Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related
notes included elsewhere in this report.
This
report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “believes,” “anticipates,”
“expects,” “intends,” “plans,” “will,” “estimates,” and similar words. Forward-looking
statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth
plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are
not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond
our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
OVERVIEW
Since
our inception, we have played a significant role in the digital distribution revolution that continues to transform the media landscape.
In addition to our pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital
distribution, we have become a leading distributor of independent content, both through organic growth and acquisitions. We distribute
products for major brands such as the Hallmark, Televisa, ITV, Nelvana, ZDF, Konami, NFL, NHL and Scholastic, as well as leading international
and domestic content creators, movie producers, television producers and other short form digital content producers. We collaborate with
producers, major brands and other content owners to market, source, curate and distribute quality content to targeted audiences through
(i) existing and emerging digital home entertainment platforms, including but not limited to, iTunes, Amazon Prime, Netflix, Hulu, Xbox,
Sony PlayStation, Tubi and cable video-on-demand (“VOD”), and (ii) physical goods, including DVD and Blu-ray Discs.
We
report our financial results in two primary segments as follows: (1) cinema equipment business and (2) media content and entertainment
business (“Content & Entertainment” or “CEG”). The cinema equipment business segment consists of the non-recourse,
financing vehicles and administrators for our digital cinema equipment (the “Systems”) installed in movie theatres throughout
North America and several international countries. It also provides fee-based support to over 6,200 movie screens as well as directly
to exhibitors and other third-party customers in the form of monitoring, billing, collection and verification services. Our Content
& Entertainment segment is a market leader in: (1) ancillary market aggregation and distribution of entertainment content and (2)
branded and curated over-the-top (“OTT”) digital network business providing entertainment channels and applications.
Beginning
in December 2015, certain of our cinema equipment began to reach the conclusion of their 10-year deployment payment period with certain
distributors and, therefore, Virtual Print Fees (“VPF”) revenues ceased to be recognized on such Systems, related to such
distributors. Furthermore, because the Phase I Deployment installation period ended in November 2007, a majority of the VPF revenue associated
with the Phase I Deployment Systems has ended. The reduction in VPF revenue on cinema equipment business systems approximately coincided
with the conclusion of certain of our non-recourse debt obligations and, therefore, the reduced cash outflows related to such non-recourse
debt obligations partially offset the reduced VPF revenue since November 2017.
Under
the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through
the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their
license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements,
we typically pursue the sale of the Systems to such exhibitors. 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 March 31, 2021, we had approximately $7.8 million of non-recourse outstanding debt principal that relates to, and is serviced by,
our cinema equipment business. We have approximately $4.1 million of outstanding debt principal, as of March 31, 2021 that is attributable
to our Content & Entertainment and Corporate segments.
24
Risks
and Uncertainties
The
COVID-19 pandemic and related economic repercussions created significant volatility and uncertainty impacting the Company’s results
for the year. As part of our Content & Entertainment business, the Company sells DVDs and Blu-ray discs at brick-and-mortar stores.
With the closure of non-essential retail stores beginning in the spring of 2020, the sale of physical discs through our retail partners
declined although this was partially offset by digital purchases of physical product. As part of our Cinema Equipment business, the Company
earns revenue when movies are exhibited in theaters. Many movie theaters in the United States closed during the spring of 2020 and remained
closed or re-opened on a limited basis through March 31, 2021. The majority of major studios shifted films out of the fiscal year to
dates when more screens would be available, and consumers felt safe to return to theaters. Films released during the year had box office
results below pre-Covid expectations due to theater closure, limited capacity and new commercial models that permitted viewing day and
date via premium video on demand (“PVOD”) and subscription video on demand (“SVOD”). To the extent films are
not shown in theaters, we do not earn revenue.
Longer
term, there may be a shift in consumer preference towards digital consumption over physical or theatrical viewing. Studios may reduce
their theatrical slates to tentpoles and certain genres releasing other content directly on their own streaming services. This decision
could negatively impact the Company’s ability to license content for the sale of physical product, if those rights are withheld
to create exclusivity to the platform and reduce revenue opportunities for virtual print fees and sales of digital cinema equipment.
While the Company has been encouraged by the pace of mass vaccinations, spikes or the emergence of new variants could require future
closures.
Liquidity
We have incurred net losses historically and have
an accumulated deficit of $474.1 million and negative working capital of $14.2 million as of March 31, 2021. We may continue to generate
net losses for the foreseeable future. In addition, we have debt-related contractual obligations as of March 31, 2021 and beyond. Based
on these conditions, the Company entered into the following transactions:
Capital
Raises
On
February 2, 2021, the Company entered into a Securities Purchase Agreement with a single institutional investor for the purchase and
sale of 5,600,000 shares of Class A common stock at a purchase price of $1.25 per share, in a registered direct offering, pursuant to
an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on July
10, 2020 (File No. 333-239710) and an applicable prospectus supplement. The closing of the sale occurred on February 5, 2021. The aggregate
gross proceeds for the sale was approximately $7.0 million. The net proceeds to the Company from the sale, after deducting the fees of
the placement agent but before paying the Company’s estimated offering expenses, was approximately $6.5 million.
