CINEVERSE CORP. The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes included elsewhere in this document.
This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as "believes," "anticipates," "expects," "intends," "plans," "will," "estimates," and similar words. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
OVERVIEW
Since our inception, we have played a significant role in the digital
distribution revolution that continues to transform the media landscape. In
addition to our pioneering role in transitioning approximately 12,000 movie
screens from traditional analog film prints to digital distribution, we have
become a leading distributor of independent content, both through organic growth
and acquisitions. We distribute products for major brands such as the NFL,
Hallmark and Scholastic, as well as leading international and domestic content
creators, movie producers, television producers and other short form digital
content producers. We collaborate with producers, major brands and other content
owners to market, source, curate and distribute quality content to targeted
audiences through (i) existing and emerging digital home entertainment
platforms, including but not limited to, iTunes, Amazon Prime, Netflix, Hulu,
Xbox, Sony PlayStation, Tubi and cable video-on-demand ("VOD"), and (ii)
physical goods, including DVD and Blu-ray Discs.
We report our financial results in two primary segments as follows: (1) cinema
equipment business and (2) media content and entertainment business ("Content &
Entertainment " or "CEG"). The cinema equipment business segment consists of the
non-recourse, financing vehicles and administrators for our digital cinema
equipment (the "Systems") installed in movie theatres throughout North America
and several international countries. It also provides fee-based support to over
12,000 movie screens as well as directly to exhibitors and other third party
customers in the form of monitoring, billing, collection and verification
services. Our Content & Entertainment segment is a market leader in: (1)
ancillary market aggregation and distribution of entertainment content and; (2)
branded and curated over-the-top ("OTT") digital network business providing
entertainment channels and applications.
Beginning in December 2015 , certain of our cinema equipment began to reach the
conclusion of their 10-year deployment payment period with certain distributors
and, therefore, Virtual Print Fees ("VPF") revenues ceased to be recognized on
such Systems, related to such distributors. Furthermore, because the Phase I
Deployment installation period ended in November 2007 , a majority of the VPF
revenue associated with the Phase I Deployment Systems has ended. As of June 30,
2020 , all of our 3,313 systems from the Phase I Deployment phase of our cinema
equipment business segment had ceased to earn a significant portion of VPF
revenue from certain major studios, although various other studios, consisting
mostly of small independent studios, will continue to pay VPFs through December
2020 . We expect to continue to earn such ancillary revenue from the cinema
equipment segment through December of 2020; however, such amounts are expected
to be significantly less material to our consolidated financial statements. The
reduction in VPF revenue on cinema equipment business systems approximately
coincided with the conclusion of certain of our non-recourse debt obligations
and, therefore, the reduced cash outflows related to such non-recourse debt
obligations partially offset the reduced VPF revenue since November 2017 .
Under the terms of our standard cinema equipment licensing agreements,
exhibitors will continue to have the right to use our Systems through the end of
the term of the licensing agreement, after which time, they have the option to:
(1) return the Systems to us; (2) renew their license agreement for successive
one-year terms; or (3) purchase the Systems from us at fair market value. As
permitted by these agreements, we typically pursue the sale of the Systems to
such exhibitors. Such sales were as originally contemplated as the conclusion of
the digital cinema deployment plan.
We are structured so that our cinema equipment business segment operates
independently from our Content & Entertainment business. As of September 30,
2020 , we had approximately $12.1 million of non-recourse outstanding debt
principal that relates to, and is serviced by, our cinema equipment business. We
also have approximately $18.8 million of outstanding debt principal, as of
September 30, 2020 that is attributable to our Content & Entertainment and
Corporate segments.
