| BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The accompanying interim Condensed Consolidated Financial Statements of Cinedigm Corp. have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) on July 1, 2022. These Condensed Consolidated Financial Statements are unaudited and have been prepared by the Company following the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations; however, the Company believes the disclosures are adequate to make the information presented not misleading. The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022. Interim results are not necessarily indicative of the results for a full year. The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Significant items subject to such estimates and assumptions include revenue recognition, allowance for doubtful accounts, returns and recovery reserves, goodwill and intangible asset impairments, share-based compensation expense, valuation allowance for deferred income taxes and amortization of intangible assets. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates. We own an 85 % interest in CON TV, LLC ("CONtv"), a worldwide digital network that creates original content, and sells and distributes on-demand digital content on the internet and other consumer digital distribution platforms, such as gaming consoles, set-top boxes, handsets, and tablets. We evaluated the investment under the voting interest entity model and determined that the entity should be consolidated as we have a controlling financial interest in the entity through our ownership of outstanding voting shares, and that other equity holders do not have substantive voting, participating or liquidation rights. We recorded net loss attributable to noncontrolling interest in our Condensed Consolidated Statements of Operations equal to 11 % of outstanding profit interest units retained by the noncontrolling interests. There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022. Reclassifications Certain amounts have been reclassified to conform to the current presentation. Cash and Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less to be “cash equivalents.” We maintain bank accounts with major banks, which from time to time may exceed the Federal Deposit Insurance Corporation’s insured limits. We periodically assess the financial condition of the institutions and believe that the risk of any loss is minimal. Accounts Receivable, Net 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. Employee Retention Tax Credit The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") provided an employee retention credit which was a refundable tax credit against certain employment taxes. The Consolidated Appropriations Act (the "Appropriations Act") extended and expanded the availability of the employee retention credit through December 31, 2021. The Appropriations Act amended the employee retention credit to be equal to 70 % of qualified wages paid to employees during the 2021 fiscal year. The Company qualified for the employee retention credit beginning in June 2020 for qualified wages through September 2021 and filed a cash refund claim during the three months ended September 30, 2022 and December 31, 2022 for $ 0.5 million and $ 2.0 million, respectively. During the three and nine months ended December 31, 2022 , the Company recorded an employee retention credit totaling $ 2.0 million and $ 2.5 million, respectively, in the Employee retention tax credit line on the Company’s Condensed Consolidated Statements of Operations. As of December 31, 2022, the tax credit receivable has been included in the Employee retention tax credit line on the Company's Condensed Consolidated Balance Sheet. Property and Equipment, Net Property and equipment, net are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
Computer equipment and software 3 - 5 years
Digital cinema projection systems 10 years
Machinery and equipment 3 - 10 years
Furniture and fixtures 3 - 6 years
Internal-Use Software 5 years We capitalize costs associated with software developed or obtained for internal use when the preliminary project stage is completed, and it is determined that the software will provide significantly enhanced capabilities and modifications. These capitalized costs are included in property and equipment, net and include external direct cost of services procured in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with, and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended use. Once the software is ready for its intended use, the costs are amortized over the useful life of the software. Post-configuration training and maintenance costs are expensed as incurred. We amortize internal-use software over its estimated useful life on a straight-line basis. Impairment of Long-lived and Finite-lived Assets 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 nine months ended December 31, 2022 and 2021 , no impairment charges were recorded from operations for long-lived assets or finite-lived assets. Intangible Assets, Net Intangible assets are stated at cost less accumulated amortization. For intangible assets that have finite lives, the assets are amortized using the straight-line method over the estimated useful lives of the related assets. For intangible assets with indefinite lives, the assets are tested annually for impairment or sooner if a triggering event occurs. Amortization lives of intangible assets are as follows:
