of
3.79
years. As of March 31, 2018, there were
338,315
stock options outstanding in the Plan with weighted average exercise price of
$15.57
and a weighted average contract life of
4.63 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 provides for the issuance of up to
2,098,270
shares of Class A common stock, in the form of various awards, including stock options, stock appreciation rights, stock, restricted stock, restricted stock units, performance awards and cash awards. The Compensation Committee of the Company’s Board of Directors (the “Board”) is authorized to administer the 2017 Plan and make grants thereunder. The approval of the 2017 Plan does not affect awards already granted under the 2000 Plan.
An analysis of all options outstanding under the 2000 Plan as of
March 31, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Prices
|
|
Options Outstanding
|
|
Weighted
Average
Remaining
Life in Years
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate Intrinsic Value (In thousands)
|
$1.16 - $6.00
|
|
3,500
|
|
|
0.08
|
|
$
|
6.00
|
|
|
$
|
—
|
|
$7.40 - $13.70
|
|
20,999
|
|
|
2.05
|
|
12.20
|
|
|
—
|
|
$14.00 - $24.40
|
|
268,316
|
|
|
4.01
|
|
14.77
|
|
|
—
|
|
$30.00 - $50.00
|
|
7,500
|
|
|
2.38
|
|
30.00
|
|
|
—
|
|
|
|
300,315
|
|
|
|
|
|
|
$
|
—
|
|
An analysis of all options exercisable under the 2000 Plan as of
March 31, 2019
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
Weighted
Average
Remaining
Life in Years
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate Intrinsic Value (In thousands)
|
2,380,924
|
|
3.79
|
|
$
|
14.87
|
|
|
$
|
—
|
|
OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN
In October 2013, we issued options outside of the 2000 Plan to
10
individuals that became employees as a result of a business combination. The employees received options to purchase an aggregate of
62,000
shares of our Class A common stock at an exercise price of
$17.50
per share. The options are fully vested as of October 2017 and expire
10 years
from the date of grant, if
unexercised.
In December 2010, we issued options to purchase
450,000
shares of Class A common stock outside of the 2000 Plan as part of our Chief Executive Officer's initial employment agreement with the Company. Such options have exercise prices per share between
$15.00
and
$50.00
, all of which were vested as of December 2013 and will expire in December 2020. As of
March 31, 2019
, all such options remained outstanding.
WARRANTS
The following table presents information on outstanding warrants to purchase shares of our Class A common stock as of
March 31, 2019
. All of the outstanding warrants are fully vested and exercisable.
|
|
|
|
|
|
|
|
|
Recipient
|
|
Amount outstanding
|
|
Expiration
|
|
Exercise price per share
|
Strategic management service provider
|
|
52,500
|
|
|
July 2021
|
|
$17.20 - $30.00
|
Warrants issued to Ronald L. Chez in connection with the Second Secured Lien Notes
|
|
206,768
|
|
|
July 2023
|
|
$1.34 - $1.57
|
Warrants issued in connection with Convertible Notes exchange transaction
|
|
207,679
|
|
|
December 2021
|
|
$1.54
|
5-year Warrant issued to Bison in connection with a term loan agreement
|
|
1,400,000
|
|
|
December 2022
|
|
$1.80
|
The warrants issued in connection with the Second Lien Loans (See Note 5 -
Notes Payable
) to Ronald L. Chez, at the time a member of our Board of Directors, contain a cashless exercise provision and customary anti-dilution rights.
|
|
7.
|
COMMITMENTS AND CONTINGENCIES
|
LEASES
Our capital lease obligations primarily related to computer equipment.
We operate from leased properties under non-cancelable operating lease agreements, certain of which contain escalating lease clauses.