In
July 2020, we entered into an At-the-Market sales agreement (the “ATM Sales Agreement”) with A.G.P./Alliance Global Partners
(“A.G.P.”) and B. Riley FBR, Inc. (“B. Riley” and, together with A.G.P., the “Sales Agents”), pursuant
to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing
on Nasdaq at the time of the sale of such shares. The Company is not obligated to sell any shares under the ATM Sales Agreement. Any
sales of shares made under the ATM Sales Agreement will be made pursuant to an effective registration statement on Form S-3 which was
declared effective by the Securities and Exchange Commission on July 10, 2020 (File No. 333-239710), for an aggregate offering price
of up to $30 million. During the year ended March 31, 2021, we sold 28,405,840 shares of Common Stock under the ATM Sales Agreement.
Net proceeds from such sales totaled $18.6 million.
On
July 16, 2020, the Company entered into a securities purchase agreement with certain investors for the purchase and sale of 7,213,334
shares of Class A common stock, par value $0.001 per share, at a purchase price of $1.50 per share, in a registered direct offering,
pursuant to an effective shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission
on July 10, 2020 (File No. 333-239710) and an applicable prospectus supplement. The closing of the sale occurred on July 20, 2020. The
aggregate gross proceeds for the sale was approximately $10.8 million. The net proceeds to the Company from the sale, after deducting
the fees of the placement agents but before paying the Company’s estimated offering expenses, is approximately $10.1 million.
25
On
May 20, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain
investors (the “Investors”) for the purchase and sale of 10,666,666 shares of the Class A common stock, at a purchase price
of $0.75 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 which was declared
effective by the Securities and Exchange Commission on May 14, 2020 (File No. 333-238183) and an applicable prospectus supplement. The
closing of the sale occurred on May 22, 2020. The aggregate gross proceeds for the sale was $8.0 million. The net proceeds to the Company
from the sale, after deducting the fees of the placement agents but before paying the Company’s estimated offering expenses, were
approximately $7.1 million.
As
of March 31, 2021, there is still approximately $38.0 million available under our shelf registration to raise additional capital.
Sale
of Cinematic Equipment
On March 17, 2021, the Company entered into two
separate agreements for the sale of cinematic equipment to American Multi-Cinema, Inc. (“AMC”). The 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 March 31, 2021 the Company executed the sale of the first tranche and recognized revenue for $300 thousand. A
portion of the total proceeds will be utilized to eliminate the remaining Prospect note payable.
Equity
Investment in a Related Party
As
previously announced, on December 27, 2019, the Company entered into, and on February 14, 2020 amended, (see Note 2 - Summary of Significant
Accounting Policies ), a stock purchase agreement (as so amended, the “Stock Purchase Agreement”) with BeiTai Investment
LP (“BeiTai”), a related party for accounting purposes of Cinedigm and Aim Right Ventures Limited (“Aim Right”),
two shareholders of Starrise Media Holdings Limited, a leading Chinese entertainment company (“Starrise”), to buy from them
an aggregate of 410,901,000 outstanding Starrise ordinary shares (the “Share Acquisition”). On February 14, 2020, the Company
purchased 162,162,162 of the Starrise ordinary shares from BeiTai and issued BeiTai 21,646,604 shares of its Class A common stock in
consideration. The Starrise shares received were valued at approximately $25 million and the Company issued shares that were valued at
approximately $11.2 million. On April 10, 2020, the Company, in accordance with the terms of the Stock Purchase Agreement, terminated
its obligation to purchase Starrise ordinary shares from Aim Right under the December 27, 2019 stock purchase agreement.
On
April 10, 2020, the Company entered into another stock purchase agreement (the “April Stock Purchase Agreement”) with five
(5) shareholders of Starrise-Bison Global Investment SPC - Bison Global No. 1 SP, Huatai Investment LP, Antai Investment LP, Mingtai
Investment LP and Shangtai Asset Management LP, all of which are related parties to the Company to buy an aggregate of 223,380,000 outstanding
Starrise ordinary shares from them and for the Company to issue to them an aggregate of 29,855,081 shares of its Class A common stock
as consideration therefor (the “April Share Acquisition”). On April 15, 2020, the April Share Acquisition was consummated
and this transaction was also recorded as an equity investment in Starrise.
Starrise’s ordinary shares (HK 1616) are
listed on the main board of the Stock Exchange of Hong Kong Limited. Based on the closing price of HKD 0.15 per share on July 23, 2021,
calculated at an exchange rate of 7.7663 Hong Kong Dollars to 1 US dollar, the market value of Cinedigm’s ownership in Starrise
ordinary shares was approximately $7.0 million.
Borrowings
On June 22, 2021, the maturity
date of the East West Credit Facility (as defined in Note 6 - Notes Payable) with East West Bank was extended from June 30, 2021 to September
28, 2021.
26
On
April 15, 2020, the Company received $2.2 million from East West Bank, the Company’s existing lender, pursuant to the Paycheck
Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The PPP Loan matures on April 10, 2022 (the “Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole
or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the
initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company used all proceeds from the
PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19
pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act and could be subject
to repayment. On January 5, 2021, the Company submitted its application for forgiveness and, as of June 30, 2021, obtained forgiveness for the
full amount as discussed on Note 12 – Subsequent Events .