32
--------------------------------------------------------------------------------Risks and Uncertainties
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in certain industries. Closures of certain entertainment facilities and retail locations have significantly impacted consumers' behaviors as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. As part of ourContent & Entertainment business, we sell physical goods, including DVDs and Blu-ray discs, at brick-and-mortar stores. Many of such stores inthe United States closed during the spring of 2020 due to COVID-19 restrictions, and many of those have not yet re-opened, or have re-opened on a limited basis. We expect that we will experience a loss of sales of such physical goods due to such closures, and we cannot predict the extent of such losses, or how long the closures or limited openings of the stores may last. As part of our Cinema Equipment business, we earn revenues that are generated when movies are exhibited by theatres. Many movie theatres inthe United States closed during the spring of 2020 due to COVID-19 restrictions and many of those have not yet re-opened, or have re-opened on a limited basis. To the extent movies are not shown in movie theatres due to the closures, we have not received, and will not receive, related revenue. The studios that produce movies may elect to delay the release of movies until theatres re-open, or to bypass exhibiting movies in theatres at all and distribute the movies through other means, such as on streaming platforms, in which case we would not earn revenues at all from such movies. These events have negatively affected, and are expected to continue to negatively affect, our business and results of operations. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related closures and market conditions will persist, or the extent of the impact they will have on our business or results of operations and financial condition. Results of Operations for the Three Months EndedSeptember 30, 2020 and 2019 Revenues Three Months Ended September 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business$ 643 $ 3,645 $ (3,002) (82) % Content & Entertainment Business 6,539 6,596 (57) (1) %$ 7,182 $ 10,241 $ (3,059) (30) % Revenues generated by our Cinema Equipment Business segment decreased primarily as a result of the reduced number of Systems earning VPF revenue and commissions for Phase II Deployment Systems. In addition, as a result of COVID-19, during the six months endedSeptember 30, 2020 studios have temporarily halted distribution of new content to movie theatres due to mandatory theatre shutdowns. Because our digital cinema business earns a VPF when a movie is first played on a system, the temporary theatre closures resulting from the COVID-19 pandemic resulted in reduced revenues. The revenues derived from the Content & Entertainment Business segment decreased by 1% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 .
Direct Operating Expenses
Three Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change
Cinema Equipment Business $ 172 $ 362 $ (190) (52) %
Content & Entertainment Business 4,158 3,725 433 12 %
$ 4,330 $ 4,087 $ 243 6 %
The increase in direct operating expenses in the three months ended
September 30, 2020 for the Content & Entertainment Business compared to the
prior period was primarily due to transition expenses related to a new third
party DVD distributor.
These costs were mainly fulfillment and freight expenses.
33
--------------------------------------------------------------------------------Selling, General and Administrative Expenses
Three Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change
Cinema Equipment Business $ 631 $ 604 $ 27 4 %
Content & Entertainment Business 2,528 2,591 (63) (2) %
Corporate 3,009 1,793 1,216 68 %
$ 6,168 $ 4,988 $ 1,180 24 %
Selling, general and administrative expenses for the three months ended
Depreciation and Amortization Expense on Property and Equipment
Three Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change
Cinema Equipment Business $ 1,239 $ 1,491 $ (252) (17) %
Content & Entertainment Business 101 76 25 33 %
Corporate 5 42 (37) (88) %
$ 1,345 $ 1,609 $ (264) (16) %
Depreciation and amortization expense decreased in our Cinema Equipment Business
segment as additional digital cinema projection Systems reached the conclusion
of their ten-year useful lives during fiscal year 2020.
Interest expense, net
Three Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change
Cinema Equipment Business $ 623 $ 691 $ (68) (10) %
Corporate 571 1,122 (551) (49) %
$ 1,194 $ 1,813 $ (619) (34) %
Interest expense in the Cinema Equipment Business segment decreased primarily as
a result of reduced note payable balances compared to the prior period,
primarily on the Prospect Term Loan. Interest expense in our Corporate Segment
decreased as a result of lower loan balances from our Credit Facility and Second
Lien Loans.
Income Tax Expense
We recorded an income tax benefit of approximately $181 thousand for the three
months ended September 30, 2020 .
We recorded income tax expense of approximately $27 thousand for the three
months ended September 30, 2019 . We have not recorded tax benefits on our loss
before income taxes because we have provided for a full valuation allowance that
offsets potential deferred tax assets resulting from net operating loss carry
forwards, reflecting our inability to use such loss carry forwards.
