UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the fiscal
period ended:
For the transition period from _____ to _____
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company | Emerging Growth Company |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
As of February 19, 2021,
CINEDIGM CORP.
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CINEDIGM CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
| December 31, 2020 | March 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Unbilled revenue | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Restricted cash | ||||||||
| Equity investment in Starrise, a related party, at fair value | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current portion of notes payable, including unamortized debt discount of $ (see Note 6) | ||||||||
| Current portion of notes payable, nonrecourse including unamortized debt discount of $— and $ | ||||||||
| Operating lease liabilities | ||||||||
| Current portion of deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Notes payable | ||||||||
| Operating lease liabilities, noncurrent | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 8) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Total stockholders’ equity (deficit) of Cinedigm Corp. | ( | ) | ||||||
| Deficit attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Total equity (deficit) | ( | ) | ||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
1
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for share and per share data)
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Direct operating (excludes depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| (Recovery) provision for doubtful accounts | ( | ) | ( | ) | ||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| (Loss) income operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of notes payable | ( | ) | ( | ) | ||||||||||||
| Change in fair value of equity investment in Starrise, a related party | ( | ) | ( | ) | ||||||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to controlling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per Class A common stock attributable to common stockholders - basic and diluted: | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of Class A common stock outstanding: basic and diluted | ||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
2
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive (loss) income: foreign exchange translation | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: comprehensive income (loss) attributable to noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss attributable to controlling interests | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
CINEDIGM CORP.
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(Unaudited)
(In thousands, except share data)
| Series A Preferred Stock | Class
A Common Stock | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | Non-Controlling | Total | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2019 | | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2019 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of conversion feature in connection with convertible note | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Balances as of September 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
CINEDIGM CORP.
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(Unaudited)
(In thousands, except share data)
| Series A Preferred Stock | Class A Common Stock | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ Equity | Non-Controlling | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | (Deficit) | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2020 | | $ | $ | | $ | ( | ) | $ | $ | ( | ) | $ | | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock issued in connection with the SPA with certain investors, net | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock in connection with the Starrise transaction, a related party | ||||||||||||||||||||||||||||||||||||||||||||||||
| Contributed capital under the Starrise transaction, a related party | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock in connection with settlement of second lien loan | ||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants for Class A common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| July 2020 issuance of Class A common stock, net of $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in connection with conversion of Convertible Notes | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for third party professional service | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock to management and employees | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with performance stock units | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued to settle second lien loan | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balances as of September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Common stock issued to settle second lien loan | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid with common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation and expenses | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock to management | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with performance stock units | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with ATM raises, net | ||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock to be issued in connection with asset acquisition | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization of property and equipment and amortization of intangible assets | ||||||||
| Changes in fair value of equity investment in Starrise | ||||||||
| Loss on extinguishment of notes payable | ||||||||
| Loss from sale of property and equipment | ||||||||
| Amortization of debt issuance costs included in interest expense | ||||||||
| (Recovery) provision for doubtful accounts | ( | ) | ||||||
| Recovery for inventory reserve | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Accretion and PIK interest expense added to note payable | ||||||||
| Changes in operating assets and liabilities; | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ||||||||
| Unbilled revenue | ( | ) | ||||||
| Prepaids and other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Sale of equipment | — | |||||||
| Sale of equity investment in Starrise | ||||||||
| Purchases of intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payment of notes payable | ( | ) | ( | ) | ||||
| Proceeds under revolving credit agreement, net | ||||||||
| Proceeds from PPP Loan | ||||||||
| Proceeds from issuance of Class A common stock, net | ||||||||
| Net cash provided by (used in) in financing activities | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
6
CINEDIGM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share information)
1. NATURE OF OPERATIONS AND LIQUIDITY
Cinedigm Corp. (“Cinedigm,” the “Company,”
“we,” “us,” or similar pronouns) was incorporated in Delaware on March 31, 2000. We are (i) a distributor
and aggregator of independent movie, television and other short form content managing a library of distribution rights to thousands
of titles and episodes released across digital, physical, theatrical, home and mobile entertainment platforms and (ii) a servicer
of digital cinema assets for over
Risks and Uncertainties
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in certain industries. Closures of certain entertainment facilities and retail locations have significantly impacted consumers’ behaviors as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. As part of our Content & Entertainment business, we sell physical goods, including DVDs and Blu-ray discs, at brick-and-mortar stores. Many of such stores in the United States closed during the spring of 2020 due to COVID-19 restrictions, and many of those have not yet re-opened, or have re-opened on a limited basis. We expect that we will experience a loss of sales of such physical goods due to such closures, and we cannot predict the extent of such losses, or how long the closures or limited openings of the stores may last. As part of our Cinema Equipment business, we earn revenues that are generated when movies are exhibited by theatres. Many movie theatres in the United States closed during the spring of 2020 due to COVID-19 restrictions and many of those have not yet re-opened, or have re-opened on a limited basis. The majority of major studios moved releases originally scheduled for the three months ended December 31, 2020 to future dates with the exception of two Studios that had theatrical releases that opened in theatres on the same day as becoming available on a streaming channel. To the extent movies are not shown in movie theatres due to the closures, we have not received, and will not receive, related revenue. The studios that produce movies may elect to delay the release of movies until theatres re-open, or to bypass exhibiting movies in theatres at all and distribute the movies through other means, such as on streaming platforms, in which case we would not earn revenues at all from such movies.
The East West Bank (“EWB”) credit facility has a maturity date of June 30, 2021. The Company intends to negotiate another extension of the EWB maturity date but in the event it is unable to do so successfully, the Company has the funds to pay the debt in full when due.
The Prospect Loan matures on March 31, 2021. The Company and
Prospect are negotiating to extend the maturity date to
These events have negatively affected, and are expected to continue to negatively affect, our business and results of operations. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related closures and market conditions will persist, or the extent of the impact they will have on our business or results of operations and financial condition.
Liquidity
We have incurred net losses historically and have an accumulated
deficit of $
Capital Raise
On February 2, 2021, the Company entered into a securities
purchase agreement (the “Securities Purchase Agreement”) with a single institutional investor for the purchase and
sale of
In July 2020, we entered into an At-the-Market sales agreement
(the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”) and B. Riley FBR, Inc. (“B.