On
June 24, 2020, the Company entered into an exchange agreement (the “Exchange Agreement”) pursuant to which the Company issued
329,501 shares of its Class A common stock, in exchange for $842,000, the’ principal amount and accrued and unpaid interest of outstanding
Second Lien Loans (as defined in Note 6 - Notes Payable ). The surrendered Second Lien Loans were immediately canceled. The exchange
was consummated on June 24, 2020.
On
June 26, 2020, the Company signed a consent agreement with the holders of the Second Lien loans to extend the maturity date to September
30, 2020 and grant the Company options to extend further to March 31, 2021 and then to June 30, 2021. A consent fee of $100,000 was paid
in connection with this extension.
In
a separate exchange with another holder of Second Lien Notes, on November 19, 2020, the Company issued 452,499 shares of Common Stock
in exchange for $247,108 principal amount of Second Lien Notes. The exchanged Second Lien Notes were immediately cancelled.
On
December 4, 2020, the Company entered into exchange agreements (the “December Exchange Agreements”) with certain holders
of notes under its Second Lien Loan Agreement dated as of July 14, 2016 among the Company, the lenders party thereto, and Cortland Capital
Market Services LLC, as Agent (“Second Lien Notes”). Pursuant to the December Exchange Agreements, the Company issued an
aggregate of 2,776,284 shares of its Class A common stock, par value $0.001 per share Common Stock in exchange for an aggregate of $1,386,106
of principal amount of Second Lien Notes. The exchanged Second Lien Notes were immediately cancelled.
On January 21, 2021, the Company entered into
an exchange agreement (the “Exchange Agreement”) with a holder of notes under its Second Lien Loan Agreement dated as of July
14, 2016 among the Company, the lenders party thereto, and Cortland Capital Market Services LLC, as Agent (“Second Lien Notes”).
Pursuant to the Exchange Agreement, the Company issued an aggregate of 1,247,626 shares of Class A common stock, in exchange for an aggregate
of $1,289,650 of principal amount of Second Lien Notes. The exchanged Second Lien Notes were immediately cancelled.
In two separate exchanges with another holder
of Second Lien Notes, on January 14, 2021 and January 21, 2021, the Company issued 689,500 shares and 580,448 shares (an aggregate of
1,269,948 shares) of Class A common stock in exchange for $500,000 and $600,000 (an aggregate of $1,100,000) principal amount of Second
Lien Notes. The exchanged Second Lien Notes were immediately cancelled.
On
February 2, 2021, the Company issued 425,290 shares of Class A common stock in exchange for $500,000 principal amount of Second Lien
Notes. The exchanged Second Lien Notes were immediately cancelled.
The
Second Lien Loans (as defined in Note 6 - Notes Payable) were to mature on June 16, 2020. On June 26, 2020, the Company entered into
a consent agreement with the lenders of the Second Lien Loans to an extension of the Second Lien Loans pursuant to which (i) the Company
paid down a portion of the outstanding principal amount plus accrued interest to date, and 47 (ii) the maturity date of the remaining
outstanding principal amount of the Second Lien Loans was extended to September 30, 2019. On July 30, 2019, one of the lenders, signed
a waiver to defer the receipt of the portion of the outstanding principal amount on the Second Lien Loans agreed to be paid no later
than September 30, 2019.The Company paid $3.4 million of the outstanding Second Lien Loans and expects to obtain additional capital from
or through Bison Capital Holding Limited or an affiliate thereof (“Bison”) for final payment of the remaining outstanding
balances. The Second Lien Loans (as defined in Note 6 - Notes Payable) were to mature on June February 16, 2020. On June 26, 2020, the
Company entered into a consent agreement with the lenders to extend the maturity date to September 30, 2020 and grant the Company options
to extend further to March 31, 2021 and then to June 30, 2021. There was a consent fee of $100,000 for this extension.
27
On
February 9, 2021, the Company prepaid all of the outstanding obligations in respect of principal, interest, fees and expenses
under the Second Lien Loan Agreement, among the Company, certain lenders and Cortland Capital Market Services LLC. The payoff amount
of approximately $3.18 million was comprised of (i) $3.1 million of principal, (2) accrued payment-in-kind interest of $.018 million,
(3) accrued current interest of $0.007 million, and (4) fees and expenses of $0.004 million. Upon such prepayment, the Second Lien Loan
Agreement was terminated effective February 9, 2021.
The
$10.0 million note payable (“2018 Loan”) to Bison Global Investment SPC for and on behalf of Global Investment SPC-Bison
Global No. 1, another affiliate of Bison (“Bison Global”), due July 20, 2019 is guaranteed by Bison Entertainment and Media
Group (“BEMG”). On July 20, 2018, the Company also entered into a side letter (the “Letter”) with BEMG, where
BEMG agreed to guarantee the payment directly to Bison Global of any amount due if (i) the 2018 Loan matures prior to June 28, 2021 or
(ii) Bison Global demands payment of the 2018 Loan, in whole or in part, prior to maturity.
On
July 12, 2019, the Company and Bison Global entered into a termination agreement (the “Termination Agreement”) with respect
to the $10.0 million 2018 Loan. Contemporaneously with the Termination Agreement, the Company entered into a convertible promissory note
(“Bison Convertible Note”) with Bison Global for $10.0 million.
The Bison Convertible Note had a term ending on
March 4, 2020, and bears interest at 5% per annum. The principal is payable upon maturity, in cash or in shares of our Class A common
stock, par value $0.001 per share (the “Common Stock” or “Class A common stock”), or a combination of cash and
Common Stock, at the Company’s option. The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and
contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan.
