CIDM-12.31.12-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
 
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2012

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from --- to ---
 
Commission File Number: 000-31810
___________________________________

Cinedigm Digital Cinema Corp.
(Exact name of registrant as specified in its charter)
___________________________________
Delaware
 
22-3720962
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
902 Broadway, 9th Floor New York, NY
 
10010
(Address of principal executive offices)
 
(Zip Code)
(973) 290-0080
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
Yes x No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
Yes x No o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  x
 
 
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x

As of February 11, 2013, 48,340,369 shares of Class A Common Stock, $0.001 par value were outstanding.





CINEDIGM DIGITAL CINEMA CORP.
CONTENTS TO FORM 10-Q

 
Page 
PART I --
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
 
Condensed Consolidated Balance Sheets at December 31, 2012 (Unaudited) and March 31, 2012
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended December 31, 2012 and 2011
 
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended December 31, 2012 and 2011
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended December 31, 2012 and 2011
 
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4.
Controls and Procedures
PART II --
OTHER INFORMATION
Item 1.
Legal Proceedings
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
 
Exhibit Index
 



PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)

    
 
December 31, 2012
 
March 31, 2012
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
17,321

 
$
17,843

Restricted available-for-sale investments
—

 
9,477

Accounts receivable, net
38,538

 
24,502

Deferred costs, current portion
2,199

 
2,228

Unbilled revenue, current portion
7,982

 
7,510

Prepaid and other current assets
7,249

 
1,121

Note receivable, current portion
478

 
498

Assets held for sale
—

 
214

Total current assets
73,767

 
63,393

Restricted cash
5,751

 
5,751

Security deposits
241

 
207

Property and equipment, net
178,275

 
200,974

Intangible assets, net
14,439

 
466

Capitalized software costs, net
6,650

 
5,156

Goodwill
7,101

 
5,765

Deferred costs, net of current portion
3,481

 
5,080

Unbilled revenue, net of current portion
611

 
617

Accounts receivable, long-term
1,602

 
773

Note receivable, net of current portion
134

 
465

Investment in non-consolidated entity, net
2,830

 
1,490

Total assets
$
294,882

 
$
290,137


See accompanying notes to Unaudited Condensed Consolidated Financial Statements


3


CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
(continued)

    
 
 
December 31, 2012
 
March 31, 2012
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
(Unaudited)
 
 
Current liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
42,983

 
$
20,854

Current portion of notes payable, non-recourse
 
33,562

 
35,644

Current portion of capital leases
 
230

 
186

Current portion of deferred revenue
 
4,556

 
3,677

Current portion of contingent consideration for business combination
 
750

 
—

Liabilities as part of assets held for sale
 
—

 
75

Total current liabilities
 
82,081

 
60,436

Notes payable, non-recourse, net of current portion
 
103,726

 
135,345

Notes payable
 
94,442

 
87,354

Capital leases, net of current portion
 
5,051

 
5,244

Interest rate swaps
 
750

 
1,771

Deferred revenue, net of current portion
 
11,464

 
11,451

Contingent consideration, net of current portion
 
3,094

 
—

Customer security deposits, net of current portion
 
—

 
9

Total liabilities
 
300,608

 
301,610

Commitments and contingencies (see Note 7)
 
 
 
 
Stockholders’ Deficit
 
 
 
 
Preferred stock, 15,000,000 shares authorized;
Series A 10% - $0.001 par value per share; 20 shares authorized; 7 shares issued and outstanding at December 31, 2012 and March 31, 2012, respectively. Liquidation preference of $3,589
 
3,439

 
3,357

Class A common stock, $0.001 par value per share; 118,759,000 and 75,000,000 shares authorized; 48,446,468 and 37,722,927 shares issued and 48,395,028 and 37,671,487 shares outstanding at December 31, 2012 and March 31, 2012, respectively
 
48

 
38

Class B common stock, $0.001 par value per share; 1,241,000 and 15,000,000 shares authorized; 1,241,000 and 1,241,000 shares issued and 0 and 25,000 shares outstanding, at December 31, 2012 and March 31, 2012, respectively
 
—

 
—

Additional paid-in capital
 
221,817

 
206,348

Treasury stock, at cost; 51,440 Class A shares
 
(172
)
 
(172
)
Accumulated deficit
 
(230,858
)
 
(221,044
)
Total stockholders’ deficit
 
(5,726
)
 