Riley” and, together with A.G.P., the “Sales Agents”), pursuant to which the Company may offer and sell, from
time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on The Nasdaq Global Market at
the time of the sale of such shares. The Company is not obligated to sell any shares under the Sales Agreement. Any sales of shares
made under the Sales Agreement will be made pursuant to an effective registration statement on Form S-3 filed by the Company with
the Securities and Exchange Commission (“SEC”) on July 6, 2020, for an aggregate offering price of up to $
During the three months ended December 31, 2020, we sold
7
On July 16, 2020, the Company entered into a securities purchase
agreement (the “July Securities Purchase Agreement”) for the sale of
The Company closed the transaction on July 20, 2020. The aggregated
gross proceeds from the sale of the July Shares were approximately $
On May 20, 2020, the Company entered into a securities purchase
agreement (the “Securities Purchase Agreement”) with certain investors (the “Investors”) for the purchase
and sale of
The Company closed the transaction on May 22, 2020. The aggregate
gross proceeds for the sale of the Shares was $
Equity Investment in Starrise, a related party transaction
On December 27, 2019, the Company entered into, and on February
14, 2020 amended, (see Note 2 - Summary of Significant Accounting Policies), a stock purchase agreement (as so amended, the “Starrise
Stock Purchase Agreement”) with BeiTai Investment LP (“BeiTai”) and Aim Right Ventures Limited (“Aim Right”),
two shareholders of Starrise Media Holdings Limited, a leading Chinese entertainment company (“Starrise”), to buy
from them an aggregate of
On April 10, 2020, the Company, in accordance with the terms
of the Starrise Stock Purchase Agreement, terminated its obligation to purchase Starrise ordinary shares from Aim Right under
the December 27, 2019 stock purchase agreement. On April 10, 2020, the Company entered into another stock purchase agreement (the
“April Stock Purchase Agreement”) with five (5) shareholders of Starrise - Bison Global Investment SPC - Bison Global
No. 1 SP (“Bison Global”), Huatai Investment LP, Antai Investment LP, Mingtai Investment LP (“Mingtai”)
and Shangtai Asset Management LP - to buy an aggregate of
Starrise’s ordinary shares (HK 1616) are listed on the
main board of the Stock Exchange of Hong Kong Limited. Based on the closing price of HKD
8
Borrowings
On April 15, 2020, the Company received $
On June 24, 2020, the Company entered into an exchange agreement
(the “Exchange Agreement”) pursuant to which the Company issued
On June 26, 2020, the Company signed a consent agreement with
the holders of the Second Lien loans to extend the maturity date to September 30, 2020 and grant the Company options to extend
further to March 31, 2021 and then to June 30, 2021. A consent fee of $
In a separate exchange with another holder of Second Lien Notes,
on November 19, 2020, the Company issued
On December 4, 2020, the Company entered into exchange agreements
(the “December Exchange Agreements”) with certain holders of notes under its Second Lien Loan Agreement dated as of
July 14, 2016 among the Company, the lenders party thereto, and Cortland Capital Market Services LLC, as Agent (“Second
Lien Notes”). Pursuant to the December Exchange Agreements, the Company issued an aggregate of
In January 2021, the Company entered into exchange agreements
with holders of the Second Lien Loan to exchange $
On February 9, 2021, the Company prepaid substantially all of the outstanding Second Lien Loans (see Note 11 – Subsequent Events).
On April 15, 2020, the Company executed a letter amendment (the “Letter Amendment”) to the Bison Convertible Note (as defined in Note 6 - Notes Payable). Among other things, the Letter Amendment amended the Note, effective as of March 4, 2020, to extend the maturity date of the Bison Convertible note to March 4, 2021.
On October 9, 2019,
On June 25, 2020, the Company signed an amendment to extend the maturity date of the East West Credit Facility (as defined in Note 6 - Notes Payable) with East West Bank from March 30, 2021 to June 30, 2021.
On September 11. 2020,
We believe the combination of: (i) our cash and cash equivalent balances as of December 31, 2020, (ii) expected cash flows from operations, (iii) cost cutting measures including payroll expense reduction and real estate occupancy cost reductions, and (iv) the extension or extinguishment of our borrowings, the Starrise equity investment, the capital raises during and the support or availability of funding from other capital resources and financings will be sufficient to satisfy our contractual obligations, as well as liquidity for our operational and capital requirements, for twelve months from the filing of this document. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.
9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying condensed consolidated financial statements are unaudited and include the accounts of the Company, its wholly owned and majority owned subsidiaries, and reflect all normal and recurring adjustments necessary for the fair presentation of its consolidated financial position, results of operations and cash flows. All material inter-company accounts and transactions have been eliminated in consolidation.
Investments in which we do not have a controlling interest or are not the primary beneficiary but have the ability to exert significant influence are accounted for under the equity method of accounting. Noncontrolling interests for which we have been determined to be the primary beneficiary are consolidated and recorded as net loss attributable to noncontrolling interest.
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, fair value for asset acquisition, and estimated amortization lives and valuation allowances for income taxes. Actual results could differ from these estimates.
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the respective interim periods are not necessarily indicative of the results expected for the full year. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.
SIGNIFICANT ACCOUNTING POLICES
The significant accounting policies used in the preparation of these condensed consolidated financial statements for the three and nine months ended December 31, 2020 are consistent with those disclosed in Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
We consider all highly liquid investments with an original maturity of three months or less to be “cash equivalents.” We maintain bank accounts with major banks, which from time to time may exceed the Federal Deposit Insurance Corporation’s insured limits. We periodically assess the financial condition of the institutions and believe that the risk of any loss is minimal. Our Prospect Loan (as defined below) requires that we maintain specified cash balances that are restricted to repayment of interest thereunder. See Note 6 - Notes Payable for information about our restricted cash balances.
10
Cash, cash equivalents, and restricted cash consisted of the following:
| As of | ||||||||
| (in thousands) | December 31, 2020 | March 31, 2020 | ||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Restricted Cash | ||||||||
| $ | $ | |||||||
EQUITY INVESTMENT IN STARRISE, A RELATED PARTY
On February 14, 2020, the Company acquired an approximately
On April 10, 2020, the Company purchased an additional
The Company has accounted for these investments under the equity method of accounting as the Company can exert significant influence over Starrise with its direct ownership and affiliation with the Company’s majority shareholders. The Company has made an irrevocable election to apply the fair value option under ASC 825-10, Financial Instruments, as it relates to its equity investment in Starrise.
During the nine months ended December 31, 2020, the Company
sold
As of December 31, 2020 and March, 31, 2020, the value of our
equity investment in Starrise, using the readily determinable fair value method from the quoted trading price of the Stock Exchange
of Hong Kong, was approximately $
NON-MONETARY TRANSACTIONS
During the three and nine months ended December 31, 2020, respectively,
the Company entered into agreements with certain vendors to transfer
There was no gain or loss resulting from these transactions for the three and nine months ended December 31, 2020.
11
ACCOUNTS RECEIVABLE
We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
We record accounts receivable, long-term in connection with activation fees that we earn from our digital cinema equipment (the “Systems”) deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rate.