On April 15, 2020, the Company executed a letter amendment (the “Letter Amendment”) to the Bison Convertible Note. Among other
things, the Letter Amendment amended the Bison Convertible Note, effective as of March 4, 2020, to change the maturity date of the Bison
Convertible Note to March 4, 2021. The Bison Convertible Note due 2021 was converted to Common Stock in March 2021. See Note 6 - Notes
Payable .
On April 15, 2020, the Company executed a letter
amendment (the “Letter Amendment”) to the Bison Convertible Note (as defined in Note 6 - Notes Payable ). Among other
things, the Letter Amendment amended the Note, effective as of March 4, 2020, to extend the maturity date of the Bison Convertible note
to March 4, 2021.
On
October 9, 2018, the Company issued a subordinated convertible note (the “Convertible Note”) to MingTai Investment LP (the
“Lender”) for $5.0 million. All proceeds from the Convertible Note were used to pay the $5.0 million 2013 Notes. See Note
6 - Notes Payable . The Convertible Note bears interest at 8% and matured on October 9, 2019. The principal is payable upon maturity,
in cash or in shares of our Class A common stock, or a combination of cash and Common Stock, at the Company’s option. On October
9, 2019, the Company signed an extension to the Ming Tai Note of $5.0 million for the first of two (2) permitted additional (1) year
extensions at the Company’s option from the original maturity date to October 9, 2020.
On
October 9, 2019, the Company signed an extension to the Ming Tai Note of $5.0 million for the first of two (2) permitted additional
(1) year extensions at the Company’s option from the original maturity date to October 9, 2020. This note will continue in full
force and effect in accordance with its terms, including the Company’s reservation of its right to further extend the maturity
date of this note, if it so elects.
On
September 11, 2020, the Bison and Mingtai Notes, having an aggregate of $15 million principal amount (the “Notes”) were
converted in full into an aggregate of 10,000,000 shares of Common Stock at a conversion price of $1.50 per share in accordance with
the terms of the Notes. Accordingly, the Notes have been extinguished. The Notes were held by Bison Global and, both of which are affiliates
of Peixin Xu, the Chairman of Bison Capital Holding Company Limited, which is indirectly Cinedigm’s largest stockholder.
On July 3, 2019, the Company entered into an amendment
(the “EWB Amendment”) to the Loan, Guaranty and Security Agreement, dated as of March 30, 2018, by and between the Company,
East West Bank and the Guarantors named therein (the “EWB Credit Agreement”). The EWB Amendment reduced the size of the facility
to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects
how the borrowing base is calculated, and extended the maturity date to June 30, 2020. In connection with the EWB Amendment, three of
our subsidiaries became additional Guarantors under the EWB Credit Agreement. On June 26, 2020, the Company signed another amendment and
extended the maturity date to June 30, 2021 and on June 22, 2021, the maturity date was extended to September 28, 2021. See Note 6 - Notes
Payable.
28
On
March 4, 2021, Cinedigm DC Holdings, LLC (“CDCH”), Access Digital Media, Inc., Access Digital Cinema Phase 2, Corp., Christie/AIX,
Inc., Cinedigm Digital Funding I, LLC, certain Lenders, and Prospect Capital Corporation, as administrative agent and collateral agent
(“Prospect”), entered into Amendment No. 3 (the “Amendment”) to the Term Loan Agreement dated February 28, 2013
(the “Term Loan Agreement”). Under the Amendment, the maturity date of the loan under the Term Loan Agreement (the “Loan”)
was extended to March 31, 2022.
We
believe the combination of: (i) our cash and cash equivalent balances at March 31, 2021, (ii) expected cash flows from operations,
(iii) expansion into Streaming, and (iv) the capacity under existing arrangements and access to new sources of capital will be sufficient
to satisfy our contractual obligations, as well as liquidity for our operational and capital needs, for twelve months from the filing
of this document. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional
capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect
on our financial position, results of operations and liquidity.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates
about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.
We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes
to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting
policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.
However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions
and estimates, and such differences could be material.
Our
significant accounting policies are discussed in Note 2 - Summary of Significant Accounting Policies , of the Notes to Consolidated
Financial Statements, included in Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K. Management
believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial
results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates
about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures
with the Audit Committee of our board of directors.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line
method over the estimated useful lives of the respective assets as follows:
Computer equipment and software
3-5 years
Internal use software
5 years
Digital cinema projection systems
10 years
Machinery and equipment
3-10 years
Furniture and fixtures
3-6 years
Leasehold
improvements are being amortized over the shorter of the lease term or the estimated useful life of the improvement. Maintenance and
repair costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized.
Useful
lives are determined based on an estimate of either physical or economic obsolescence, or both. During the fiscal years ended March 31,
2021 and 2020, we have neither made any revisions to estimated useful lives, nor recorded any impairment charges on our property, equipment
and internal use software.
29
FAIR
VALUE ESTIMATES
Goodwill,
Intangible and Long-Lived Assets
We
evaluate our goodwill for impairment in the fourth quarter of each fiscal year (as of March 31), or whenever events or changes in circumstances
indicate the fair value of a reporting unit is below its carrying amount. The determination of whether or not goodwill has become impaired
involves a significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting units.
