UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the fiscal period ended: June 30, 2022

 

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

 

For the transition period from _____ to _____

 

Commission File Number: 001-31810

 

Cinedigm Corp.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3720962
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
264 West 40th Street, New York, NY   10018
(Address of principal executive offices)   (Zip Code)

 

(212) 206-8600

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  

Large accelerated filer ☐   Accelerated filer ☐   Non-accelerated filer ☒   Smaller reporting company ☒   Emerging Growth Company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒    

 

☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

As of August 9, 2022, 177,250,068 shares of Class A Common Stock, $0.001 par value, were outstanding.

 

 

 

 

 

 

CINEDIGM CORP.

TABLE OF CONTENTS

 

    Page
  PART I - FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets at June 30, 2022 (Unaudited) and March 31, 2022 1
  Unaudited Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2022 and 2021 2
  Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months ended June 30, 2022 and 2021 3
  Unaudited Condensed Consolidated Statements of (Deficit) Equity for the Three Months ended June 30, 2022 and 2021 4
  Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2022 and 2021 6
  Notes to the Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 4. Controls and Procedures 39
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Mine Safety Disclosures 41
Item 5. Other Information 41
Item 6. Exhibits 42
Exhibit Index 42
Signatures 43

 

i

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

CINEDIGM CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)

 

   June 30,
2022
   March 31,
2022
 
ASSETS        
Current assets        
Cash and cash equivalents  $11,519   $13,062 
Accounts receivable, net of allowance of $2,605 and $2,921, respectively   25,215    30,843 
Inventory   129    116 
Unbilled revenue   2,597    2,349 
Prepaid and other current assets   4,621    5,793 
           
Total current assets   44,081    52,163 
Equity investment in A Metaverse Company, a related party, at fair value   5,772    7,028 
Property and equipment, net   1,865    1,980 
Operating lease right-of use assets, net   680    749 
Intangible assets, net   19,290    20,034 
Goodwill   21,084    21,084 
Other long-term assets   1,451    1,598 
Total assets  $94,223   $104,636 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $46,450   $52,025 
Current portion of deferred consideration on purchase of business   3,449    3,432 
Current portion of earnout consideration on purchase of business   1,188    1,081 
Operating lease liabilities   193    258 
Current portion of deferred revenue   371    196 
           
Total current liabilities   51,651    56,992 
Deferred consideration on purchase – net of current portion   5,379    5,600 
Earnout consideration on purchase – net of current portion   627    603 
Operating lease liabilities, net of current portion   489    491 
Other long-term liabilities   86    - 
           
Total liabilities   58,232    63,686 
Commitments and contingencies (see Note 6)   
 
    
 
 
Stockholders’ Equity          
Preferred stock, 15,000,000 shares authorized; Series A 10% - $0.001 par value per share; 20 shares authorized; 7 shares issued and outstanding at June 30, 2022 and March 31, 2022. Liquidation preference of $3,648   3,559    3,559 
Common stock, $0.001 par value; Class A stock 275,000,000 and 275,000,000 shares authorized at June 30, 2022 and March 31, 2022, respectively, 176,737,459 and 176,629,435 shares issued and 175,421,608 and 175,313,584 shares outstanding at June 30, 2022 and March 31, 2022, respectively.   174    174 
Additional paid-in capital   523,669    522,601 
Treasury stock, at cost; 1,315,851 and 1,315,851 Class A common shares at June 30, 2022 and March 31, 2022, respectively.   (11,608)   (11,608)
Accumulated deficit   (478,403)   (472,310)
Accumulated other comprehensive loss   (115)   (163)
Total stockholders’ equity of Cinedigm Corp.   37,276    42,253 
Deficit attributable to noncontrolling interest   (1,285)   (1,303)
Total equity   35,991    40,950 
Total liabilities and equity  $94,223   $104,636 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

1

 

 

CINEDIGM CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except for share and per share data)

 

   Three Months Ended
June 30,
 
   2022   2021 
Revenues  $13,590   $15,015 
Costs and expenses:          
Direct operating (excludes depreciation and amortization shown below)   7,356    4,631 
Selling, general and administrative   9,815    6,043 
Bad debt expense   3    71 
Depreciation and amortization of property and equipment   256    649 
Amortization of intangible assets   744    847 
Total operating expenses   18,174    12,241 
Income (loss) from operations   (4,584)   2,774 
Interest expense, net   (133)   (144)
Gain on forgiveness of PPP loan and extinguishment of note payable   -    2,178 
Change in fair value of equity investment in A Metaverse Company, a related party   (1,256)   334 
Other expense, net   (14)   (11)
Income (loss) before income taxes   (5,987)   5,131 
Income tax benefit   -    63 
Net income (loss)   (5,987)   5,194 
Net loss attributable to noncontrolling interest   (18)   (7)
Net income (loss) attributable to controlling interests   (6,005)   5,187 
Preferred stock dividends   (88)   (89)
Net income (loss) attributable to common stockholders  $(6,093)  $5,098 
Net income (loss) per Class A common stock attributable to common stockholders - basic:  $(0.03)  $0.03 
Weighted average number of Class A common stock outstanding: basic   175,420,421    167,940,285 
Net income (loss) per Class A common stock attributable to common stockholders - diluted:  $(0.03)  $0.03 
Weighted average number of Class A common stock outstanding: diluted   175,420,421    171,257,356 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

2

 

 

CINEDIGM CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

   Three Months Ended
June 30,
 
   2022   2021 
Net income (loss)  $(5,987)  $5,194 
Other comprehensive (loss) income: foreign exchange translation   48    (54)
Comprehensive income (loss)   (5,939)   5,140 
Less: comprehensive income attributable to noncontrolling interest   (18)   (7)
Comprehensive income (loss) attributable to controlling interests  $(5,957)  $5,133 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

3

 

 

CINEDIGM CORP.

CONSDENSED CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY

(Unaudited)

(In thousands, except share data)

 

   Series A Preferred Stock   Class A
Common Stock
   Treasury   Additional Paid-In   Accumulated   Accumulated Other Comprehensive   Total Stockholders’
Equity
   Non-Controlling   Total
Equity
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   (Deficit)   Interest   (Deficit) 
Balances as of March 31, 2021   7   $3,559    166,228,568   $164    1,313,836   $(11,603)  $499,272   $(474,080)  $(68)  $17,244   $(1,362)  $15,882 
Foreign exchange translation       
        
        
    
    
    (54)   (54)   
    (54)
Stock-based compensation   
    
    35,714    
    
    
    983    
    
    983    
    983 
Issuance of common stock in connection with a business combination   
    
    1,483,129    2    
    
    2,504    
    
    2,506    
    2,506 
Preferred stock dividends paid with common stock   
    
    53,278    
    
    
    89    (89)   
    
    
    
 
Net income       
        
        
    
    5,187    
    5,187    7    5,194 
Balances as of June 30, 2021   7    3,559    167,800,689    166    1,313,836    (11,603)   502,848    (468,982)   (122)   25,866    (1,355)   24,511 

 

 

See accompanying & Notes to Condensed Consolidated Financial Statements

 

4

 

 

CINEDIGM CORP.

CONDENSED CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY

(Unaudited)

(In thousands, except share data)

  

   Series A Preferred Stock   Class A
Common Stock
   Treasury   Additional Paid-In   Accumulated   Accumulated Other Comprehensive   Total Stockholders’
Equity
   Non-Controlling   Total
Equity
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   (Deficit)   Interest   (Deficit) 
Balances as of March 31, 2022   7   $3,559    175,313,584   $174    1,315,851   $(11,608)  $522,601   $(472,310)  $(163)  $42,253   $(1,303)  $40,950 
Foreign exchange translation       
        
        
    
    
    48    48    
    48 
Stock-based compensation       
        
        
    980    
    
    980    
    980 
Preferred stock dividends paid with common stock   
    
    108,024    
    
    
    88    
    
    88    
    88 
Preferred stock dividends accrued       
        
        
    
    (88)   
    (88)   
    (88)
Net income (loss)       
        
        
    
    (6,005)   
    (6,005)   18    (5,987)
Balances as of June 30, 2022   7   $3,559    175,421,608   $174    1,315,851   $(11,608)  $523,669   $(478,403)  $(115)  $37,276   $(1,285)  $35,991 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5

 

 

CINEDIGM CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Three Months Ended
June 30,
 
   2022   2021 
Cash flows from operating activities:        
Net income (loss)  $(5,987)  $5,194 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization of property and equipment and amortization of intangible assets   1,000    1,496 
Impairment of prepaid advances   32    
-
 
Changes in fair value of equity investment in A Metaverse Company   1,256    (334)
Gain from forgiveness of PPP loan   -    (2,178)
Provision for doubtful accounts   3    71 
Stock-based compensation   980    983 
Interest expense for deferred consideration   81    
-
 
Interest expense for earnout consideration   52    
-
 
Changes in operating assets and liabilities, net of acquisitions:          
Accounts receivable   5,625    (6,103)
Inventory   (13)   24 
Unbilled revenue   (248)   (295)
Prepaids and other current assets, and other long-term assets   1,287    1,730 
Accounts payable, accrued expenses, and other liabilities   (5,441)   3,508 
Deferred revenue   175    (475)
Net cash (used in) provided by operating activities   (1,198)   3,621 
Cash flows from investing activities:          
Purchases of property and equipment   (141)   (41)
Purchase of a business   80    (750)
Net cash used in investing activities   (61)   (791)
Cash flows from financing activities:          
Payment of notes payable   (284)   (4,755)
Payment under revolving credit agreement, net   
-
    (1,569)
Net cash used in by financing activities   (284)   (6,324)
Net change in cash, cash equivalents, and restricted cash   (1,543)   (3,494)
Cash, cash equivalents, and restricted cash at beginning of period   13,062    17,849 
Cash, cash equivalents, and restricted cash at end of period  $11,519   $14,355 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

6

 

 

CINEDIGM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF OPERATIONS AND LIQUIDITY

 

Cinedigm Corp. (“Cinedigm,” the “Company,” “we,” “us,” or similar pronouns) was incorporated in Delaware on March 31, 2000. We are (i) a distributor and aggregator of independent movie, television and other short form content managing a library of distribution rights to thousands of titles and episodes released across digital, physical, theatrical, home and mobile entertainment platforms (“Streaming”) and (ii) a servicer of digital cinema assets (“Systems”) for movie screens in both North America and several international countries.

