Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
An investment in our securities involves a degree of risk. The risks
described below are not the only ones facing us. Additional risks not presently known to us or that we currently deem immaterial may also
have a material adverse effect on us. If any of the following risks actually occur, our financial condition, results of operations, cash
flows or business could be harmed. In that case, the market price of our stock could decline and you could lose part or all of your investment
in our stock.
Risks Related to our Business
We face the risks of doing business in new and rapidly evolving
markets and may not be able successfully to address such risks and achieve acceptable levels of success or profits.
We have encountered and may continue to encounter the challenges, uncertainties
and difficulties frequently experienced in new and rapidly evolving markets, including:
● limited
operating experience;
● net
losses;
● lack
of sufficient customers or loss of significant customers;
● a
changing business focus;
● the
downward trend in sales of physical DVD and Blu-ray discs;
● rapidly-changing
technology for some of the products and services we offer; and
● difficulties
in managing potentially rapid growth.
We expect competition to be intense. If we are unable to compete
successfully, our business and results of operations will be seriously harmed.
The markets for the digital cinema business and the content distribution
business are competitive, evolving and subject to rapid technological and other changes. We expect the intensity of competition in each
of these areas to increase in the future. Companies willing to expend the necessary capital to create facilities and/or capabilities similar
to ours may compete with our business. Increased competition may result in reduced revenues and/or margins and loss of market share, any
of which could seriously harm our business. In order to compete effectively in each of these fields, we must differentiate ourselves from
competitors.
Many of our current and potential competitors have longer operating
histories and greater financial, technical, marketing and other resources than we do, which may permit them to adopt aggressive pricing
policies. As a result, we may suffer from pricing pressures that could adversely affect our ability to generate revenues and our results
of operations. Many of our competitors also have significantly greater name and brand recognition and a larger customer base than us.
If we are unable to compete successfully, our business and results of operations will be seriously harmed.
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Our plan to acquire additional businesses involves risks, including
our inability to complete or integrate an acquisition successfully, our assumption of liabilities, dilution of your investment and significant
costs.
Strategic and financially appropriate acquisitions are a key component
of our growth strategy. Although there are no acquisitions identified by us as probable at this time, we may make acquisitions of similar
or complementary businesses or assets. Even if we identify appropriate acquisition candidates, we may be unable to negotiate successfully
the terms of the acquisitions, finance them, integrate the acquired business into our then existing business, obtain required regulatory
approvals, and/or attract and retain customers. Completing an acquisition and integrating an acquired business may require a significant
diversion of management time and resources and may involve assuming new liabilities. Any acquisition also involves the risks that the
assets acquired may prove less valuable than expected and/or that we may assume unknown or unexpected liabilities, costs and problems.
If we make one or more significant acquisitions in which any of the consideration consists of our capital stock, your equity interest
in the Company could be diluted, perhaps significantly. If we were to proceed with one or more significant acquisitions in which the consideration
included cash, we could be required to use a substantial portion of our available cash or obtain additional financing to consummate them.
Our previous acquisitions involve risks, including our inability
to integrate successfully the new businesses and our assumption of certain liabilities.
Our previous acquisitions of businesses and their respective assets
also involved the risks that the businesses and assets acquired may prove to be less valuable than we expected and/or that we may assume
unknown or unexpected liabilities, costs and problems. In addition, we assumed certain liabilities in connection with these acquisitions
and we cannot assure you that we will be able to satisfy adequately such assumed liabilities. Other companies that offer similar products
and services may be able to market and sell their products and services more cost-effectively than we can.
We have recorded goodwill impairment charges in the past and
may be required to record additional charges to future earnings if our goodwill becomes further impaired or our intangible assets become
impaired.
We are required under generally accepted accounting principles to review
our goodwill and definite-lived intangible assets for impairment when events or changes in circumstances indicate the carrying value may
not be recoverable. Goodwill must be tested for impairment at least annually. Factors that may be considered a change in circumstances
indicating that the carrying value of our reporting units and intangible assets may not be recoverable include a decline in stock price
and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have
implications on the profitability of our business. We may be required to record additional charges to earnings during any period in which
a further impairment of our goodwill or other intangible assets is determined which could adversely affect our results of operations.
