The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and related notes included elsewhere in this report.
This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as "believes," "anticipates," "expects," "intends," "plans," "will," "estimates," and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. OVERVIEW Since our inception, we have played a significant role in the digital distribution revolution that continues to transform the media landscape. In addition to our pioneering role in transitioning approximately 12,000 movie screens from traditional analog film prints to digital distribution, we have become a leading distributor of independent content, both through organic growth and acquisitions. We distribute products for major brands such as Hallmark, Televisa, ITV,
Nelvana, ZDF, Konami, NFL, and Scholastic, as well as leading international and domestic content creators, movie producers, television producers and other short-form digital content producers. We collaborate with producers, major brands and other content owners to market, source, curate and distribute quality content to targeted audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to Apple iTunes, Amazon Prime, Netflix, Hulu, Xbox, Pluto, Tubi and most video-on-demand ("VOD") and free ad-supported television ("FAST") streaming platforms, as well as (ii) physical goods, including DVD and Blu-ray Discs. We report our financial results in two primary segments as follows: (1) cinema equipment business and (2) content and entertainment business (" Content & Entertainment" or "CEG"). The cinema equipment business segment consists of the non-recourse, financing vehicles and administrators for our digital cinema equipment (the "Systems") installed in movie theatres throughout North Americaand Australia. It also provides fee-based support to over 1,082 movie screens as well as directly to exhibitors and other third-party customers in the form of monitoring, billing, collection and verification services. Our Content & Entertainmentsegment operates in: (1) ancillary market aggregation and distribution of entertainment content and (2) branded and curated over-the-top ("OTT") digital network business providing entertainment channels and applications. Beginning in December 2015, certain of our cinema equipment began to reach the conclusion of their 10-year deployment payment period with certain distributors and, therefore, Virtual Print Fee ("VPF") revenues ceased to be recognized on such Systems, related to such distributors. Furthermore, because the Phase I Deployment installation period ended in November 2007, a majority of the VPF revenue associated with the Phase I Deployment Systems has ended. The reduction in VPF revenue on cinema equipment business systems approximately coincided with the conclusion of certain of our non-recourse debt obligations and, therefore, the reduced cash outflows related to such non-recourse debt obligations partially offset the reduced VPF revenue since November 2017. Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of the digital cinema deployment plan. We are structured so that our cinema equipment business segment operates independently from our Content & Entertainmentbusiness. As of June 30, 2022, we had approximately $0.0 millionof non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We have approximately $0.0 millionof outstanding debt principal, as of June 30, 2022that is attributable to our Content & Entertainmentand Corporate segments.
26 Risks and Uncertainties The COVID-19 pandemic and related economic repercussions created significant volatility and uncertainty impacting the Company's results for the period. As part of our
Content & Entertainmentbusiness, the Company sells DVDs and Blu-ray discs at brick-and-mortar stores. Liquidity
We have incurred net losses historically and net loss for the three months ended
June 30, 2022of $6.0 million. As of June 30, 2022, we had an accumulated deficit of $478.4 millionand negative working capital of $7.6 million. Net cash used in operating activities for the three months ended June 30, 2022was $1.2 million. Based on these and prior conditions, the Company entered into the following transactions described below. Capital Raises On May 20, 2020, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with certain investors (the "Investors") for the purchase and sale of 10,666,666 shares of the Common Stock, at a purchase price of $0.75per 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 Commissionon May 14, 2020(File No. 333-238183) and an applicable prospectus supplement. The closing of the sale occurred on May 22, 2020. The aggregate gross proceeds for the sale was $8.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company's estimated offering expenses, were approximately $7.1 million. In July 2020, we entered into an At-the-Market sales agreement (the "ATM Sales Agreement") with A.G.P./ Alliance Global Partners("A.G.P.") and B. Riley FBR, Inc.