As of
March 31, 2019
, obligations under non-cancelable operating leases are due as follows (dollars in thousands):
|
|
|
|
|
|
Fiscal years ending March 31,
|
2020
|
|
$
|
1,109
|
|
2021 & 2022
|
|
1,816
|
|
2023 & 2024
|
|
—
|
|
Thereafter
|
|
—
|
|
|
|
$
|
2,925
|
|
Rent expense, included in selling, general and administrative expenses in our consolidated statements of operations, was
$1.0 million
and
$1.1 million
for the years ended
March 31, 2019
and
2018
, respectively.
LEGAL PROCEEDINGS
We are subject to certain legal proceedings in the ordinary course of business. We do not expect any such items to have a significant impact on our financial position and results of operations and liquidity.
|
|
8.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Cash interest paid
|
|
$
|
8,628
|
|
|
$
|
13,888
|
|
Income taxes paid
|
|
273
|
|
|
402
|
|
Accrued dividends on preferred stock
|
|
89
|
|
|
89
|
|
Issuance of Class A common stock for payment of preferred stock dividends
|
|
356
|
|
|
356
|
|
Issuance of Class A common stock for settlement of an obligation to a vendor
|
|
—
|
|
|
867
|
|
Issuance of Second Lien Loans in connection with Convertible Notes exchange transaction
|
|
—
|
|
|
1,462
|
|
Issuance of warrants in connection with debt instruments
|
|
—
|
|
|
1,084
|
|
Issuance of Class A common stock in exchange for the CEO's Second Lien Loans
|
|
—
|
|
|
500
|
|
Issuance of Class A common stock for asset acquisition
|
|
106
|
|
|
—
|
|
As discussed in Note 1 -
Nature of Operations and Liquidity
, we have retrospectively recast the operating segments for the prior period.
We operate in
two
reportable segments: Cinema Equipment Business and Content & Entertainment Business, or CEG. Our segments were determined based on the economic characteristics of our products and services, our internal organizational structure, the manner in which our operations are managed and the criteria used by our CODM to evaluate performance, which generally the segment's operating income (loss) before depreciation and amortization.
|
|
|
Operations of:
|
Products and services provided:
|
Cinema Equipment Business
|
Financing vehicles and administrators for 3,480 Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 5,853 Systems installed domestically and internationally in our second deployment phase (“Phase II Deployment”).
We retain ownership of the Systems and the residual cash flows related to the Systems in Phase I Deployment after the repayment of all non-recourse debt at the expiration of exhibitor master license agreements. For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business also provides monitoring, collection, verification and management services to this segment, as well as to exhibitors who purchase their own equipment, and also collects and disburses VPFs from motion picture studios, distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors (collectively, “Services”).
|
Content & Entertainment Business
|
Leading distributor of independent content, and collaborates with producers and other content owners to market, source, curate and distribute independent content to targeted and profitable audiences in theatres and homes, and via mobile and emerging platforms.
|
One (
1
) customer represented more than 10% of our consolidated revenues for fiscal year ended
March 31, 2019
.