ADVANCES
Advances, which are recorded within prepaid and other current
assets on the condensed consolidated balance sheets, represent amounts prepaid to studios or content producers for which we provide
content distribution services. We evaluate advances regularly for recoverability and record impairment charges for amounts that
we expect may not be recoverable as of the consolidated balance sheet date. Impairments and accelerated amortization related to
advances were $
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
| Computer equipment and software | ||||
| Internal use software | ||||
| Digital cinema projection systems | ||||
| Machinery and equipment | ||||
| Furniture and fixtures |
We capitalize costs associated with software developed or obtained for internal use when the preliminary project stage is completed, and it is determined that the software will provide significantly enhanced capabilities and modifications. These capitalized costs are included in property and equipment and include external direct cost of services procured in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with, and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended use. Once the software is ready for its intended use, the costs are amortized over the useful life of the software. Post-configuration training and maintenance costs are expensed as incurred.
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Repair and maintenance costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized. Upon the sale or other disposition of any property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss on disposal is included in the condensed consolidated statements of operations.
12
FAIR VALUE MEASUREMENTS
The fair value measurement disclosures are grouped into three levels based on valuation factors:
| ● | Level 1 – quoted prices in active markets for identical investments |
| ● | Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs) |
| ● | Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments) |
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.
The equity investment in Starrise is in Hong
Kong dollars and was translated into US dollars as of December 31, 2020 and March 31, 2020 at an exchange rate of
The following tables summarize the levels of fair value measurements of our financial assets and liabilities as of December 31, 2020 and March 31, 2020:
| As of December 31, 2020 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Restricted cash | $ | $ | $ | $ | ||||||||||||
| Equity investment in Starrise, at fair value | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| As of March 31, 2020 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Restricted cash | $ | $ | $ | $ | ||||||||||||
| Equity investment in Starrise, at fair value | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Our cash and cash equivalents, accounts receivable,
unbilled revenue and accounts payable and accrued expenses are financial instruments and are recorded at cost in the condensed
consolidated balance sheets. The estimated fair values of these financial instruments approximate their carrying amounts because
of their short-term nature. At December 31, 2020 and March 31, 2020, the estimated fair value of our fixed rate debt
approximated its carrying amounts. We estimated the fair value of debt based upon current interest rates available to us at the
respective balance sheet dates for arrangements with similar terms and conditions. Based on borrowing rates currently available
to us for loans with similar terms, the fair value of the variable rate debt is $
IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS
We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset’s fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. During the three months and nine months ended December 31, 2020 and 2019, no impairment charge was recorded from operations for long-lived assets or finite-lived assets.
13
ASSET ACQUISITIONS
An asset acquisition is an acquisition of an asset, or a group of assets, that does not meet the definition of a business. Asset acquisitions are accounted for by using the cost accumulation model whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values.
GOODWILL
Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is tested for impairment on an annual basis or more often if warranted by events or changes in circumstances indicating that the carrying value may exceed fair value, also known as impairment indicators.
Inherent in the fair value determination for each reporting unit are certain judgments and estimates relating to future cash flows, including management’s interpretation of current economic indicators and market conditions, and assumptions about our strategic plans with regard to its operations. To the extent additional information arises, market conditions change, or our strategies change, it is possible that the conclusion regarding whether our remaining goodwill is impaired could change and result in future goodwill impairment charges that will have a material effect on our consolidated financial position or results of operations.
No goodwill impairment charge was recorded in the three and nine months ended December 31, 2020 and 2019.
Gross amounts of goodwill and accumulated impairment charges that we have recorded are as follows:
| (In thousands) | ||||
| Goodwill | $ | |||
| Accumulated impairment charges | ( | ) | ||
| Goodwill at December 31, 2020 and March 31, 2020 | $ | |||
REVENUE RECOGNITION
We determine revenue recognition by:
| ● | identifying the contract, or contracts, with the customer; |
| ● | identifying the performance obligations in the contract; |
| ● | determining the transaction price; |
| ● | allocating the transaction price to performance obligations in the contract; and |
| ● | recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services. |
We recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the services provided, sales of physical products (DVDs and Blu-ray Discs) or when the content is available for subscription on the digital platform or available on the point-of-sale for transactional and video on demand services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes are recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.
Payment terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. We have in the past entered into arrangements in connection with activation fees due from our System deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
14
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 occur when the uncertainty associated with the variable consideration is subsequently resolved.
Under the terms of our standard cinema equipment licensing
agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement,
after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year
terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale
of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of the digital cinema deployment
plan. Cinedigm completed the sale of 15 and 24 digital projection Systems, respectively, for an aggregate sales price of approximately
$
Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.
Exhibitors who purchased and own Systems using their own financing
in the Cinema Equipment Business paid us an upfront activation fee of approximately $
The Cinema Equipment Business earns an administrative fee of
approximately
15
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:
| ● | which party is primarily responsible for fulfilling the promise to provide the specified good or service; and |
| ● | which party has discretion in establishing the price for the specified good or service. |
Shipping and Handling
Shipping and handling costs are incurred to move physical goods (e.g., 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 is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.
16
We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.
Deferred revenue pertaining to our Content & Entertainment Business includes amounts related to the sale of DVDs with future release dates.
Deferred revenue relating to our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms.
The ending deferred revenue balance, including current and
non-current balances, as of December 31, 2020 was $
During the three and nine months ended December 31, 2020, $
Disaggregation of Revenue
The Company disaggregates revenue into different revenue categories for the Cinema Equipment and CEG Businesses. The Cinema Equipment Business revenue categories are: Phase I Deployment revenue, Phase II Deployment revenue, Services, and Digital System Sales, and the Content & Entertainment Business revenue categories are: Base Distribution Business and OTT Streaming and Digital.
The following tables present the Company’s revenue categories for the three and nine months ended December 31, 2020 and 2019: (in thousands):
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Cinema Equipment Business: | ||||||||||||||||
| Phase I Deployment | $ | $ | $ | $ | ||||||||||||
| Phase II Deployment | ||||||||||||||||
| Services | ||||||||||||||||
| Digital System Sales | ||||||||||||||||
| Total Cinema Equipment Business revenue | $ | $ | $ | $ | ||||||||||||
| Content & Entertainment Business: | ||||||||||||||||
| Base Distribution Business | $ | $ | $ | $ | ||||||||||||
| OTT Streaming and Digital | ||||||||||||||||
| Total Content & Entertainment Business revenue | $ | $ | $ | $ | ||||||||||||
17
STOCK-BASED COMPENSATION
Employee and director stock-based compensation expense related to our stock-based awards was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
During the three and nine months ended December 31, 2020 and
2019, the Company granted
Grant Date: November 19, 2020 –
Maturity Date: November 19, 2030 –
Fair value of class A common stock on grant date: $
Volatility:
Discount rate:
There was $
Total SARs outstanding are as follows:
Nine
Months Ended December 31, | ||||
| SARs Outstanding March 31, 2020 | ||||
| Issued | ||||
| Forfeited | ||||
| Total SARs Outstanding December 31, 2020 | ||||
There are
In addition, during the three months ended December 31, 2020,
the Company granted and issued
18
There was $
There was $
On September 1, 2020, we issued
INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carryforwards and for differences between the carrying amounts of existing assets and liabilities and their respective tax bases.