(11,473
)
Total liabilities and stockholders’ deficit
 
$
294,882

 
$
290,137


See accompanying notes to Unaudited Condensed Consolidated Financial Statements

4


CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(Unaudited)
    
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
2012
 
2011
 
2012
 
2011
Revenues
$
23,212

 
$
19,793

 
$
66,725

 
$
58,862

Costs and expenses:
 
 
 
 
 
 
 
Direct operating (exclusive of depreciation and amortization shown below)
3,169

 
2,104

 
8,532

 
5,394

Selling, general and administrative
6,265

 
4,303

 
18,464

 
11,784

Provision for doubtful accounts
72

 
—

 
226

 
—

Research and development
38

 
72

 
112

 
162

Merger and acquisition expenses
—

 
—

 
1,267

 
—

Restructuring expenses
—

 
832

 
340

 
832

Depreciation and amortization of property and equipment
9,155

 
8,996

 
27,372

 
26,719

Amortization of intangible assets
739

 
84

 
1,120

 
253

Total operating expenses
19,438

 
16,391

 
57,433

 
45,144

Income from operations
3,774

 
3,402

 
9,292

 
13,718

Interest income
2

 
21

 
20

 
96

Interest expense
(6,690
)
 
(7,603
)
 
(21,444
)
 
(22,543
)
Income (loss) on investment in non-consolidated entity
678

 
(343
)
 
1,340

 
(343
)
Other income, net
103

 
175

 
494

 
606

Change in fair value of interest rate swap
349

 
597

 
1,025

 
29

Net loss from continuing operations
(1,784
)
 
(3,751
)
 
(9,273
)
 
(8,437
)
Loss from discontinued operations
—

 
(6,889
)
 
(274
)
 
(8,826
)
Net loss
(1,784
)
 
(10,640
)
 
(9,547
)
 
(17,263
)
Preferred stock dividends
(89
)
 
(89
)
 
(267
)
 
(267
)
Net loss attributable to common stockholders
$
(1,873
)
 
$
(10,729
)
 
$
(9,814
)
 
$
(17,530
)
Net loss per Class A and Class B common share - basic and diluted:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.03
)
 
$
(0.10
)
 
$
(0.20
)
 
$
(0.24
)
Loss from discontinued operations
$
—

 
$
(0.18
)
 
$
(0.01
)
 
$
(0.25
)
 
$
(0.03
)
 
$
(0.28
)
 
$
(0.21
)
 
$
(0.49
)
Weighted average number of Class A and Class B common shares outstanding: Basic and diluted
48,320,257

 
37,620,287

 
47,254,337

 
35,800,878


See accompanying notes to Unaudited Condensed Consolidated Financial Statements

5


CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

 
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
 
2012
 
2011
 
2012
 
2011
Net loss
 
$
(1,784
)
 
$
(10,640
)
 
$
(9,547
)
 
$
(17,263
)
Other comprehensive income: Unrealized gains on available-for-sale investment securities
 
—

 
—

 
—

 
95

Comprehensive loss
 
$
(1,784
)
 
$
(10,640
)
 
$
(9,547
)
 
$
(17,168
)

See accompanying notes to Unaudited Condensed Consolidated Financial Statements


6


CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
    
 
For the Nine Months Ended December 31,
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net loss
$
(9,547
)
 
$
(17,263
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Gain on disposal of business
—

 
3,696

Depreciation and amortization of property and equipment and
     amortization of intangible assets
28,492

 
29,840

Amortization of capitalized software costs
829

 
494

Impairment of assets
—

 
800

Amortization of debt issuance costs
1,671

 
1,610

Provision for doubtful accounts
226

 
561

Stock-based compensation and expenses
1,832

 
2,246

Change in fair value of interest rate swaps
(1,025
)
 
(29
)
Realized loss on restricted available-for-sale investments
—

 
117

PIK interest expense added to note payable
5,657

 
5,226

(Income) loss on investment in non-consolidated entity
(1,340
)
 
343

Accretion of note payable
1,646

 
1,849

Changes in operating assets and liabilities, net of acquisition:
 
 
 
     Accounts receivable
(6,096
)
 
(8,854
)
     Unbilled revenue
(464
)
 
(1,669
)
     Prepaid expenses and other current assets
(5,138
)
 
(87
)
     Other assets
331

 
1,277

     Accounts payable and accrued expenses
6,630

 
7,750

     Deferred revenue
577

 
1,912

     Other liabilities
(290
)
 