 

We report our financial results in two primary segments as follows: (1) cinema equipment business and (2) 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 Australia. It also provides fee-based support to music and 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 operates 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.

 

Risks and Uncertainties

 

The COVID-19 pandemic and related economic repercussions created significant volatility and uncertainty impacting the Company’s results for the period. As part of our Content & Entertainment business, the Company sells DVDs and Blu-ray discs at brick-and-mortar stores.

 

Liquidity

 

We have incurred net losses historically and have net loss of $6.0 million for the three months ended June 30, 2022. We also have an accumulated deficit of $478.4 million and negative working capital of $7.6 million as of June 30, 2022. Net cash used by operating activities for the three months ended June 30, 2022 was $1.2 million. We may continue to generate net losses for the foreseeable future. Based on these conditions, the Company entered into the following transactions described below:

  

We believe the combination of: (i) our cash and cash equivalent balances at June 30, 2022 and (ii) expected cash flow from operations, will be sufficient for our operations and capital needs, for at least twelve months from the filing of this report. 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.

 

7

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION AND CONSOLIDATION

 

Our consolidated financial statements include the accounts of Cinedigm and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

Investments in which we do not have a controlling interest or are not the primary beneficiary, but have the ability to exert significant influence, are accounted for under the equity method of accounting. Noncontrolling interests for which we have been determined to be the primary beneficiary are consolidated and recorded as net loss attributable to noncontrolling interest. See Note 3 - Other Interests to the Consolidated Financial Statements for a discussion of our noncontrolling interests.

 

USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include the accrual of digital revenue, accounts receivable reserves, return reserves, inventory reserves, recovery of advances, assessment of goodwill impairment, intangible asset impairment and estimated amortization lives, fair value for asset acquisitions and business combinations, valuation allowances for income taxes and stock awards. Actual results could differ from these estimates.  

 

CASH AND CASH EQUIVALENTS

 

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.

 

Cash and cash equivalents consisted of the following:

 

   As of 
(in thousands)  June 30,
2022
   March 31,
2022
 
Cash and Cash Equivalents  $11,519   $13,062 

 

EQUITY INVESTMENT IN A METAVERSE COMPANY, A RELATED PARTY

 

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

 

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

 

8

 

 

The Company has accounted for these investments under the equity method of accounting as the Company can exert significant influence over Metaverse 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 Metaverse.

 

On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted, the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse’s stock valuation is based on an evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs.  

 

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 Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rate.

 

ADVANCES

 

Advances, which are recorded within prepaid and other current assets on the consolidated balance sheets, represent amounts prepaid to studios or content producers for which we provide content distribution services. We evaluate advances regularly for recoverability and record impairment charges for amounts that we expect may not be recoverable as of the consolidated balance sheet date. Impairments and accelerated amortization related to advances were $32 thousand and $0.2 million, for the three months ended June 30, 2022 and 2021, respectively.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:

 

Computer equipment and software     3 - 5 years  
Internal use software     5 years  
Digital cinema projection systems     10 years  
Machinery and equipment     3 - 10 years  
Furniture and fixtures     3 - 6 years  

 

We capitalize costs associated with software developed or obtained for internal use when the preliminary project stage is completed, and it is determined that the software will provide significantly enhanced capabilities and modifications. These capitalized costs are included in property and equipment and include external direct cost of services procured in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with, and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended use. Once the software is ready for its intended use, the costs are amortized over the useful life of the software. Post-configuration training and maintenance costs are expensed as incurred.

 

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Repair and maintenance costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized. Upon the sale or other disposition of any property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss on disposal is included in the consolidated statements of operations.

 

9

 

 

IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS

 

We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset’s fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. During the three months ended June 30, 2022 and 2021, no impairment charge was recorded from operations for long-lived assets or finite-lived assets.

 

INTANGIBLE ASSETS

 

Intangible assets are stated at cost less accumulated amortization. For intangible assets that have finite lives, the assets are amortized using the straight-line method over the estimated useful lives of the related assets. For intangible assets with indefinite lives, the assets are tested annually for impairment or sooner if a triggering event occurs. During the three months ended June 30, 2022 and 2021, no impairment charge was recorded from operations for intangible assets.

 

Amortization expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:

 

Trademark     3 years  
Content Library     3 – 20 years  
Customer Relationships     5 – 13 years  
Tradename     2 – 15 years  
Supplier Agreements     2 years  
Advertiser relationships and Channel     3-13 years  
Software       10 years    

 

The Company’s intangible assets included the following on June 30, 2022:

 

   Cost Basis   Accumulated
Amortization
  

 

Impairment

   Net 
Trademark  $1,925   $(925)  $
-
    1,000 
Content Library   23,685    (20,803)   
-
    2,882 
Customer Relationships   10,658    (7,395)   (1,968)   1,295 
Tradename   2,101    (619)   
-
    1,482 
Theatre Relationship   550    (550)   
-
    
-
 
Patents   17    (17)   
-
    
-
 
Supplier Agreements   11,430    (11,399)   
-
    31 
Advertiser relationships and Channel   10,081    (361)   
-
    9,720 
Software   3,200    (320)   
-
    2,880 
Total Intangible Assets  $63,647   $(42,389)  $(1,968)   19,290 

 

The Company’s intangible assets included the following on March 31, 2022:

 

   Cost Basis   Accumulated
Amortization
  

 

Impairment

   Net 
Trademark  $1,925   $(776)  $
-
    1,149 
Content Library   23,685    (20,665)   
-
    3,020 
Customer Relationships   10,658    (7,327)   (1,968)   1,363 
Tradename   2,101    (525)   
-
    1,576 
Theatre Relationship   550    (550)   
-
    
-
 
Patents   17    (17)   
-
    
-
 
Supplier Agreements   11,430    (11,384)   
-
    46 
Advertiser relationships and Channel   10,081    (161)   
-
    9,920 
Software   3,200    (240)   
-
    2,960 
Total Intangible Assets  $63,647   $(41,645)  $(1,968)   20,034 

 

10

 

 

Below is the amortization expense per year for the intangible assets:

 

   Total 
2023  $2,520 
2024   3,048 
2025   1,796 
2026   1,489 
2027   1,269 
Thereafter   9,168 
Total  $19,290 

 

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 Metaverse is in Hong Kong dollars and was translated into US dollars as of June 30, 2022 and 2021 at an exchange rate of 7.8 and 7.8 Hong Kong Dollars to 1 US Dollar, respectively. The fair value of this equity investment was measured by the quoted market price of Metaverse on the Stock Exchange of Hong Kong at June 30, 2021. On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange and as of June 30, 2022, Metaverse’s stock valuation is based on a preliminary evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs. The adjustment to fair value of this investment resulted in a loss of $1.3    million and gain of $0.3 million for the three months ended June 30, 2022 and 2021, respectively. As the value of the investment in Metaverse is being determined by an offer to purchase the shares from an independent third party, the value of the investment may need to be reduced or fully written off should the offer be rescinded.

 

The following tables summarize the levels of fair value measurements of our financial assets and liabilities as of June 30, 2022 and March 31, 2022:

 

As of June 30, 2022

 

(in thousands)  Level 1   Level 2   Level 3   Total 
Assets:                
Equity investment in Metaverse, at fair value  $
-
   $
-
   $5,772   $5,772 
   $
-
   $
-
   $5,772   $5,772 
                     
Liabilities:                    
Current portion of earnout consideration on purchase of a business  $
   $
   $1,188   $1,188 
Long term portion of earnout consideration on purchase of a business   
    
    627    627 
   $
   $
   $1,815   $1,815 

 

11

 

 

As of March 31, 2022

 

(in thousands)  Level 1   Level 2   Level 3   Total 
Assets:                
Equity investment in Metaverse, at fair value  $7,028   $
   $
   $7,028 
   $7,028   $
   $
   $7,028 
                     
Liabilities:                    
Current portion of earnout consideration on purchase of a business  $
   $
   $1,081   $1,081 
Long term portion of earnout consideration on purchase of a business   
    
    603    603 
   $
   $
   $1,684   $1,684 

 

Our cash and cash equivalents, accounts receivable, unbilled revenue and accounts payable and accrued expenses are financial instruments and are recorded at cost in the consolidated balance sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature.  