Our effective tax rate for the three months ended
34
--------------------------------------------------------------------------------Adjusted EBITDA
We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items.
Consolidated Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the three months endedSeptember 30, 2020 decreased by$2.5 million , compared to the three months endedSeptember 30, 2019 . Adjusted EBITDA from our Cinema Equipment Business segment decreased by$2.5 million or 105% compared to the three months endedSeptember 30, 2019 primarily due to state mandated theater closures due to COVID-19, the temporary halt of distribution of major studio releases and the expected decline of the Cinema Equipment Business. Adjusted EBITDA from our Content & Entertainment Business increased$25 thousand or 2.5% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We use Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe Adjusted EBITDA will also be useful to others, including its stockholders, as a valuable financial metric. We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net loss from continuing operations as an indicator of operating performance. We also believe that Adjusted EBITDA is a financial measure that is useful both to management and investors when evaluating our performance and comparing our performance with that of our competitors. We also use Adjusted EBITDA for planning purposes and to evaluate our financial performance because Adjusted EBITDA excludes certain incremental expenses or non-cash items, such as stock-based compensation charges, that we believe are not indicative of our ongoing operating performance. We believe that Adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net loss from continuing operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:
35
--------------------------------------------------------------------------------Three Months Ended September
30,
($ in thousands) 2020 2019
Net loss $ (26,566) $ (3,088)
Add Back:
Income tax (benefit) expense (181) 27
Depreciation and amortization of property and equipment 1,345 1,609
Amortization of intangible assets 591 589
Loss on extinguishment of notes payable 335 -
Interest expense, net 1,194 1,818
Changes in fair value on equity investment in Starrise 19,832 -
Other expense, net 1,291 296
Stock-based compensation and expenses 1,035 178
Net income attributable to noncontrolling interest 23 (7)
Adjusted EBITDA Adjustments related to the Cinema Equipment Business Depreciation and amortization of property and equipment
$ (1,239) $ (1,491) Amortization of intangible assets (7) (12) Loss (income) from operations 1,384 (917) Adjusted EBITDA fromContent & Entertainment business and corporate segment$ (963) $ (998) Results of Operations for the Six Months Ended Months EndedSeptember 30, 2020 and 2019 Revenues Six Months Ended September 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business$ 1,248 $ 7,638 $ (6,390) (84) % Content & Entertainment Business 11,952 12,406 (454) (4) %$ 13,200 $ 20,044 $ (6,844) (34) % Revenues generated by our Cinema Equipment Business segment decreased primarily as a result of the reduced number of Systems earning VPF revenue and commissions for Phase II Deployment Systems. In addition, as a result of COVID-19, during the six months endedSeptember 30, 2020 studios have temporarily halted distribution of new content to movie theatres due to mandatory theatre shutdowns. Because our digital cinema business earns a VPF when a movie is first played on a System, the temporary theatre closures resulting from the COVID-19 pandemic resulted in reduced revenues. The revenues derived from the Content & Entertainment Business decreased by 4% for the six months endedSeptember 30, 2020 compared to the six monthsSeptember 30, 2019 , respectively, as a result of the temporary closure of DVD distribution warehouses due to COVID-19. Direct Operating Expenses Six Months Ended September 30, ($ in thousands) 2020 2019 $ Change % Change Cinema Equipment Business$ 354 $ 596 $ (242) (41) % Content & Entertainment Business 6,655 7,103 (448) (6) %$ 7,009 $ 7,699 $ (690) (9) % 36
-------------------------------------------------------------------------------- The decrease in direct operating expenses in the six months endedSeptember 30, 2020 for the Content & Entertainment Business compared to the prior period was primarily due a decrease in overall revenue offset by an increase due to transition expenses related to a new third party DVD distributor. These costs were mainly fulfillment and freight expenses. The decrease for the Cinema Equipment business was due to a reduction in property tax payments.