If we do not manage our growth, our business will be harmed.
We may not be successful in managing our growth. Past growth has placed,
and future growth will continue to place, significant challenges on our management and resources, related to the successful integration
of the newly acquired businesses. To manage the expected growth of our operations, we will need to improve our existing, and implement
new, operational and financial systems, procedures and controls. We may also need to expand our finance, administrative, client services
and operations staffs and train and manage our growing employee base effectively. Our current and planned personnel, systems, procedures
and controls may not be adequate to support our future operations. Our business, results of operations and financial position will suffer
if we do not effectively manage our growth.
If we are not successful in protecting our intellectual property,
our business will suffer.
We depend heavily on technology and viewing content to operate our
business. Our success depends on protecting our intellectual property, which is one of our most important assets. We have intellectual
property consisting of:
● rights
to certain domain names;
● registered
service marks on certain names and phrases;
● various
unregistered trademarks and service marks;
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● film,
television and other forms of viewing content;
● know-how;
and
● rights
to certain logos.
If we do not adequately protect our intellectual property, our business,
financial position and results of operations would be harmed. Our means of protecting our intellectual property may not be adequate. Unauthorized
parties may attempt to copy aspects of our intellectual property or to obtain and use information that we regard as proprietary. In addition,
competitors may be able to devise methods of competing with our business that are not covered by our intellectual property. Our competitors
may independently develop similar technology, duplicate our technology or design around any intellectual property that we may obtain.
Although we hold rights to various web domain names, regulatory bodies
in the United States and abroad could establish additional top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. The relationship between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. We may be unable to prevent third parties from acquiring domain names that are similar to or diminish
the value of our proprietary rights.
Any future debt obligations of ours, and
debt obligations of our non-consolidated subsidiaries, could impair our financial flexibility and restrict our business significantly.
We do not currently have debt obligations. However, if we incur debt
obligations in the future, such debt obligations could have important consequences for us, including:
● limiting
our ability to obtain necessary financing in the future;
● requiring
us to dedicate a substantial portion of our cash flow to payments on our debt obligations, thereby reducing the availability of our cash
flow to fund working capital, capital expenditures; and
● other
corporate requirements that may affect or limit our business activities.
CDF2 and CDF2 Holdings are our indirect wholly-owned, non-consolidated
VIEs that are intended to be special purpose, bankruptcy remote entities. CDF2 Holdings has entered into the a lease (the “CHG Lease”)
pursuant to which CHG-Meridian U.S. Finance, Ltd. provided sale/leaseback financing for digital cinema projection systems that were partially
financed as part of the Phase II deployment of our Digital Equipment segment. The CHG Lease is non-recourse to Cinedigm and our subsidiaries,
excluding our VIEs, CDF2 and CDF2 Holdings, as the case may be. Although the Phase II financing arrangements undertaken by CDF2 and CDF2
Holdings are important to us with respect to the success of our Phase II Deployment, our financial exposure related to the debt of CDF2
and CDF2 Holdings is limited to the $2.0 million initial investment we made into CDF2 and CDF2 Holdings. CDF2 Holding’s total stockholder’s
deficit at March 31, 2022 was $55.6 million. We have no obligation to fund the operating loss or the deficit beyond our initial investment,
and accordingly, we carried our investment in CDF2 Holdings at $0 as of March 31, 2022 and 2021.
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The obligations and restrictions under the CHG Lease could have important
consequences for CDF2 and CDF2 Holdings, including:
● Limiting
our ability to obtain necessary financing in the future;
● restricting
us from incurring liens on the digital cinema projection systems financed and from subleasing, assigning or modifying the digital cinema
projection systems financed; and
● requiring
them to dedicate a substantial portion of their cash flow to payments on their debt obligations, thereby reducing the availability of
their cash flow for other uses.