Inherent in the fair value determination for each reporting unit are certain judgments and estimates relating to future cash flows, including
management’s interpretation of current economic indicators and market conditions, and assumptions about our strategic plans with
regard to our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible
that the conclusion regarding whether goodwill is impaired could change and result in future goodwill impairment charges that could have
a material adverse effect on our consolidated financial position or results of operations.
The
Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely
than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test.
The
quantitative test involves comparing the estimated fair value of a reporting unit with its respective book value, including goodwill.
If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting
unit is less than book value, an impairment loss is recognized in an amount equal to the excess.
The
Company tests for goodwill impairment annually at March 31. During the years ended March 31, 2021 and 2020, there were no impairment
charges recorded on goodwill. In 2021, we elected to conduct a qualitative goodwill assessment and in 2020 we conducted a quantitative
goodwill assessment. In determining fair value, we used various assumptions, including expectations of future cash flows based on projections
or forecasts derived from analysis of business prospects, economic or market trends and any regulatory changes that may occur. We estimated
the fair value of the reporting unit using a net present value methodology, which is dependent on significant assumptions related to
estimated future discounted cash flows, discount rates and tax rates. Certain of the estimates and assumptions that we used in determining
the value of our CEG reporting unit are discussed in Note 2 - Summary of Significant Accounting Policies of Item 8 - Financial
Statements and Supplementary Data of this Report on Form 10-K.
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.
30
REVENUE
RECOGNITION
We
determine revenue recognition by:
● identifying
the contract, or contracts, with the customer;
● identifying
the performance obligations in the contract;
● determining
the transaction price;
● allocating
the transaction price to performance obligations in the contract; and
● recognizing
revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.
We
recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the services provided, sales of
physical products (DVDs and Blu-ray) or when the content is available for subscription on the digital platform or available on
the point-of-sale for transactional and VOD services which is when the control of the promised products and services is transferred to
our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes
is recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes.
Payment
terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of
consideration for the effects of a significant financing component when we expect, at contract inception, that the period between
our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. We
have in the past entered into arrangements in connection with activation fees due from our digital cinema equipment (the
“Systems”) deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant
and hence the impact of significant financing would be insignificant.
Cinema
Equipment Business
Financing vehicles and administrators for 3,122
Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 3,104 Systems
installed domestically and internationally in our second deployment phase (“Phase II Deployment”).
We retain ownership of our digital cinema equipment (the “Systems”) and the residual cash flows related to the Systems in
Phase I Deployment after the 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, collection, verification and management services to this segment, as well as to
exhibitors who purchase their own equipment, and also collects and disburses Virtual print fees (“VPFs”) from motion picture
studios, and distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors (collectively, “Services”).
VPFs are earned, net of administrative fees,
pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase
II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs
are earned and payable to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every
digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed
using the Systems in any given accounting period. VPF revenue is recognized in the period in which the digital title first plays on a
System for general audience viewing in a digitally equipped movie theatre, as Phase I Deployment’s and Phase II Deployment’s
performance obligations have been substantially met at that time.
Phase II Deployment’s agreements with distributors
require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase
II Deployment may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors,
is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled
the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”,
as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further,
if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time “cost recoupment bonus.”
The Company evaluated the constraining estimates related to the variable consideration, i.e., the one-time bonus and determined that
it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will
occur when the uncertainty associated with the variable consideration is subsequently resolved.
Under
the terms of our standard Cinema Equipment licensing agreements, exhibitors will continue to have the right to use our Systems through
the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their
license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements,
we have begun, and expect to continue, to pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated
as the conclusion of the digital cinema deployment plan.
Revenues
earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.
31
Exhibitors
who purchased and own Systems using their own financing in the Cinema Equipment Business paid us an upfront activation fee of approximately
$2.0 thousand per screen (the “Exhibitor-Buyer Structure”). Upfront activation fees were recognized in the period in which
these Systems were delivered and ready for content, as we had no further obligations to the customer after that time and collection was
reasonably assured. In addition, we recognize activation fee revenue of between $1.0 thousand and $2.0 thousand on Phase 2 DC Systems
and for Systems installed by CDF2 Holdings, a related party, (See Note 4 - Other Interests ) upon installation and such fees are
generally collected upfront upon installation. Our services division manages and collects VPFs on behalf of exhibitors, for which it
earns an administrative fee equal to 10% of the VPFs collected.
The
Cinema Equipment Business earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service
fee equal to 2.5% of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPF’s
and the performance obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on
screens utilizing our Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding
VPF fees are due from the movie studios and distributors.
Under
the terms of the standard cinema equipment licensing agreements, exhibitors will continue to have the right to use the Systems through
the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their
license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements,
we have begun, and expect to continue, to pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated
as the conclusion of the digital cinema deployment plan. Cinedigm completed the sale of approximately 2,177 and 152 digital projection
Systems for an aggregate sales price of approximately $6.7 million and $1.6 million during the year ended March 31, 2021 and 2020, respectively.
