CINEDIGM CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Glimpses |

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.



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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 over 12,000 movie screens from using traditional analog film prints to digital distribution, we have become a leading distributor of independent content, through both organic growth and acquisitions. We distribute products for major brands such as the Discovery Networks, National Geographic 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, PlayStation, 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 the United States and Canada and in Australia and New Zealand. 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 , 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 , a majority of the VPF revenue associated with the Phase I Deployment Systems has ended. As of , all of our 3,445 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 . 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 .

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 have begun, and expect to continue, to 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 cinema business segment operates independently from our Content & Entertainment business. As of , we had approximately $16.2 million of non-recourse outstanding debt principal that relates to, and is serviced by, our cinema equipment business. We also have approximately $43.9 million of outstanding debt principal, as of , that is attributable to our Content & Entertainment and Corporate segments.

On , the previously announced Agreement and Plan of Merger, dated as of , among the Company, C&F Merger Sub, Inc., a wholly-owned subsidiary of the Company, Future Today Inc, Alok Ranjan and Vikrant Mathur (individually and as Stockholder Representative) and the Company Stockholders identified therein, was amended. Pursuant to the Merger Amendment, among other things, the parties (x) extended the End Date and exclusivity period to , (y) provided for payment of a non-refundable deposit of $500,000 by the Company, and (z) provided the Company with the unilateral right to extend the End Date and exclusivity period to upon making an additional non-refundable deposit of $500,000. Any non-refundable deposit(s) made prior to closing will be credited against the purchase price at closing. On , the Company exercised its right to extend to . The Company is still in the process of working toward closing the transaction as soon as practicable.





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Results of Operations for the Three Months Ended and 2018

Revenues

                                           Three Months Ended June 30,
($ in thousands)                   2019       2018       $ Change     % Change

Cinema Equipment Business $ 3,993 $ 7,115 $ (3,122 ) (44 )% Content & Entertainment Business 5,810 5,963 (153 ) (3 )%

                                 $ 9,803    $ 13,078    $ (3,275 )     (25 )%



Revenues generated by our Cinema Equipment Business segment decreased primarily as a result of the reduced number of Systems earning VPF revenue and commissions. The Phase I Deployment Systems deployment period ended for major studios during the fiscal year ended which is contributing to the decrease in revenues.


Direct Operating Expenses
                                             Three Months Ended June 30,
($ in thousands)                     2019          2018      $ Change     % Change

Cinema Equipment Business $ 234 $ 312 $ (78 ) (25 )% Content & Entertainment Business 3,378 3,113 265 9 %

                                 $   3,612       $ 3,425    $    187         5  %



Increase in direct operating expenses in the three months ended compared to the prior period was not significant.

Selling, General and Administrative Expenses

                                            Three Months Ended June 30,
($ in thousands)                    2019        2018      $ Change      % Change

Cinema Equipment Business $ 496 $ 533 $ (37 ) (7 )% Content & Entertainment Business 3,224 3,887 (663 ) (17 )% Corporate

                            2,129      2,123            6         -  %
                                 $   5,849    $ 6,543    $    (694 )     (11 )%



Selling, general and administrative expenses for the three months ended decreased primarily due to a $0.3 million decrease in our personnel expense, as a result of our cost cutting initiative, and a decrease of $0.3 million in marketing spend in our OTT business.

Depreciation and Amortization Expense on Property and Equipment

                                            Three Months Ended June 30,
($ in thousands)                    2019        2018      $ Change      % Change

Cinema Equipment Business $ 1,646 $ 1,960 $ (314 ) (16 )% Content & Entertainment Business 86 82

            4         5  %
Corporate                               42         47           (5 )     (11 )%
                                 $   1,774    $ 2,089    $    (315 )     (15 )%


Depreciation and amortization expense decreased in our Cinema Equipment Business segment as the majority of our digital cinema projection Systems reached the conclusion of their ten-year useful lives during fiscal years 2019 and 2018.



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Interest expense, net
                                      Three Months Ended June 30,
($ in thousands)                2019          2018     $ Change     % Change
Cinema Equipment Business $      828        $ 1,404   $    (576 )    (41 )%
Corporate                      1,454          1,291         163       13  %
                          $    2,282        $ 2,695   $    (413 )    (15 )%


Interest expense in the Cinema Equipment Business segment decreased primarily as a result of reduced debt balances compared to the prior period, primarily due to the payoff of our KBC facilities, P2 Vendor Note, and the reduction of the Prospect Term Loan. Interest expense in our Corporate segment increased due to a larger loan balance from our credit facility, in the three months ended , compared to prior period.