("B. Riley" and, together with A.G.P., the "Sales Agents"), pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on Nasdaq at the time of the sale of such shares. The Company is not obligated to sell any shares under the ATM Sales Agreement. Any sales of shares made under the ATM Sales Agreement will be made pursuant the 2020 Shelf Registration Statement, for an aggregate offering price of up to $30 million. Net proceeds from such sales totaled $18.6 million. No sales under the ATM Sales Agreement were made during the three months ended June 30, 2022. On July 16, 2020, the Company entered into a securities purchase agreement with certain investors for the purchase and sale of 7,213,334 shares of Common Stock, par value $0.001per share, at a purchase price of $1.50per share, in a registered direct offering, pursuant to the 2020 Shelf Registration Statement and an applicable prospectus supplement. The closing of the sale occurred on July 20, 2020. The aggregate gross proceeds for the sale was approximately $10.8 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agents but before paying the Company's estimated offering expenses, is approximately $10.1 million. On February 2, 2021, the Company entered into a Securities Purchase Agreement with a single institutional investor for the purchase and sale of 5,600,000 shares of Common Stock at a purchase price of $1.25per 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 Commissionon July 10, 2020(File No. 333-239710) (the "2020 Shelf Registration Statement") and an applicable prospectus supplement. The closing of the sale occurred on February 5, 2021. The aggregate gross proceeds for the sale was approximately $7.0 million. The net proceeds to the Company from the sale, after deducting the fees of the placement agent but before paying the Company's estimated offering expenses, was approximately $6.5 million. 27 In October 2021, we entered into a Common Stock Purchase Agreement (the "Equity Line Purchase Agreement") and a Registration Rights Agreement (the "Registration Rights Agreement") with B. Riley Principal Capital, LLC("B. Riley Principal Capital"). Pursuant to the Equity Line Purchase Agreement, the Company has the right to sell to B. Riley Principal Capitalup to the lesser of (i) $50,000,000of newly issued shares of Common Stock and (ii) the Exchange Cap (as defined in the Equity Line Purchase Agreement), from time to time during the 24-month period from and after the October 21, 2021. Sales of Common Stock pursuant to the Equity Line Purchase Agreement, and the timing of any sales, are solely at the option of the Company, and the Company is under no obligation to sell any securities to B. Riley Principal Capitalunder the Equity Line PurchaseAgreement. As consideration for B. Riley Principal Capital'scommitment to purchase shares of Common Stock at the Company's direction upon the terms and subject to the conditions set forth in the Equity Line Purchase Agreement, upon execution of the Equity Line Purchase Agreement, the Company issued 210,084 shares of Common Stock to B. Riley Principal Capital(the "Commitment Shares"). The purchase price of the shares of Common Stock that we elect to sell to B. Riley Principal Capitalpursuant to the Equity Line Purchase Agreement will be determined by reference to the volume weighted average price of the Common Stock ("VWAP") during the applicable purchase date, less a fixed 5% discount to such VWAP. Pursuant to the Registration Rights Agreement, the Company filed a Registration Statement on Form S-1 that was declared effective by the Securities and Exchange Commissionon October 21, 2021(File No. 333-260210) for the resale by B. Riley Principal Capitalof up to 25,210,084 shares of Common Stock (including the Commitment Shares) acquired pursuant to the Equity Line PurchaseAgreement. During the year ended March 31, 2022, we sold 5,300,000 shares of Common Stock under the Equity Line Purchase Agreement. Net proceeds from such sales totaled $12.4 million. No sales under the Equity Line Purchase Agreement were made during the three months ended June 30, 2022. As of June 30, 2022, there is still approximately $38.0 millionavailable under the 2020 Shelf Registration Statement, and $37.6 millionavailable under the Equity Line Purchase Agreement, to raise additional capital. Sale of Cinematic Equipment On March 17, 2021, the Company entered into two separate agreements (the "AMC Equipment Purcahse Agreements") for the sale of cinematic equipment to American Multi-Cinema, Inc.("AMC"). The agreement included the sale in tranches of a total of 2,369 cinematic projectors starting in March 2021throughout January 2023for a total cash consideration of $10.8 million. As of June 30, 2022, the Company recognized revenue for $10.3 million. A portion of the total proceeds was utilized to pay off the remaining Prospect note payable.