Content
& Entertainment Business
CEG earns fees for the distribution of content
in the home entertainment markets via several distribution channels, including digital, video on demand (“VOD”), and physical
goods (e.g., DVD and Blu-ray Discs). Fees earned are typically a percentage based on the net amounts received from our customers depending
upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance
obligations include the delivery of content for transactional, subscription and ad supported/FAST on the digital platforms, and shipment
of DVD and Blu-ray Discs. Revenue is recognized at the point in time when the performance obligation is satisfied which is when the content
is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional
and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery
of content through various distribution channels to be a single performance obligation. Physical Revenue is recognized after deducting
the reserves for sales returns and other allowances, which are accounted for as variable consideration.
Physical
goods Reserves for sales returns and other allowances are recorded based upon historical experience. If actual future returns and allowances
differ from past experience, adjustments to our allowances may be required.
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.
Based
on our evaluation of the above indicators, we concluded that there were no changes to our gross versus net reporting from legacy GAAP.
Shipping
and Handling
Shipping
and handling costs are incurred to move physical goods (e.g., DVD and Blu-ray Discs) to customers. We recognize all shipping and handling
costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of
control to the customer.
32
Contract
Liabilities
We
generally record a receivable related to revenue when we have an unconditional right to invoice and receive payment, and we record deferred
revenue (contract liability) when cash payments are received or due in advance of our performance, even if amounts are refundable.
We
maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical
bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate
the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
Our
CEG segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that
it recognizes revenue from a sale. Reserves for product returns and other allowances are recorded based upon historical experience. If
actual future returns and allowances differ from past experience, adjustments to our allowances may be required. Sales returns and allowances
are reported as a reduction of revenues.
We
record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment
terms. Such accounts receivable are discounted to their present value at prevailing market rates. The outstanding balances on these arrangements
are insignificant and hence the impact of significant financing would be insignificant.
Deferred
revenue pertaining to 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 March 31, 2021 was $0.9 million. For the year ended
March 31, 2021, the additions to our deferred revenue balance were primarily due to cash payments received or due in advance of satisfying
performance obligations, while the reductions to our deferred revenue balance were primarily due to the recognition of revenue upon fulfillment
of our performance obligations, both of which were in the ordinary course of business.
During
the year ended March 31, 2021, $1.6 million of revenue was recognized that was included in the deferred revenue balance at the beginning
of the year. As of March 31, 2021, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $0.9
million. We expect to recognize this balance over the next 12 months.
In
connection with revenue recognition for CEG, the following are also considered critical accounting policies:
Advances
Advances,
which are recorded within prepaid and other current assets within the consolidated balance sheets, represent amounts prepaid to studios
or content producers for which we provide content distribution services. We evaluate advances regularly for recoverability and record
impairment charges for amounts that we expect may not be recoverable as of the consolidated balance sheet date.
33
ASSET
ACQUISITIONS
An
asset acquisition is an acquisition of an asset, or a group of assets, that does not meet the definition of a business as substantially
all of the fair value of the gross assets acquired are concentrated in a single or group of similar, identifiable assets. Asset acquisitions
are accounted for by using the cost accumulation model whereby the cost of the acquisition, including certain transaction costs, is allocated
to the assets acquired on a relative fair value basis. Determining and valuing intangible assets requires judgment.
Results
of Operations for the Fiscal Years Ended March 31, 2021 and 2020
Revenues
For the Fiscal Year Ended March 31,
($ in thousands)
2021
2020
$ Change
% Change
Cinema Equipment Business
$ 3,222
$ 12,741
$ (9,519 )
(74.7 )%
Content & Entertainment
28,197
26,550
1,647
6.2 %
$ 31,419
$ 39,291
$ (7,872 )
(20.0 )%
Revenues
generated by our Cinema Equipment Business segment decreased as a result of the reduced number of Systems earning VPF revenue and
administrative fees for Phase II Deployment Systems, as well as the COVID-19 pandemic. During the year ended March 31, 2021, studios
temporarily halted distribution of new content to movie theatres due to mandatory theatre shutdowns. Restrictions for theatre
re-openings and capacity limitations were at the sole discretion of local governments and varied state to state. The majority of new
content released in theatres during the year ended March 31, 2021 was from small Independent distributors with limited releases.
There were two major studios that provided theatrical releases during the period though simultaneously releasing on streaming
platforms, while other studios chose to bypass the theatrical market entirely or postpone domestic releases. In addition, as studios
began to release new content directly on streaming platforms and capacity restrictions persisted, discounted VPFs were necessary to
encourage bookings in the limited theatrical market. Because our digital cinema business earns a VPF when a movie is first played on
a system, the temporary theatre closures, limited releases and discounted VPFs resulting from the COVID-19 pandemic significantly
affected the reduced revenues. The revenues in the Content & Entertainment Business segment increased by 6.2% for the year ended
March 31, 2021 compared to the year ended March 31, 2020. The increase is consistent with the addition of five new streaming
channels as well as an increase in the number of advertising partners and stay at home orders increased in home digital
viewing.
Direct
Operating Expenses
For the Fiscal Year Ended March 31,
($ in thousands)
2021
2020
$ Change
% Change
Cinema Equipment Business
$ 683
$ 1,236
$ (553 )
(44.7 )%
Content & Entertainment
15,420
15,910
(490 )
(3.1 )%
$ 16,103
$ 17,146
$ (1,043 )
(6.1 )%
The
decrease in direct operating expenses in the year ended March 31, 2021 for the Cinema Equipment Business compared to the prior period
was primarily due to a reduction in head count and shifting of certain employees from full time to part time as a result of the negative
impact of the Covid 19 pandemic. The decrease in direct operating expenses in the year ended March 31, 2021 for the Content & Entertainment
Business compared to the prior period was primarily due to reduced cost of sales from the change in revenue mix from physical sales to
digital distribution, also less spend on marketing and on theatrical releases due to COVID-19, partially offset by an increase in transition
expenses related to a new third party DVD distributor. These costs were mainly fulfillment and freight expenses.