Valuation allowances are established when management is unable to conclude that it is more likely than not that some portion, or all, of the deferred tax asset will ultimately be realized. The Company is primarily subject to income taxes in the United States.
The Company accounts for uncertain tax positions in accordance
with an amendment to ASC Topic 740-10, Income Taxes (Accounting for Uncertainty in Income Taxes), which
clarified the accounting for uncertainty in tax positions. This amendment provides that the tax effects from an uncertain tax
position can be recognized in the financial statements only if the position is “more-likely-than-not” to be sustained
were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of
the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the
“more-likely-than-not” threshold, the largest amount of tax benefit that is more than
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
Basic and diluted net loss per common share has been calculated as follows:
| Basic
and diluted net loss per common share attributable to common stockholders = |
Net loss attributable to common stockholders |
| Weighted
average number of common stock outstanding during the period |
Stock issued and treasury stock repurchased during the period are weighted for the portion of the period that they are outstanding. Shares issued and any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.
We incurred net losses for the three and nine months ended
December 31, 2020 and 2019, and therefore the impact of potentially dilutive common shares from outstanding stock options and
warrants, totaling
19
COMPREHENSIVE LOSS
As of the three and nine months ended December 31, 2020 and 2019, comprehensive loss consisted of net loss and foreign currency translation adjustments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Not yet adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which provides new guidance regarding the measurement and recognition of credit impairment for certain financial assets. Such guidance will impact how the Company determines its allowance for estimated uncollectible receivables and evaluates its available-for-sale investments for impairment. ASU 2016-13 is effective for the Company in the first quarter of 2023. The Company is currently evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in ASU 2018-13 modify the disclosure requirements associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently assessing the impact this pronouncement may have on our consolidated financial statements
On December 18, 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The update also simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to improve consistent application. The amendment in this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact this pronouncement may have on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments of ASU No. 2020-04 are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. We are currently assessing the impact this pronouncement may have on our consolidated financial statements
3. OTHER INTERESTS
Investment in CDF2 Holdings
We indirectly own
CDF2 Holdings is a Variable Interest Entity (“VIE”), as defined in Accounting Standards Codification Topic 810 (“ASC 810”), “Consolidation.” ASC 810 requires the consolidation of VIEs by an entity that has a controlling financial interest in the VIE which entity is thereby defined as the primary beneficiary of the VIE. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, among other factors. Although we indirectly, wholly own CDF2 Holdings, we, a third party that also has a variable interest in CDF2 Holdings, and an independent third party manager must mutually approve all business activities and transactions that significantly impact CDF2 Holdings’ economic performance. We have therefore assessed our variable interests in CDF2 Holdings and determined that we are not the primary beneficiary of CDF2 Holdings. As a result, CDF2 Holdings’ financial position and results of operations are not consolidated in our financial position and results of operations. In completing our assessment, we identified the activities that we consider most significant to the economic performance of CDF2 Holdings and determined that we do not have the power to direct those activities, and therefore we account for our investment in CDF2 Holdings under the equity method of accounting.
As of December 31, 2020 and March 31, 2020, our maximum
exposure to loss, as it relates to the non-consolidated CDF2 Holdings entity, represents accounts receivable for service fees
under a master service agreement with CDF2 Holdings. Such accounts receivable was $
The accompanying Condensed Consolidated Statements of Operations
include $
20
Total Stockholders’ Deficit of CDF2 Holdings at December
31, 2020 and March 31, 2020 was $
Majority Interest in CONtv
We own an
4. ASSET ACQUISTION
On December 21, 2020, the Company acquired substantially all
of the assets of The Film Detective, LLC (“TFD”), a leading content distributor and streaming channel company focused
on classic film and television programming. The purchase price for the TFD acquisition was $
| Asset | Amount in ($000) | Useful Life | ||||||
| Content Library | $ | |||||||
| Distribution Contracts | ||||||||
| Trade Name | ||||||||
| Other | ||||||||
| Total | $ | |||||||
5. INCOME TAXES
We calculate income tax expense based upon an annual effective
tax rate forecast, including estimates and assumptions. We recorded an income tax benefit (expense) of approximately $
Our effective tax rate for the nine months
ended December 31, 2020 and 2019 was
On March 27, 2020, the Coronavirus Aid, Relief,
and Economic Security (CARES) Act was signed into law.
21
6. NOTES PAYABLE
Notes payable consisted of the following:
| December 31, 2020 | March 31, 2020 | |||||||||||||||
| (In thousands) | Current Portion | Long Term Portion | Current Portion | Long Term Portion | ||||||||||||
| Prospect Loan | $ | $ | $ | $ | ||||||||||||
| Total non-recourse notes payable | ||||||||||||||||
| Less: Unamortized debt issuance costs and debt discounts | ( | ) | ( | ) | ||||||||||||
| Total non-recourse notes payable, net of unamortized debt issuance costs and debt discounts | $ | $ | $ | $ | ||||||||||||
| Bison Note Payable | $ | $ | $ | |||||||||||||
| Second Lien Loans | ||||||||||||||||
| Credit Facility | ||||||||||||||||
| Mingtai Convertible Note | ||||||||||||||||
| PPP Loan | ||||||||||||||||
| Total recourse notes payable | ||||||||||||||||
| Less: Unamortized debt issuance costs and debt discounts | ( | ) | ||||||||||||||
| Total recourse notes payable, net of unamortized debt issuance costs and debt discounts | $ | $ | $ | $ | ||||||||||||
| Total notes payable, net of unamortized debt issuance costs | $ | $ | $ | $ | ||||||||||||
Non-recourse debt is generally defined as debt whereby the lenders’ sole recourse with respect to defaults, is limited to the value of the asset, which is collateral for the debt. Certain of our subsidiaries are liable with respect to, and their assets serve as collateral for, certain indebtedness for which our assets and the assets of our other subsidiaries that are not parties to the transaction are generally not liable. We have referred to this indebtedness as “non-recourse debt” because the recourse of the lenders is limited to the assets of specific subsidiaries. Such indebtedness includes the Prospect Loan.