Income Tax Expense

We recorded approximately $0.1 million of income tax expense for each of the three months ended and 2018, respectively, in our Cinema Equipment Business and Corporate segments for state and federal income taxes.

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.

Adjusted EBITDA (including the results of Cinema Equipment Business segment ) for the three months ended decreased by $2.6 million, or 83%, compared to the three months ended . Adjusted EBITDA loss from our non-cinema equipment business was negative $2.2 million for the three months ended compared to negative $2.5 million for the three months ended . The decrease in Adjusted EBITDA compared to the prior period primarily reflects lower revenue in our cinema equipment business.

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.



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Following is the reconciliation of our consolidated net loss to Adjusted EBITDA:

                                                                   Three Months Ended June 30,
($ in thousands)                                                     2019               2018
Net loss                                                       $      (5,039 )     $      (3,283 )
Add Back:
Income tax expense                                                        47                 139
Depreciation and amortization of property and equipment                1,774               2,089
Amortization of intangible assets                                        995               1,395
Interest expense, net                                                  2,282               2,695
Other expense, net                                                       463                  10
Stock-based compensation and expenses                                     11                  86
Net loss attributable to noncontrolling interest                           6                  16
Adjusted EBITDA                                                $         539       $       3,147

Adjustments related to the Cinema Equipment Business Depreciation and amortization of property and equipment $ (1,646 ) $ (1,960 ) Amortization of intangible assets

                                        (11 )               (12 )
 Stock-based compensation and expenses                                     1                   -
    Income from operations                                            (1,133 )            (3,723 )
Adjusted EBITDA from non-cinema equipment business             $      (2,243 )     $      (2,548 )



Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In connection with the preparation of our 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 SEC on , except the accounting policy changes detailed in Note 2 of our condensed consolidated financial statements as a result of the adoption of the new leasing standard.

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 $5.0 million and $3.3 million for the three months ended and 2018, respectively. We have an accumulated deficit of $400.9 million, and negative working capital of $56.7 million, as of . In addition, we have significant debt-related contractual obligations as of and beyond.

We have incurred net losses each year since we commenced our operations. Since our inception, we have financed our operations substantially through the private placement of shares of our common and preferred stock, the issuance of promissory notes, our initial public offering and subsequent private and public offerings, notes payable and common stock used to fund various acquisitions.



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We may continue to generate net losses in the future primarily due to depreciation and amortization, interest on notes payable, 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 our debt agreements 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. The Prospect Loan requires certain screen turn performance from certain of our Cinema Equipment Business subsidiaries. While such restrictions may reduce the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements, we do not have similar restrictions imposed upon our CEG business. We may seek to raise additional capital as 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.

In accordance with the Stock Purchase Agreement, on , the Company entered into a loan agreement with BEMG, pursuant to which the Company borrowed $10.0 million (the "2017 Loan"). The maturity date was with interest at 5% per annum, payable quarterly in cash. The 2017 Loan is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the 2017 Loan were used for working capital and general corporate purposes. As part of this 2017 Loan, the Company also issued warrants to BEMG to purchase 1,400,000 shares of the Company's Class A common stock (the "Warrants"). The 2017 Loan was paid in full on .

On , we entered into the 2018 Loan. The 2018 Loan has a one (1) year term that may be extended by mutual agreement of Bison Global and the Company and bears interest at 5% per annum, payable quarterly in cash. On , we entered into a Termination Agreement for the 2018 Loan and at the same time entered into a $10.0 million Convertible Promissory Note. See Note 12 - Subsequent Events.

On , the Company issued a subordinated convertible note (the "Convertible Note") to MingTai Investment LP (the "Lender") for $5.0 million from the Lender. All proceeds from the Convertible Note was used to pay the $5.0 million 2013 Notes described in Note 5 - Notes Payable.

On , the Company and Bison Global Investment SPC for and on behalf of Global Investment SPC-Bison Global No. 1, another affiliate of Bison Global, entered into a Termination Agreement with respect to the 2018 Loan between them, pursuant to which the Company had borrowed from Bison Global $10.0 million. Pursuant to the Termination Agreement, the accrued and unpaid interest on such outstanding principal amount will be paid in cash to Bison Global no later than . Contemporaneously with the Termination Agreement, the Company entered into a Bison Convertible Note with Bison Global for $10.0 million.