 

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.

 

The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test. The Company reassessed goodwill impairment on its annual measurement date of March 31, 2022 by performing a qualitative analysis and determined that it was not more likely than not that the fair value of its reporting unit is less than its carrying amount.  

 

No goodwill impairment charge was recorded in the three months ended June 30, 2022 and 2021.

 

12

 

 

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of 
(In thousands)  June 30,
2022
   March 31,
2022
 
Accounts payable  $29,325   $34,177 
Amounts due to producers   9,254    10,430 
Accrued compensation and benefits   4,401    3,507 
Accrued taxes (refund) payable   (67)   (78)
Accrued other expenses   3,537    3,989 
Total accounts payable and accrued expenses  $46,450   $52,025 

 

PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consisted of the following:

 

   As of 
(In thousands)  June 30,
2022
   March 31,
2022
 
Non-trade accounts receivable  $688   $826 
Advances   1,853    2,117 
Due from producers   1,057    1,861 
Prepaid insurance   212    169 
Other prepaid expenses   811    820 
Total prepaid and other current assets  $4,621   $5,793 

 

Impairments and accelerated amortization related to advances were $32 thousand and $0.2 million, for the three months ended June 30, 2022 and 2021, respectively.

 

REVENUE RECOGNITION

 

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.

 

13

 

 

Cinema Equipment Business

 


Our Cinema Equipment Business consists of financing vehicles and administrators for Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for Systems installed domestically and internationally in our second deployment phase (“Phase II Deployment”).

 

We retain ownership of our Systems and the residual cash flows related to the Systems in Phase I Deployment after the end of the 10-year deployment payment period.

 

For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.

 

The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees (“VPFs”) from motion picture studios and distributors and Alternative Content Fees (“ACFs”) from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, “Services”).

 

VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to us with respect to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period the title first plays for general audience viewing in a digital projector equipped movie theatre. The Phase 1 Deployment’s and Phase 2 Deployments performance obligations for revenue recognition are met at this time.

 

Phase II Deployment’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related to the variable consideration, that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.  

 

Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the Systems and Cinedigm received the sale proceeds. Such sales were originally contemplated as the conclusion of the digital cinema deployment plan. Total system revenue was $1.2 million and $5.6 million, during the three months ended June 30, 2022 and 2021, respectively. Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.

 

Exhibitors who purchased and own Systems using their own financing in Phase II of the Cinema Equipment Business paid us an upfront activation fee of approximately $2.0 thousand per screen (the “Exhibitor-Buyer Structure”). Upfront activation fees were recognized in the period in which these Systems were delivered and ready for content, as we had no further obligations to the customer after that time and collection was reasonably assured. In addition, we recognize activation fee revenue of between $1.0 thousand and $2.0 thousand on Phase II Deployment Systems and for Systems installed by CDF2 Holdings, a related party, (See Note 3 - Other Interests) upon installation and such fees are generally collected upfront upon installation. Our services division manages and collects VPFs on behalf of exhibitors, for which it earns an administrative fee equal to 10% of the VPFs collected.

 

14

 

 

The Cinema Equipment Business earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service fee equal to 2.5% of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPF’s and the performance obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on screens utilizing our Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding VPF fees are due from the movie studios and distributors.

 

Content & Entertainment Business

 

CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand (“VOD” or “OTT Streaming and Digital”), and physical goods (e.g., DVDs and Blu-ray Discs) (“Physical Revenue” or “Base Distribution Business”). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance obligations include the delivery of content for transactional, subscription and ad supported/free ad-supported streaming TV (“FAST”) on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the content is available for subscription on the digital platform (the company’s digital content is considered functional IP), at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical revenue from the sale of physical goods is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.

 

Reserves for potential sales returns of physical goods 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 are 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.

 

The Company follows the five-step model established by ASC 606 when preparing its assessment of revenue recognition

 

Principal Agent Considerations

 

Revenue earned by our CEG business from the delivery of digital content and physical goods may be recognized gross or net depending on the terms of the arrangement. 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., DVDs and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.

 

15

 

 

Credit Losses

 

We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

 

Our CEG segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. Reserves for product returns and other allowances is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.

 

We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates.

 

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.

 

Deferred revenue pertaining to our Content & Entertainment Business includes amounts related to the sale of DVDs with future release dates.

 

Deferred revenue relating to our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms.

 

The ending deferred revenue balance, including current and non-current balances, as of June 30, 2022 was $0.4 million. For the three months ended June 30, 2022, the additions to our deferred revenue balance were primarily due to cash payments received or due in advance of satisfying performance obligations, while the reductions to our deferred revenue balance were primarily due to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business. For the three months ended June 30, 2022 and 2021, there was $12.0 million and $14.6 million  , respectively, included in accounts payable that represents a refund liability, a portion or all of which may be recognized as revenue upon completion of audit periods.

 

Participations and royalties payable

 

When we use third parties to distribute company owned content, we record participations payable, which represent amounts owed to the distributor under revenue-sharing arrangements. When we provide content distribution services, we record accounts payable and accrued expenses to studios or content producers for royalties owed under licensing arrangements. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers.

 

Disaggregation of Revenue

 

The Company disaggregates revenue into different revenue categories for the Cinema Equipment and CEG Businesses. The Cinema Equipment Business revenue categories are: Phase I Deployment revenue, Phase II Deployment revenue, Services, and Digital System Sales, and the Content & Entertainment Business revenue categories are: Base Distribution Business and OTT Streaming and Digital.

 

The following tables present the Company’s revenue categories for the three months ended June 30, 2022 and 2021 (in thousands):

 

   Three Months Ended
June 30,
 
   2022   2021 
Cinema Equipment Business:        
Phase I Deployment  $113   $91 
Phase II Deployment   
-
    386 
Services   120    179 
Digital System Sales   1,194    5,575 
Total Cinema Equipment Business revenue  $1,427   $6,231 
           
Content & Entertainment Business:          
Physical Revenue  $2,205   $1,778 
OTT Streaming and Digital   9,958    7,006 
Total Content & Entertainment Business revenue  $12,163   $8,784 

 

16

 

 

Concentrations

 

For the three months ended June 30, 2022, three customers, Amazon.com, Inc., Distribution Solutions, a division of Alliance Entertainment and Roku, Inc., represented 22% and 14%, and 10% respectively, of Content & Entertainment Business revenues, and approximately 19%, and 13% and 9%, respectively, of our consolidated revenues. For the three months ended June 30, 2021, Amazon.com, Inc. Distribution Solutions, a division of Alliance Entertainment and Roku, Inc., represented 23%, 11% and 11%, respectively, of Content & Entertainment Business revenues and approximately 14%, 6% and 6%, respectively, of our consolidated Revenues.   

 

DIRECT OPERATING COSTS

 

Direct operating costs consist of operating costs such as cost of revenue, fulfillment expenses, shipping costs, property taxes and insurance on Systems, royalty expenses, impairments of advances, and marketing and direct personnel costs.

 

STOCK-BASED COMPENSATION

 

The Company issues stock-based awards to employees and non-employees, generally in the form of restricted stock, restricted stock units, stock appreciation rights and performance stock units. The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock units and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. The Company measures the compensation expense of employee and nonemployee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period during which the employee and nonemployee is required to provide service in exchange for the award. The fair values of options and stock appreciation rights are calculated as of the date of grant using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term. The Company’s estimates of these assumptions are primarily based on the trading price of the Company’s stock, historical data, peer company data and judgment regarding future trends and factors.

 

INCOME TAXES

 

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carryforwards and for differences between the carrying amounts of existing assets and liabilities and their respective tax bases.

 

Valuation allowances are established when management is unable to conclude that it is more likely than not that some portion, or all, of the deferred tax asset will ultimately be realized. The Company is primarily subject to income taxes in the United States.

 

The Company accounts for uncertain tax positions in accordance with an amendment to ASC Topic 740-10, Income Taxes (Accounting for Uncertainty in Income Taxes), which clarified the accounting for uncertainty in tax positions. This amendment provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not” to be sustained were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is more than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded. The Company has no uncertain tax positions.

 

17

 

 

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

Basic and diluted net loss per common share has been calculated as follows:

 

Basic net income (loss) per common share attributable to common stockholders = Net loss attributable to common stockholders
Weighted average number of common stock
outstanding during the period

 

Diluted net income (loss) per common share attributable to common stockholders = Net loss attributable to common stockholders
Weighted average number of common stock
outstanding during the period plus potential dilutive shares

 

Stock issued and treasury stock repurchased or reacquired during the period are weighted for the portion of the period that they are outstanding.