February 14, 2020, the Company acquired an approximately 11.5% interest in A Metaverse Company ("Metaverse"), a leading publicly traded Chinese entertainment company, formerly Starrise Media Holdings Limited, whose ordinary shares are listed on the Stock Exchange of Hong Kong. The Company acquired such interest as a strategic investment and in a private transaction from a shareholder of Metaverse that is related to our major shareholder. Our major shareholder also maintains a significant beneficial interest ownership in Metaverse. Upon consummation of the transaction on February 14, 2020, the Company recorded an initial investment of approximately $25.1 million, which is the fair market value of the Metaverse shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company's common stock of $11.2 million, valued as of the date of the issuance of the Common Stock of the Company. The difference in value of shares received in Metaverse and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital. On April 10, 2020, the Company purchased an additional 15% interest in Metaverse in a private transaction from shareholders of Metaverse that are affiliated with the major shareholder of the Company. The Company recorded an additional equity investment of approximately $28.2 million, which is the fair market value of the Metaverse shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company's common stock of $11.0 million, valued at the date of the issuance of the Common Stock of the Company. The difference in the value of shares received in Metaverse and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital. This transaction was also recorded as an equity investment in Metaverse. The Company has accounted for these investments under the equity method of accounting as the Company can exert significant influence over Metaverse with its direct ownership and affiliation with the Company's majority shareholders. The Company has made an irrevocable election to apply the fair value option under ASC 825-10, Financial Instruments, as it relates to its equity investment in Metaverse. 28
April 1, 2022, trading of Metaverse's ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse's stock valuation is based on a evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs. As the value of the investment in Metaverse is being determined by an offer to purchase the shares from an independent third party, the value of the investment may need to be reduced or fully written off should the offer be rescinded. We believe the combination of: (i) our cash and cash equivalent balances at June 30, 2022and (ii) expected cash flow from operations will be sufficient for our operations and capital needs, for at least twelve months from the filing of this report. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America("GAAP"). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2 - Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 1, Condensed Consolidated Financial Statements (Unaudited), of this Quarterly Report on Form 10- Q. Managementbelieves that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our board of directors. FAIR VALUE ESTIMATES
Goodwillis the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwillis tested for impairment on an annual basis or more often if warranted by events or changes in circumstances indicating that the carrying value may exceed fair value, also known as impairment indicators. Inherent in the fair value determination for each reporting unit are certain judgments and estimates relating to future cash flows, including management's interpretation of current economic indicators and market conditions, and assumptions about our strategic plans with regard to its operations. To the extent additional information arises, market conditions change, or our strategies change, it is possible that the conclusion regarding whether our remaining goodwill is impaired could change and result in future goodwill impairment charges that will have a material effect on our consolidated financial position or results of operations. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or to perform the quantitative impairment test. We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset's residual value, if any. The assessment for recoverability is based primarily on our ability to recover the carrying value of its long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the assets the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset's fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. 29
In the three months ended
Investment in Metaverse
Fair value measurement information is grouped into three levels based on valuation factors:
? Level 1 – quoted prices in active markets for identical investments
? Level 2 – other significant observable inputs (including quoted prices for
similar investments and data corroborated by the market)
? Level 3 – significant unobservable inputs (including our own assumptions in
determining the fair value of investments)
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions relating to identical or comparable assets or liabilities.
In the three months ended
Adoption of ASU Topic 606, “Customer Contract Revenue”
We determine revenue recognition by:
? identify the contract(s) with the customer;
? identify performance obligations in the contract;
? determine the price of the transaction;
? allocate the transaction price to the performance obligations in the contract;
? recognize revenue when, or over time, we meet performance obligations in respect of
transfer the promised goods or services.
We recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the services provided, sales of physical products (DVD's and Blu-ray Discs) or when the content is available for subscription on the digital platform or available on the point-of-sale for transactional and video on demand services which is when the control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenues that might be subject to various taxes are recorded net of transaction taxes assessed by governmental authorities such as sales value-added taxes and other similar taxes. Payment terms and conditions vary by customer and typically provide net 30 to 90 day terms. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less. We have in the past entered into arrangements in connection with activation fees due from our System deployments that had extended payment terms. The outstanding balances on these arrangements are insignificant and hence the impact of significant financing would be insignificant. Cinema Equipment Business Our Cinema Equipment Business consists of financing vehicles and administrators for 434 Systems installed nationwide in our first deployment phase ("Phase I Deployment") to theatrical exhibitors and for 648 Systems installed domestically and internationally in our second deployment phase ("Phase II Deployment"). We retain ownership of our Systems and the residual cash flows related to the Systems in Phase I Deployment after the end of the 10-year deployment payment period. 30
For certain Phase II Deployment Systems, we do not retain ownership of the residual cash flows and digital cinema equipment in Phase II Deployment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements. The Cinema Equipment Business also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors who purchase their own equipment, in order to collect virtual print fees ("VPFs") from motion picture studios and distributors and Alternative Content Fees ("ACFs") from alternative content providers, and to distribute those fees to theatrical exhibitors (collectively, "Services"). VPFs are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase I Deployment based on a defined fee schedule until the end of the VPF term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period the title first plays for general audience viewing in a digital projector equipped movie theatre. The Phase 1 Deployment's and Phase 2 Deployments performance obligations for revenue recognition are met at this time. Phase II Deployment's agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase II Deployment may no longer collect VPFs once "cost recoupment," as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all "overhead and ongoing costs", as defined, and including service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, the studios will pay us a one-time "cost recoupment bonus." The Company evaluated the constraining estimates related to the variable consideration, i.e., the one-time bonus and determined that it is not probable to conclude at this point in time that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved. Under the terms of our standard cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale of the Systems to such exhibitors.