Content Library 3 – 20 years
Advertiser Relationships and Channel 3 – 13 years
Customer Relationships 5 – 13 years
Software 10 years
Trademarks and Tradenames 2 – 15 years
Supplier Agreements 2 years The Company’s intangible assets included the following (in thousands):
As of December 31, 2022 Cost Basis Accumulated Impairment Net
Content Library $ 23,685 $ ( 21,038 ) $ — $ 2,647
Advertiser Relationships and Channel 11,104 ( 759 ) — 10,345
Customer Relationships 10,658 ( 7,531 ) ( 1,968 ) 1,159
Software 3,200 ( 480 ) — 2,720
Trademark and Tradenames 4,026 ( 2,033 ) — 1,993
Total Intangible Assets $ 52,673 $ ( 31,841 ) $ ( 1,968 ) $ 18,864
As of March 31, 2022 Cost Basis Accumulated Impairment Net
Content Library $ 23,685 $ ( 20,665 ) $ — $ 3,020
Advertiser Relationships and Channel 10,081 ( 161 ) — 9,920
Customer Relationships 10,658 ( 7,327 ) ( 1,968 ) 1,363
Software 3,200 ( 240 ) — 2,960
Trademark and Tradenames 4,026 ( 1,301 ) — 2,725
Supplier Agreements 11,430 ( 11,384 ) — 46
Total Intangible Assets $ 63,080 $ ( 41,078 ) $ ( 1,968 ) $ 20,034 During the nine months ended December 31, 2022 and 2021, no impairment charge was recorded for intangible assets. During the three and nine months ended December 31, 2022, the Company had amortization expense of $ 0.7 million and $ 2.2 million , respectively. During the three and nine months ended December 31, 2021, the Company had amortization expense of $ 0.7 million and $ 2.2 million , respectively. During the three months ended December 31, 2022 , the Company entered into a non-monetary transaction for the purchase and sale of content licenses with an unrelated third-party. The fair value of the content licenses sold was determined to be $ 1.0 million which is included in Revenues in our Condensed Consolidated Statement of Operations for the three months ended December 31, 2022 . The fair value of the content licenses purchased was determined to be $ 1.0 million and is recognized in Intangible Assets, Net on our Condensed Consolidated Balance Sheet as of December 31, 2022. As of December 31, 2022, amortization expense is expected to be (in thousands):
Total
Remainder of fiscal year 2023 $ 1,252
2024 3,343
2025 2,137
2026 1,745
2027 1,269
Thereafter 9,118
$ 18,864 Goodwill 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 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. The Company reassessed goodwill impairment on its annual measurement date of March 31, 2022 by performing a qualitative analysis and determined that it was not more likely than not that the fair value of its reporting unit is less than its carrying amount. No goodwill impairment charge was recorded in the three and nine months ended December 31, 2022 and 2021 . Fair Value Measurements The fair value measurement disclosures are 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 market corroborated inputs) • Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments) The following tables summarize the levels of fair value measurements of our financial assets and liabilities (in thousands):
As of December 31, 2022
Level 1 Level 2 Level 3 Total
Assets:
Equity investment in Metaverse, at fair value $ — $ — $ 5,200 $ 5,200
$ — $ — $ 5,200 $ 5,200
Liabilities:
Current portion of earnout consideration on purchase of a business $ — $ — $ 768 $ 768
Long-term portion of earnout consideration on purchase of a business — — 676 676
$ — $ — $ 1,444 $ 1,444
As of March 31, 2022
Level 1 Level 2 Level 3 Total
Assets:
Equity investment in Metaverse, at fair value $ 7,028 $ — $ — $ 7,028
$ 7,028 $ — $ — $ 7,028
Liabilities:
Current portion of earnout consideration on purchase of a business $ — $ — $ 1,081 $ 1,081
Long-term portion of earnout consideration on purchase of a business — — 603 603
$ — $ — $ 1,684 $ 1,684 The Company's equity investment in A Metaverse Company ("Metaverse") is in Hong Kong dollars and was translated into US dollars as of December 31, 2022 and March 31, 2022 at an exchange rate of 7.8 Hong Kong Dollars to 1 US Dollar. The fair value of this equity investment was measured by the quoted market price of Metaverse on the Stock Exchange of Hong Kong (SEHK: 1616) as of March 31, 2022. On April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. As of December 31, 2022, Metaverse’s stock valuation is based on an independent valuation based on the market approach and is categorized as Level 3 based on unobservable inputs. The Company estimated the fair value based on the market approach based on the last known enterprise value adjusting for trends in value from comparable companies. The adjustment to fair value of this investment resulted in a loss of $ 1.8 million and gain of $ 1.5 million for the nine months ended December 31, 2022 and 2021, respectively. As the value of the investment in Metaverse is determined based on unobservable inputs, company and industry fluctuations, as well as general economic, political, regulatory and market conditions such as recessions, interest rate changes or international currency fluctuations, changes to these assumptions may have a significant impact on the fair value of our investment in Metaverse. Our cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable and accrued expenses are financial instruments and are recorded at cost in the Condensed Consolidated Balance Sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature. Prepaid and Other Current Assets Prepaid and other current assets consisted of the following (in thousands):