If we are unable to meet our debt obligations, we could be forced to
restructure or refinance our obligations, to seek additional equity financing or to sell assets, which we may not be able to do on satisfactory
terms or at all. As a result, we could default on those obligations and in the event of such default, our lenders could accelerate our
debt or take other actions that could restrict our operations.
The foregoing risks would be intensified to the extent we borrow additional
money or incur additional debt.
We may not be able to generate the amount
of cash needed to fund our future operations.
Our ability either to make payments on or to refinance our indebtedness,
or to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future.
Our ability to generate cash is in part subject to general economic, financial, competitive, regulatory and other factors that are beyond
our control.
Based on our current level of operations and in conjunction with the
cost reduction measures that we have recently implemented and continue to implement, we believe our cash flow from operations, available
borrowings and loan and credit agreement terms will be adequate to meet our future liquidity needs through at least the next twelve months.
Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our
business, liquidity or capital requirements. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy
that may include actions such as:
● reducing
capital expenditures;
● reducing
our overhead costs and/or workforce;
● reducing
research and development efforts;
● selling
assets;
● restructuring
or refinancing our remaining indebtedness; and
● seeking
additional funding.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, or that we will be able to make future borrowings in amounts sufficient to enable us to pay the principal and
interest on our current indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness
on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms
or at all.
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We have incurred long term losses.
We have incurred long term losses and have financed our operations
principally through equity investments and borrowings. As of March 31, 2022, we had negative working capital, defined as current
assets less current liabilities, of $(4.8) million, and cash and cash equivalents totaling $13.1 million, total equity of $41 million,
and $4.9 million provided by net cash flows from operating activities.
Our net losses and cash outflows may increase as and to the extent
that we increase the size of our business operations, increase our sales and marketing activities, increase our content distribution rights
acquisition activities, enlarge our customer support and professional services and acquire additional businesses. These efforts may prove
to be more expensive than we currently anticipate which could further increase our losses. We must continue to increase our revenues in
order to become profitable. We cannot reliably predict when, or if, we will become profitable. Even if we achieve profitability, we may
not be able to sustain it. If we cannot generate operating income or positive cash flows in the future, we will be unable to meet our
working capital requirements.
Many of our corporate actions may be controlled by our officers,
directors and principal stockholders; these actions may benefit these principal stockholders more than our other stockholders.
As of
March 31, 2022, our directors, executive officers and principal stockholders, those known by us to beneficially own more than 5% of
the outstanding shares of our Common Stock, beneficially own, directly or indirectly, in the aggregate, approximately 23.9% of our
outstanding Common Stock. Certain of these stockholders are under the common control of one of our directors. These stockholders, as
a group, may have significant influence over our business affairs, with the ability to control matters requiring approval by our
security holders, including elections of directors and approvals of mergers or other business combinations. In addition, certain
corporate actions directed by our officers may not necessarily inure to the proportional benefit of our other
stockholders.
We face risks associated with our business
in China.
In November 2017, Bison, a Hong Kong-based entity that does business
in mainland China as well as other locations, became our majority owner. We anticipate that Bison’s presence and relationships in China
will provide us with assistance in expanding our business to China. In January 2018, we announced a strategic alliance with A Metaverse
Company, a leading Chinese entertainment company, formerly Starrise Media Holdings Limited,
whose ordinary shares are listed on the Hong Kong Stock Exchange (“Metaverse”), to release films in China theatrically and
to digital platforms, and to evaluate opportunities to jointly produce Chinese/American film co-productions, and in February and April
2020, we acquired approximately 26% of the outstanding ordinary shares of Metaverse. Accordingly, we are exposed to risks of doing business
in China. As a result, the economic, political, legal and social conditions in China could have a material adverse effect on our business.
