CINEDIGM CORP.

CONSOLIDATED STATEMENTSTATEMENTS OF DEFICIT

See accompanying Notes to Condensed Consolidated Financial Statements

CINEDIGM CORP.

CONSOLIDATED STATEMENTSTATEMENTS OF DEFICIT

(In thousands, except share data)

See accompanying Notes to Condensed Consolidated Financial Statements

CINEDIGM CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cinedigm Corp. ("Cinedigm," the "Company," "we," "us," or similar pronouns) was incorporated in Delaware on March 31, 2000. We are (i) a leading distributor and aggregator of independent movie, television and other short form content managing a library of distribution rights to thousands of titles and episodes released across digital, physical, theatrical, home and mobile entertainment platforms and (ii) a leading servicer of digital cinema assets for over 12,000 movie screens in both North America and several international countries.

We have incurred net losses historically and have an accumulated deficit of $379.2$406.4 million and negative working capital of $54.7 million as of December 31, 2017.2019. We may continue to generate net losses for the foreseeable future. In addition, we have significant debt relateddebt-related contractual obligations for the fiscal year ended Marchas of December 31, 20182019 and beyond.

We believe the combination of: (i) our cash and restricted cash equivalent balances at December 31, 2017, which includes the net proceeds received from Bison for the issuance of 19,666,667 shares and from the Loan,2019, (ii) implemented and planned cost reduction initiatives, (iii) retirement of the full outstanding amount of Convertible Notes, and (iv) expected cash flows from operations, and (iii) the support or availability of funding from Bison and its related parties and other capital resources and financing will be sufficient to satisfy our contractual obligations, operational and liquidity and capital requirements for at least a year after these consolidated interim financial statements are issued.to February 2021. Our capital requirements will depend on many factors, and we may need to develop and formulate operating plans with Bison to use available capital resources and raiseobtain additional capital. Failure to generate additional revenues, raiseobtain additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.

The accompanying Condensed Consolidated Financial Statementscondensed consolidated financial statements are unaudited and include the accounts of the Company, its wholly owned and majority owned subsidiaries, and reflect all normal and recurring adjustments necessary for the fair presentation of its consolidated financial position, results of operations and cash flows. All material inter-company accounts and transactions have been eliminated in consolidation.

The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts reported in these Condensed Consolidated Financial Statementsof revenue and accompanying notes. As permitted under GAAP, interim accounting for certain expenses such asduring the reporting period. Such estimates include the adequacy of accounts receivable reserves, return reserves, inventory reserves, recovery of advances, assessment of goodwill andimpairment, intangible asset impairment and estimated amortization lives and valuation reserveallowances for income taxes, are based on full year assumptions when appropriate.taxes. Actual results could differ materially from thosethese estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the respective interim periods are not necessarily indicative of the results expected for the full year. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.2019.

We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. We had a provision for doubtful accounts of $0.6 million and $1.6 million for the three and nine months ended December 31, 2017, respectively. The provision for doubtful accounts was $0.4 million for the three and nine months ended December 31, 2016.

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.

Advances, which are recorded within prepaid and other current assets on the Condensed Consolidated Balance Sheets,condensed consolidated balance sheets, represent amounts prepaid to studios or content producers for which we provide content distribution services. We evaluate advances regularly for recoverability and record impairment charges for amounts that we expect may not be recoverable as of the consolidated balance sheet date. Impairments and accelerated amortization related to advances were $1.1$0.3 million and $0.6$0.3 million, respectively for the three months ended December 31, 20172019 and 2016, respectively.2018. Impairments and accelerated amortization related to advances were $2.2$0.7 million and $1.4$0.9 million, respectively for the nine months ended December 31, 20172019 and 2016, respectively.

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

The fair value measurement disclosures are grouped into three levels based on valuation factors:

 

 

Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.

The following tables summarize the levels of fair value measurements of our financial assets and liabilities as of December 31, 20172019 and March 31, 2017:2019:

Our cash and cash equivalents, accounts receivable, unbilled revenue and accounts payable and accrued expenses are financial instruments and are recorded at cost in the Condensed Consolidated Balance Sheets.condensed consolidated balance sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature.  At December 31, 20172019 and March 31, 2017,2019, the estimated fair value of our fixed rate debt approximated its carrying amounts. We estimated the fair value of debt based upon current interest rates available to us at the respective balance sheet dates for arrangements with similar terms and conditions. Based on borrowing rates currently available to us for loans with similar terms, the carryingfair value of notes payablethe variable rate debt is $13.1 million, and capital lease obligations approximates fair value.