The following tables present certain financial information related to our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
(In thousands)
|
|
Intangible Assets, net
|
|
Goodwill
|
|
Total Assets
|
|
Notes Payable, Non-Recourse
|
|
Notes Payable
|
|
Cinema Equipment Business
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
42,958
|
|
|
$
|
19,132
|
|
|
$
|
—
|
|
|
Content & Entertainment
|
|
9,607
|
|
|
8,701
|
|
|
51,531
|
|
|
—
|
|
|
—
|
|
|
Corporate
|
|
10
|
|
|
—
|
|
|
4,350
|
|
|
—
|
|
|
43,319
|
|
|
Total
|
|
$
|
9,686
|
|
|
$
|
8,701
|
|
|
$
|
98,839
|
|
|
$
|
19,132
|
|
|
$
|
43,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
(In thousands)
|
|
Intangible Assets, net
|
|
Goodwill
|
|
Total Assets
|
|
Notes Payable, Non-Recourse
|
|
Notes Payable
|
|
Cinema Equipment Business
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
53,427
|
|
|
$
|
38,082
|
|
|
$
|
—
|
|
|
Content & Entertainment
|
|
14,529
|
|
|
8,701
|
|
|
58,313
|
|
|
—
|
|
|
—
|
|
|
Corporate
|
|
9
|
|
|
—
|
|
|
9,442
|
|
|
—
|
|
|
30,210
|
|
|
Total
|
|
$
|
14,653
|
|
|
$
|
8,701
|
|
|
$
|
121,182
|
|
|
$
|
38,082
|
|
|
$
|
30,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
|
|
|
For the Fiscal Year Ended March 31, 2019
|
|
|
|
Cinema Equipment Business
|
|
|
Content & Entertainment
|
|
Corporate
|
|
Consolidated
|
Revenues
|
|
|
$
|
26,199
|
|
|
|
$
|
27,335
|
|
|
$
|
—
|
|
|
$
|
53,534
|
|
Direct operating (exclusive of depreciation and amortization shown below)
|
|
|
1,401
|
|
|
|
14,719
|
|
|
—
|
|
|
16,120
|
|
Selling, general and administrative
|
|
|
1,960
|
|
|
|
15,322
|
|
|
10,379
|
|
|
27,661
|
|
Allocation of corporate overhead
|
|
|
1,549
|
|
|
|
4,038
|
|
|
(5,587
|
)
|
|
—
|
|
Provision for doubtful accounts
|
|
|
1,760
|
|
|
|
(140
|
)
|
|
—
|
|
|
1,620
|
|
Depreciation and amortization of property and equipment
|
|
|
7,599
|
|
|
|
343
|
|
|
182
|
|
|
8,124
|
|
Amortization of intangible assets
|
|
|
46
|
|
|
|
5,576
|
|
|
5
|
|
|
5,627
|
|
Total operating expenses
|
|
|
14,315
|
|
|
|
39,858
|
|
|
4,979
|
|
|
59,152
|
|
Income (loss) from operations
|
|
|
$
|
11,884
|
|
|
|
$
|
(12,523
|
)
|
|
$
|
(4,979
|
)
|
|
$
|
(5,618
|
)
|
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
|
|
|
27
|
|
|
328
|
|
|
1,221
|
|
|
1,576
|
|
Total stock-based compensation
|
|
|
$
|
27
|
|
|
$
|
328
|
|
|
$
|
1,221
|
|
|
$
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
|
|
|
For the Fiscal Year Ended March 31, 2018
|
|
|
|
Cinema Equipment Business
|
|
Content & Entertainment
|
|
Corporate
|
|
Consolidated
|
Revenues
|
|
|
$
|
37,577
|
|
|
$
|
30,106
|
|
|
$
|
—
|
|
|
$
|
67,683
|
|
Direct operating (exclusive of depreciation and amortization shown below)
|
|
|
1,526
|
|
|
17,997
|
|
|
—
|
|
|
19,523
|
|
Selling, general and administrative
|
|
|
1,755
|
|
|
16,715
|
|
|
9,984
|
|
|
28,454
|
|
Allocation of corporate overhead
|
|
|
1,604
|
|
|
3,409
|
|
|
(5,013
|
)
|
|
—
|
|
(Benefit) provision for doubtful accounts
|
|
|
991
|
|
|
—
|
|
|
—
|
|
|
991
|
|
Depreciation and amortization of property and equipment
|
|
|
11,690
|
|
|
443
|
|
|
279
|
|
|
12,412
|
|
Amortization of intangible assets
|
|
|
46
|
|
|
5,528
|
|
|
6
|
|
|
5,580
|
|
Total operating expenses
|
|
|
17,612
|
|
|
44,092
|
|
|
5,256
|
|
|
66,960
|
|
Income (loss) from operations
|
|
|
$
|
19,965
|
|
|
$
|
(13,986
|
)
|
|
$
|
(5,256
|
)
|
|
$
|
723
|
|
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
|
|
|
|
$
|
36
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
60
|
|
Selling, general and administrative
|
|
|
|
14
|
|
|
817
|
|
|
1,388
|
|
|
2,219
|
|
Total stock-based compensation
|
|
|
|
$
|
50
|
|
|
$
|
841
|
|
|
$
|
1,388
|
|
|
$
|
2,279
|
|
The following table presents the results of our operating segments for the three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