In addition, the legal system in China has inherent uncertainties that may limit the legal protections available in the event of any claims
or disputes that we may have with third parties, including our ability to protect the intellectual property we use in China. As China’s
legal system is still evolving, the interpretation of many laws, regulations and rules is not always uniform and enforcement of these
laws, regulations and rules involve uncertainties, which may limit the remedies available in the event of any claims or disputes with
third parties. Some of the other risks related to doing business in China include:
● the
Chinese government exerts substantial influence over the manner in which we must conduct our business activities;
● restrictions
on currency exchange may limit our ability to receive and use our cash effectively;
● the
Chinese government may favor local businesses and make it more difficult for foreign businesses to operate in China on an equal footing,
or generally;
● there
are increased uncertainties related to the enforcement of contracts with certain parties; and
● more
restrictive rules on foreign investment could adversely affect our ability to expand our operations in China
As a result of our growing operations in China, these risks could have
a material adverse effect on our business, results of operations and financial condition.
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We are subject to risks from our equity
investment in a foreign company.
We own approximately 18% of the outstanding ordinary shares of Metaverse,
a company that operates in China and whose ordinary shares trade on the Hong Kong Stock Exchange. We have partnered with Metaverse in
the past, and continue to do so, with respect to the release of U.S.-sourced content in China and China-sourced content in the U.S. We
may experience consequences from economic and regulatory events and requirements outside of the United States that affect the value of
these shares and their value to us, including changes in regulatory requirements that affect Metaverse, fluctuations in international
currency exchange rates, volatility in international political and economic environments, public disclosure requirements, and unforeseen
developments and conditions, including terrorism, war, epidemics and international tensions and conflicts. No assurance can be made that,
if we were to sell these shares on the Hong Kong Stock Exchange in Hong Kong currency, we would receive the full value in U.S. dollars
upon repatriating the proceeds, based on fluctuating currency exchange rates.
While the impact of these factors is difficult to predict, any one
or more of these factors could adversely affect the value of our investment in the Metaverse shares.
Our success will significantly depend on
our ability to hire and retain key personnel.
Our success will depend in significant part upon the continued performance
of our senior management personnel and other key technical, sales and creative personnel. We do not currently have significant “key
person” life insurance policies for any of our employees. We currently have employment agreements with our chief executive officer.
If we lose one or more of our key employees, we may not be able to find a suitable replacement(s) and our business and results of operations
could be adversely affected. In addition, competition for key employees necessary to create and distribute our entertainment content and
software products is intense and may grow in the future. Our future success will also depend upon our ability to hire, train, integrate
and retain qualified new employees and our inability to do so may have an adverse impact upon our business, financial condition, operating
results, liquidity and prospects for growth.
If we do not respond to future changes in technology and customer
demands, our financial position, prospects and results of operations may be adversely affected.
The demand for our Systems and other assets in connection with our
digital cinema business (collectively, our “Digital Cinema Assets”) may be affected by future advances in technology and changes
in customer demands. We cannot assure you that there will be continued demand for our Digital Cinema Assets. Our profitability depends
largely upon the continued use of digital presentations at theatres. Although we have entered into long term agreements with major motion
picture studios and independent studios (the “Studio Agreements”), there can be no assurance that these studios will continue
to distribute digital content to movie theatres. If the development of digital presentations and changes in the way digital files are
delivered does not continue or technology is used that is not compatible with our Systems, there may be no viable market for our Systems
and related products. Any reduction in the use of our Systems and related products resulting from the development and deployment of new
technology may negatively impact our revenues and the value of our Systems.
The demand for DVD products is declining, and we anticipate that this
decline will continue. We anticipate, however, that the distribution of DVD products will continue to generate positive cash flows for
the Company for the foreseeable future. Should a decline in consumer demand be greater than we anticipate, our business could be adversely
affected.
Termination of the MLAs and MLAAs could damage our revenue and
profitability.
The master license agreements with each of our licensed exhibitors
(the “MLAs”) are critical to our business as are master license administrative agreements (the “MLAAs”). The MLAs
have terms, which expire in 2020 through 2022 and provide the exhibitor with an option to purchase our Systems or to renew for successive
one-year periods up to ten years thereafter. The MLAs also require our suppliers to upgrade our Systems when Technology is necessary for
compliance with DCI Specification becomes commercially available and we may determine to enhance the Systems, which may require additional
capital expenditures. If any one of the MLAs were terminated prior to the end of its term, not renewed at its expiration or found to be
unenforceable, or if our Systems are not upgraded or enhanced as necessary, it would have a material adverse effect on our revenue, profitability,
financial condition and cash flows. Additionally, termination of MLAAs could adversely impact our servicing business.