Cinedigmrecognizes revenue once the customer takes possession of the Systems and Cinedigmreceived the sale proceeds. Such sales were originally contemplated as the conclusion of the digital cinema deployment plan. Total system revenue was $1.2 millionand $5.6 million, during the three months ended June 30, 2022and 2021, respectively. Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.
Exhibitors who purchased and own Systems using their own financing in Phase II of the Cinema Equipment Business paid us an upfront activation fee of approximately
$2.0 thousandper 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 thousandand $2.0 thousandon Phase II Deployment Systems and for Systems installed by CDF2 Holdings, a related party, (See Note 3 - Other Interests) upon installation and such fees are generally collected upfront upon installation. Our services division manages and collects VPFs on behalf of exhibitors, for which it earns an administrative fee equal to 10% of the VPFs collected. The Cinema Equipment Business earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service fee equal to 2.5% of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPFs and the performance obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on screens utilizing our Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding VPF fees are due from the movie studios and distributors. 31
Content and entertainment company
CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video on demand ("VOD" or "OTT Streaming and Digital"), and physical goods (e.g., DVDs and Blu-ray Discs) ("Physical Revenue" or "Base Distribution Business"). Fees earned are typically a percentage based on the net amounts received from our customers. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company's performance obligations include the delivery of content for transactional, subscription and ad supported/free ad-supported streaming TV ("FAST") on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the performance obligation is satisfied, which is when the content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services as the control over the content or the physical title is transferred to the customer. The Company considers the delivery of content through various distribution channels to be a single performance obligation. Physical revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.
Material assets reserved for sales returns and other allowances are recorded based on historical experience. If actual future returns and allocations differ from past experience, adjustments to our allocations may be necessary.
CEG also has contracts for the theatrical distribution of third party feature movies and alternative content. CEG's distribution fee revenue and CEG's participation in box office receipts are recognized at the time a feature movie and alternative content are viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature movies' or alternative content's theatrical release date.
Principal Agent Considerations
We determine whether revenue should be reported on a gross or net basis based on each revenue stream. Key indicators that we use in evaluating gross versus net treatment include, but are not limited to, the following:
? which party is primarily responsible for fulfilling the promise to provide the
specified good or service; and
? which party has the discretion to establish the price of the good or
service. Shipping and Handling Shipping and handling costs are incurred to move physical goods (e.g., DVDs and Blu-ray Discs) to customers. We recognize all shipping and handling costs as an expense in cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer. Credit Losses
We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Our CEG segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. Reserves for product returns and other allowances is variable consideration as part of the transaction price. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates. 32 Contract Liabilities
We generally record a revenue-related receivable 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 before our performance, even if the amounts are refundable.
Deferred revenue related to our content and entertainment business includes amounts related to the sale of DVDs with future release dates.
Deferred revenue relating to our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms. The ending deferred revenue balance, including current and non-current balances, as of
June 30, 2022was $0.4 million. For the three months ended June 30, 2022, the additions to our deferred revenue balance were primarily due to cash payments received or due in advance of satisfying performance obligations, while the reductions to our deferred revenue balance were primarily due to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business.