Selling, General and Administrative Expenses
Six Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change
Cinema Equipment Business $ 1,180 $ 1,100 $ 80 7 %
Content & Entertainment Business 4,423 5,815 (1,392) (24) %
Corporate 4,405 3,922 483 12 %
$ 10,008 $ 10,837 $ (829) (8) %
Selling, general and administrative expenses for the six months ended September
30, 2020 decreased by $0.8 million primarily due to a $1.5 million retention
bonus expense management and employees received in cash, and an issuance of
Class A common stock to employees of $0.8 million , offset by decreases in other
general and administrative expenses.
Depreciation and Amortization Expense on Property and Equipment
Six Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change
Cinema Equipment Business $ 2,642 $ 3,137 $ (495) (16) %
Content & Entertainment Business 204 162 42 26 %
Corporate 23 84 (61) (73) %
$ 2,869 $ 3,383 $ (514) (15) %
Depreciation and amortization expense decreased in our Cinema Equipment Business
segment as additional digital cinema projection Systems reached the conclusion
of their ten-year useful lives during fiscal year 2020.
Interest expense, net
Six Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change
Cinema Equipment Business $ 1,201 $ 1,519 $ (318) (21) %
Corporate 1,283 2,576 (1,293) (50) %
$ 2,484 $ 4,095 $ (1,611) (39) %
Interest expense in the Cinema Equipment Business segment decreased primarily as
a result of reduced debt balances compared to the prior period on the Prospect
Term Loan. Interest expense in our Corporate Segment decreased as a result of
lower loan balances from our Credit Facility and Second Lien Loans.
Income Tax Expense
We recorded an income tax benefit of approximately$181 thousand for the six months endedSeptember 30, 2020 . We recorded income tax expense of approximately$74 thousand six months endedSeptember 30, 2019 . We have not recorded tax benefits on our loss before income taxes because we have provided for a full valuation allowance that offsets potential deferred tax assets resulting from net operating loss carry forwards, reflecting our inability to use such loss carry forwards. 37 --------------------------------------------------------------------------------
Adjusted EBITDA
We define Adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items.
Consolidated Adjusted EBITDA (including the results of Cinema Equipment Business segment) for the six months endedSeptember 30, 2020 decreased by$3.3 million compared to the six months endedSeptember 30, 2019 . Adjusted EBITDA from our Cinema Equipment Business segment decreased by$5.6 million or 107% compared to the six months endedSeptember 30, 2019 primarily due to state mandated theater closures due to COVID-19, the temporary halt of distribution of major studio releases and the expected decline of the Cinema Equipment Business. Adjusted EBITDA fromContent & Entertainment business and corporate segment increased by$2.3 million or 72% for the six months endedSeptember 30, 2020 compared to the six months endedSeptember 30, 2019 , due to growth of higher margin OTT Streaming & Digital revenues. Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We use Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe Adjusted EBITDA will also be useful to others, including its stockholders, as a valuable financial metric. We present Adjusted EBITDA because we believe that Adjusted EBITDA is a useful supplement to net loss from continuing operations as an indicator of operating performance. We also believe that Adjusted EBITDA is a financial measure that is useful both to management and investors when evaluating our performance and comparing our performance with that of our competitors. We also use Adjusted EBITDA for planning purposes and to evaluate our financial performance because Adjusted EBITDA excludes certain incremental expenses or non-cash items, such as stock-based compensation charges, that we believe are not indicative of our ongoing operating performance. We believe that Adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss from continuing operations and Adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net loss from continuing operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:
38
--------------------------------------------------------------------------------
Six Months Ended September 30,
($ in thousands) 2020 2019
Net loss (46,436) (8,127)
Add Back:
Income tax (benefit) expense (181) 74
Depreciation and amortization of property and equipment 2,869 3,383
Amortization of intangible assets 1,181 1,589
Loss on extinguishment of notes payable 312 -
Interest expense, net 2,484 4,095
Changes in fair value on equity investment in Starrise 35,626 -
Other expense, net 1,590 759
Stock-based compensation 1,212 189
Net loss attributable to noncontrolling interest 37 (1)
Adjusted EBITDA Adjustments related to the Cinema Equipment Business Depreciation and amortization of property and equipment
(2,642) (3,137)
Amortization of intangible assets (15) (23)
Stock-based compensation and expenses - 7
Income (loss) from operations 3,045 (2,050)
Adjusted EBITDA from Content & Entertainment business and corporate
segment $ (918) $ (3,242) Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). In connection with the preparation of our consolidated 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.
