| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES BASIS OF PRESENTATION AND
CONSOLIDATION Our consolidated financial statements include the accounts of Cinedigm and its wholly-owned and majority-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation. Investments
in which we do not have a controlling interest or are not the primary beneficiary, but have the ability to exert significant influence,
are accounted for under the equity method of accounting. Noncontrolling interests for which we have been determined to be the primary
beneficiary are consolidated and recorded as net loss attributable to noncontrolling interest. See Note 3 - Other Interests USE OF ESTIMATES The preparation of 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 of revenue and expenses during the reporting period. Such
estimates include the accrual of digital revenue, accounts receivable reserves, return reserves, inventory reserves, recovery of advances,
assessment of goodwill impairment, intangible asset impairment and estimated amortization lives, fair value for asset acquisitions and
business combinations, valuation allowances for income taxes and stock awards. Actual results could differ from these estimates. 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. Cash and cash equivalents consisted
of the following:
As of
(in thousands) June 30, March 31,
Cash and Cash Equivalents $ 11,519 $ 13,062 EQUITY INVESTMENT IN A METAVERSE
COMPANY, A RELATED PARTY On February 14, 2020, the Company
acquired an approximately 11.5% interest in A Metaverse Company (“Metaverse”), a leading publicly traded Chinese entertainment
company, formerly Starrise Media Holdings Limited, whose ordinary shares are listed on the Stock Exchange of Hong Kong. The
Company acquired such interest as a strategic investment and in a private transaction from a shareholder of Metaverse that is related
to our major shareholder. Our major shareholder also maintains a significant beneficial interest ownership in Metaverse. Upon consummation
of the transaction on February 14, 2020, the Company recorded an initial investment of approximately $25.1 million, which is the
fair market value of the Metaverse shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company’s
common stock of $11.2 million, valued as of the date of the issuance of the Common Stock of the Company. The difference in value
of shares received in Metaverse and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital. On April 10, 2020, the Company
purchased an additional 15% interest in Metaverse in a private transaction from shareholders of Metaverse that are affiliated with
the major shareholder of the Company. The Company recorded an additional equity investment of approximately $28.2 million, which
is the fair market value of the Metaverse shares on the transaction date on the Stock Exchange of Hong Kong, in exchange for the Company’s
common stock of $11.0 million, valued at the date of the issuance of the Common Stock of the Company. The difference in the value
of shares received in Metaverse and shares issued by the Company is deemed as contributed capital and recorded in additional paid-in capital.
This transaction was also recorded as an equity investment in Metaverse. The Company has accounted for
these investments under the equity method of accounting as the Company can exert significant influence over Metaverse with its direct
ownership and affiliation with the Company’s majority shareholders. The Company has made an irrevocable election to apply the fair
value option under ASC 825-10, Financial Instruments On
April 1, 2022, trading of Metaverse’s ordinary shares was halted on the Hong Kong Stock Exchange. This
investment was previously a level 1 investment as the shares were being actively traded in a marketplace, but with the trading of the
shares being halted, the Company needed to reassess the fair value level of the investment. Without an active market where the shares
are being traded, the investment no longer qualifies as a level 1. As of June 30, 2022, Metaverse’s
stock valuation is based on an evaluated offer received from an independent third party to purchase our shares and trending assessment
of market pricing and is categorized as Level 3 based on unobservable inputs. ACCOUNTS RECEIVABLE 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 record accounts receivable,
long-term in connection with activation fees that we earn from our Systems deployments that have extended payment terms. Such accounts
receivable are discounted to their present value at prevailing market rate. ADVANCES Advances, which are recorded
within prepaid and other current assets on the 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 $32 thousand and $0.2 million, for the three months ended June 30, 2022 and 2021, respectively. PROPERTY AND EQUIPMENT 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:
Computer equipment and software 3 - 5 years
Internal use software 5 years
Digital cinema projection systems 10 years
Machinery and equipment 3 - 10 years
Furniture and fixtures 3 - 6 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 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. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the leasehold improvements. Repair and maintenance costs are charged