|
|
|
For the Three Months Ended March 31, 2019
|
|
|
(Unaudited)
|
|
|
|
|
Cinema Equipment Business
|
|
Content & Entertainment
|
|
Corporate
|
|
Consolidated
|
Revenues
|
|
|
|
$
|
6,273
|
|
|
$
|
5,796
|
|
|
$
|
—
|
|
|
$
|
12,069
|
|
Direct operating (exclusive of depreciation and amortization shown below)
|
|
|
|
174
|
|
|
3,659
|
|
|
—
|
|
|
3,833
|
|
Selling, general and administrative
|
|
|
|
514
|
|
|
4,103
|
|
|
3,589
|
|
|
8,206
|
|
Allocation of corporate overhead
|
|
|
|
382
|
|
|
996
|
|
|
(1,378
|
)
|
|
—
|
|
Provision for doubtful accounts
|
|
|
|
376
|
|
|
(1
|
)
|
|
—
|
|
|
375
|
|
Depreciation and amortization of property and equipment
|
|
|
|
1,755
|
|
|
87
|
|
|
43
|
|
|
1,885
|
|
Amortization of intangible assets
|
|
|
|
12
|
|
|
1,427
|
|
|
1
|
|
|
1,440
|
|
Total operating expenses
|
|
|
|
3,213
|
|
|
10,271
|
|
|
2,255
|
|
|
15,739
|
|
Income (loss) from operations
|
|
|
|
$
|
3,060
|
|
|
$
|
(4,475
|
)
|
|
$
|
(2,255
|
)
|
|
$
|
(3,670
|
)
|
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
|
|
|
19
|
|
|
167
|
|
|
627
|
|
|
813
|
|
Total stock-based compensation
|
|
|
$
|
19
|
|
|
$
|
167
|
|
|
$
|
627
|
|
|
$
|
813
|
|
The following table presents the components of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Federal:
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
Deferred
|
|
—
|
|
|
—
|
|
Total federal
|
|
—
|
|
|
(4
|
)
|
State:
|
|
|
|
|
Current
|
|
295
|
|
|
405
|
|
Deferred
|
|
—
|
|
|
—
|
|
Total state
|
|
295
|
|
|
405
|
|
Income tax expense
|
|
$
|
295
|
|
|
$
|
401
|
|
Net deferred taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
(In thousands)
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
6,877
|
|
|
$
|
6,680
|
|
Stock-based compensation
|
|
2,468
|
|
|
1,993
|
|
Intangibles
|
|
6,293
|
|
|
5,918
|
|
Accrued liabilities
|
|
1,345
|
|
|
1,332
|
|
Allowance for doubtful accounts
|
|
1,279
|
|
|
852
|
|
Capital loss carryforwards
|
|
2,247
|
|
|
3,009
|
|
Interest expense
|
|
1,368
|
|
|
—
|
|
Other
|
|
430
|
|
|
648
|
|
Total deferred tax assets before valuation allowance
|
|
22,307
|
|
|
20,432
|
|
Less: Valuation allowance
|
|
(19,084
|
)
|
|
(15,880
|
)
|
Total deferred tax assets after valuation allowance
|
|
$
|
3,223
|
|
|
$
|
4,552
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(3,223
|
)
|
|
$
|
(4,552
|
)
|
Total deferred tax liabilities
|
|
(3,223
|
)
|
|
(4,552
|
)
|
Net deferred tax
|
|
$
|
—
|
|
|
$
|
—
|
|
We have provided a valuation allowance equal to our net deferred tax assets for the years ended March 31, 2019 and 2018. We are required to recognize all or a portion of our deferred tax assets if we believe that it is more likely than not that such assets will be realized, given the weight of all available evidence. We assess the realizability of the deferred tax assets at each interim and annual balance sheet date. In assessing the need for a valuation allowance, we considered both positive and negative evidence, including recent financial performance, projections of future taxable income and scheduled reversals of deferred tax liabilities. We increased the valuation allowance by
$3.2 million
during the fiscal year ended March 31, 2019 due to increases in the deferred tax assets. We decreased the valuation allowance by
$90.8 million
during the fiscal year ended March 31, 2018, primarily due to write-downs of the deferred tax assets due to a Section 382 ownership change limitation on the net operating losses, a Section 108 tax attribute reduction, and other decreases in the deferred tax assets related to changes in the tax rates due to the Act. We will continue to assess the realizability of the deferred tax assets at each interim and annual balance sheet date based upon actual and forecasted operating results.