(68
)
Net cash provided by operating activities
23,991

 
29,751

Cash flows from investing activities:
 
 
 
Purchase of New Video Group, Inc., net of cash acquired of $6,873
(3,127
)
 
—

Purchases of property and equipment
(4,354
)
 
(16,916
)
Purchases of intangible assets
(29
)
 
(35
)
Additions to capitalized software costs
(2,323
)
 
(1,632
)
Net proceeds from disposal of business
—

 
6,497

Sales/maturities of restricted available-for-sale investments
9,477

 
2,681

Purchase of restricted available-for-sale investments
—

 
(5,793
)
Investment in non-consolidated entity
—

 
(2,000
)
Restricted cash
—

 
(2
)
Net cash used in investing activities
(356
)

(17,200
)
Cash flows from financing activities:
 
 
 
Repayment of notes payable
(37,383
)
 
(29,007
)
Proceeds from notes payable
3,469

 
15,795

Principal payments on capital leases
(132
)
 
(97
)
Proceeds from issuance of Class A common stock
11,002

 
7,070

   Costs associated with issuance of Class A common stock
(1,113
)
 
(446
)
Net cash used in financing activities
(24,157
)

(6,685
)
Net change in cash and cash equivalents
(522
)
 
5,866

Cash and cash equivalents at beginning of period
17,843

 
10,748

Cash and cash equivalents at end of period
$
17,321

 
$
16,614


See accompanying notes to Unaudited Condensed Consolidated Financial Statements

7


CINEDIGM DIGITAL CINEMA CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012
($ in thousands, except for share and per share data)
(Unaudited)

1.
NATURE OF OPERATIONS

Cinedigm Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 (“Cinedigm”, and collectively with its subsidiaries, the “Company”).

The Company is a digital cinema services, software and content marketing and distribution company supporting and capitalizing on the conversion of the exhibition industry from film to digital technology and the accelerating shift in the home entertainment market to digital and video-on-demand services from physical goods such as DVDs.  The Company provides a digital cinema platform that combines technology solutions, financial advice and guidance, and software services to content owners and distributors and to movie exhibitors.  Cinedigm leverages this digital cinema platform with a series of business applications that utilize the platform to capitalize on the new business opportunities created by the transformation of movie theatres into networked entertainment centers.  The two main applications provided by Cinedigm include (i) its end-to-end digital entertainment content acquisition, marketing and distribution business focused on the distribution of alternative content and independent film in theatrical and ancillary home entertainment markets; and (ii) its operational, analytical and transaction processing software applications.  Historically, the conversion of an industry from analog to digital has created new revenue and growth opportunities as well as an opening for new players to emerge to capitalize on this technological shift.

The Company reports its financial results in four primary segments as follows: (1) the first digital cinema deployment (“Phase I Deployment”), (2) the second digital cinema deployment (“Phase II Deployment”), (3) digital cinema services (“Services”) and (4) media content and entertainment (“Content & Entertainment”).  The Phase I Deployment and Phase II Deployment segments are the non-recourse, financing vehicles and administrators for the Company's digital cinema equipment (the “Systems”) installed in movie theatres nationwide.  The Services segment provides services, software and support to the Phase I Deployment and Phase II Deployment segments as well as directly to exhibitors and other third party customers.  Included in these services are asset management services for a specified fee via service agreements with Phase I Deployment and Phase II Deployment as well as third party exhibitors as buyers of their own digital cinema equipment; and software license, maintenance and consulting services to Phase I and Phase II Deployment, various other exhibitors, studios and other content organizations.  These services primarily facilitate the conversion from analog to digital cinema and have positioned the Company at what it believes to be the forefront of a rapidly developing industry relating to the distribution and management of digital cinema and other content to theatres and other remote venues worldwide.  The Content & Entertainment segment, which includes our newly acquired wholly-owned subsidiary New Video Group, Inc. ("New Video") as described below, provides content marketing and distribution services in both theatrical and ancillary home entertainment markets to alternative and independent film content owners and to theatrical exhibitors.

Purchase of New Video Group, Inc.