We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset's fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. During the three months and nine months ended December 31, 20172019 and 2016,2018, no impairment charge was recorded from operations for long-lived assets or finite-lived assets.

Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is tested for impairment on an annual basis at the end of the fourth quarter of each fiscal year, or more often if warranted by events or changes in circumstances indicating that the carrying value of a reporting unit may exceed fair value, also known as impairment indicators. Our process of evaluating goodwill for impairment involves the determination of fair value of goodwill compared to its carrying value. Our only reporting unit with goodwill is our Content & Entertainment reporting unit.

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.

Virtual print fees (“VPFs”) are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Cinedigm Digital Funding I, LLC. ("Phase 1 DC, CDF IDC") and to Access Digital Cinema Phase 2 DCCorp. (“Phase 2 DC”) when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase 1 DC and CDF I based on a defined fee schedule with a reduced VPF rate year over year until the sixth year (calendar year 2011) at which pointend of the VPF rate remains unchanged through the tenth year until the VPFs phase out.term. One VPF is payable for every digital title initially displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period in which the digital title first plays on a System for general audience viewing in a digitally equipped movie theatre, as Phase 1 DC’s CDF I's and Phase 2 DC’s performance obligations have been substantially met at that time.

Phase 2 DC’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 2 DC 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 2 DC 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 mustwill pay us a one-time “cost recoupment bonus.” Any other cash flows, net of expenses, received by Phase 2 DC followingThe Company evaluated the achievement of cost recoupment are required to be returnedconstraining estimates related to the distributors onvariable consideration, i.e. the one-time bonus and determined that it is not probable to conclude at this point in time, that a pro-rata basis. At this time, we cannot estimatesignificant reversal in the timing or probabilityamount of cumulative revenue recognized will not 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 achievementterm of cost recoupment. Beginning in December 2018, certain Phase 2 DCthe licensing agreement, after which time, they have the option to: (1) return the Systems willto us; (2) renew their license agreement for successive one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we have reachedbegun, and expect to continue, to pursue the sale of the Systems to such exhibitors. Such sales were as originally contemplated as the conclusion of theirthe digital cinema deployment payment period, subject to earlier achievementplan. During the three and nine months ended December 31, 2019, there was $0.2 million and $1.2 million, respectively, of cost recoupment. In accordance with existing agreements with distributors, VPF revenues will cease to be recognized on such Systems. Becausedigital System sales revenue for the Phase II deployment installation period ended in December 2012, a majoritysale of the VPF revenue associated with the Phase II systems will end by December 2022 or earlier if cost recoupment is achieved.

Revenues earned in connection with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period.

Our Services segmentThe 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 recognized inrelated to the period in whichcollection and remittance of the billing of VPFs occurs, asVPF’s and the performance obligations have been substantially metobligation is satisfied at that time.time the related VPF fees are due which is at the time

CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, VOD,video on demand ("VOD"), and physical goods (e.g., DVD and Blu-ray Discs). Fees earned are typically based on the gross amounts billed to our customers less the amounts owed to the media studios or content producers under distribution agreements, and gross media sales of owned or licensed content. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. Generally, revenues areThe Company’s performance obligations include the delivery of content for subscription on the digital platform, shipment of DVD and Blu-ray Discs, or make available at point-of-sale for transactional and VOD services. 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. 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. Revenue is recognized after deducting the reserves for sales returns and other allowances, which are accounted for as variable consideration.

Reserves for sales returns and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. Sales returns and allowances are reported as a reduction of revenues.

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 is 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.

Shipping and handling costs primarily consist of operatingare incurred to move physical goods (e.g. DVD and Blu-ray Discs) to customers. We recognize all shipping and handling costs such 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.

The ending deferred revenue balance, including current and non-current balances, as of December 31, 2019 was $3.0 million. For the three months ended December 31, 2019, 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 expenses, property taxesof our performance obligations, both of which were in the ordinary course of business.

During the three and insurance on systems, shipping costs, royalty expenses, impairmentsnine months ended December 31, 2019, $1.3 million and $3.4 million, respectively of advances, participation expenses, marketingrevenue was recognized that was included in the deferred revenue balance at the beginning of the period. As of December 31, 2019, the aggregate amount of contract revenue allocated to unsatisfied performance obligations was $3.0 million. We expect to recognize approximately $1.6 million of this balance over the next 12 months, and direct personnel costs.the remainder thereafter.

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

No stock options were granted or exercised duringDuring the three months and nine months ended December 31, 2017 and 2016.

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and

Valuation allowances are established when management is unable to conclude that it is more likely than not that some portion,