At March 31, 2019, we had federal and state net operating loss carryforwards of approximately
$25.3 million
available in the United States of America ("US") and approximately
$0.7 million
in Australia to reduce future taxable income. The U.S. federal and state net operating loss carryforwards of approximately
$25.3 million
will begin to expire in 2020. The Australian net operating loss carryforward of
$0.7 million
does not expire.
At March 31, 2019, we had federal and state capital loss carryforwards of approximately
$8.7 million
available to reduce future capital gains. The capital loss carryforwards were generated during the year ended March 31, 2015 and expire after the year ending March 31, 2020.
Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may result in a limitation on the amount of net operating losses that may be utilized in future years. During the year ended March 31, 2018, approximately
$233.5 million
of our net operating losses became subject to limitation under Internal Revenue Code Section 382 in connection with the consummation in November 2017 of the transactions under the Stock Purchase Agreement with Bison. Approximately
$209.0 million
of our net operating losses will not be able to be utilized because of the ownership change. As a result of the ownership change, we reduced our gross deferred tax assets and valuation allowance by
$81.9 million
as of March 31, 2018, which had no impact on our consolidated financial statements for the year ended March 31, 2018. Future significant ownership changes could cause a portion or all of these net operating losses to expire before utilization.
During the year ended March 31, 2018, we realized approximately
$26.2 million
of cancellation of indebtedness income for tax purposes, which was excluded from taxable income under the provisions of Internal Revenue Code Section 108. In connection with the exclusion, we reduced our net operating losses by approximately
$26.2 million
. This gave rise to a reduction of approximately
$10.2 million
of our gross deferred tax assets and valuation allowance as of March 31, 2018, which had no impact on our consolidated financial statements for the year ended March 31, 2018.
The Tax Cuts and Jobs Act (the "Act") was enacted in December 2017. Among other things, the Act reduced the U.S. federal corporate tax rate from 34 percent to 21 percent as of January 1, 2018 and eliminated the alternative minimum tax (“AMT”) for corporations. Since the deferred tax assets are expected to reverse in a future year, it has been tax effected using the 21% federal corporate tax rate. As a result of the reduction in the corporate tax rate, we decreased our gross deferred tax assets by approximately
$7.2 million
which was offset by a corresponding decrease to the valuation allowance as of March 31, 2018, which had no impact on our consolidated financial statements for the year ended March 31, 2018. Additionally, the Company has an investment in a foreign subsidiary for which the cumulative earnings and profits of this entity was estimated to be negative. Accordingly, the Company did not record a provisional amount for the transition tax enacted under the Act.