On April 19, 2012, the Company entered into a stock purchase agreement for the purchase of all of the issued and outstanding capital stock of New Video, an independent home entertainment distributor of quality packaged goods entertainment and digital content that provides distribution services in the DVD, BD, Digital and VOD channels for more than 500 independent rights holders (the “New Video Acquisition”). The Company agreed to pay $10.0 million in cash and 2,525,417 shares of Class A common stock at $1.51 per share, subject to certain transfer restrictions, plus up to an additional $6.0 million in cash or Class A common stock, at the Company’s discretion, if certain business unit financial performance targets are met during the fiscal years ended March 31, 2013, 2014 and 2015. In addition, the Company has agreed to register the resale of the shares of Class A common stock paid as part of the purchase price. The New Video Acquisition was consummated on April 20, 2012. The Company is currently in the process of finalizing the fair value of assets acquired and liabilities assumed. Merger and acquisition expenses, consisting primarily of professional fees, directly related to the New Video Acquisition totaled $1.9 million, of which $1.3 million was incurred during the three months ended June 30, 2012.
The results of operations of New Video have been included in the accompanying condensed consolidated statements of operations from the date of the acquisition within the Company's Content & Entertainment segment. The total amount of revenues and net income of New Video since the acquisition date that have been included in the condensed consolidated statements of operations for the nine months ended December 31, 2012 was approximately $10.0 million and $1.6 million, respectively.
The aggregate purchase price after post-closing adjustments for 100% of the equity of New Video was $17.6 million, including cash acquired of $6.9 million.

8


The purchase price has been preliminarily allocated to the identifiable net assets acquired as follows pending management's final valuation of the fair value of the net assets acquired as of the date of acquisition:
Cash and cash equivalents
 
$
6,873

Accounts receivable
 
8,983

Other assets
 
1,142

Intangible assets subject to amortization
 
15,064

Goodwill
 
1,336

Total assets acquired
 
33,398

Less: Total liabilities assumed
 
(15,763
)
Total net assets acquired
 
$
17,635

The preliminary estimated fair value of the accounts receivable acquired was $8,983. The Company has estimated that all of the accounts receivable will be collected.
Of the preliminary estimate of $15,064 of intangible assets subject to amortization, $11,595 was preliminarily assigned to customer relationships with a useful life of 15 years, $1,913 was preliminarily assigned to a content library with a useful life of five years, $1,296 was preliminarily assigned to a favorable lease with a useful life of approximately five years and $260 was preliminarily assigned to covenants not to compete with a useful life of two years. Upon finalization of the allocations, the amortization impact, if any, on any individual quarter, is not expected to be material.

Pro forma Information Related To the Acquisition of New Video (Unaudited)
The following unaudited supplemental pro forma consolidated summary operating data for the three and nine months ended December 31, 2011 has been prepared by adjusting the historical data as set forth in the accompanying condensed consolidated statements of operations for the three and nine months ended December 31, 2011 to give effect to the acquisition of New Video as if it had occurred at April 1, 2011. As the acquisition of New Video was consummated near the beginning of the three months ended June 30, 2012, the difference between actual operating results and pro forma results for the nine months ended December 31, 2012 is not substantial.
 
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
 
2012
 
2011
 
2012
 
2011
Revenue
 
$
23,212

 
$
24,729

 
$
66,725

 
$
69,038

Operating income
 
$
3,774

 
$
5,457

 
$
9,292

 
$
15,815

Net loss
 
$
(1,784
)
 
$
(8,585
)
 
$
(9,547
)
 
$
(15,166
)
 
 
 
 
 
 
 
 
 
Net loss per share (basic and diluted)
 
$
(0.03
)
 
$
(0.23
)
 
$
(0.21
)
 
$
(0.42
)

This unaudited pro forma information is provided for informational purposes only and does not purport to be indicative of the results of operations that would have occurred if the acquisition had been completed on the date set forth above, nor is it necessarily indicative of the future operating results.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION

The Company has incurred net losses historically and has an accumulated deficit of $230,858 as of December 31, 2012. The Company also has significant contractual obligations related to its recourse and non-recourse debt for the fiscal year ended March 31, 2013 and beyond. The Company may continue to generate net losses for the foreseeable future. Based on the Company’s cash position at December 31, 2012, and expected cash flows from operations, management believes that the Company has the ability to meet its obligations through at least December 31, 2013. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on the Company’s financial position, results of operations or liquidity.