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An increase in the use of alternative movie distribution channels
and other competing forms of entertainment could drive down movie theatre attendance, which, if causing significant theatre closures or
a substantial decline in motion picture production, may lead to reductions in our revenues.
Various exhibitor chains, which are our distributors, face competition
for patrons from a number of alternative motion picture distribution channels, such as DVD, network and syndicated television, VOD, pay-per-view
television and downloading utilizing the Internet. These exhibitor chains also compete with other forms of entertainment competing for
patrons’ leisure time and disposable income such as concerts, amusement parks and sporting events. An increase in popularity of
these alternative movie distribution channels and competing forms of entertainment could drive down movie theatre attendance and potentially
cause certain of our exhibitors to close their theatres for extended periods of time. Significant theatre closures could in turn have
a negative impact on the aggregate receipt of our VPF revenues, which in turn may have a material adverse effect on our business and ability
to service our debt.
An increase in the use of alternative movie distribution channels could
also cause the overall production of motion pictures to decline, which, if substantial, could have an adverse effect on the businesses
of the major studios with which we have Studio Agreements. A decline in the businesses of the major studios could in turn force the termination
of certain Studio Agreements prior to the end of their terms. The Studio Agreements with each of the major studios are critical to our
business, and their early termination may have a material adverse effect on our revenue, profitability, financial condition and cash flows.
Our success depends on external factors in the motion picture
and television industry.
Our success depends on the commercial success of movies and television
programs, which is unpredictable. Operating in the motion picture and television industry involves a substantial degree of risk. Each
movie and television program is an individual artistic work, and inherently unpredictable audience reactions primarily determine commercial
success. Generally, the popularity of movies and television programs depends on many factors, including the critical acclaim they receive,
the format of their initial release, for example, theatrical or direct-to-video, the actors and other key talent, their genre and their
specific subject matter. The commercial success of movies and television programs also depends upon the quality and acceptance of movies
or programs that our competitors release into the marketplace at or near the same time, critical reviews, the availability of alternative
forms of entertainment and leisure activities, general economic conditions and other tangible and intangible factors, many of which we
do not control and all of which may change. We cannot predict the future effects of these factors with certainty, any of which could have
a material adverse effect on our business, financial condition, operating results, liquidity and prospects. In addition, because a movie’s
or television program’s performance in ancillary markets, such as home video and pay and free television, is often directly related
to its box office performance or television ratings, poor box office results or poor television ratings may negatively affect future revenue
streams. Our success will depend on the experience and judgment of our management to select and develop new content acquisition and investment
opportunities. We cannot make assurances that movies and television programs will obtain favorable reviews or ratings, will perform well
at the box office or in ancillary markets or that broadcasters will license the rights to broadcast any of our television programs in
development or renew licenses to broadcast programs in our library. The failure to achieve any of the foregoing could have a material
adverse effect on our business, financial condition, operating results, liquidity and prospects.
In addition, the motion picture industry has been significantly affected
by the COVID-19 pandemic in light of mandatory theatre shutdown, changes to the planned production, distribution and release schedules.
The industry may continue to be negatively impacted by delays in the production and release schedules of new motion pictures and TV shows,
which may negatively affect our business, financial condition, operating results, liquidity and prospects.
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Our business involves risks of liability claims for media content,
which could adversely affect our business, results of operations and financial condition.
As a distributor of media content, we may face potential liability
for:
● defamation;
● invasion
of privacy;
● negligence;
● copyright
or trademark infringement (as discussed above); and
● other
claims based on the nature and content of the materials distributed.
These types of claims have been brought, sometimes successfully, against
producers and distributors of media content. Any imposition of liability that is not covered by insurance or is in excess of insurance
coverage could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
O ur revenues and earnings are subject to market downturns .