Prospect Loan
In
February 2013, our DC Holdings, AccessDM and Phase 2 DC subsidiaries entered into a term loan agreement (the “Prospect Loan”)
with Prospect Capital Corporation (“Prospect”), pursuant to which DC Holdings borrowed $
Collections
of DC Holdings accounts receivable are deposited into accounts designated to pay certain operating expenses, principal, interest,
fees, costs and expenses relating to the Prospect Loan. On a quarterly basis, if there is excess cash flow, it is used for prepayment
of the Prospect Loan. We also maintain a debt service fund under the Prospect Loan for future principal and interest payments.
As of December 31, 2020, and March 31, 2020, the debt service fund had a balance of $
22
The Prospect Loan matures on March 31, 2021 and may be accelerated upon a change in control (as defined in the agreement) or other events of default as set forth therein and would be subject to mandatory acceleration upon insolvency of DC Holdings. We are permitted to pay the full outstanding balance of the Prospect Loan at any time after the second anniversary of the initial borrowing, subject to the following prepayment penalties:
| ● |
| ● |
| ● |
| ● |
| ● |
| ● | No penalty if the balance of the Prospect Loan, including accrued interest, is prepaid thereafter. |
The
Prospect Loan is secured by, among other things, a first priority pledge of the stock of CDF2 Holdings, our wholly owned unconsolidated
subsidiary, the stock of AccessDM, owned by DC Holdings, and the stock of our Phase 2 DC subsidiary, and is also guaranteed by
AccessDM and Phase 2 DC. We provide limited financial support to the Prospect Loan not to exceed $
The Prospect Loan contains customary representations, warranties, affirmative covenants, negative covenants and events of default.
The following table summarizes the activity related to the Prospect Loan:
| As of | ||||||||
| (In thousands) | December 31, 2020 | March 31, 2020 | ||||||
| Prospect Loan, at issuance | $ | $ | ||||||
| PIK Interest | ||||||||
| Payments to date | ( | ) | ( | ) | ||||
| Prospect Loan, gross | $ | $ | ||||||
| Less unamortized debt issuance costs and debt discounts | ( | ) | ||||||
| Prospect Loan, net | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Total long term portion | $ | $ | ||||||
Bison Note Payable
In
December 2017, the Company entered into a loan with Bison for $
The loan was made in accordance with the Stock Purchase Agreement between the Company and Bison Entertainment Investment Limited, another affiliate of Bison, entered into on June 29, 2017.
On
July 20, 2018, the Company entered into a term loan agreement (the “2018 Loan Agreement”) with Bison Global, pursuant
to which the Company borrowed from Bison Global $
23
Bison Convertible Note
The
Bison Convertible Note has a term ending on March 4, 2021, and bears interest at
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. On April 15, 2020, the Company executed a letter amendment to the Bison Convertible Note dated July 12, 2019, amending the Bison Convertible Note, effective as of March 4, 2020, to change the maturity date of the note to March 4, 2021.
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 September 11. 2020, Bison Global converted the Bison Convertible
Note in full into an aggregate of
Second Secured Lien Loans
On
July 14, 2016, we entered into a Second Lien Loan Agreement (the “Second Lien Loan Agreement”), under which we may
borrow up to $
In
addition, under the terms of the Second Lien Loan Agreement, we are required to issue
On
June 24, 2020, the Company entered into an exchange agreement (the “Exchange Agreement”) pursuant to which the Company
issued
The
Exchange Agreement included a true-up clause. The true-up clause stated that if the gross proceeds from the sale of the Company’s
Class A common stock are less than $
24
On July 2, 2020, in accordance with the true-up clause, an
additional
On
June 26, 2020, the Company entered into a consent agreement to extend the maturity date to September 30, 2020 and grant the Company
options to extend further to March 31, 2021 and then to June 30, 2021.There was a consent fee of $
On November 19, 2020, the Company issued
On December 4, 2020, the Company entered into exchange agreements
(the “December Exchange Agreements”) with certain holders of notes under its Second Lien Loan Agreement dated as of
July 14, 2016 among the Company, the lenders party thereto, and Cortland Capital Market Services LLC, as Agent (“Second
Lien Notes”). Pursuant to the December Exchange Agreements, the Company issued an aggregate of
See Note 11 – Subsequent Events for exchange agreements subsequent to December 31, 2020.
Credit Facility and Cinedigm Revolving Loans
On
March 30, 2018, the Company entered into the Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between
the Company, East West Bank and the Guarantors named therein (the “Credit Facility”) for a maximum of $
Interest
under the Credit Facility is due monthly at a rate elected by the Company of either
As
of December 31, 2020 and March 31, 2020, there was $
Mingtai Convertible Note
On
October 9, 2018, the Company issued a subordinated convertible note (the “Mingtai Convertible Note”) to Mingtai for
$
25
The
Mingtai 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 $
Upon
conversion prior to maturity by Mingtai, 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 $
On
September 11, 2020, Mingtai converted the Notes in full into an aggregate of
PPP Loan
On
April 15, 2020, the Company received $
7. STOCKHOLDERS’ DEFICIT
COMMON STOCK
During
the nine months ended December 31, 2020, we issued
In July 2020, we entered into an At-the-Market sales agreement
(the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”) and B. Riley FBR, Inc. (“B.