34
Selling,
General and Administrative Expenses
For the Fiscal Year Ended March 31,
($ in thousands)
2021
2020
$ Change
% Change
Cinema Equipment Business
$ 2,277
$ 2,085
$ 192
9.2 %
Content & Entertainment
9,798
10,017
(219 )
(2.2 )%
Corporate
9,917
4,242
5,675
133.8 %
$ 21,992
$ 16,344
$ 5,648
34.6 %
Selling, general and administrative expenses for
the year ended March 31, 2021 increased by $5.7 million primarily due to a $4.9 million increase in bonus incentive expense and stock-based
compensation to management and employees, $0.7 million for legal and accounting fees related to securities reporting and consulting and
$0.3 for remote-working equipment, partially offset by $0.2 million related to occupancy costs as a result of the company-wide program
to downsize office space and move to a more remote workforce, in the Content & Entertainment Business segment.
(Recovery)
Provision for Doubtful Accounts
Provision
for doubtful accounts was $(0.1) million and $0.8 million for the fiscal years ended March 31, 2021 and 2020, respectively.
Depreciation
and Amortization Expense on Property and Equipment
For the Fiscal Year Ended March 31,
($ in thousands)
2021
2020
$ Change
% Change
Cinema Equipment Business
$ 3,916
6,087
(2,171 )
(35.7 )%
Content & Entertainment
461
366
95
26.0 %
Corporate
27
167
(140 )
(83.8 )%
$ 4,404
$ 6,620
$ (2,216 )
(33.5 )%
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 fiscal years 2021 and 2020. Corporate and Content & Entertainment depreciation
and amortization expense is lower due to the write off of leasehold improvements with the closing of the Los Angeles office.
Interest
expense, net
For the Fiscal Year Ended March 31,
($ in thousands)
2021
2020
$ Change
% Change
Cinema Equipment Business
$ 2,346
$ 2,773
$ (427 )
(15.4 )%
Content & Entertainment
9
-
9
n/a
Corporate
1,695
4,464
(2,769 )
(62.0 )%
$ 4,050
$ 7,237
$ (3,187 )
(44.0 )%
Interest
expense in the Cinema Equipment Business segment decreased primarily as a result of reduced debt balances compared to the prior period
on the Prospect Term Loan. Interest expense in our Corporate segment decreased as a result of lower loan balances from our Credit Facility,
Second Lien Loans settled for Class A common stock and the conversion of the Bison Convertible Note and the Mingtai Convertible Note
into shares of Class A Common Stock.
35
Income
Tax Expense
We
recorded an income tax benefit of approximately $0.3 million for year ended March 31, 2021. We recorded income tax expense of approximately
$0.3 million year ended March 31, 2020. The benefit in income tax is mainly derived from minor changes in estimates between the
State tax income tax provision and its filling.
Adjusted
EBITDA
We define Adjusted EBITDA to be earnings before
interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs,
restructuring, transition and acquisitions expense, net, goodwill impairment, change in fair value on equity investment in Starrise and
certain other items.
Consolidated
Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the year ended March 31, 2021 decreased by $9.7 million
compared to the year ended March 31, 2020. Adjusted EBITDA from our Cinema Equipment Business segment decreased primarily due to state
mandated theater closures due to COVID-19, the temporary halt of distribution of major studio releases and the expected decline of the
Cinema Equipment Business. Negative Adjusted EBITDA from the Content & Entertainment business and Corporate segment decreased by
$1.0 million for the year ended March 31, 2021 compared to the year ended March 31, 2020, due increase on bonus incentive and stock-compensation
expenses, offset by the growth of Streaming & Digital revenues based on higher volume for streaming due to the pandemic and
adding additional channels and content compared to the prior period.
Adjusted
EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other
companies. We use Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes
it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe
Adjusted EBITDA will also be useful to others, including its stockholders, as a valuable financial metric.
We
present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net loss from continuing operations as an indicator
of operating performance. We also believe that Adjusted EBITDA is a financial measure that is useful both to management and investors
when evaluating our performance and comparing our performance with that of our competitors. We also use Adjusted EBITDA for planning
purposes and to evaluate our financial performance because Adjusted EBITDA excludes certain incremental expenses or non-cash items, such
as stock-based compensation charges, that we believe are not indicative of our ongoing operating performance.
We
believe that Adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss from
continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an
alternative to income from operations or net loss from continuing operations as an indicator of performance or as an alternative to cash
flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of
liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and
income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or
as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated
financial statements prepared in accordance with GAAP.