 

We incurred a net loss for the three months ended June 30, 2022, and therefore the impact of potentially dilutive common shares from outstanding stock options and warrants, totaling 8,506,098 shares as of June 30, 2022, were excluded from the computations of loss per share as their impact would have been anti-dilutive.

 

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

 

COMPREHENSIVE LOSS

 

For the three months ended June 30, 2022 and 2021, comprehensive loss consisted of net loss and foreign currency translation adjustments.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which provides new guidance regarding the measurement and recognition of credit impairment for certain financial assets. Such guidance will impact how the Company determines its allowance for estimated uncollectible receivables and evaluates its available-for-sale investments for impairment. ASU 2016-13 is effective for the Company in the first quarter of fiscal 2023. The Company is currently evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.

 

3. OTHER INTERESTS

 

Investment in CDF2 Holdings

 

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

 

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

 

18

 

 

As of June 30, 2022 and March 31, 2022, our maximum exposure to loss, as it relates to the non-consolidated CDF2 Holdings entity, represents accounts receivable for service fees under a master service agreement with CDF2 Holdings. Such accounts receivable was $0.7 million and $0.8 million as of June 30, 2022 and March 31, 2022, respectively, which are included in accounts receivable, net on the accompanying consolidated balance sheets.

 

The accompanying Consolidated Statements of Operations include $(104) thousand and $77 thousand of digital cinema servicing revenue from CDF2 Holdings for the three months ended June 30, 2022 and 2021, respectively.

 

Total Stockholders’ Deficit of CDF2 Holdings at June 30, 2022 and March 31, 2022 was $57.3 million and $55.6 million, respectively. We have no obligation to fund the operating loss or the stockholders’ deficit beyond our initial investment of $2.0 million and, accordingly, our investment in CDF2 Holdings as of June 30, 2022 and March 31, 2022 is carried at $0.

 

Majority Interest in CONtv

 

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

 

Investment in Roundtable

 

On March 15, 2022, the Company entered into a stock purchase agreement with Roundtable Entertainment Holdings, Inc. (“Roundtable”) pursuant to which the Company purchased 500 shares of Roundtable Series A Preferred Stock and warrants to purchase 100 shares of Roundtable Common Stock (together, the “Roundtable Securities”). The Company paid the purchase price for the Roundtable Securities by issuing to Roundtable 316,937 shares of Common Stock is based on the closing price of the company on the date of the purchase. The Company recorded $0.2 million for the purchase of the Roundtable Securities which is included in other long-term assets on the consolidated balance sheet. The investment in the Roundtable Securities was made in connection with a proposed collaboration with Roundtable regarding production and distribution of streaming content including the launch of high profile branded enthusiast streaming channels. The Roundtable investment was accounted for using the cost method.

 

4. STOCKHOLDERS’ EQUITY (DEFICIT)

 

COMMON STOCK

 

Authorized Common Stock

 

As of June 30, 2022 the number of shares of Common Stock authorized for issuance was 275,000,000 shares.

 

During the three months ended June 30, 2022, the Company issued 108,024 shares of Common Stock which consist the issuance of Common Stock in payment of preferred stock dividends.

  

PREFERRED STOCK

 

Cumulative dividends in arrears on preferred stock were $0.1 million and $0.1 million as of June 30, 2022 and 2021, respectively. In May 2022 and 2021, we paid preferred stock dividends in arrears in the form of 108,024 and 53,278 shares of Common Stock, respectively.

 

TREASURY STOCK

 

We have treasury stock, at cost, consisting of 1,315,851 and 1,315,851 shares of Common Stock at June 30, 2022 and March 31, 2022, respectively.

 

19

 

 

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 Common Stock on the date of grant. ISOs granted to shareholders having more than 10% of the total combined voting power of the Company must have exercise prices of at least 110% of the fair market value of our Common Stock on the date of grant. ISOs and non-statutory stock options granted under the 2000 Plan are subject to vesting provisions, and exercise is subject to the continuous service of the participant. The exercise prices and vesting periods (if any) for non-statutory options are set at the discretion of our compensation committee. On November 1, 2017, upon the consummation of the initial equity investment in Cinedigm by Bison, as a result of which there was a change of control of the Company, all stock options (incentive and non-statutory) and shares of restricted stock were vested immediately and the options became fully exercisable.

 

In connection with the grants of stock options and shares of restricted stock under the 2000 Plan, we and the participants have executed stock option agreements and notices of restricted stock awards setting forth the terms of the grants. The 2000 Plan provided for the issuance of up to 2,380,000 shares of Common Stock to employees, outside directors and consultants.

 

As of June 30, 2022, there were 212,037 stock options outstanding in the 2000 Plan with weighted average exercise price of $14.46   and a weighted average contract life of 1.32 years. As of March 31, 2022, there were 217,337 shares pursuant to stock options outstanding in the Plan with weighted average exercise price of $14.49 and a weighted average contract life of 1.54 years. A total of 5,300 options expired and zero options were forfeited during the three months ended June 30, 2022.

 

Options outstanding under the 2000 Plan as of June 30, 2022 is as follows:

 

As of June 30, 2022
Range of Prices  Options Outstanding   Weighted Average Remaining Life in Years   Weighted Average Exercise Price   Aggregate Intrinsic Value
(In thousands)
 
$1.16 - $7.40   5,000    3.01   $7.40   $
 
$13.70 - $24.40   207,037    1.28    14.63    
 
    212,037             $
 

 

An analysis of all options exercisable under the 2000 Plan as of June 30, 2022 is presented below:

 

Options Exercisable   Weighted Average
Remaining Life in Years
   Weighted Average
Exercise Price
   Aggregate Intrinsic Value
(In thousands)
 
 212,037    1.32   $14.46    
 

   

In August 2017, the Company adopted the 2017 Equity Incentive Plan (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 Common Stock, in the form of various awards, including stock options, stock appreciation rights, stock, restricted stock, restricted stock units, performance awards and cash awards. The Compensation Committee of the Company’s Board of Directors (the “Board”) is authorized to administer the 2017 Plan and make grants thereunder. The approval of the 2017 Plan did not affect awards already granted under the 2000 Plan. On December 4, 2019, upon shareholder approval, the 2017 Plan was amended to increase the maximum number of shares of Common Stock authorized for issuance thereunder from 2,108,270 shares to 4,098,270.

 

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

 

On October 11, 2021, the Company amended its 2017 Plan to increase the number of shares authorized for issuance thereunder from 14,098,270 to 18,098,270.

 

20

 

 

Stock appreciation rights outstanding under the 2017 Plan as of June 30, 2022 is as follows:

 

As of June 30, 2022
Range of Prices  SARs Outstanding   Weighted Average Remaining Life in Years   Weighted Average Exercise Price   Aggregate Intrinsic Value
(In thousands)
 
$0.54 - $0.74   5,550,000    8.45   $0.60   $
 
$1.16 - $1.47   2,283,610    6.29    1.25    
 
$1.71 - $2.10   2,455,738    6.53    1.49    
 
$2.23 - $2.56   604,250    9.31    2.29    
 
    10,893,598             $
 

 

An analysis of all stock appreciation rights exercisable under the 2017 Plan as of June 30, 2022 is presented below:

 

SAR Exercisable   Weighted Average
Remaining Life in Years
   Weighted Average
Exercise Price
   Aggregate Intrinsic Value
(In thousands)
 
 2,736,473    7.29   $1.21    - 

 

Total SARs outstanding are as follows:

 

   Year
Ended
June 30,
2022
 
SARs Outstanding March 31, 2022   10,893,598 
Issued   
-
 
Forfeited   
-
 
Total SARs Outstanding June 30, 2022   10,893,598 

 

Following is the activity for performance stock unit awards:

 

   Shares   Weighted Average Grant Date Fair Value 
Unvested balance at March 31, 2022   696,280   $1.25 
Granted   
-
    
-
 
Vested   
-
    
-
 
Unvested balance at June 30, 2022   696,280   $1.25 

 

During the three months ended June 30, 2022, zero shares were issued for vested awards and 255,219   shares are to be issued as of June 30, 2022.

 

Employee and director stock-based compensation expense related to our stock-based awards was as follows:

 

   Three Months Ended
June 30,
 
(In thousands)  2022   2021 
Selling, general and administrative  $980   $983 
   $980   $983 

 

There was $875 thousand   and $1 thousand of stock-based compensation recorded for the three months ended June 30, 2022 and 2021, respectively, related to employees’ restricted stock awards.

 

21

 

 

There was $105 thousand   and $126 thousand of stock-based compensation for the three months ended June 30, 2022 and 2021, respectively, related to board of directors. During the three months ended June 30, 2022, the Company issued zero restricted shares to non-employee directors.

 

OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN

 

In October 2013, we issued options outside of the 2000 Plan to 10 individuals who became employees as a result of a business combination. The employees received options to purchase an aggregate of 62,000 shares of our Common Stock at an exercise price of $17.50 per share. The options were fully vested as of October 2017 and expire 10 years from the date of grant, if unexercised. As of June 30, 2022, 12,500   of such options remained outstanding.

 

WARRANTS

 

The following table presents information about outstanding warrants to purchase shares of our Common Stock as of June 30, 2022. All of the outstanding warrants are fully vested and exercisable.