Riley” and, together with A.G.P., the “Sales Agents”), pursuant to which the Company may offer and sell, from
time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on The Nasdaq Global Market at
the time of the sale of such shares. The Company is not obligated to sell any shares under the Sales Agreement. Any sales of shares
made under the Sales Agreement will be made pursuant to an effective registration statement on Form S-3 filed by the Company with
the SEC on July 6, 2020, for an aggregate offering price of up to $
During the quarter ended December 31, 2020, we sold
On September 1, 2020, we issued
On October 23, 2020, the Company filed a Certificate of Amendment
to the Fifth Amended and Restated Certificate of Incorporation, pursuant to which the number of shares of Class A common stock
authorized for issuance was increased to
On November 19, 2020, the Company issued
On December 4, 2020, the Company entered into Exchange Agreements
with certain holders of the Second Lien Loans. Pursuant to the Exchange Agreements, the Company issued an aggregate of
26
PREFERRED STOCK
Cumulative
dividends in arrears on preferred stock were $
TREASURY STOCK
We
have treasury stock, at a cost, consisting of
CINEDIGM’S EQUITY INCENTIVE PLANS
Stock Based Compensation Awards
Awards
issued under our 2000 Equity Incentive Plan (the “2000 Plan”) may be in any of the following forms (or a combination
thereof) (i) stock option awards; (ii) stock appreciation rights; (iii) stock or restricted stock or restricted stock units; or
(iv) performance awards. The 2000 Plan provides for the granting of incentive stock options (“ISOs”) with exercise
prices not less than the fair market value of our Class A Common Stock on the date of grant. ISOs granted to shareholders having
more than
In
connection with the grants of stock options and shares of restricted stock under the 2000 Plan, we and the participants have executed
stock option agreements and notices of restricted stock awards setting forth the terms of the grants. The 2000 Plan provided for
the issuance of up to
As
of December 31, 2020, there were
27
In
August 2017, the Company adopted the 2017 Plan. The 2017 Plan replaced the 2000 Plan, and applies to employees and directors of,
and consultants to, the Company. The 2017 Plan provided for the issuance of up to 2,108,270 shares of Class A common stock, in
the form of various awards, including stock options, stock appreciation rights, stock, restricted stock, restricted stock units,
performance awards and cash awards. The Compensation Committee of the Company’s Board of Directors (the “Board”)
is authorized to administer the 2017 Plan and make grants thereunder. The approval of the 2017 Plan does not affect awards already
granted under the 2000 Plan. On December 4, 2019, upon shareholder approval, the 2017 Plan was amended to increase the maximum
number of shares of Class A common stock authorized for issuance thereunder from
On
October 23, 2020, the Company amended its 2017 Equity Incentive Plan to increase the number of shares authorized for issuance
thereunder from
The analysis of all options outstanding under the 2000 Plan as of December 31, 2020 is as follows:
| As of December 31, 2020 | |||||||||||||||||
| Range of Prices | Options Outstanding | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | |||||||||||||
| $ | $ | $ | |||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN
In
October 2013, we issued options outside of the 2000 Plan to
In
December 2010, we issued options to purchase
WARRANTS
The following table presents information about outstanding warrants to purchase shares of our Class A common stock as of December 31, 2020. All of the outstanding warrants are fully vested and exercisable.
| Recipient | Amount outstanding | Expiration | Exercise price per share | ||||||||
| Strategic management service provider | $ | | |||||||||
| Warrants issued in connection with Convertible Notes exchange transaction | $ | ||||||||||
| 5-year Warrant issued to BEMG in connection with a term loan agreement | $ | ||||||||||
28
Certain
warrants issued in connection with the Second Lien Loans (See Note 6 - 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. On June 4, 2020, Ronald
L. Chez exercised all such warrants to purchase
8. COMMITMENTS AND CONTINGENCIES
We operate from leased properties under non-cancelable operating lease agreements, certain of which contain escalating lease clauses.
During the first quarter of 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted the standard using the modified retrospective approach with an effective date as of April 1, 2019. The Company did not apply the new standard to comparative periods and therefore, those amounts are not presented below.
The Company elected the package of three practical expedients. As such, the Company did not reassess whether expired or existing contracts are or contain a lease and did not need to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases. The Company did not elect the hindsight practical expedient. The land easement practical expedient was not applicable to the Company. Also, the Company has elected to take the practical expedient to not separate lease and non-lease components for all asset classes. The Company made an accounting policy election to continue not to recognize leases with durations of twelve months or less on the consolidated balance sheet.
The Company leases office space under operating leases. The Company’s portfolio of leases is primarily related to real estate and since most of our leases do not provide a readily determinable implicit rate, the Company estimated its incremental borrowing rate to discount the lease payments based on information available at either the implementation date of Topic 842 or at lease commencement for leases entered into thereafter.
The table below presents the lease-related assets and liabilities recorded on the balance sheet as of December 31, 2020
| (In thousands) | Classification on the Balance Sheet | December 31, 2020 | ||||
| Assets | ||||||
| Noncurrent | Operating lease right-of-use asset | $ | ||||
| Liabilities | ||||||
| Current | Operating leases - current portion | |||||
| Noncurrent | Operating leases - long-term portion | |||||
| Total operating lease liabilities | $ | |||||
Weighted-average discount rate (1)
| (1) | Upon adoption of the new lease standard, discount rates used for existing leases were established at April 1, 2019. |
29
Lease Costs
The table below presents certain information related to lease costs for leases:
| Three Months Ended | Nine Months Ended | |||||||
| (In thousands) | December 31, 2020 | |||||||
| Operating lease cost | $ | $ | ||||||
| Total lease cost | $ | $ | ||||||
Other Information
The table below presents supplemental cash flow information related to leases:
| Three Months Ended | Nine Months Ended | |||||||
| (In thousands) | December 31, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows used for operating leases | $ | $ | ||||||
The Company terminated an office lease in Los Angeles in April
2020 and a lease for office equipment was terminated in June 2020. The Company removed the right-of-use assets of $
9. SUPPLEMENTAL CASH FLOW INFORMATION
| Nine
Months Ended December 31, |
||||||||
| (In thousands) | 2020 | 2019 | ||||||
| Cash interest paid | $ | $ | ||||||
| Accrued dividends on preferred stock | ||||||||
| Issuance of Class A common stock for payment of preferred stock dividends | ||||||||
| Issuance of Class A common stock to Starrise, a related party | ||||||||
| Contributed capital under the Starrise transaction, a related party | ||||||||
| Settlement of second lien loan with Class A common stock | ||||||||
| Conversion of note payable | ||||||||
| Class A common stock to be issued in connection with the asset acquisition | — | |||||||
| Right-of-use assets and operating lease liability recorded upon adoption of ASU 842, net | ||||||||
| Amounts accrued in connection with addition of property and equipment | — | |||||||
| Starrise shares used to pay down vendors | ||||||||
30
10. SEGMENT INFORMATION
We
operate in
| Operations of: | Products and services provided: | |
| Cinema Equipment Business | Financing vehicles and administrators for
We retain ownership of the Systems and the residual cash flows related to the Systems in Phase I Deployment after the repayment of all non-recourse debt at the expiration of exhibitor master license agreements. For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Cinema Equipment Business also provides monitoring, collection, verification and management services to this segment, as well as to exhibitors who purchase their own equipment, and also collects and disburses VPFs from motion picture studios, distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors (collectively, “Services”). | |
| Content & Entertainment Business | Leading distributor of independent content, and collaborates with producers and other content owners to market, source, curate and distribute independent content to targeted and profitable audiences in theatres and homes, and via mobile and emerging platforms. |
The following tables present certain financial information related to our reportable segments and Corporate:
| As of December 31, 2020 | ||||||||||||||||||||||||
| (In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non-Recourse | Notes Payable | Operating lease liabilities | ||||||||||||||||||