to expense as incurred. Major renewals, improvements and additions are capitalized. Upon the sale or other disposition of any property
and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss on disposal
is included in the consolidated statements of operations. 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 three months ended June 30, 2022 and 2021, no impairment charge was recorded from operations for long-lived assets or finite-lived
assets. INTANGIBLE ASSETS 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. During the three months ended June 30, 2022 and 2021, no impairment charge was
recorded from operations for intangible assets. Amortization expense is recorded
using the straight-line method over the estimated useful lives of the respective assets as follows:
Trademark 3 years
Content Library 3 – 20 years
Customer Relationships 5 – 13 years
Tradename 2 – 15 years
Supplier Agreements 2 years
Advertiser relationships and Channel 3-13 years
Software 10 years The Company’s intangible
assets included the following on June 30, 2022:
Cost Basis Accumulated Impairment Net
Trademark $ 1,925 $ (925 ) $ - 1,000
Content Library 23,685 (20,803 ) - 2,882
Customer Relationships 10,658 (7,395 ) (1,968 ) 1,295
Tradename 2,101 (619 ) - 1,482
Theatre Relationship 550 (550 ) - -
Patents 17 (17 ) - -
Supplier Agreements 11,430 (11,399 ) - 31
Advertiser relationships and Channel 10,081 (361 ) - 9,720
Software 3,200 (320 ) - 2,880
Total Intangible Assets $ 63,647 $ (42,389 ) $ (1,968 ) 19,290 The Company’s
intangible assets included the following on March 31, 2022:
Cost Basis Accumulated Impairment Net
Trademark $ 1,925 $ (776 ) $ - 1,149
Content Library 23,685 (20,665 ) - 3,020
Customer Relationships 10,658 (7,327 ) (1,968 ) 1,363
Tradename 2,101 (525 ) - 1,576
Theatre Relationship 550 (550 ) - -
Patents 17 (17 ) - -
Supplier Agreements 11,430 (11,384 ) - 46
Advertiser relationships and Channel 10,081 (161 ) - 9,920
Software 3,200 (240 ) - 2,960
Total Intangible Assets $ 63,647 $ (41,645 ) $ (1,968 ) 20,034 Below is the amortization expense
per year for the intangible assets:
Total
2023 $ 2,520
2024 3,048
2025 1,796
2026 1,489
2027 1,269
Thereafter 9,168
Total $ 19,290 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) Assets and liabilities measured
at fa The equity
investment in Metaverse is in Hong Kong dollars and was translated into US dollars as of June 30, 2022 and 2021 at an exchange rate of 7.8 and 7.8 Hong
Kong Dollars to 1 US Dollar, respectively. The fair value of this equity investment was measured by the quoted market price
of Metaverse on the Stock Exchange of Hong Kong at June 30, 2021. On April 1, 2022, trading of Metaverse’s ordinary shares was
halted on the Hong Kong Stock Exchange and as of June 30, 2022, Metaverse’s stock valuation is based on a preliminary evaluated
offer received from an independent third party to purchase our shares and trending assessment of market pricing and is categorized as
Level 3 based on unobservable inputs. The adjustment to fair value of this investment resulted in a loss of $1.3 million and
gain of $0.3 million for the three months ended June 30, 2022 and 2021, respectively. As the value of the investment in Metaverse is being determined by an offer to purchase the shares from an independent
third party, the value of the investment may need to be reduced or fully written off should the offer be rescinded. The following tables summarize the levels of fair value measurements
of our financial assets and liabilities as of June 30, 2022 and March 31, 2022: As of June 30, 2022
(in thousands) Level 1 Level 2 Level 3 Total
Assets:
Equity investment in Metaverse, at fair value $ - $ - $ 5,772 $ 5,772
$ - $ - $ 5,772 $ 5,772
Liabilities:
Current portion of earnout consideration on purchase of a business $ — $ — $ 1,188 $ 1,188
Long term portion of earnout consideration on purchase of a business — — 627 627
$ — $ — $ 1,815 $ 1,815 As of March 31, 2022
(in thousands) 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 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 consolidated balance sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of
their short-term nature. ASSET ACQUISITIONS An asset acquisition is an acquisition
of an asset, or a group of assets, that does not meet the definition of a business. Asset acquisitions are accounted for by using the
cost accumulation model whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired
on the basis of relative fair values. 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 months ended June 30, 2022 and 2021. ACCOUNTS
PAYABLE AND ACCRUED EXPENSES Accounts
payable and accrued expenses consisted of the following:
As of
(In thousands) June 30, March 31,
Accounts payable $ 29,325 $ 34,177
Amounts due to producers 9,254 10,430
Accrued compensation and benefits 4,401 3,507
Accrued taxes (refund) payable (67 ) (78 )
Accrued other expenses 3,537 3,989
Total accounts payable and accrued expenses $ 46,450 $ 52,025 PREPAID
AND OTHER CURRENT ASSETS Prepaid
and other current assets consisted of the following:
As of