 

Recipient  Amount
outstanding
   Expiration   Exercise price
per share
 
5-year Warrant issued to Bison Entertainment and Media Group(” BEMG”) in connection with a term loan agreement   1,400,000    December 2022   $1.80 

  

5. COMMITMENTS AND CONTINGENCIES

 

We operate from leased properties under non-cancelable operating lease agreements, certain of which contain escalating lease clauses.

  

The Company leases office space under an operating lease. The Company’s portfolio of leases is primarily related to real estate and since most of our leases do not provide a readily determinable implicit rate, the Company estimated its incremental borrowing rate to discount the lease payments based on information available at either the implementation date of Topic 842 or at lease commencement for leases entered into thereafter.

 

The table below presents the lease-related assets and liabilities recorded on the balance sheet as of June 30, 2022 and March 31, 2022:

 

(In thousands)   Classification on the Balance Sheet   June 30, 2022     March 31,
2022
 
Assets                
Noncurrent   Operating lease right-of-use asset   $ 680     $ 749  
Liabilities                    
Current   Operating leases – current portion     193       258  
Noncurrent   Operating leases – long-term portion     489       491  
Total operating lease liabilities       $ 682     $ 749  

 

Lease Costs

 

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

 

   Three Months Ended   Three Months Ended 
(In thousands)  June 30,
2022
   June 30,
2021
 
Operating lease cost  $84   $22 
Total lease cost  $84   $22 

 

22

 

 

Other Information

 

The table below presents supplemental cash flow information related to leases:

 

   Three Months Ended   Three Months Ended 
(In thousands)  June 30,
2022
   June 30,
2021
 
Cash paid for amounts included in the measurement of lease liabilities   
       -
      22 
Operating cash flows used for operating leases Hyde Park Agreement  $
-
   $22 

 

On January 5, 2022, the Company entered into a letter agreement with Hyde Park Entertainment, Inc. (“Hyde Park”), pursuant to which the Company and Hyde Park are collaborating on the development, production and/or distribution of a project based on the novel Audition by Ryu Murakami (the “Audition Project”). Each of the Company and Hyde Park owns 50% of the rights in connection with the Audition Project. The Company paid $100 thousand to Hyde Park plus $26 thousand in legal fees to counsel for the Audition project. Ashok Amritraj, a director of the Company, is the Chairman and CEO of Hyde Park and has an interest in 100% of the revenues of Hyde Park. Ashok Amritraj is a current board member and related party to the Company.

 

6. SUPPLEMENTAL CASH FLOW INFORMATION AND DISCLOSURE OF NON-CASH INVESTMENTING AN FINANCING ACTIVITY

 

   Three Months Ended
June 30,
 
(In thousands)  2022   2021 
Cash interest paid  $
-
   $663 
Income taxes paid   
-
    
-
 
Accrued dividends on preferred stock   88    89 
Issuance of Class A common stock for payment of preferred stock dividends   88    89 
Issuance of Class A common stock for business combination   
-
    2,506 
Deferred consideration in purchase of a business   
-
    1,980 
Earnout consideration in purchase of a business   80    
-
 

 

7. SEGMENT INFORMATION

 

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

 

Operations of:   Products and services provided:
Cinema Equipment Business  

Financing vehicles and administrators for 434   Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 648   Systems installed domestically and internationally in our second deployment phase (“Phase II Deployment”).

 

We retain ownership of the Systems and the residual cash flows related to the Systems in Phase I Deployment after the repayment of all non-recourse debt at the expiration of exhibitor master license agreements. For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.

 

The Cinema Equipment Business segment also provides monitoring, collection, verification and management services to this segment, as well as to exhibitors who purchase their own equipment, and also collects and disburses VPFs from motion picture studios, distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors (collectively, “Services”).

 

23

 

 

Content & Entertainment Business   Leading independent streaming company of content and channels. We collaborate with producers and other content owners to market, source, curate and distribute independent content to targeted and under-served audiences in theatres and homes, and via mobile and emerging platforms.

 

The following tables present certain financial information related to our reportable segments and Corporate:

 

   As of June 30, 2022 
(In thousands)  Intangible
Assets, net
   Goodwill   Total
Assets
   Notes
Payable,
Non-
Recourse
   Notes
Payable
   Operating
lease
liabilities
 
Cinema Equipment Business  $
   $
   $20,282   $
   $
   $
 
Content & Entertainment Business   19,202    21,084    66,770    
    
    675 
Corporate   88    
    7,171    
    
    7 
Total  $19,290   $21,084   $94,223   $
   $
   $682 

 

   As of March 31, 2022 
(In thousands)  Intangible
Assets, net
   Goodwill   Total
Assets
   Notes
Payable,
Non-
Recourse
   Notes
Payable
   Operating
lease
liabilities
 
Cinema Equipment Business  $
   $
   $24,445   $
   $
   $
 
Content & Entertainment Business   19,946    21,084    68,873    
    
     
Corporate   88    
    11,318    
    
    749 
Total  $20,034   $21,084   $104,636   $
   $
   $749 

 

   Statements of Operations 
   Three Months Ended June 30, 2022 
   (in thousands) 
   Cinema
Equipment
Business
   Content & Entertainment
Business
   Corporate   Consolidated 
                 
Revenues  $1,427   $12,163   $
-
   $13,590 
Direct operating (exclusive of depreciation and amortization shown below)   144    7,212    
-
    7,356 
Selling, general and administrative   1,071    3,783    4,961    9,815 
Allocation of corporate overhead   103    2,752    (2,855)   0 
Provision for (recovery of) doubtful accounts   3    
-
    
-
    3 
Depreciation and amortization of property and equipment   117    138    1    256 
Amortization of intangible assets   
-
    637    107    744 
Total operating expenses   1,438    14,522    2,214    18,174 
Income (loss) from operations  $(11)  $(2,359)  $(2,214)  $(4,584)

 

24

 

 

The following employee and director stock-based compensation expense related to our stock-based awards is included in the above amounts as follows:

 

(In thousands) 

Cinema

Equipment

Business

   Content & Entertainment
Business
   Corporate   Consolidated 
Direct operating  $
       -
   $
           -
   $
               -
   $
           -
 
Selling, general and administrative   
-
    -    980    980 
Total stock-based compensation  $
-
   $-   $980   $980 

 

   Statements of Operations 
   Three Months Ended June 30, 2021 
   (in thousands) 
   Cinema
Equipment
Business
   Content & Entertainment
Business
   Corporate   Consolidated 
Revenues  $6,231   $8,784   $
   $15,015 
Direct operating (exclusive of depreciation and amortization shown below)   257    4,374    
    4,631 
Selling, general and administrative   429    2,818    2,796    6,043 
Allocation of corporate overhead   99    660    (759)   
 
Provision for doubtful accounts   27    44    
    71 
Depreciation and amortization of property and equipment   507    143    (1)   649 
Amortization of intangible assets       846    1    847 
Total operating expenses   1,319    8,885    2,037    12,241 
Income (loss) from operations  $4,912   $(101)  $(2,037)  $2,774 

 

The following employee and director stock-based compensation expense related to our stock-based awards is included in the above amounts as follows:

 

(In thousands) 

Cinema

Equipment

Business

   Content & Entertainment
Business
   Corporate   Consolidated 
Direct operating  $
   —
   $
       —
   $
      —
   $
      —
 
Selling, general and administrative   
    166    817    983 
Total stock-based compensation  $
   $166   $817   $983 

 

8. 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 zero   and $63 thousand for the three months ended June 30, 2022 and 2021, respectively. We have not recorded tax benefits on our loss before income taxes because we have provided for a full valuation allowance that offsets potential deferred tax assets resulting from net operating loss carry forwards, reflecting our inability to use such loss carry forwards.

 

Our effective tax rate for the three months ended June 30, 2022 and 2021 was zero   and negative 1.2%, respectively.

 

25

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes included elsewhere in this report.

 

This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “estimates,” and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

 

OVERVIEW

 

Since our inception, we have played a significant role in the digital distribution revolution that continues to transform the media landscape. In addition to our pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, we have become a leading distributor of independent content, both through organic growth and acquisitions. We distribute products for major brands such as Hallmark, Televisa, ITV, Nelvana, ZDF, Konami, NFL, 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 Apple iTunes, Amazon Prime, Netflix, Hulu, Xbox, Pluto, Tubi and most video-on-demand (“VOD”) and free ad-supported television (“FAST”) streaming platforms, as well as (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) 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 Australia. It also provides fee-based support to over 1,082 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 operates 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 Fee (“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 June 30, 2022, we had approximately $0.0 million of non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We have approximately $0.0 million of outstanding debt principal, as of June 30, 2022 that is attributable to our Content & Entertainment and Corporate segments.

 

26

 

 

Risks and Uncertainties

 

The COVID-19 pandemic and related economic repercussions created significant volatility and uncertainty impacting the Company’s results for the period. As part of our Content & Entertainment business, the Company sells DVDs and Blu-ray discs at brick-and-mortar stores.