Our revenues and earnings may fluctuate significantly in the future.
General economic or other conditions could cause lower than expected revenues and earnings within our digital cinema, technology or content
and entertainment businesses. The global economic turmoil of recent years has caused a general tightening in the credit markets, lower
levels of liquidity, increases in the rates of default and bankruptcy, an unprecedented level of intervention from the U.S. federal government
and other foreign governments, decreased consumer confidence, overall slower economic activity and extreme volatility in credit, equity
and fixed income markets. While the ultimate outcome of these events cannot be predicted, a decrease in economic activity in the U.S.
or in other regions of the world in which we do business could adversely affect demand for our movies, thus reducing our revenue and earnings.
While stabilization has continued, it remains a slow process and the global economy remains subject to volatility. Moreover, financial
institution failures may cause us to incur increased expenses or make it more difficult either to financing of any future acquisitions,
or financing activities. Any of these factors could have a material adverse effect on our business, results of operations and could result
in significant additional dilution to shareholders.
Changes in economic conditions could have a material adverse
effect on our business, financial position and results of operations.
Our operations and performance could be influenced by worldwide economic
conditions. Uncertainty about current global economic conditions poses a risk as consumers and businesses may postpone spending in response
to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the
demand for our products and services. Other factors that could influence demand include continuing increases in fuel and other energy
costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence,
and other macroeconomic factors affecting consumer-spending behavior. These and other economic factors could have a material adverse effect
on demand for our products and services and on our financial condition and operating results. Uncertainty about current global economic
conditions could also continue to increase the volatility of our stock price.
Changes to existing accounting pronouncements or taxation rules
or practices may affect how we conduct our business and affect our reported results of operations.
New accounting pronouncements or tax rules and varying interpretations
of accounting pronouncements or taxation practice have occurred and may occur in the future. A change in accounting pronouncements or
interpretations or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting
of transactions completed before the change is effective. Changes to existing rules and pronouncements, future changes, if any, or the
questioning of current practices or interpretations may adversely affect our reported financial results or the way we conduct our business.
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Our ability to utilize our net operating loss carryforwards in
the future is subject to substantial limitations and we may not be able to use some identified net operating loss carryforwards, which
could result in increased tax payments in future periods.
Under Section 382 of the Internal Revenue Code, if a corporation undergoes
an ownership change (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the
corporation’s ability to use its pre-change net operating loss (“NOL”) carryforwards to offset its post-change income
may be limited. Similar rules may apply under state tax laws. On November 1, 2018, we experienced an ownership change with respect to
the Bison acquisition. Accordingly, our ability to utilize our NOL carryforwards attributable to periods prior to November 1, 2018 is
subject to substantial limitations. These limitations could result in increased future tax payments, which could be material.
We may experience unanticipated effects of the COVID-19 pandemic.
Our business could be adversely affected by the effects of a widespread
outbreak of contagious disease, including the outbreak of COVID-19. 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 slowly re-opened with limited capacities through March 31, 2022. The majority of major studios resumed blockbuster
films releases during the year which showed an encouraging return of consumer confidence for the theatrical experience. As vaccines became
readily available and COVID cases decreased, major studios resumed theatrical releases and there was an uptick in box office revenue during
the period ending March 31, 2022.
Longer term, there had been speculation that the future of theatrical
release strategies could change as a result of Major Studios being able to release movies simultaneously in theatres and on streaming
platforms during the pandemic. If fewer movies are released theatrically, a shift to digital viewing reduces revenue opportunities for
virtual print fees and sales of digital cinema equipment. While Studios are still in an experimentation phase regarding theatrical/streaming
strategies we are encouraged by the success of recent exclusive theatrical releases such as Sony’s ‘Spider-Man: No Way Home’,
which became the first movie since the pandemic to hit $1 billion globally with no current plans to premiere on any streaming platforms.
R isks Related to Common Stock
The liquidity of the Common Stock is uncertain; the limited trading
volume of the Common Stock may depress the price of such stock or cause it to fluctuate significantly.