Contributions and royalties to be paid
When we use third parties to distribute company owned content, we record participations payable, which represent amounts owed to the distributor under revenue-sharing arrangements. When we provide content distribution services, we record accounts payable and accrued expenses to studios or content producers for royalties owed under licensing arrangements. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers. ASSET ACQUISITIONS An asset acquisition is an acquisition of an asset, or a group of assets, that does not meet the definition of a business as substantially all of the fair value of the gross assets acquired are concentrated in a single or group of similar, identifiable assets. Asset acquisitions are accounted for by using the cost accumulation model whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on a relative fair value basis. Determining and valuing intangible assets requires judgment. BUSINESS COMBINATIONS The Company accounts for acquisitions in accordance with FASB ASC 805, "Business Combinations" ("ASC 805"), and goodwill in accordance with ASC 350, "Intangibles -
Goodwilland Other" ("ASC 350"). The excess of the purchase price over the estimated fair value of net assets acquired in a business combination is recorded as goodwill. ASC 805 specifies criteria to be used in determining whether intangible assets acquired in a business combination must be recognized and reported separately from goodwill. Amounts assigned to goodwill and other identifiable intangible assets are based on independent appraisals or internal estimates. ASC 805 defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date the acquirer achieves control. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquirer (if any) at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the acquirer to recognize contingent consideration (if any) at the acquisition date, measured at its fair value at that date. 33 Results of Operations for the Fiscal Three Months Ended June 30, 2022and 2021 Revenues For the Three Months Ended June 30, ($ in thousands) 2022 2021 $ Change % Change Cinema Equipment Business $ 1,427 $ 6,231 $ (4,804 )(77 )%
Content & Entertainment Business 12,163 8,784 3,379
$ 13,590 $ 15,015 $ (1,425 )(9 )%
Revenues generated by our Cinema Equipment Business segment decreased as a result of the lower system revenue and eligible VPF systems. Total system revenue recognized was
$1.2 millionand $5.6 million, during the quarter ended June 30, 2022and 2021, respectively. An increase in Blockbuster content released during the period ending June 30, 2022showed a return to pre-pandemic results; however, this was offset by an 80% decrease in eligible VPF systems for the same period last year. Revenue in the Content & Entertainment Business segment increased by 38% for the quarter ended June 30, 2022compared to the quarter ended June 30, 2021. The increase is consistent with the addition of seven new streaming channels related to Bloody Disgusting and DMR business acquisitions and four managed channel additions of The Country Network, Real Madrid TV, El Reyand The Only Wayis Essex as well as an increase in the number of advertising partners Direct Operating Expenses For the Three Months Ended June 30, ($ in thousands) 2022 2021 $ Change % Change Cinema Equipment Business $ 144 $ 257 $ (113 )(44 )% Content & Entertainment Business 7,212 4,374 2,838 65 % $ 7,356 $ 4,631 $ 2,72559 % The decrease in direct operating expenses in the quarter ended June 30, 2022for the Cinema Equipment Business compared to the prior period was primarily due to a decrease in property taxes as a result of system sales. The increase in direct operating expenses in the three months ended June 30, 2022for the Content & Entertainment Business compared to the prior year was primarily due to $0.2 millionhigher license and royalty costs, $0.3 millionincrease related to DVD manufacturing and fulfillment, $0.7 millionhigher content and production costs related to continued growth in revenue and distribution, $0.3 millionhigher personnel and contractors, and $0.2 millionrelated to the film restoration, conversion and website content production costs. Additionally, $0.8 millionin Software as a service ("SaaS") expense resulted from the DMR acquisition was realized during the three months ended June 30, 2022.
Selling, general and administrative expenses
For the Three Months Ended June 30, ($ in thousands) 2022 2021 $ Change % Change Cinema Equipment Business
$ 1,071 $ 429 $ 642150 %
Content & Entertainment Business 3,783 2,818 965
34 % Corporate 4,961 2,796 2,165 77 %
$ 9,815 $ 6,043 $ 3,77262 %
Selling, general and administrative expenses for the quarter ended
June 30, 2022increased by $3.7 millionprimarily due to $2.2 millionincrease in personnel costs from the acquisitions of Screambox, DMR and Bloody Disguising, $0.7
million in legal fees primarily related to a legal settlement, and
million in professional consulting services.