 

Liquidity

 

We have incurred net losses historically and net loss for the three months ended June 30, 2022 of $6.0 million. As of June 30, 2022, we had an accumulated deficit of $478.4 million and negative working capital of $7.6 million. Net cash used in operating activities for the three months ended June 30, 2022 was $1.2 million. Based on these and prior conditions, the Company entered into the following transactions described below.

 

Capital Raises

  

On May 20, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain investors (the “Investors”) for the purchase and sale of 10,666,666 shares of the Common Stock, at a purchase price of $0.75 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on May 14, 2020 (File No. 333-238183) and an applicable prospectus supplement. The closing of the sale occurred on May 22, 2020. The aggregate gross proceeds for the sale was $8.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company’s estimated offering expenses, were approximately $7.1 million.

 

In July 2020, we entered into an At-the-Market sales agreement (the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”) and B. Riley FBR, Inc. (“B. Riley” and, together with A.G.P., the “Sales Agents”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on Nasdaq at the time of the sale of such shares. The Company is not obligated to sell any shares under the ATM Sales Agreement. Any sales of shares made under the ATM Sales Agreement will be made pursuant the 2020 Shelf Registration Statement, for an aggregate offering price of up to $30 million. Net proceeds from such sales totaled $18.6 million. No sales under the ATM Sales Agreement were made during the three months ended June 30, 2022.

 

On July 16, 2020, the Company entered into a securities purchase agreement with certain investors for the purchase and sale of 7,213,334 shares of Common Stock, par value $0.001 per share, at a purchase price of $1.50 per share, in a registered direct offering, pursuant to the 2020 Shelf Registration Statement and an applicable prospectus supplement. The closing of the sale occurred on July 20, 2020. The aggregate gross proceeds for the sale was approximately $10.8 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company’s estimated offering expenses, is approximately $10.1 million.

  

On February 2, 2021, the Company entered into a Securities Purchase Agreement with a single institutional investor for the purchase and sale of 5,600,000 shares of Common Stock at a purchase price of $1.25 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on July 10, 2020 (File No. 333-239710) (the “2020 Shelf Registration Statement”) and an applicable prospectus supplement. The closing of the sale occurred on February 5, 2021. The aggregate gross proceeds for the sale was approximately $7.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agent but before paying the Company’s estimated offering expenses, was approximately $6.5 million.

 

27

 

 

In October 2021, we entered into a Common Stock Purchase Agreement (the “Equity Line Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital, LLC (“B. Riley Principal Capital”). Pursuant to the Equity Line Purchase Agreement, the Company has the right to sell to B. Riley Principal Capital up to the lesser of (i) $50,000,000 of newly issued shares of Common Stock and (ii) the Exchange Cap (as defined in the Equity Line Purchase Agreement), from time to time during the 24-month period from and after the October 21, 2021. Sales of Common Stock pursuant to the Equity Line Purchase Agreement, and the timing of any sales, are solely at the option of the Company, and the Company is under no obligation to sell any securities to B. Riley Principal Capital under the Equity Line Purchase Agreement. As consideration for B. Riley Principal Capital’s commitment to purchase shares of Common Stock at the Company’s direction upon the terms and subject to the conditions set forth in the Equity Line Purchase Agreement, upon execution of the Equity Line Purchase Agreement, the Company issued 210,084 shares of Common Stock to B. Riley Principal Capital (the “Commitment Shares”). The purchase price of the shares of Common Stock that we elect to sell to B. Riley Principal Capital pursuant to the Equity Line Purchase Agreement will be determined by reference to the volume weighted average price of the Common Stock (“VWAP”) during the applicable purchase date, less a fixed 5% discount to such VWAP. Pursuant to the Registration Rights Agreement, the Company filed a Registration Statement on Form S-1 that was declared effective by the Securities and Exchange Commission on October 21, 2021 (File No. 333-260210) for the resale by B. Riley Principal Capital of up to 25,210,084 shares of Common Stock (including the Commitment Shares) acquired pursuant to the Equity Line Purchase Agreement. During the year ended March 31, 2022, we sold 5,300,000 shares of Common Stock under the Equity Line Purchase Agreement. Net proceeds from such sales totaled $12.4 million. No sales under the Equity Line Purchase Agreement were made during the three months ended June 30, 2022.

 

As of June 30, 2022, there is still approximately $38.0 million available under the 2020 Shelf Registration Statement, and $37.6 million available under the Equity Line Purchase Agreement, to raise additional capital.

 

Sale of Cinematic Equipment

 

On March 17, 2021, the Company entered into two separate agreements (the “AMC Equipment Purcahse Agreements”) for the sale of cinematic equipment to American Multi-Cinema, Inc. (“AMC”). The agreement included the sale in tranches of a total of 2,369 cinematic projectors starting in March 2021 throughout January 2023 for a total cash consideration of $10.8 million. As of June 30, 2022, the Company recognized revenue for $10.3 million. A portion of the total proceeds was utilized to pay off the remaining Prospect note payable.

 

Equity Investment in a Related Party

 

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

 

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

 

The Company has accounted for these investments under the equity method of accounting as the Company can exert significant influence over Metaverse 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 Metaverse.

 

28

 

 

On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse’s stock valuation is based on a evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs.  As the value of the investment in Metaverse is being determined by an offer to purchase the shares from an independent third party, the value of the investment may need to be reduced or fully written off should the offer be rescinded.

 

We believe the combination of: (i) our cash and cash equivalent balances at June 30, 2022 and (ii) expected cash flow from operations will be sufficient for our operations and capital needs, for at least twelve months from the filing of this report. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

 

Our significant accounting policies are discussed in Note 2 – Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 1, Condensed Consolidated Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our board of directors.

 

FAIR VALUE ESTIMATES

 

Goodwill, Intangible and Long-Lived Assets

 

Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is tested for impairment on an annual basis or more often if warranted by events or changes in circumstances indicating that the carrying value may exceed fair value, also known as impairment indicators.

 

Inherent in the fair value determination for each reporting unit are certain judgments and estimates relating to future cash flows, including management’s interpretation of current economic indicators and market conditions, and assumptions about our strategic plans with regard to its operations. To the extent additional information arises, market conditions change, or our strategies change, it is possible that the conclusion regarding whether our remaining goodwill is impaired could change and result in future goodwill impairment charges that will have a material effect on our consolidated financial position or results of operations.

 

The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test.

 

We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. The assessment for recoverability is based primarily on our ability to recover the carrying value of its long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the assets the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset’s fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows.

 

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During the three months ended June 30, 2022 and 2021, no impairment charge was recorded to intangible assets.

 

Investment in Metaverse

 

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.

 

During the three months ended June 30, 2022 and 2021, the company recorded a charge   of $1,256   and ($334) in the company’s investment in Metaverse.  

 

REVENUE RECOGNITION

 

Adoption of ASU Topic 606, “Revenue from Contracts with Customers”

 

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 (DVD’s and Blu-ray Discs) or when the content is available for subscription on the digital platform or available on the point-of-sale for transactional and video on demand services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes are recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.

 

Payment terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. We have in the past entered into arrangements in connection with activation fees due from our System deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant.

 

Cinema Equipment Business

 

Our Cinema Equipment Business consists of financing vehicles and administrators for 434 Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 648 Systems installed domestically and internationally in our second deployment phase (“Phase II Deployment”).

 

We retain ownership of our Systems and the residual cash flows related to the Systems in Phase I Deployment after the end of the 10-year deployment payment period.

 

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For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.

 

The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees (“VPFs”) from motion picture studios and distributors and Alternative Content Fees (“ACFs”) from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, “Services”).

 

VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period the title first plays for general audience viewing in a digital projector equipped movie theatre. The Phase 1 Deployment’s and Phase 2 Deployments performance obligations for revenue recognition are met at this time.

 

Phase II Deployment’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related to the variable consideration, i.e., the one-time bonus and determined that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the Systems and Cinedigm received the sale proceeds. Such sales were originally contemplated as the conclusion of the digital cinema deployment plan. Total system revenue was $1.2 million and $5.6 million, during the three months ended June 30, 2022 and 2021, respectively. Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.

 

Exhibitors who purchased and own Systems using their own financing in Phase II of the Cinema Equipment Business paid us an upfront activation fee of approximately $2.0 thousand per screen (the “Exhibitor-Buyer Structure”). Upfront activation fees were recognized in the period in which these Systems were delivered and ready for content, as we had no further obligations to the customer after that time and collection was reasonably assured. In addition, we recognize activation fee revenue of between $1.0 thousand and $2.0 thousand on Phase II Deployment Systems and for Systems installed by CDF2 Holdings, a related party, (See Note 3 – Other Interests) upon installation and such fees are generally collected upfront upon installation. Our services division manages and collects VPFs on behalf of exhibitors, for which it earns an administrative fee equal to 10% of the VPFs collected.

 

The Cinema Equipment Business earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service fee equal to 2.5% of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPFs and the performance obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on screens utilizing our Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding VPF fees are due from the movie studios and distributors.

 

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Content & Entertainment Business

 

CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand (“VOD” or “OTT Streaming and Digital”), and physical goods (e.g., DVDs and Blu-ray Discs) (“Physical Revenue” or “Base Distribution Business”). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance obligations include the delivery of content for transactional, subscription and ad supported/free ad-supported streaming TV (“FAST”) on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the performance obligation is satisfied, which is when the content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.