The differences between the United States statutory federal tax rate and our effective tax rate are as follows:
|
|
|
|
|
|
|
|
For the fiscal years ended March 31,
|
|
2019
|
|
2018
|
Provision at the U.S. statutory federal tax rate
|
21.0
|
%
|
|
30.8
|
%
|
State income taxes, net of federal benefit
|
2.1
|
%
|
|
9.0
|
%
|
Change in valuation allowance
|
(20.1
|
)%
|
|
501.8
|
%
|
Non-deductible expenses
|
(5.7
|
)%
|
|
(2.7
|
)%
|
Net operating loss decrease under IRC 382
|
—
|
|
|
(511.3
|
)%
|
Effect of tax reform
|
—
|
|
|
(40.2
|
)%
|
Losses from non-consolidated entities
|
0.8
|
%
|
|
10.0
|
%
|
Other
|
—
|
|
|
0.4
|
%
|
Income tax expense
|
(1.9
|
)%
|
|
(2.2
|
)%
|
We file income tax returns in the U.S. federal jurisdiction, various states and Australia. For federal income tax purposes, our fiscal 2016 through 2019 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations. For state tax purposes, our fiscal 2015 through 2019 tax years generally remain open for examination by most of the tax authorities under a four-year statute of limitations. For Australian tax purposes, fiscal tax years ended March 31, 2016 through 2019 are open for examination.
Stock Purchase Agreement
On July 9, 2019, the Company entered into the Stock Purchase Agreement with BEMG, an affiliate of Bison Capital Holding Company Limited, which, through an affiliate, is the majority holder of our Class A common stock, pursuant to which the Company agreed to sell to BEMG a total of 2,000,000 shares of SPA Shares, for an aggregate purchase price in cash of $3.0 million priced at $1.50 per share. The sale of the SPA Shares was consummated on July 9, 2019. The SPA Shares are subject to certain transfer restrictions. The proceeds of the sale of the SPA Shares sold were used for working capital, including the repayment of Second Lien Loans (as defined in Note 5 -
Notes Payable
). In addition, the Company has agreed to enter into a registration rights agreement for the resale of the SPA Shares.
Amendment to Credit Facility
On July 3, 2019, the Company entered into the EWB Amendment to the Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between the Company, East West Bank and the Guarantors named therein. The EWB Amendment reduced the size of the facility to
$18.0 million
, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, extended the maturity date to June 30, 2020 and excluded Future Today Inc and any of its future subsidiaries (in connection with the previously announced agreement to acquire Future Today, Inc.) from requirements to become Guarantors. In connection with the EWB Amendment, three of our subsidiaries became Guarantors under the EWB Credit Agreement.
$10.0 Million Loan converted into Convertible Note
On July 12, 2019, the Company and Bison Global Investment SPC for and on behalf of Global Investment SPC-Bison Global No. 1, another affiliate of Bison Global, entered into a Termination Agreement with respect to the 2018 Loan between them, pursuant to which the Company had borrowed from Bison Global
$10.0 million
. Pursuant to the Termination Agreement, the accrued and unpaid interest on such outstanding principal amount will be paid in cash to Bison Global no later than September 30, 2019. Contemporaneously with the Termination Agreement, the Company entered into a Bison Convertible Note with Bison Global for
$10.0 million
.
The Bison Convertible Note has a term ending on March 4, 2020, and bears interest at
5%
per annum. The principal is payable upon maturity, in cash or in shares of Common Stock, or a combination of cash and Common Stock, at the Company’s option. The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan.
The Bison Convertible Note, offset by the concurrent payoff and termination of the 2018 Loan, did not result in any increase to the Company’s outstanding debt balance.
Extension of Second Lien Loans
On June 28, 2019, the Company entered into a consent agreement with lenders of the Second Lien Loans to an extension of the Second Lien Loans pursuant to which (i) the Company paid half of the outstanding principal amount plus accrued interest to date, and (ii) the maturity date of the remaining outstanding principal amount of the Second Lien Loans was extended to September 30, 2019. On July 10, 2019, the Company paid
$3.0 million
of the outstanding Second Lien Loans and will obtain additional capital from or through Bison Capital Holding Limited or an affiliate thereof ("Bison") for final payment of the remaining outstanding balances of the Second Lien Loans. See Note 5 -
Notes Payable.
PART II. OTHER INFORMATION