| Cinema Equipment Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Content & Entertainment Business | ||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| As of March 31, 2020 | ||||||||||||||||||||||||
| (In thousands) | Intangible Assets, net | Goodwill | Total Assets | Notes Payable, Non-Recourse | Notes Payable | Operating lease liabilities | ||||||||||||||||||
| Cinema Equipment Business | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Content & Entertainment Business | ||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
31
| Statements of Operations | ||||||||||||||||
| Three Months Ended December 31, 2020 | ||||||||||||||||
| (Unaudited, in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of corporate overhead | ( | ) | ||||||||||||||
| Provision for doubtful accounts | ||||||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Employee and director stock-based compensation expense related
to the Company’s stock-based awards was negative $
| (In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
| Statements of Operations | ||||||||||||||||
| Three Months Ended December 31, 2019 | ||||||||||||||||
| (Unaudited, in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of Corporate overhead | ( | ) | ||||||||||||||
| Provision (recovery) for doubtful accounts | ( | ) | ( | ) | ||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ( | ) | ||||||||||||||
| Income (loss) from operations | $ | $ | ( | ) | $ | $ | ||||||||||
Employee
and director stock-based compensation expense related to the Company’s stock-based awards was $
| (In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
32
| Statements of Operations | ||||||||||||||||
| Nine Months Ended December 31, 2020 | ||||||||||||||||
| (Unaudited, in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of corporate overhead | ( | ) | ||||||||||||||
| Recovery for doubtful accounts | ( | ) | ( | ) | ||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Employee and director stock-based compensation expense related
to the Company’s stock-based awards was $
| (In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
| Statements of Operations | ||||||||||||||||
| Nine Months Ended December 31, 2019 | ||||||||||||||||
| (Unaudited, in thousands) | ||||||||||||||||
| Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Direct operating (exclusive of depreciation and amortization shown below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Allocation of corporate overhead | ( | ) | ||||||||||||||
| Provision (recovery) for doubtful accounts | ( | ) | ||||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ( | ) | ||||||||||||||
| Loss from operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
33
Employee
and director stock-based compensation expense related to the Company’s stock-based awards was $
| (In thousands) | Cinema Equipment Business | Content & Entertainment Business | Corporate | Consolidated | ||||||||||||
| Direct operating | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ( | ) | ||||||||||||||
| Total stock-based compensation | $ | ( | ) | $ | $ | $ | ||||||||||
11. SUBSEQUENT EVENTS
On January 21, 2021, the Company entered into an exchange
agreement (the “Exchange Agreement”) with a holder of notes under its Second Lien Loan Agreement dated as of July 14,
2016 among the Company, the lenders party thereto, and Cortland Capital Market Services LLC, as Agent (“Second Lien Notes”).
Pursuant to the Exchange Agreement, the Company issued an aggregate of
In two separate exchanges with another holder of Second Lien
Notes, on January 14, 2021 and January 21, 2021, the Company issued
On February 9, 2021, the Company prepaid substantially all of
the outstanding obligations in respect of principal, interest, fees and expenses under the Second Lien Loan Agreement, among the
Company, certain lenders and Cortland Capital Market Services LLC. The payoff amount of approximately $
On February 2, 2021, the Company entered into a Securities
Purchase Agreement with a single institutional investor for the purchase and sale of
The closing of the sale of the February Shares under the Securities
Purchase Agreement occurred on February 5, 2021. The aggregate gross proceeds for the sale of the February Shares was approximately
$
34
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes included elsewhere in this document.
This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “estimates,” and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
OVERVIEW
Since our inception, we have played a significant role in the digital distribution revolution that continues to transform the media landscape. In addition to our pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, we have become a leading distributor of independent content, both through organic growth and acquisitions. We distribute products for major brands such as the NFL, Hallmark and Scholastic, as well as leading international and domestic content creators, movie producers, television producers and other short form digital content producers. We collaborate with producers, major brands and other content owners to market, source, curate and distribute quality content to targeted audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to, iTunes, Amazon Prime, Netflix, Hulu, Xbox, Sony PlayStation, Tubi and cable video-on-demand (“VOD”), and (ii) physical goods, including DVD and Blu-ray Discs.
We report our financial results in two primary segments as follows: (1) cinema equipment business and (2) media content and entertainment business (“Content & Entertainment” or “CEG”). The cinema equipment business segment consists of the non-recourse, financing vehicles and administrators for our digital cinema equipment (the “Systems”) installed in movie theatres throughout North America and several international countries. It also provides fee-based support to over 12,000 movie screens as well as directly to exhibitors and other third party customers in the form of monitoring, billing, collection and verification services. Our Content & Entertainment segment is a market leader in: (1) ancillary market aggregation and distribution of entertainment content and; (2) branded and curated over-the-top (“OTT”) digital network business providing entertainment channels and applications.
Beginning in December 2015, certain of our cinema equipment began to reach the conclusion of their 10-year deployment payment period with certain distributors and, therefore, Virtual Print Fees (“VPF”) revenues ceased to be recognized on such Systems, related to such distributors. Furthermore, because the Phase I Deployment installation period ended in November 2007, a majority of the VPF revenue associated with the Phase I Deployment Systems has ended. The reduction in VPF revenue on cinema equipment business systems approximately coincided with the conclusion of certain of our non-recourse debt obligations and, therefore, the reduced cash outflows related to such non-recourse debt obligations partially offset the reduced VPF revenue since November 2017.
Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan.
We are structured so that our cinema equipment business segment operates independently from our Content & Entertainment business. As of December 31, 2020, we had approximately $11.9 million of non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We also have approximately $13.3 million of outstanding debt principal, as of December 31, 2020 that is attributable to our Content & Entertainment and Corporate segments.
Risks and Uncertainties
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in certain industries. Closures of certain entertainment facilities and retail locations have significantly impacted consumers’ behaviors as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. As part of our Content & Entertainment business, we sell physical goods, including DVDs and Blu-ray discs, at brick-and-mortar stores. Many of such stores in the United States closed during the spring of 2020 due to COVID-19 restrictions, and many of those have not yet re-opened, or have re-opened on a limited basis. We expect that we will experience a loss of sales of such physical goods due to such closures, and we cannot predict the extent of such losses, or how long the closures or limited openings of the stores may last. As part of our Cinema Equipment business, we earn revenues that are generated when movies are exhibited by theatres. Many movie theatres in the United States closed during the spring of 2020 due to COVID-19 restrictions and many of those have not yet re-opened, or have re-opened on a limited basis. The majority of major studios moved releases originally scheduled for the three months ended December 31, 2020 to future dates with the exception of two Studios that had theatrical releases that opened in theatres on the same day as becoming available on a streaming channel. To the extent movies are not shown in movie theatres due to the closures, we have not received, and will not receive, related revenue. The studios that produce movies may elect to delay the release of movies until theatres re-open, or to bypass exhibiting movies in theatres at all and distribute the movies through other means, such as on streaming platforms, in which case we would not earn revenues at all from such movies.