Although the Common Stock is listed on Nasdaq, there has been a limited
public market for the Common Stock and there can be no assurance that a more active trading market for the Common Stock will develop.
As a result, you may not be able to sell your shares of Common Stock in short time periods, or possibly at all. The absence of an active
trading market may cause the price per share of the Common Stock to fluctuate significantly.
Substantial resales or future issuances of our Common Stock could
depress our stock price.
The market price for the Common Stock could decline, perhaps significantly,
as a result of resales or issuances of a large number of shares of the Common Stock in the public market or even the perception that such
resales or issuances could occur. In addition, we have outstanding a substantial number of options and warrants exercisable for shares
of Common Stock that may be exercised in the future. These factors could also make it more difficult for us to raise funds through future
offerings of our equity securities.
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You will incur substantial dilution as a result of certain future
equity issuances.
We have a substantial number of options and warrants currently outstanding
which may be immediately exercised for shares of Common Stock. To the extent that these options or warrants are exercised, or to the extent
we issue additional shares of Common Stock in the future, as the case may be, there will be further dilution to holders of shares of the
Common Stock.
Our issuance of preferred stock could adversely affect holders
of Common Stock.
Our board of directors is authorized to issue series of preferred stock
without any action on the part of our holders of Common Stock. Our board of directors also has the power, without stockholder approval,
to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights, preferences over
our Common Stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue preferred
stock in the future that has preference over our Common Stock with respect to the payment of dividends or upon our liquidation, dissolution
or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our Common Stock, the rights of holders
of our Common Stock or the price of our Common Stock could be adversely affected.
Our stock price has been volatile and may continue to be volatile
in the future; this volatility may affect the price at which you could sell our Common Stock.
The trading price of the Common Stock has been volatile and may continue
to be volatile in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material
adverse effect on an investment in our securities:
● actual
or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar
to us;
● changes
in the market’s expectations about our operating results;
● success
of competitors;
● our
operating results failing to meet the expectation of securities analysts or investors in a particular period;
● changes
in financial estimates and recommendations by securities analysts concerning us, the market for digital and physical content, content
distribution and entertainment in general;
● operating
and stock price performance of other companies that investors deem comparable to us;
● our
ability to market new and enhanced products on a timely basis;
● changes
in laws and regulations affecting our business or our industry;
● commencement
of, or involvement in, litigation involving us;
● changes
in our capital structure, such as future issuances of securities or the incurrence of debt;
● the
volume of shares of the Common Stock available for public sale;
● any
major change in our board of directors or management;
● sales
of substantial amounts of Common Stock by our directors, executive officers or significant stockholders or the perception that such sales
could occur; and
● general
economic and political conditions such as recessions, interest rates, international currency fluctuations and acts of war or terrorism.
Broad market and industry factors may materially harm the market price
of the Common Stock irrespective of our operating performance. The stock market in general, and Nasdaq in particular, have experienced
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies
affected. The trading prices and valuations of these stocks, and of the Common Stock, may not be predictable. A loss of investor confidence
in the market for retail stocks or the stocks of other companies that investors perceive to be similar to us could depress our stock price
regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of the Common Stock
also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
19
Anti-takeover provisions contained in our certificate of incorporation
and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our fifth amended and restated certificate of incorporation and bylaws,
as amended, contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without
the consent of our board of directors.
These provisions include:
● no
cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
● the
exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or
the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
● the
ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those
shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership
of a hostile acquirer;
● the
requirement that an annual meeting of stockholders may be called only by the board of directors, which may delay the ability of our stockholders
to force consideration of a proposal or to take action, including the removal of directors;
● limiting
the liability of, and providing indemnification to, our directors and officers;
● controlling
the procedures for the conduct and scheduling of stockholder meetings; and
● providing
that directors may be removed prior to the expiration of their terms by the Board of Directors only for cause.