Recovery of doubtful accounts
Recovery of bad debts has been
Depreciation of property, plant and equipment
For the Three Months Ended June 30, ($ in thousands) 2022 2021 $ Change % Change Cinema Equipment Business
$ 117507 (390 ) (77 )%
Content & Entertainment Business 138 143 (5
) (3 )% Corporate 1 (1 ) 2 (200 )%
$ 256 $ 649 $ (393 )(61 )% Depreciation and amortization expense decreased in our Cinema Equipment Business Segment as the majority of our digital cinema projection systems reached the conclusion of their ten-year useful lives during the quarter ended June 30,
2022 and 2021
Amortization of intangible assets
For the Three Months Ended June 30, ($ in thousands) 2022 2021 $ Change % Change
Content & Entertainment Business 637 845 (208
) (25 )% Corporate 107 1 106 10600 %
$ 744 $ 846 $ (102 )(12 )%
The amortization of intangible fixed assets of Corporate and Content & Entertainment Business is
Interest expense, net For the Three Months Ended June 30, ($ in thousands) 2022 2021 $ Change % Change Cinema Equipment Business $ -
$ 133 $ (133 )(100 )%
Content & Entertainment Business - - -
- % Corporate 133 11 122 1109 %
$ 133 $ 144 $ (11 )(8 )%
Interest expense in our Corporate segment increased as a result of deferred and earnout consideration accretion related to the acquisition of Bloody Disgusting, FoundationTV and DMR.
Changes in fair value in Metaverse
April 1, 2022, trading of Metaverse's ordinary shares was halted on the Hong Kong Stock Exchange. This investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the shares being halted the Company needed to reassess the fair value level of the investment. Without an active market where the shares are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse's stock valuation is based on an evaluated offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as Level 3 based on unobservable inputs. Income Tax Benefit We recorded income tax expense of $0for the three months ended June 30, 2022. We recorded an income tax benefit of approximately $63 thousandfor the three months ended June 30, 2021.
Our effective tax rate for the three months ended
Net profit/Net loss attributable to common shareholders
For the Three Months Ended June 30, ($ in thousands) 2022 2021 $ Change % Change Cinema Equipment Business
$ 137 $ 4,771 $ (4,634 )(97 )%
Content & Entertainment Business (2,380 ) (108 ) (2,272 )
(2104 )% Corporate (3,850 ) 435 (4,285 ) (985 )%
$ (6,093 ) $ 5,098 $ (11,191 )(220 )% Adjusted EBITDA
We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisition, net, impairment of goodwill and certain other items.
Consolidated Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the three months ended
June 30, 2022decreased by $7.7 millioncompared to the three months ended June 30, 2021. Adjusted EBITDA from our Cinema Equipment Business segment decreased primarily due to a decrease in systems sales and eligible VPF systems. Adjusted EBITDA from the Content & Entertainment Business and Corporate decreased by $2.3 millionfor the three months ended June 30, 2022compared to the three months ended June 30, 2021, due to an increase of $2.8 millionin direct operating expense and $3.1 millionhigher selling, general and administrative expenses, versus previous year despite a $3.4 millionincrease in Streaming digital revenue, adding channels, and acquisitions, and $0.4 millionin one-time acquisition cost adjustments. Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We use Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe Adjusted EBITDA will also be useful to others, including its stockholders, as a valuable financial metric. We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net income (loss) from continuing operations as an indicator of operating performance. We also believe that Adjusted EBITDA is a financial measure that is useful both to management and investors when evaluating our performance and comparing our performance with that of our competitors. We also use Adjusted EBITDA for planning purposes and to evaluate our financial performance because Adjusted EBITDA excludes certain incremental expenses or non-cash items, such as stock-based compensation charges, that we believe are not indicative of our ongoing operating performance. We believe that Adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net loss from continuing operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. 36 Following is the reconciliation of our consolidated net loss to Adjusted EBITDA: For the Three Months Ended June 30, ($ in thousands) 2022 2021 Net income (loss) $ (5,987 ) $ 5,194Add Back: Income tax (income) expense - (63 ) Depreciation and amortization of property and equipment 256 649 Amortization of intangible assets 744 847 (Gain) Loss on extinguishment of note payable
- (2,178 ) Interest expense, net 133 144 Intangible impairment - - Change in fair value on equity investment in Metaverse 1,256 (334 ) Other expense, net 396 173 Recovery of doubtful accounts 3 71 Stock-based compensation and expenses 980 983 Net income (loss) attributable to noncontrolling interest (18 ) (7 ) Adjusted EBITDA $
Adjustments related to the cinematographic equipment activity Depreciation of property, plant and equipment
$ (507 )Amortization of intangible assets - - Stock-based compensation and expenses
- - Other expense (11 ) (11 ) Recovery of doubtful accounts (3 ) (27 ) Income from operations 11 (4,912 ) Adjusted (negative EBITDA) from
Content & EntertainmentBusiness and Corporate $ (2,357 )$ 22
Recent accounting pronouncements
See Note 2 – Summary of significant accounting policies to our consolidated financial statements included herein.