As of
December 31, March 31,
Advances $ 3,244 $ 2,117
Due from producers 1,549 1,861
Other receivables 1,134 826
Inventory 209 116
Other prepaid expenses 1,167 989
Total prepaid and other current assets $ 7,303 $ 5,909 Advances 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. Impairments related to advances were $ 1.0 million and $ 0.4 million for the three months ended December 31, 2022 and 2021, respectively. Impairments related to advances were $ 1.6 million and $ 0.8 million for the nine months ended December 31, 2022 and 2021 , respectively. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following (in thousands):
As of
December 31, March 31,
Accounts payable $ 17,720 $ 34,177
Amounts due to producers 15,967 10,430
Accrued compensation and benefits 3,390 3,507
Accrued other expenses 3,642 3,911
Total accounts payable and accrued expenses $ 40,719 $ 52,025 Revenue Recognition 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. The following tables present the Company’s disaggregated revenue by segment and source (in thousands):
Three Months Ended Nine Months Ended
2022 2021 2022 2021
Cinema Equipment:
Deployment $ 7,458 $ 220 $ 9,340 $ 1,263
Services ( 316 ) 506 ( 88 ) 1,171
Digital system sales 44 1,334 1,966 9,110
Total Cinema Equipment revenue $ 7,186 $ 2,060 $ 11,218 $ 11,544
Content & Entertainment:
Base distribution business $ 8,121 $ 3,668 $ 11,145 $ 6,368
OTT streaming and digital 12,575 8,356 33,115 21,290
Total Content & Entertainment revenue $ 20,696 $ 12,024 $ 44,260 $ 27,658
Total revenue $ 27,882 $ 14,084 $ 55,478 $ 39,202 Cinema Equipment Segment Our Cinema Equipment segment consists of financing vehicles and administrators for Systems installed nationwide in our first deployment phase (“Phase I Deployment”) to theatrical exhibitors and for 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. 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 segment 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 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 distributors, whereby amounts are payable by a distributor to Phase I Deployment and to Phase II Deployment when distributor's movies are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to us with respect 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 Deployment's 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 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. The Company evaluated the constraining estimates related to the variable consideration 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: (i) return the Systems to us; (ii) renew their license agreement for successive one-year terms; or (iii) 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. Cinedigm recognizes revenue once the customer takes possession of the Systems and Cinedigm receives the sale proceeds. Such sales were originally contemplated as the conclusion of the digital cinema deployment plan. The Cinema Equipment segment 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 Deployment. This administrative fee is related to the collection and remittance of the VPF’s and the performance obligation is satisfied at the 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 distributors. A limited number of systems from our Phase I deployment remain eligible for VPFs from certain distributors where Phase I exhibitors have renewed their term on an annual basis. We continue to pursue system sales for these remaining exhibitors. Our Phase II deployment currently consists of a limited number of exhibitors who purchased their own systems and have not yet reached recoupment or the end of their contractual term. We continue to administer VPFs for these limited systems from certain distributors. During the three and nine months ended December 31, 2022, $ 7.4 million and $ 9.1 million of revenue was recognized that was included in the accounts payable balance as constrained variable consideration at the beginning of the year. The Company recognized the revenue once the uncertainty associated with the variable consideration was resolved. As of December 31, 2022 , approximately $ 1.0 million remains on our balance sheet in accounts payable as constrained variable consideration. Content & Entertainment Segment Content & Entertainment segment 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 content is available for subscription on the digital platform (the Company’s digital content is considered functional IP), 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. Revenue from the sale of physical goods is recognized after deducting reserves for sales returns and other allowances. Reserves for potential sales returns of physical goods 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. The Content & Entertainment segment also has contracts for the theatrical distribution of third-party feature movies and alternative