The Bison Convertible Note has a term ending on , and bears interest at 5% per annum. The principal is payable upon maturity, in cash or in shares of Common Stock, or a combination of cash and Common Stock, at the Company's option. The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan.

The Bison Convertible Note, offset by the concurrent payoff and termination of the 2018 Loan, did not result in any increase to the Company's outstanding debt balance.

On , the Company entered into the July Stock Purchase Agreement with BEMG, an affiliate of Bison Capital Holding Company Limited, which, through an affiliate, is the majority holder of our Class A common stock, pursuant to which the Company agreed to sell to BEMG a total of 2,000,000 July SPA Shares, for an aggregate purchase price in cash of $3.0 million priced at $1.50 per share. The sale of the July SPA Shares was consummated on . The July SPA Shares are subject to certain transfer restrictions. The proceeds of the sale of the July SPA Shares sold were used for working capital, including the repayment of Second Lien Loans (as defined in Note 5 - Notes Payable). In addition, the Company has agreed to enter into a registration rights agreement for the resale of the July SPA Shares.

On , the Company entered into the August Stock Purchase Agreement with BEMG, pursuant to which the Company agreed to sell to BEMG a total of 1,900,000 August SPA Shares, for an aggregate purchase price in cash of $2.9 million priced at $1.50 per share. The sale of the August SPA Shares was consummated on . The August SPA Shares are subject to certain transfer restrictions. The proceeds of the sale of the August SPA Shares sold were used for working capital. In addition, the Company has agreed to enter into a registration rights agreement for the resale of the August SPA Shares.


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The Second Lien Loans (as defined in Note 5 - Notes Payable) were to mature on . On , the Company entered into a consent agreement with lenders of the Second Lien Loans to an extension of the Second Lien Loans pursuant to which (i) the Company paid down a portion of the outstanding principal amount plus accrued interest to date, and (ii) the maturity date of the remaining outstanding principal amount of the Second Lien Loans was extended to . On , the Company paid $3.0 million of the outstanding Second Lien Loans and expects to obtain additional capital from or through Bison Capital Holding Limited or an affiliate thereof ("Bison") for final payment of the remaining outstanding balances of the Second Lien Loans. See Note 5 - Notes Payable and Note 10 - Subsequent Events.

Non-Recourse Indebtedness

Our Cinema Equipment Business has historically been financed through a series of non-recourse loans. Certain of the subsidiaries that make up the Cinema Equipment Business have pledged their assets as collateral for, and are liable with respect to, certain indebtedness for which our other subsidiaries and their assets generally are not. We have referred to this indebtedness as "non-recourse debt" because the recourse of the lenders is limited to the assets of specific subsidiaries. Such indebtedness includes the Prospect Loan, the KBC Facilities, the 2013 Term Loans, the P2 Vendor Note and the P2 Exhibitor Notes. The balance of our non-recourse debt, net of related debt issuance costs, as of was $14.9 million for our Cinema Equipment Business segment, which mature as presented in the Contractual Obligations table below. We continue to expect cash flows from our Cinema Equipment Business operations will be sufficient to satisfy our liquidity and contractual requirements that are linked to these operations.

Revolving Credit Agreements

On , the Company entered into a new Loan, Guaranty and Security Agreement, dated as of , by and between the Company, East West Bank ("EWB") and the Guarantors named therein, which are certain subsidiaries of the Company (the "Loan Agreement"). The Loan Agreement provides for a credit facility (the "Credit Facility") consisting of a maximum of $19.0 million in revolving loans at any one time outstanding and having a maturity date of , which may be extended for two successive periods of one year each at the sole discretion of the lender so long as certain conditions are met.

Interest is due monthly on the last day of the month based on the rate determined by the Company in prior month of either 0.5% plus Prime Rate or 3.25% above LIBOR Rate established by EWB.

On , the Company borrowed $8.2 million under the Credit Facility. The proceeds from the Credit Facility were used to pay the $7.8 million outstanding principal and accrued interest under the prior credit agreement. During the year ended , the Company borrowed an additional $10.4 million under the Credit Facility. As of , there was $17.6 million outstanding and there was no additional availability under the Credit Facility based on the Company's borrowing base.