There have been no material changes to the critical accounting policies
previously disclosed in our Annual Report on Form 10-K, filed with the
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included herein.
Liquidity and Capital Resources
We incurred consolidated net loss of$46.6 million and$8.1 million for the six months endedSeptember 30, 2020 and 2019, respectively. We have incurred net losses historically and have an accumulated deficit of$457.5 million , and negative working capital of$35.9 million as ofSeptember 30, 2020 . We may continue to generate net losses for the foreseeable future. In addition, we have significant debt-related contractual obligations as ofSeptember 30, 2020 and beyond. Based on these conditions, the Company entered into the following transactions described below: 39 --------------------------------------------------------------------------------
Capital Raise
InJuly 2020 , we entered into an At-the-Market sales agreement (the "ATM Sales Agreement") with A.G.P./Alliance Global Partners ("A.G.P.") andB. Riley FBR, Inc. ("B. Riley" and, together with A.G.P., the "Sales Agents"), pursuant to which the Company may offer and sell, from time to time, through the Sales Agents, shares of Common Stock at the market prices prevailing on The Nasdaq Global Market at the time of the sale of such shares. The Company is not obligated to sell any shares under the Sales Agreement. Any sales of shares made under the Sales Agreement will be made pursuant to an effective registration statement on Form S-3 filed by the Company with theSEC onJuly 6, 2020 , for an aggregate offering price of up to$30 million . During the quarter endedSeptember 30, 2020 , we did not sell any shares of Common Stock under the ATM Sales Agreement. OnJuly 16, 2020 , the Company entered into a securities purchase agreement (the "July Securities Purchase Agreement" for the sale of 7,213,334 shares (the "July Shares") of Class A common stock at a purchase price of$1.50 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 (Reg. No. 333-239710) which was declared effective by theSecurities and Exchange Commission onJuly 10, 2020 and an applicable prospectus supplement. This registration statement covers offerings of up to an aggregate offering price of$75.0 million . The Company closed the transaction onJuly 20, 2020 . The aggregated gross proceeds from the sale of the July Shares were approximately$10.8 million . The net proceeds to the Company from the sale of the July Shares, after deducting the fees of the placement agents but before paying the Company's estimated offering expenses, was approximately$10.1 million . OnMay 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 (the "Shares") of the Company's Class A common stock, par value$0.001 per share, (the "Common Stock" or "Class A common stock"), at a purchase price of$0.75 per share, in a registered direct offering, pursuant to an effective shelf registration statement on Form S-3 (Reg. No. 333-238183) which was declared effective by theSecurities and Exchange Commission onMay 14, 2020 and an applicable prospectus supplement. The aggregate gross proceeds for the sale of the Shares was$8.0 million . The net proceeds to the Company from the sale of the Shares, after deducting the fees of the placement agents but before paying the Company's estimated offering expenses, were approximately$7.1 million .