 

Physical goods reserved for sales returns and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.

 

CEG also has contracts for the theatrical distribution of third party feature movies and alternative content. CEG’s distribution fee revenue and CEG’s participation in box office receipts are 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., DVDs and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.

 

Credit Losses

 

We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

 

Our CEG segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. Reserves for product returns and other allowances is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required.

 

We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates.

 

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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.

 

Deferred revenue pertaining to our Content & Entertainment Business includes amounts related to the sale of DVDs with future release dates.

 

Deferred revenue relating to our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms.

 

The ending deferred revenue balance, including current and non-current balances, as of June 30, 2022 was $0.4 million. For the three months ended June 30, 2022, the additions to our deferred revenue balance were primarily due to cash payments received or due in advance of satisfying performance obligations, while the reductions to our deferred revenue balance were primarily due to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business.

 

Participations and royalties payable

 

When we use third parties to distribute company owned content, we record participations payable, which represent amounts owed to the distributor under revenue-sharing arrangements. When we provide content distribution services, we record accounts payable and accrued expenses to studios or content producers for royalties owed under licensing arrangements. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers.

 

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 as substantially all of the fair value of the gross assets acquired are concentrated in a single or group of similar, identifiable assets. 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 a relative fair value basis. Determining and valuing intangible assets requires judgment.

 

BUSINESS COMBINATIONS

 

The Company accounts for acquisitions in accordance with FASB ASC 805, “Business Combinations” (“ASC 805”), and goodwill in accordance with ASC 350, “Intangibles — Goodwill and Other” (“ASC 350”). The excess of the purchase price over the estimated fair value of net assets acquired in a business combination is recorded as goodwill. ASC 805 specifies criteria to be used in determining whether intangible assets acquired in a business combination must be recognized and reported separately from goodwill. Amounts assigned to goodwill and other identifiable intangible assets are based on independent appraisals or internal estimates.

 

ASC 805 defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date the acquirer achieves control. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquirer (if any) at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the acquirer to recognize contingent consideration (if any) at the acquisition date, measured at its fair value at that date.

 

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Results of Operations for the Fiscal Three Months Ended June 30, 2022 and 2021

 

Revenues

 

   For the Three Months Ended June 30, 
($ in thousands)  2022   2021   $ Change   % Change 
Cinema Equipment Business  $1,427   $6,231   $(4,804)   (77)%
Content & Entertainment Business   12,163    8,784    3,379    38%
   $13,590   $15,015   $(1,425)   (9)%

 

Revenues generated by our Cinema Equipment Business segment decreased as a result of the lower system revenue and eligible VPF systems. Total system revenue recognized was $1.2 million and $5.6 million, during the quarter ended June 30, 2022 and 2021, respectively.  An increase in Blockbuster content released during the period ending June 30, 2022 showed a return to pre-pandemic results; however, this was offset by an 80%   decrease in eligible VPF systems for the same period last year. Revenue in the Content & Entertainment Business segment increased by 38% for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021. The increase is consistent with the addition of seven new streaming channels related to Bloody Disgusting and DMR business acquisitions and four managed channel additions of The Country Network, Real Madrid TV, El Rey and The Only Way is Essex as well as an increase in the number of advertising partners 

 

Direct Operating Expenses

 

   For the Three Months Ended June 30, 
($ in thousands)  2022   2021   $ Change   % Change 
Cinema Equipment Business  $144   $257   $(113)   (44)%
Content & Entertainment Business   7,212    4,374    2,838    65%
   $7,356   $4,631   $2,725    59%

 

The decrease in direct operating expenses in the quarter ended June 30, 2022 for the Cinema Equipment Business compared to the prior period was primarily due to a decrease in property taxes as a result of system sales. The increase in direct operating expenses in the three months ended June 30, 2022 for the Content & Entertainment Business compared to the prior year was primarily due to $0.2   million higher license and royalty costs, $0.3 million increase related to DVD manufacturing and fulfillment, $0.7   million higher content and production costs related to continued growth in revenue and distribution, $0.3   million higher personnel and contractors, and $0.2   million related to the film restoration, conversion and website content production costs. Additionally, $0.8   million in Software as a service (“SaaS”) expense resulted from the DMR acquisition was realized during the three months ended June 30, 2022.

 

Selling, General and Administrative Expenses

 

   For the Three Months Ended June 30, 
($ in thousands)  2022   2021   $ Change   % Change 
Cinema Equipment Business  $1,071   $429   $642         150%
Content & Entertainment Business   3,783    2,818    965    34%
Corporate   4,961    2,796    2,165    77%
   $9,815   $6,043   $3,772    62%

 

Selling, general and administrative expenses for the quarter ended June 30, 2022 increased by $3.7 million primarily due to $2.2   million increase in personnel costs from the acquisitions of Screambox, DMR and Bloody Disguising, $0.7   million in legal expenses primarily related to a legal settlement  , and $0.5   million in professional consulting services.  

 

Recovery of Doubtful Accounts

 

Recovery of doubtful accounts was $3   thousand and $0.1   million for the fiscal three months ended June 30, 2022 and 2021, respectively.

 

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Depreciation and Amortization Expense on Property and Equipment

 

   For the Three Months Ended June 30, 
($ in thousands)  2022   2021   $ Change   % Change 
Cinema Equipment Business  $117    507    (390)   (77)%
Content & Entertainment Business   138    143    (5)   (3)%
Corporate   1    (1)   2    (200)%
   $256   $649   $(393)   (61)%

 

Depreciation and amortization expense decreased in our Cinema Equipment Business Segment as the majority of our digital cinema projection systems reached the conclusion of their ten-year useful lives during the quarter ended June 30, 2022 and 2021

 

Amortization of intangible assets

 

   For the Three Months Ended June 30, 
($ in thousands)  2022   2021   $ Change   % Change 
Content & Entertainment Business   637    845    (208)   (25)%
Corporate   107    1    106    10600%
   $744   $846   $(102)   (12)%

 

Corporate and Content & Entertainment Business amortization expense on intangible assets is $111 thousand lower due Customer Contracts asset being fully amortized, saving $0.4   million, partially offset by $0.2   million higher amortization expense related to the DMR acquisition and Cinedigm India.

 

Interest expense, net

 

   For the Three Months Ended June 30, 
($ in thousands)  2022   2021   $ Change   % Change 
Cinema Equipment Business  $-   $133   $(133)   (100)%
Content & Entertainment Business   -    -    -    -%
Corporate   133    11    122    1109%
   $133   $144   $(11)   (8)%

 

Interest expense in our Corporate segment increased as a result of deferred and earnout consideration accretion related to the acquisition of Bloody Disgusting, FoundationTV and DMR.

 

Changes in fair value in Metaverse

 

On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse’s stock valuation is based on an evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs.  

 

Income Tax Benefit

 

We recorded income tax expense of $0   for the three months ended June 30, 2022. We recorded an income tax benefit of approximately $63 thousand for the three months ended June 30, 2021.

 

Our effective tax rate for the three months ended June 30, 2022 and 2021 was zero and negative 1.2%, respectively.

 

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Net Income/Loss attributable to common shareholders

 

   For the Three Months Ended June 30, 
($ in thousands)  2022   2021   $ Change   % Change 
Cinema Equipment Business  $137   $4,771   $(4,634)   (97)%
Content & Entertainment Business   (2,380)   (108)   (2,272)   (2104)%
Corporate   (3,850)   435   (4,285)   (985)%
   $(6,093)  $5,098   $(11,191)   (220)%

 

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 June 30, 2022 decreased by $7.7 million compared to the three months ended June 30, 2021. Adjusted EBITDA from our Cinema Equipment Business segment decreased primarily due to a decrease in systems sales and eligible VPF systems. Adjusted EBITDA from the Content & Entertainment Business and Corporate decreased by $2.3 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, due to an increase of $2.8 million in direct operating expense and $3.1 million higher selling, general and administrative expenses, versus previous year despite a $3.4 million increase in Streaming digital revenue, adding channels, and acquisitions, and $0.4 million  in one-time acquisition cost adjustments.

 

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 income (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.

 

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Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:

 

   For the Three Months Ended
June 30,
 
($ in thousands)  2022   2021 
Net income (loss)  $(5,987)  $5,194 
Add Back:          
Income tax (income) expense   -    (63)
Depreciation and amortization of property and equipment   256    649 
Amortization of intangible assets   744    847 
(Gain) Loss on extinguishment of note payable   -    (2,178)
Interest expense, net   133    144 
Intangible impairment   -    - 
Change in fair value on equity investment in Metaverse   1,256    (334)
Other expense, net   396    173 
Recovery of doubtful accounts   3    71 
Stock-based compensation and expenses   980    983 
Net income (loss) attributable to noncontrolling interest   (18)   (7)
Adjusted EBITDA  $(2,237)  $5,479 
           
Adjustments related to the Cinema Equipment Business          
Depreciation and amortization of property and equipment   (117)  $(507)
Amortization of intangible assets   -    - 
Stock-based compensation and expenses   -    - 
Other expense   (11)   (11)
Recovery of doubtful accounts   (3)   (27)
Income from operations   11    (4,912)
Adjusted (negative EBITDA) from Content & Entertainment Business and Corporate  $(2,357)  $22 

 

Recent Accounting Pronouncements

 

See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included herein.