36
Following
is the reconciliation of our consolidated net loss to Adjusted EBITDA:
For the Fiscal Year
Ended March 31,
($ in thousands)
2021
2020
Net loss
$ (62,905 )
$ (14,724 )
Add Back:
Income tax (benefit)/expense
(315 )
313
Depreciation and amortization of property and equipment
4,404
6,620
Amortization of intangible assets
2,515
2,772
Loss on extinguishment of note payable
1,498
-
Interest expense, net
4,050
7,237
Change in fair value on equity investment in Starrise
43,518
1,618
Other expense, net
1,475
1,585
(Recovery) Provision for doubtful accounts
(122 )
758
Stock-based compensation
2,892
543
Net income (loss) attributable to noncontrolling interest
85
(10 )
Adjusted EBITDA
$ (2,905 )
$ 6,712
Adjustments related to the Cinema Equipment Business
Depreciation and amortization of property and equipment
$ (3,916 )
$ (6,087 )
Amortization of intangible assets
(23 )
(46 )
Stock-based compensation and expenses
73
7
Income from operations
4,142
(1,721 )
Adjusted EBITDA from non-cinema equipment business
$ (2,629 )
$ (1,135 )
Recent
Accounting Pronouncements
See
Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included herein.
37
Changes
in our cash flows were as follows:
For the Fiscal Years Ended March 31,
($ in thousands)
2021
2020
Net cash (used in) provided by operating activities
$ (20,007 )
$ 7,762
Net cash used in investing activities
(1,710 )
(1,247 )
Net cash provided by (used in) financing activities
24,272
(10,093 )
Net increase (decrease) in cash and cash equivalents
$ 2,555
$ (3,578 )
As
of March 31, 2021, we had cash and restricted cash balances of $17.8 million.
As
of March 31, 2020, we had cash and restricted cash balances of $15.3 million.
For
the year ended March 31, 2021, net cash used in operating activities is primarily driven by loss from operations, excluding non-cash
expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, including other changes in
working capital. Additionally, during the year ended March 31, 2021, the Company paid down $29.8 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. 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.
Cash flows were also impacted as a result of COVID-19, as during the year ended March 31, 2021, theatres in many major markets remained
closed throughout the fourth quarter causing the majority of major studios to move wide releases scheduled for the year ended March 31,
2021 to future dates. Only two major studios had wide theatrical releases in the last part of the year, however, the theatrical
window before the streaming debut was shortened or eliminated to accommodate the lack of theatrical venues. Because our digital cinema
business earns a VPF when a movie is first played on a system, the temporary theatre closures resulting from the COVID-19 pandemic resulted
in reduced revenues.
For
the year ended March 31, 2020, net cash provided by operating activities is primarily driven by loss from operations, excluding non-cash
expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, offset by changes in working
capital. Cash received from VPFs declined from the previous period as Phase I and Phase II Deployment Systems in our Cinema Equipment
Business reached the conclusion of their deployment payment period with certain major studios. Changes in accounts receivable from our
studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by
the major studios. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues
earned during the holiday season, and lower in the other two quarters as we pay royalties on such revenues. In addition, we make advances
on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered
within six to twelve months.
For
the year ended March 31, 2021, cash flows used in investing activities consisted of proceeds from the sale of Starrise shares of $0.8
million, purchases of property and equipment of $0.06 million, the sale of property and equipment of $0.08 million, and the purchase of
intangible assets of $2.5 million related to the asset acquisition.
For
the year ended March 31, 2020, cash flows used in investing activities mainly consisted of purchases of property and equipment of $1.2
million.
For the year ended March 31, 2021, cash flows
provided by financing activities consisted of payments of approximately $7.7 million in notes payable, $12.8 million in Credit Facility
repayments, $42.7 million received in connection with the issuance Class A common stock and the exercise of warrants, and $2.2 million
received pursuant to the Payment Protection Program of the Coronavirus Aid, Relief and Economic Security Act.
For
the year ended March 31, 2020, cash flows used in financing activities reflects payments of $39.5 million on notes payable offset
by $23.6 million form proceeds under the revolving credit agreement and $5.8 million received in connection with the sale of 3,900,000
shares of our Common Stock.
38
We
may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, interest on our debt obligations,
marketing and promotional activities and content acquisition and marketing costs. Certain of these costs, including costs of content
acquisition, marketing and promotional activities, could be reduced if necessary. The restrictions imposed by the terms of our debt obligations
may limit our ability to obtain financing, make it more difficult to satisfy our debt obligations or require us to dedicate a substantial
portion of our cash flow to payments on our existing debt obligations. We feel we are adequately financed for at least the next twelve
months; however, we may need to raise additional capital for working capital as deemed necessary. Failure to generate additional revenues,
raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations
or liquidity.
Seasonality
Revenues
from our Cinema Equipment segment derived from the collection of VPFs from motion picture studios are seasonal, coinciding with the timing
of releases of movies by the motion picture studios. Generally, motion picture studios release the most marketable movies during the
summer and the winter holiday season. The unexpected emergence of a hit movie during other periods can alter the traditional trend. The
timing of movie releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily
indicative of results for the next quarter or any other quarter. While CEG benefits from the winter holiday season, we believe the seasonality
of motion picture exhibition, is becoming less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout
the year.
Off-balance
sheet arrangements
We
are not a party to any off-balance sheet arrangements, other than operating leases in the ordinary course of business, which are disclosed
above in the table of our significant contractual obligations, and CDF2 Holdings. In addition, as discussed further in Note 2 - Basis
of Presentation and Consolidation and Note - Other Interests to the Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K, 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.
39