OnDecember 27, 2019 , the Company entered into, and onFebruary 14, 2020 amended, (see Note 2 - Summary of Significant Accounting Policies), a stock purchase agreement (as so amended, the " Starrise Stock Purchase Agreement") withBeiTai Investment LP ("BeiTai") andAim Right Ventures Limited ("Aim Right"), two shareholders of Starrise Media Holdings Limited, a leading Chinese entertainment company ("Starrise"), to buy from them an aggregate of 410,901,000 outstanding Starrise ordinary shares (the "Share Acquisition"). OnFebruary 14, 2020 , the Company purchased 162,162,162 of the Starrise ordinary shares from BeiTai and issued BeiTai 21,646,604 shares of Class A common stock as consideration. OnApril 10, 2020 , the Company, in accordance with the terms of the Starrise Stock Purchase Agreement, terminated its obligation to purchase Starrise ordinary shares from Aim Right under theDecember 27, 2019 stock purchase agreement. OnApril 10, 2020 , the Company entered into another stock purchase agreement (the "April Stock Purchase Agreement") with five (5) shareholders ofStarrise-Bison Global Investment SPC - Bison Global No. 1 SP,Huatai Investment LP ,Antai Investment LP ,Mingtai Investment LP andShangtai Asset Management LP , to buy an aggregate of 223,380,000 outstanding Starrise ordinary shares from them and for the Company to issue to them an aggregate of 29,855,081 shares of its Class A common stock in consideration therefore (the "April Share Acquisition"). OnApril 15, 2020 , the April Share Acquisition was consummated and recorded as an equity investment in Starrise and is a related party transaction. Starrise's ordinary shares (HK 1616) are listed on the main board of theStock Exchange of Hong Kong Limited . Based on the closing price ofHKD 0.16 per share onNovember 13, 2020 , calculated at an exchange rate of$7.75 Hong Kong Dollars to1 US dollar , the market value ofCinedigm's ownership in Starrise ordinary shares was approximately$7.3 million . 40 --------------------------------------------------------------------------------
Borrowings
OnApril 15, 2020 , the Company received$2.2 million fromEast West Bank , the Company's existing lender, pursuant to the Paycheck Protection Program (the "PPP Loan") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The PPP Loan matures onApril 10, 2022 (the "PPN Maturity Date"), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the PPN Maturity Date. The Company used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act and could be subject to repayment. OnJune 24, 2020 , the Company entered into an exchange agreement (the "Exchange Agreement") pursuant to which the Company issued 329,501 shares of its Class A common stock, in exchange for$842 thousand principal amount and accrued and unpaid interest of outstanding Second Lien Loans (as defined in Note 5 - Notes Payable). The surrendered Second Lien Loans were immediately canceled. The exchange was consummated onJune 24, 2020 . OnJune 26, 2020 , the Company signed a consent agreement with the holders of the Second Lien loans to extend the maturity date toSeptember 30, 2020 and grant the Company options to extend further toMarch 31, 2021 and then toJune 30, 2021 . A consent fee of$100,000 was paid in connection with this extension. OnApril 15, 2020 , the Company executed a letter amendment (the "Letter Amendment") to the Bison Convertible Note (as defined in Note 5 - Notes Payable). Among other things, the Letter Amendment amended the Note, effective as ofMarch 4, 2020 , to extend the maturity date of the Bison Convertible note toMarch 4, 2021 . OnOctober 9, 2019 , the Company signed an extension to the Ming Tai Note of$5.0 million for the first of two (2) permitted additional (1) year extensions at the Company's option from the original maturity date toOctober 9, 2020 . This note will continue in full force and effect in accordance with its terms, including the Company's reservation of its right to further extend the maturity date of this note, if it so elects. OnJune 25, 2020 , the Company signed an amendment to extend the maturity date of the East West Credit Facility (as defined in Note 5 - Notes Payable) withEast West Bank fromMarch 30, 2021 toJune 30, 2021 . OnSeptember 11 . 2020, the Bison and Ming Tai Notes, having an aggregate of$15 million principal amount (the "Notes") were converted in full into an aggregate of 10,000,000 shares of Common Stock at a conversion price of$1.50 per share in accordance with the terms of the Notes. Accordingly, the Notes have been extinguished. The Notes were held by Global Investment SPC-Bison Global No. 1SP and Mingtai Investment LP , both of which are affiliates ofPeixin Xu , the Chairman ofBison Capital Holding Company Limited , which is indirectlyCinedigm's largest stockholder.