(In thousands) June 30, March 31,
Non-trade accounts receivable $ 688 $ 826
Advances 1,853 2,117
Due from producers 1,057 1,861
Prepaid insurance 212 169
Other prepaid expenses 811 820
Total prepaid and other current assets $ 4,621 $ 5,793 Impairments
and accelerated amortization related to advances were $32 thousand and $0.2 million, for the three months ended June 30, 2022
and 2021, respectively. 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. Cinema Equipment Business 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 Business
also provides monitoring, data collection, serial data verification and management services to this segment, as well as to exhibitors
who purchase their own equipment, in order to collect virtual print fees (“VPFs”) from motion picture studios and distributors
and Alternative Content Fees (“ACFs”) from alternative content providers, and to distribute those fees to theatrical exhibitors
(collectively, “Services”). VPFs are earned, net of administrative
fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase I Deployment and to
Phase II Deployment when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres.
VPFs are earned and payable to 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 Deployments performance
obligations for revenue recognition are met at this time. Phase II
Deployment’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the
date each system is installed; however, Phase II Deployment may no longer collect VPFs once “cost recoupment,” as defined
in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash
receipts collected by Phase II Deployment have equaled the total of all cash outflows, including the purchase price of all Systems, all
financing costs, all “overhead and ongoing costs”, as defined, and including service fees, subject to maximum agreed upon
amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract
year, the studios will pay us a one-time “cost recoupment bonus.” The Company evaluated the constraining estimates related
to the variable consideration, that it is not probable to conclude at this point in time that a significant reversal in the amount of
cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved. Under the terms of our standard
cinema equipment licensing agreements, exhibitors will continue to have the right to use our Systems through the end of the term of the
licensing agreement, after which time, they have the option to: (1) return the Systems to us; (2) renew their license agreement for successive
one-year terms; or (3) purchase the Systems from us at fair market value. As permitted by these agreements, we typically pursue the sale
of the Systems to such exhibitors. Cinedigm recognizes revenue once the customer takes possession of the Systems and Cinedigm received
the sale proceeds. Such sales were originally contemplated as the conclusion of the digital cinema deployment plan. Total system revenue
was $1.2 million and $5.6 million, during the three months ended June 30, 2022 and 2021, respectively. Revenues earned in connection
with up front exhibitor contributions are deferred and recognized over the expected cost recoupment period. Exhibitors who purchased and
own Systems using their own financing in Phase II of the Cinema Equipment Business paid us an upfront activation fee of approximately
$2.0 thousand per screen (the “Exhibitor-Buyer Structure”). Upfront activation fees were recognized in the period in
which these Systems were delivered and ready for content, as we had no further obligations to the customer after that time and collection
was reasonably assured. In addition, we recognize activation fee revenue of between $1.0 thousand and $2.0 thousand on Phase
II Deployment Systems and for Systems installed by CDF2 Holdings, a related party, (See Note 3 - Other Interests The Cinema Equipment Business
earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service fee equal to 2.5%
of the VPFs earned by Phase 1 DC. This administrative fee is related to the collection and remittance of the VPF’s and the performance
obligation is satisfied at that time the related VPF fees are due which is at the time the movies are displayed on screens utilizing our
Systems installed in movie theatres. The service fees are recognized as a point in time revenue when the corresponding VPF fees are due
from the movie studios and distributors. Content & Entertainment
Business CEG earns fees for the distribution
of content in the home entertainment markets via several distribution channels, including digital, video on demand (“VOD”
or “OTT Streaming and Digital”), and physical goods (e.g., DVDs and Blu-ray Discs) (“Physical Revenue” or “Base
Distribution Business”). Fees earned are typically a percentage based on the net amounts received from our customers. Depending
upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. The Company’s performance
obligations include the delivery of content for transactional, subscription and ad supported/free ad-supported streaming TV (“FAST”)
on the digital platforms, and shipment of DVDs and Blu-ray Discs. Revenue is recognized at the point in time when the 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.