 

Cash flow

 

Changes in our cash flows were as follows:

 

   For the Three Months Ended
June 30,
 
($ in thousands)  2022   2021 
Net cash (used in) provided by operating activities  $(1,198)  $3,621 
Net cash used in investing activities   (61)   (791)
Net cash used in financing activities   (284)   (6,324)
Net decrease in cash and cash equivalents  $(1,543)  $(3,494)

 

As of June 30, 2022, we had cash and cash equivalents balances of $11.5 million.

 

As of June 30, 2021, we had cash, cash equivalents, and restricted cash balances of $14.4 million.

 

For the three months ended June 30, 2022, net cash provided by operating activities is primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, gain on extinguishment of note payable, including other changes in working capital. Additionally, during the three months ended June 30, 2022, the Company increased accounts payable by $5.4 million to vendors. Accounts receivable increased due to growth in streaming and acquisitions of Bloody Disgusting, Screambox and DMR. Cash received from VPFs decreased from the previous period in alignment with the decrease in eligible VPF systems. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and seasonally lower in the other two quarters. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months.

 

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For the three months ended June 30, 2021, net cash provided by operating activities is primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, including other changes in working capital. Additionally, during the three months ended June 30, 2021, the Company paid down $8.1 million to vendors at both CEG and Corporate. Cash received from VPFs declined from the previous period as Phase I Deployment Systems in our Cinema Equipment Business reached the conclusion of their deployment payment periods with certain major studios. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. This was further impacted by the decrease in eligible VPF systems. Because our digital cinema business earns a VPF when a movie is first played on a system, the reduction of eligible VPF systems resulted in reduced revenues. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and lower in the other two quarters as we pay royalties on such revenues. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months. For the three months ended June 30, 2022 revenues from the sale of digital projections Systems was $1.2 million.

 

For the three months ended June 30, 2022, cash flows used in investing activities consisted of purchases of property and equipment of $0.1 million.

 

For the three months ended June 30, 2021, cash flows used in investing activities consisted of purchases of property and equipment of $40 thousand and the purchase of a business of $1.0 million related to the business combination for FoundationTV.

 

For the three months ended June 30, 2022, cash flows provided by financing activities consisted of payments of approximately $0.3 million in notes payable.

 

For the three months ended June 30, 2021, cash flows used in financing activities consisted of payments of approximately $4.8 million in notes payable and $1.6 million in Credit Facility repayments.

 

Contractual Obligations

 

The following table summarizes our significant contractual obligations as of June 30, 2022:

 

   Payments Due 
Contractual Obligations (in thousands)  Total   2023   2024 &
2025
   2026 &
2027
   Thereafter 
Operating lease obligations  $682   $193   $489   $   $ 

 

We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, marketing and promotional activities and content acquisition and marketing costs. Certain of these costs, including costs of content acquisition, marketing and promotional activities, could be reduced if necessary. We feel we are adequately financed for at least the next twelve months; however, we may need to raise additional capital for working capital as deemed necessary. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity.

  

Seasonality

 

Revenues from our Cinema Equipment Business derived from the collection of VPFs from motion picture studios are seasonal, coinciding with the timing of releases of movies by the motion picture studios. Generally, motion picture studios release the most marketable movies during the summer and the winter holiday season. The unexpected emergence of a hit movie during other periods can alter the traditional trend. The timing of movie releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter or any other quarter. While CEG benefits from the winter holiday season, we believe the seasonality of motion picture exhibition, is becoming less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout the year.

 

38

 

 

Off-balance sheet arrangements

 

We are not a party to any off-balance sheet arrangements other than as discussed in Note 2 – Summary of Significant Accounting Policies, Basis of Presentation and Consolidation and Note 3 - Other Interests to the Condensed Consolidated Financial Statements (Unaudited) included in Item 1 of this Quarterly Report on Form 10-Q, we hold a 100% equity interest in CDF2 Holdings, which is an unconsolidated variable interest entity (“VIE”), which wholly owns Cinedigm Digital Funding 2, LLC; however, we are not the primary beneficiary of the VIE.

 

Impact of Inflation

 

The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse impact on our operating results.

  

Item 4. CONTROLS AND PROCEDURES

 

Definition and Limitations of Disclosure Controls and Procedures

 

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

 

Evaluation of Disclosure Controls and Procedures

 

The management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Operating Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in the Exchange Act), as of June 30, 2022. Based on such evaluation, our principal executive officer and principal financial and accounting officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, on a timely basis, and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures due to the material weaknesses identified in our internal control over financial reporting as of June 30, 2022.

 

Previously Reported Material Weakness on Internal Control Over Financial Reporting

 

In the 2022 Form 10-K, filed with the SEC on July 1, 2022, management concluded that our internal control over financial reporting was not effective as of March 31, 2022. In the evaluation, management identified material weaknesses in internal controls related to our financial close and reporting process and information and communication controls. Management also concluded that we did not have a sufficient complement of corporate personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting matters completely and accurately. As a result of this evaluation, management extensively used outside consultants who possessed the appropriate levels of accounting and controls knowledge.

 

39

 

 

Remediation. Following identification of this control deficiency, management is implementing modifications to better ensure that the Company has appropriate and timely reviews on all financial reporting analysis. The material weakness in our internal control over financial reporting will not be considered remediated until these modifications are implemented, in operation for a sufficient period of time, tested, and concluded by management to be designed and operating effectively. In addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify our remediation plan. Management will test and evaluate the implementation of these modifications to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material misstatement in the Company’s financial statements. 

 

The steps we took to address the deficiencies identified included: 

 

we hired a new Chief Financial Officer;

 

we hired a new Executive Vice-President (“EVP”) Accounting;

 

we have engaged in efforts to restructure accounting processes and revise organizational structures to enhance accurate accounting and appropriate financial reporting;

 

we have hired additional experienced accounting personnel in the corporate office to enhance the application of accounting standards and our financial closing and reporting process;

 

we have engaged external advisors to provide financial accounting and reporting assistance;

 

we will enhance information and communication processes through information technology solutions to ensure that information needed for financial reporting is accurate, complete, relevant and reliable, and communicated in a timely manner; and

 

we have engaged external advisors to evaluate and document the design and operating effectiveness of our internal control over financial reporting and assist with the remediation and implementation of our internal control function.

 

As noted above, we believe that, as a result of management’s in-depth review of its accounting processes, and the additional procedures management has implemented, there are no material inaccuracies or omissions of material fact in this Form 10-Q and, to the best of our knowledge, we believe that the consolidated financial statements in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows in conformity with GAAP. 

 

We and our Board treat the controls surrounding, and the integrity of, our financial statements with the utmost priority. Management is committed to the planning and implementation of remediation efforts to address control deficiencies and any other identified areas of risk. These remediation efforts are intended to both address the identified material weakness and to enhance our overall financial control environment. We are committed to maintaining a strong internal control environment, and we believe the measures described above will strengthen our internal control over financial reporting and remediate the material weakness we have identified. Our remediation efforts have begun, and we will continue to devote significant time and attention to these remedial efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above, which may require additional implementation time. 

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes, other than our remediation efforts discussed above, in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

40

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

41

 

 

ITEM 6. EXHIBITS

 

EXHIBIT INDEX

 

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

 

42

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CINEDIGM CORP.
     
Date: August 15, 2022 By: /s/ Christopher J. McGurk
    Christopher J. McGurk
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
     
Date: August 15, 2022 By: /s/ John K. Canning
    John K. Canning
Chief Financial Officer
(Principal Financial Officer)

 

 

43

 

 

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EXHIBIT 31.1

 

CERTIFICATION

 

I, Christopher J. McGurk, certify that:

 

1. I have reviewed this Form 10-Q of Cinedigm Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 15, 2022   By: /s/ Christopher J. McGurk
        Christopher J. McGurk
        Chief Executive Officer and
        Chairman of the Board of Directors
        (Principal Executive Officer)

EXHIBIT 31.2

 

CERTIFICATION

 

I, John K. Canning, certify that:

 

1. I have reviewed this Form 10-Q of Cinedigm Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: August 15, 2022   By: /s/ John K. Canning
        John K. Canning
        Chief Financial Officer (Principal Financial Officer)

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with Form 10-Q of Cinedigm Corp. (the “Company”) for the period ended June 30, 2022 as filed with the SEC (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

Date: August 15, 2022   By: /s/ Christopher J. McGurk
        Christopher J. McGurk
        Chief Executive Officer and
        Chairman of the Board of Directors
        (Principal Executive Officer)

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with Form 10-Q of Cinedigm Corp. (the “Company”) for the period ended June 30, 2022 as filed with the SEC (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

Date: August 15, 2022   By: /s/ John K. Canning
        John K. Canning
        Chief Financial Officer (Principal Financial Officer)