On , the Company entered into the EWB Amendment to the Loan, Guaranty and Security Agreement, dated as of , by and between the Company, East West Bank and the Guarantors named therein. The EWB Amendment reduced the size of the facility to $18.0 million, required certain prepayments and daily cash sweeps from collections of receivables to be made, changed in certain respects how the borrowing base is calculated, extended the maturity date to and excluded Future Today Inc and any of its future subsidiaries (in connection with the previously announced agreement to acquire Future Today, Inc.) from requirements to become Guarantors. In connection with the EWB Amendment, three of our subsidiaries became Guarantors under the EWB Credit Agreement.

Other Indebtedness

In , we issued notes to certain investors in the aggregate principal amount of $5.0 million (the "2013 Notes") and warrants to purchase 150,000 shares of Class A Common Stock to such investors. The principal amount outstanding under the 2013 Notes is due on and the notes bore interest at 9.0% per annum, payable in quarterly installments. The 2013 Notes were paid in full on , prior to their maturity date of .

On , the Company issued a subordinated convertible note (the "Convertible Note") to MingTai Investment LP (the "Lender") for $5.0 million. All proceeds from the Convertible Note were used to pay the $5.0 million 2013 Notes described above. See Note 5 - Notes Payable. The Convertible Note bears interest at 8% and matures on with two one year extensions at the Company's option.


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The Convertible Note is convertible into 3,333,333 shares of the Company's Class A common stock, based on initial conversion price of $1.50 per share. The Convertible Note is convertible at the option of the Lender, or the Company, at any time prior to payment in full of the principal balance, and all accrued interest on the Convertible Note in whole, or in part, into fully paid and non-assessable shares of Company's Class A common stock.

Upon conversion by the Lender, we may elect to settle such conversion in shares of our Class A common stock, cash or a combination thereof. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to APIC) of $270 thousand. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value similar non-convertible debt; the debt discount is being amortized as additional non-cash interest expense using the effective interest method over the term of the Note.

The $10.0 million note payable to Bison Global Investment SPC due is guaranteed by Bison Entertainment and Media Group ("BEMG"). On , the Company also entered into a side letter (the "Letter") with BEMG, where BEMG agreed to guarantee the payment directly to Bison Global of any amount due if (i) the 2018 Loan matures prior to or (ii) Bison Global demands payment of the 2018 Loan, in whole or in part, prior to maturity.

On , the Company and Bison Global Investment SPC for and on behalf of Global Investment SPC-Bison Global No. 1, another affiliate of Bison Global, entered into a Termination Agreement with respect to the 2018 Loan between them, pursuant to which the Company had borrowed from Bison Global $10.0 million. Pursuant to the Termination Agreement, the accrued and unpaid interest on such outstanding principal amount will be paid in cash to Bison Global no later than . Contemporaneously with the Termination Agreement, the Company entered into a Bison Convertible Note with Bison Global for $10.0 million.

The Bison Convertible Note has a term ending on , and bears interest at 5% per annum. The principal is payable upon maturity, in cash or in shares of Common Stock, or a combination of cash and Common Stock, at the Company's option.

The Bison Convertible Note is unsecured and may be prepaid without premium or penalty, and contains customary covenants, representations and warranties. The proceeds of the Bison Convertible Note were used to repay the 2018 Loan. The Bison Convertible Note, offset by the concurrent payoff and termination of the 2018 Loan, did not result in any increase to the Company's outstanding debt balance.

In addition, as discussed in more detail in Note 5 - Notes Payable, our debt obligations include certain financial and liquidity covenants and capital requirements, and from time to time, we may need to use available capital resources and raise additional capital to satisfy these covenants and requirements.


Cash Flows
                                                                For the Three Months Ended June
                                                                           30, 2019
($ in thousands)                                                    2019               2018
Net cash provided by operating activities                      $     4,015         $     5,315
Net cash used in investing activities                                 (252 )              (197 )
Net cash used in financing activities                               (5,493 )            (5,250 )
Net change in cash and cash equivalents                        $    (1,730 )       $      (132 )



As of , we had cash and restricted cash balances of $17.1 million.

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 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


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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 mainly consisted of purchases of property and equipment.

For the three months ended , cash flows used in financing activities reflects payments of $4.4 million for the 2013 Prospect Loan, and approximately $1.0 million for the Credit Facility.

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.

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, and CDF2 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 in CDF2 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.

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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