Physical revenue from the sale of physical goods is recognized after deducting the reserves for sales returns and other allowances, which
are accounted for as variable consideration. 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. CEG also has contracts for the
theatrical distribution of third party feature movies and alternative content. CEG’s distribution fee revenue and CEG’s participation
in box office receipts are recognized at the time a feature movie and alternative content are viewed. CEG has the right to receive or
bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable
at the time of execution, and all related distribution revenue is deferred until the third party feature movies’ or alternative
content’s theatrical release date. The Company follows the five-step
model established by ASC 606 when preparing its assessment of revenue recognition Principal Agent Considerations Revenue earned by our CEG business
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 cost of goods sold because we are responsible for delivery of the product to our customers prior to transfer of control to the customer. Credit Losses We maintain reserves for potential
credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations,
customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis. Our CEG segment recognizes accounts
receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a
sale. Reserves for product returns and other allowances is variable consideration as part of the transaction price. If actual future returns
and allowances differ from past experience, adjustments to our allowances may be required. We record accounts receivable,
long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable
are discounted to their present value at prevailing market rates. 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 Business includes amounts related to the sale of DVDs with future release dates. Deferred revenue relating to
our Cinema Equipment Business pertains to revenues earned in connection with up front exhibitor contributions that are deferred and recognized
over the expected cost recoupment period. It also includes unamortized balances in connection with activation fees due from the Systems
deployments that have extended payment terms. The
ending deferred revenue balance, including current and non-current balances, as of June 30, 2022 was $0.4 million. For the three months
ended June 30, 2022, the additions to our deferred revenue balance were primarily due to cash payments received or due in advance of satisfying
performance obligations, while the reductions to our deferred revenue balance were primarily due to the recognition of revenue upon fulfillment
of our performance obligations, both of which were in the ordinary course of business. For the three months ended June 30, 2022 and 2021,
there was $12.0 million and $14.6 million ,
respectively, included in accounts payable that represents a refund liability, a portion or all of which may be recognized as revenue
upon completion of audit periods. 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. Disaggregation of Revenue The Company disaggregates revenue
into different revenue categories for the Cinema Equipment and CEG Businesses. The Cinema Equipment Business revenue categories are: Phase
I Deployment revenue, Phase II Deployment revenue, Services, and Digital System Sales, and the Content & Entertainment Business revenue
categories are: Base Distribution Business and OTT Streaming and Digital. The following tables present
the Company’s revenue categories for the three months ended June 30, 2022 and 2021 (in thousands):
Three Months Ended
2022 2021
Cinema Equipment Business:
Phase I Deployment $ 113 $ 91
Phase II Deployment - 386
Services 120 179
Digital System Sales 1,194 5,575
Total Cinema Equipment Business revenue $ 1,427 $ 6,231
Content & Entertainment Business:
Physical Revenue $ 2,205 $ 1,778
OTT Streaming and Digital 9,958 7,006
Total Content & Entertainment Business revenue $ 12,163 $ 8,784 Concentrations For
the three months ended June 30, 2022, three customers,
Distribution Solutions represented 2 % and 4% respectively of revenues and approximately %,
and 13% , respectively, of our consolidated revenues. For the three months ended June
30, 2021, Distribution Solutions represented % and % respectively of revenues and approximately % and 6%, respectively, of our consolidated Revenues. DIRECT
OPERATING COSTS Direct operating costs consist
of operating costs such as 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 and
performance stock units. 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 consolidated statements of operations and comprehensive 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 stock appreciation rights 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 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. INCOME
TAXES The Company accounts for income taxes using the
asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to operating loss and tax credit carryforwards and for differences between the carrying amounts of existing assets and liabilities and
their respective tax bases. Valuation allowances are established when management
is unable to conclude that it is more likely than not that some portion, or all, of the deferred tax asset will ultimately be realized.
The Company is primarily |