9


The Company’s condensed consolidated financial statements include the accounts of Cinedigm, Access Digital Media, Inc. (“AccessDM”), Hollywood Software, Inc. d/b/a Cinedigm Software (“Software”), Core Technology Services, Inc. (“Managed Services”) (sold in August 2010), FiberSat Global Services, Inc. d/b/a Cinedigm Satellite and Support Services (“Satellite”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre (certain assets and liabilities sold in May 2011), Christie/AIX, Inc. d/b/a Cinedigm Digital Cinema (“Phase 1 DC”), USM (sold in September 2011), Vistachiara Productions, Inc. f/k/a The Bigger Picture, currently d/b/a Cinedigm Content and Entertainment Group, New Video, Access Digital Cinema Phase 2 Corp. (“Phase 2 DC”), Cinedigm Digital Cinema Australia Pty Ltd, Access Digital Cinema Phase 2 B/AIX Corp. (“Phase 2 B/AIX”) and Cinedigm Digital Funding I, LLC (“CDF I”). Content and Entertainment Group and New Video are together referred to as CEG. AccessDM and Satellite are together referred to as the DMS (the majority of which was sold in November, 2011 and remaining assets of which were sold in May 2012). All intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated balance sheet as of March 31, 2012, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements were prepared following the interim reporting requirements of the Securities and Exchange Commission (“SEC”). They do not include all disclosures normally made in financial statements contained in the Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of financial position, the results of operations and cash flows in accordance with U.S. generally accepted accounting principles (“GAAP”) for the periods presented have been made. The results of operations for the respective interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012 filed with the SEC on June 18, 2012 (the “Form 10-K”).

INVESTMENT IN NON-CONSOLIDATED ENTITY

The Company indirectly owns 100% of the common equity of CDF2 Holdings, LLC, ("Holdings"), which is a Variable Interest Entity (“VIE”), as defined in Accounting Standards Codification Topic 810 ("ASC 810"), “Consolidation". The Company has determined that it is not the primary beneficiary of Holdings in accordance with ASC 810, and it is accounting for its investment in Holdings under the equity method of accounting. The Company's net investment in Holdings is reflected as “Investment in non-consolidated entity, net" in the accompanying condensed consolidated balance sheets. See Note 4 for further discussion.

RECLASSIFICATION

Certain reclassifications, principally for discontinued operations (see Note 3) have been made to the fiscal year ended March 31, 2012 financial statements to conform to the current fiscal year ending March 31, 2013 presentation.

USE OF ESTIMATES

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include the adequacy of accounts receivable reserves, assessment of goodwill and intangible asset impairment and valuation reserve for income taxes, among others. Actual results could differ from these estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of three months or less to be “cash equivalents.” The Company maintains bank accounts with major banks, which from time to time may exceed the Federal Deposit Insurance Corporation’s insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.


10


RESTRICTED AVAILABLE-FOR-SALE INVESTMENTS
In connection with $172,500 of term loans issued in May 2010 (See Note 5), the sale of USM in September 2011 and the sale of the majority of assets of DMS in November 2011 (See Note 3), the Company segregated $9,477 of the combined proceeds received in the transactions into an account to be used with the approval of the 2010 Noteholder either (i) to support an acquisition by the Company; or (ii) to repay the 2010 Note. During the three months ended June 30, 2012, these funds were released from restricted available-for-sale investments and used to finance a portion of the cost of the acquisition of the New Video Acquisition in April 2012 (See Note 1).

ACCOUNTS RECEIVABLE

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes 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. Allowance for doubtful accounts amounted to $448 and $257 as of December 31, 2012 and March 31, 2012, respectively.

Accounts receivable, long-term result from up-front activation fees with extended payment terms that are discounted to their present value at prevailing market rates.

RESTRICTED CASH

In connection with the 2010 Term Loans issued in May 2010 (See Note 5), the Company maintains cash restricted for repaying interest on the 2010 Term Loans, as follows:

 
 
As of December 31, 2012
 
As of March 31, 2012
Reserve account related to the 2010 Term Loans (See Note 5)
 
$
5,751

 
$
5,751


DEFERRED COSTS

Deferred costs primarily consist of unamortized debt issuance costs which are amortized on a straight-line basis over the term of the respective debt.  The straight-line basis is not materially different from the effective interest method.  

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. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Maintenance and repair 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 condensed consolidated statements of operations.
 