The changes in our cash flows are as follows:
For the Three Months Ended June 30, ($ in thousands) 2022 2021 Net cash (used in) provided by operating activities
$ (1,198 ) $ 3,621Net cash used in investing activities (61 ) (791 ) Net cash used in financing activities (284 ) (6,324 ) Net decrease in cash and cash equivalents $ (1,543 ) $ (3,494 )
For the three months ended
June 30, 2022, net cash provided by operating activities is primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, recovery for doubtful accounts and stock-based compensation, gain on extinguishment of note payable, including other changes in working capital. Additionally, during the three months ended June 30, 2022, the Company increased accounts payable by $5.4 millionto vendors. Accounts receivable increased due to growth in streaming and acquisitions of Bloody Disgusting, Screambox and DMR. Cash received from VPFs decreased from the previous period in alignment with the decrease in eligible VPF systems. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and seasonally lower in the other two quarters. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months. 37 For the three months ended June 30, 2021, net cash provided by operating activities is primarily driven by income from operations, excluding non-cash expenses such as depreciation, amortization, provision for doubtful accounts and stock-based compensation, including other changes in working capital. Additionally, during the three months ended June 30, 2021, the Company paid down $8.1 millionto vendors at both CEG and Corporate. Cash received from VPFs declined from the previous period as Phase I Deployment Systems in our Cinema Equipment Business reached the conclusion of their deployment payment periods with certain major studios. Changes in accounts receivable from our studio customers largely impact cash flows from operating activities and vary based on the seasonality of movie release schedules by the major studios. This was further impacted by the decrease in eligible VPF systems. Because our digital cinema business earns a VPF when a movie is first played on a system, the reduction of eligible VPF systems resulted in reduced revenues. Operating cash flows from CEG are typically higher during our fiscal third and fourth quarters, resulting from revenues earned during the holiday season, and lower in the other two quarters as we pay royalties on such revenues. In addition, we make advances on theatrical releases and to certain home entertainment distribution clients for which initial expenditures are generally recovered within six to twelve months. For the three months ended June 30, 2022revenues from the sale of digital projections Systems was $1.2 million.
For the three months ended
For the three months ended
June 30, 2021, cash flows used in investing activities consisted of purchases of property and equipment of $40 thousandand the purchase of a business of $1.0 millionrelated to the business combination for FoundationTV.
For the three months ended
For the three months ended
Contractual Obligations The following table summarizes our significant contractual obligations as of
June 30, 2022: Payments Due Contractual Obligations (in 2024 & 2026 & thousands) Total 2023 2025 2027 Thereafter Operating lease obligations $ 682 $ 193 $ 489
$ - $ -
We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, marketing and promotional activities and content acquisition and marketing costs. Certain of these costs, including costs of content acquisition, marketing and promotional activities, could be reduced if necessary. We feel we are adequately financed for at least the next twelve months; however, we may need to raise additional capital for working capital as deemed necessary. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity. Seasonality
Revenues from our Cinema Equipment Business derived from the collection of VPFs from motion picture studios are seasonal, coinciding with the timing of releases of movies by the motion picture studios. Generally, motion picture studios release the most marketable movies during the summer and the winter holiday season. The unexpected emergence of a hit movie during other periods can alter the traditional trend. The timing of movie releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter or any other quarter. While CEG benefits from the winter holiday season, we believe the seasonality of motion picture exhibition, is becoming less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout the year. 38
Off-balance sheet arrangements
We are not a party to any off-balance sheet arrangements other than as discussed in Note 2 - Summary of Significant Accounting Policies, Basis of Presentation and Consolidation and Note 3 - Other Interests to the Condensed Consolidated Financial Statements (Unaudited) included in Item 1 of this Quarterly Report on Form 10-Q, we hold a 100% equity interest in
CDF2 Holdings, which is an unconsolidated variable interest entity ("VIE"), which wholly owns CinedigmDigital 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 high inflation in the future will not adversely affect our results of operations.
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