Changes in our cash flows were as follows:
Cash Flows
Six Months Ended September 30,
($ in thousands) 2020 2019
Net cash (used) provided by operating activities $ (12,773) $ 3,799
Net cash provided (used) in investing activities 789 -
Net cash provided (used) in financing activities 14,193 (8,006)
Net change in cash and cash equivalents
As of
Net cash provided by operating activities is primarily driven by loss from
operations, excluding non-cash expenses such as
depreciation, amortization, provision for doubtful accounts and stock-based
compensation, offset by changes in working capital. Cash received from VPFs
declined from the previous period as Phase I Deployment Systems in our Cinema
Equipment
Business reached the conclusion of their deployment payment period with certain
major studios. Changes in accounts receivable from our studio customers largely
impact cash flows from operating activities and vary based on the seasonality of
41
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movie release schedules by the major studios. Operating cash flows from CEG are
typically higher during our fiscal third and
fourth quarters, resulting from revenues earned during the holiday season, and
lower in the other two quarters as we pay royalties on such revenues. In
addition, we make advances on theatrical releases and to certain home
entertainment distribution
clients for which initial expenditures are generally recovered within six to
twelve months.
Cash flows used in investing activities consisted of proceeds from the sale of
Starrise shares of
For the six months endedSeptember 30, 2020 , cash flows used in financing activities reflects payments of approximately$14.0 million for the Credit Facility and Prospect Loan, offset by$8.5 million from Credit Facility draw,$17.6 million received in connection with the sale of 18,116,899 shares of Class A common stock and exercise of warrants, and$2.2 million received pursuant to the Payment Protection Program of the Coronavirus Aid, Relief and Economic Security Act.
We have contractual obligations that primarily consist of term notes payable, credit facilities, and non-cancelable operating leases related to office space.
We have contractual obligations that primarily consist of term notes payable, credit facilities, and non-cancelable operating leases related to office space.
We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, interest on our debt obligations, marketing and promotional activities and content acquisition and marketing costs. Certain of these costs, including costs of content acquisition, marketing and promotional activities, could be reduced if necessary. The restrictions imposed by the terms of our debt obligations may limit our ability to obtain financing, make it more difficult to satisfy our debt obligations or require us to dedicate a substantial portion of our cash flow to payments on our existing debt obligations. We feel we are adequately financed for at least the next twelve months; however we may need to raise additional capital for working capital as deemed necessary. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity. We believe the combination of: (i) our cash and cash equivalent balances as ofSeptember 30, 2020 , (ii) expected cash flows from operations, (iii) cost cutting measures including payroll expense reduction and real estate occupancy cost reductions, and (iv) the extension of maturity dates of our borrowings, the Starrise equity investment, the capital raises during and the support or availability of funding from other capital resources and financings will be sufficient to satisfy our contractual obligations, as well as liquidity for our operational and capital requirements, for twelve months from the filing of this document. Our capital requirements will depend on many factors, and we may need to use capital resources and obtain additional capital. Failure to generate additional revenues, obtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity. Seasonality Revenues from our Cinema Equipment Business segment derived from the collection of VPFs from motion picture studios are seasonal, coinciding with the timing of releases of movies by the motion picture studios. Generally, motion picture studios release the most marketable movies during the summer and the winter holiday season. The unexpected emergence of a hit movie during other periods can alter the traditional trend. The timing of movie releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter or any other quarter. Our CEG segment benefits from the winter holiday season, and as a result, revenues in the segment are typically highest in our fiscal third quarter; however, we believe the seasonality of motion picture exhibition is becoming less pronounced as the motion picture studios are releasing movies more evenly throughout the year.
Off-balance sheet arrangements
We are not a party to any off-balance sheet arrangements, other than operating leases in the ordinary course of business, which are disclosed above in the table of our significant contractual obligations, andCDF2 Holdings, LLC ("CDF2 Holdings "), our wholly-owned unconsolidated subsidiary. As discussed further in Note 3 - Other Interests to the Condensed Consolidated Financial Statements included in Item 1 of this Report on Form 10-Q, we hold a 100% equity interest inCDF2 Holdings , which is an unconsolidated variable interest entity ("VIE"), which wholly owns Cinedigm Digital Funding 2, LLC; however, we are not the primary beneficiary of the VIE. 42 --------------------------------------------------------------------------------
Impact of Inflation
The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse impact on our operating results.
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