content. The Content & Entertainment segment’s distribution fee revenue participation in box office receipts are recognized at the time a feature movie and alternative content are viewed. The Content & Entertainment segment 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 movie's or alternative content’s theatrical release date. The Company follows the five-step model established by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), Revenue from contracts with customers ("ASC 606") when preparing its assessment of revenue recognition. Principal Agent Considerations Revenue earned by our Content & Entertainment segment from the delivery of digital content and physical goods may be recognized gross or net depending on the terms of the arrangement. We determine whether revenue should be reported on a gross or net basis based on each revenue stream. Key indicators that we use in evaluating gross versus net treatment include, but are not limited to, the following: • which party is primarily responsible for fulfilling the promise to provide the specified good or service; and • which party has discretion in establishing the price for the specified good or service. 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 direct operating expenses 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 Content & Entertainment 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. During the three and nine months ended December 31, 2022 and 2021, we did not recognize any credit losses or reversals of previously recorded provisions, and did not have any write-offs charged against the allowance. Contract Liabilities We generally record a receivable related to revenue when we have an unconditional right to invoice and receive payment, and we record deferred revenue (contract liability) when cash payments are received or due in advance of our performance, even if amounts are refundable. Deferred revenue pertaining to our Content & Entertainment segment includes amounts related to the sale of DVDs with future release dates. Deferred revenue relating to our Cinema & Equipment segment pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems deployments that have extended payment terms. The ending deferred revenue balance, including current and non-current balances as of March 31, 2022 and December 31, 2022 was $ 0.2 million and $ 0.4 million , respectively. For the three and nine months ended December 31, 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. Participations and royalties payable 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. Concentrations For the three months ended December 31, 2022, Iconic, Distribution Solutions, a division of Alliance Entertainment, Amazon.com, Inc., and Tubi represented 35 % , 16 % , 14 % and 5 % , respectively, of Content & Entertainment segment revenues, and approximately 16 % , 7 % , 14 % and 6 % , respectively, of our consolidated revenues. For the nine months ended December 31, 2022, Iconic, Distribution Solutions, a division of Alliance Entertainment, Amazon.com, Inc., and Tubi, represented 27 % , 19 % , 25 % and 10 % respectively, of Content & Entertainment segment revenues, and approximately 8 % , 5 % , 11 % and 5 % , respectively, of our consolidated revenues. For the three months ended December 31, 2021, Amazon.com, Inc., Distribution Solutions, a division of Alliance Entertainment and Tubi, represented 15 % , 11 % and 7 % , respectively, of Content & Entertainment segment revenues and approximately 13 % , 9 % and 6 % , respectively, of our consolidated revenues. For the nine months ended December 31, 2021, Amazon.com, Inc. Distribution Solutions, a division of Alliance Entertainment and Roku, Inc., represented 24 % , 9 % and 10 % , respectively, of Content & Entertainment segment revenues and approximately 17 % , 6 % and 7 % , respectively, of our consolidated revenues. Direct Operating Costs Direct operating costs consist of cost of revenue, fulfillment expenses, shipping costs, property taxes and insurance on systems, royalty expenses, impairments of advances and marketing and direct personnel costs. Stock-based Compensation The Company issues stock-based awards to employees and non-employees, generally in the form of restricted stock, restricted stock units, stock appreciation rights ("SARs") and performance stock units ("PSUs"). The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock units and modifications to existing stock options, to be recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) based on their fair values. The Company measures the compensation expense of employee and nonemployee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period during which the employee and nonemployee is required to provide service in exchange for the award. The fair values of options and SARs are calculated as of the date of grant using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility, risk-free rate and expected term. The Company’s estimates of these assumptions are primarily based on the trading price of the Company’s stock, historical data, peer company data and judgment regarding future trends and factors. Forfeitures are recognized as they occur. Income Taxes The Company accounts for income taxes using the asset and |