In addition, our certificate of incorporation authorizes the issuance
of 15,000,000 shares of preferred stock. The terms of our preferred stock may be fixed by the company’s board of directors without
further stockholder action. The terms of any outstanding series or class of preferred stock may include priority claims to assets and
dividends and special voting rights, which could adversely affect the rights of holders of Common Stock. Any future issuance(s) of preferred
stock could make the takeover of the company more difficult, discourage unsolicited bids for control of the company in which our stockholders
could receive premiums for their shares, dilute or subordinate the rights of holders of Common Stock and adversely affect the trading
price of the Common Stock.
These provisions, alone or together, could delay hostile takeovers
and changes in control of the Company or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware
law, including Section 203 of the DGCL, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging
in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of
our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit
the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some
investors are willing to pay for our securities.
20
We may not be able to maintain the listing of our Common Stock
on Nasdaq, which may adversely affect the flexibility of holders of Common Stock to resell their securities in the secondary market.
The Common Stock is presently listed on Nasdaq. On April 4, 2022, we
received a letter (the “Notice”) from the Listing Qualifications staff of Nasdaq indicating that the Company no longer meets
the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1). The Notice did not result
in the immediate delisting of the Common Stock from Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided a period
of 180 calendar days, or until October 3, 2022, in which to regain compliance. There can be no assurance that we regain compliance within
such period, or will be granted an extension of time to cure the deficiency. If the Company is unable to meet the continued listing criteria
of Nasdaq and the Common Stock became delisted, trading of the Common Stock could thereafter be conducted in the over-the-counter markets
in the OTC Pink, also known as “pink sheets” or, if available, on another OTC trading platform. Any such delisting could harm
our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the loss of
confidence in our financial stability by suppliers, customers and employees. Investors would likely find it more difficult to dispose
of, or to obtain accurate market quotations for, the Common Stock, as the liquidity that Nasdaq provides would no longer be available
to investors. In addition, the failure of our Common Stock to continue to be listed on the Nasdaq could adversely impact the market price
for the Common Stock and our other securities, and we could face a lengthy process to re-list the Common Stock, if we are able to re-list
the Common Stock.
We have no present intention of paying dividends on our Common
Stock.
We have never paid any cash dividends on our Common Stock and have
no present plans to do so. In addition, certain of our credit facilities restrict our ability to pay dividends on the Common Stock. As
a result, you may not receive any return on an investment in our Common Stock unless you sell any shares you hold for a price greater
than that which you paid for them.
Our ability to raise capital in the future may be limited, which
could make us unable to fund our capital requirements.
Our business and operations may consume resources faster than we
anticipate, or we may require additional funds to pursue acquisition or expansion opportunities. In the future, we may need to raise
additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be
available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our
capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make
claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our Common
Stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of
our future securities offerings reducing the market price of our Common Stock, diluting their interest or being subject to rights
and preferences senior to their own.
We identified material weaknesses in our internal control over
financial reporting, and we may identify additional material weaknesses in the future that may cause us to fail to meet our reporting
obligations or result in material misstatements of our financial statements. If we fail to remediate any material weaknesses or if we
otherwise fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial
results could be adversely affected.
We identified deficiencies in our internal control that we consider
to be material weaknesses in our internal control over financial reporting which existed as of March 31, 2021 and 2022. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis.
21
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.
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.
By taking the remediation steps described in Item 9A, 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-K and, to the best of our knowledge, we believe that
the consolidated financial statements in this Form 10-K fairly present in all material respects our financial condition, results of operations
and cash flows in conformity with GAAP.
We may identify future material weaknesses in our internal controls
over financial reporting and we may be unable to accurately report our financial results, or report them within the timeframes required
by law or stock exchange regulations. We cannot assure that our existing material weakness will be remediated or that additional material
weaknesses will not exist or otherwise be discovered, any of which could adversely affect our reputation, financial condition and results
of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We operated from the following leased properties at March 31,
2022.
Location
Square
Feet (Approx.)
Lease
Expiration Date
Primary
Use
264
W. 40 th St. 15 th Floor, New York City, NY 10018
5,363
Jan
31, 2025
Office
space
We do not own any real estate or invest in real estate or related investments.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
22
PART II