35
These events have negatively affected, and are expected to continue to negatively affect, our business and results of operations. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related closures and market conditions will persist, or the extent of the impact they will have on our business or results of operations and financial condition.
Results of Operations for the Three Months Ended December 31, 2020 and 2019
Revenues
| Three Months Ended December 31, | ||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 910 | $ | 3,129 | $ | (2,219 | ) | (71 | )% | |||||||
| Content & Entertainment Business | 9,044 | 8,383 | 661 | 8 | % | |||||||||||
| $ | 9,954 | $ | 11,512 | $ | (1,558 | ) | (14 | )% | ||||||||
Revenues generated by our Cinema Equipment Business segment decreased primarily as a result of the reduced number of Systems earning VPF revenue and commissions for Phase II Deployment Systems. In addition, as a result of COVID-19, during the three months ended December 31, 2020, theatres in many major markets remained closed throughout the third quarter causing the majority of major studios to move wide releases scheduled for the three months ended December 31, 2020 to future dates. Only two major studios had wide theatrical releases in November/December, however, the theatrical window before the streaming debut was shortened or eliminated to accommodate the lack of theatrical venues. Because our digital cinema business earns a VPF when a movie is first played on a system, the temporary theatre closures resulting from the COVID-19 pandemic resulted in reduced revenues. The revenues in the Content & Entertainment Business segment increased by 8% for the three months ended December 31, 2020 compared to the three months ended December 31, 2019. The increase is due to the addition of five new third-party OTT channels and an increase in the number of advertising partners.
Direct Operating Expenses
| Three Months Ended December 31, | ||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 150 | $ | 312 | $ | (162 | ) | (52 | )% | |||||||
| Content & Entertainment Business | 4,235 | 5,414 | (1,179 | ) | (22 | )% | ||||||||||
| $ | 4,385 | $ | 5,726 | $ | (1,341 | ) | (23 | )% | ||||||||
The decrease in direct operating expenses in the three months ended December 31, 2020 for the Content & Entertainment Business compared to the prior period was primarily due to transition credits received related to a new third-party DVD distributor. These credits mainly offset fulfillment and freight expenses. In addition, there was a significant decrease in manufacturing costs between the distributor in place in the prior period and the inventory reserve has decreased. The decrease in direct operating expenses in the three months ended December 31, 2020 for the Cinema Equipment Business compared to the prior period was primarily due to a reduction in head count and shifting of certain employees from full time to part time as a result of the negative impact of the Covid 19 pandemic.
Selling, General and Administrative Expenses
| Three Months Ended December 31, | ||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 524 | $ | 536 | $ | (12 | ) | (2 | )% | |||||||
| Content & Entertainment Business | 2,244 | 2,294 | (50 | ) | (2 | )% | ||||||||||
| Corporate | 2,593 | 167 | 2,426 | 1453 | % | |||||||||||
| $ | 5,361 | $ | 2,997 | $ | 2,364 | 79 | % | |||||||||
36
Selling, general and administrative expenses for the three month ended December 31, 2020 increase by $2.4 million, primarily due to increase in share based compensation expense of $0.8 million and a bonus expense of $1.4 million.
Depreciation and Amortization Expense on Property and Equipment
| Three Months Ended December 31, | ||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 706 | $ | 1,475 | $ | (769 | ) | (52 | )% | |||||||
| Content & Entertainment Business | 108 | 77 | 31 | 40 | % | |||||||||||
| Corporate | 8 | 42 | (34 | ) | (81 | )% | ||||||||||
| $ | 822 | $ | 1,594 | $ | (772 | ) | (48 | )% | ||||||||
Depreciation and amortization expense decreased in our Cinema Equipment Business segment as additional digital cinema projection Systems reached the conclusion of their ten-year useful lives during fiscal year 2020.
Interest expense, net
| Three Months Ended December 31, | ||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||
| Cinema Equipment Business | $ | 629 | $ | 640 | $ | (11 | ) | (2 | )% | |||||||
| Content & Entertainment Business | 9 | - | 9 | - | % | |||||||||||
| Corporate | 310 | $ | 978 | $ | (668 | ) | (68 | )% | ||||||||
| $ | 948 | $ | 1,618 | $ | (670 | ) | (41 | )% | ||||||||
Interest expense in the Cinema Equipment Business segment decreased primarily as a result of reduced note payable balances compared to the prior period, solely on the Prospect Term Loan. Interest expense in our Corporate Segment decreased as a result of lower loan balances from our Credit Facility and Second Lien Loans settled with Class A common stock and the conversion of the Bison Convertible Note and the Mingtai Convertible Note into shares of Class A Common Stock.
Change in fair value of equity investment in Starrise, a related party
Our investment in Starrise is accounted for at fair value with changes in fair value recognized in the statement of operations. The loss of $6.8 million during the three months ended December 31, 2020 reflects the decrease during the period in the market price of Starrise’s stock.
Income Tax Expense
We recorded an income tax benefit of $0 for the three months ended December 31, 2020. We recorded income tax expense of approximately $0.1 million for the three months ended December 31, 2019.
Our effective tax rate for the three months ended December 31, 2020 and 2019 was 0% and negative 2.0%, respectively.
Adjusted EBITDA
We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items.
Consolidated Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the three months ended December 31, 2020 decreased by $1.8 million compared to the three months ended December 31, 2019. Adjusted EBITDA from our Cinema Equipment Business segment decreased primarily due to state mandated theater closures due to COVID-19, the temporary halt of distribution of major studio releases and the expected decline of the Cinema Equipment Business. Adjusted EBITDA from our Content & Entertainment Business and corporate increased for the three months ended December 31, 2020 compared to the three months ended December 31, 2019 by $0.2 million due to the addition of five new third-party OTT channels and an increase in the number of advertising partners.
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Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We use Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe Adjusted EBITDA will also be useful to others, including its stockholders, as a valuable financial metric.
We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net loss from continuing operations as an indicator of operating performance. We also believe that Adjusted EBITDA is a financial measure that is useful both to management and investors when evaluating our performance and comparing our performance with that of our competitors. We also use Adjusted EBITDA for planning purposes and to evaluate our financial performance because Adjusted EBITDA excludes certain incremental expenses or non-cash items, such as stock-based compensation charges, that we believe are not indicative of our ongoing operating performance.
We believe that Adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net loss from continuing operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:
| Three Months Ended December 31, | ||||||||
| ($ in thousands) | 2020 | 2019 | ||||||
| Net loss | $ | (9,667 | ) | $ | (2,162 | ) | ||
| Add Back: | ||||||||
| Income tax expense | — | 136 | ||||||