ACCOUNTING FOR DERIVATIVE ACTIVITIES

Derivative financial instruments are recorded at fair value.  In May 2010, the Company settled the interest rate swap in place with respect to its previous credit facility.  In June 2010, the Company executed three separate interest rate swap agreements (the “Interest Rate Swaps”) to limit the Company’s exposure to changes in interest rates related to the 2010 Term Loans.  Changes in fair value of derivative financial instruments are either recognized in accumulated other comprehensive loss (a component of stockholders' equity (deficit)) or in the condensed consolidated statements of operations depending on whether the derivative qualifies for hedge accounting.  The Company has not sought hedge accounting treatment for these instruments and therefore, changes in the value of its Interest Rate Swaps were recorded in the condensed consolidated statements of operations (See Note 5).


11


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 the Company’s own assumptions in determining the fair value of investments)
 
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.

The following tables summarize the levels of fair value measurements of the Company’s financial assets:

 
 
As of December 31, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
17,321

 
$
—

 
$
—

 
$
17,321

Restricted cash
 
5,751

 
—

 
—

 
5,751

Interest rate swap
 
—

 
(750
)
 
—

 
(750
)
Contingent consideration
 
—

 
—

 
(3,844
)
 
(3,844
)
 
 
$
23,072

 
$
(750
)
 
$
(3,844
)
 
$
18,478


 
 
As of March 31, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
17,843

 
$
—

 
$
—

 
$
17,843

Restricted available-for-sale investments
 
9,477

 
—

 
—

 
9,477

Restricted cash
 
5,751

 
—

 
—

 
5,751

Interest rate swap
 
—

 
(1,771
)
 
—

 
(1,771
)
 
 
$
33,071

 
$
(1,771
)
 
$
—

 
$
31,300

Contingent consideration is a liability to the sellers of New Video based upon its business unit financial performance target in each of the fiscal years ended March 31, 2013, 2014 and 2015 (see Note 1). The preliminary estimates of the fair value of the contingent consideration arrangement was estimated by using the current forecast of New Video adjusted EBITDA, as defined by the New Video stock purchase agreement. That measure is based on significant inputs that are not observable in the market, which are considered Level 3 inputs.
The following summarized changes in contingent consideration liabilities in during the nine months ended December 31, 2012:
Balance at March 31, 2012
 
$
—

Contingent consideration
 
3,844

Balance at December 31, 2012
 
$
3,844


Key assumptions include a discount rate of 8% and that New Video will achieve 100% of its business unit financial performance target in each of the three fiscal years described above, resulting in a payment of 75% of the maximum contingent consideration amount described in Note 1. As of December 31, 2012, the amount recognized for the contingent consideration arrangements, the range of outcomes, and the assumptions used to develop the estimate had not changed.

IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS

The Company reviews the recoverability of its long-lived assets and finite-lived intangible assets, when events or conditions exist that indicate a possible impairment exists. The assessment for recoverability is based primarily on the Company’s ability to recover the carrying value of its 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 assets the asset is deemed not to be recoverable and

12


possibly impaired.  The Company then estimates the fair value of the asset to determine whether an impairment loss should be recognized.  An impairment loss will be recognized if the difference between the fair value and the carrying value of the asset exceeds its fair value.  Fair value is determined by computing the expected future discounted cash flows.  During the three and nine months ended December 31, 2012 and 2011, no impairment charge from continuing operations for long-lived assets was recorded.

GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill and intangible assets with indefinite lives are not amortized; rather, they are tested for impairment on at least an annual basis.

The Company’s process of evaluating goodwill for impairment involves the determination of fair value of its goodwill reporting units: Software and CEG.  The Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year, measured as of March 31, unless triggering events occur which require goodwill to be tested at another date. As discussed in Note 1, goodwill increased as a result of the New Video Acquisition. During the three and nine months ended December 31, 2012 and 2011, no impairment charge was recorded for goodwill related to the Company's continuing operations.

For further details on the Company's process for evaluating goodwill for impairment, refer to the Form 10-K. Information related to the goodwill allocated to the Company is detailed below:
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
As of March 31, 2012
 
$
—

 
$
—

 
$
4,197

 
$
1,568

 
$
—

 
$
5,765

Goodwill resulting from the New Video Acquisition
 
—

 
—

 
—

 
1,336

 
—

 
1,336

As of December 31, 2012
 
$
—

 
$
—

 
$
4,197

 
$
2,904

 
$
—

 
$
7,101



REVENUE RECOGNITION

Phase I Deployment and Phase II Deployment

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

Phase 2 DC’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as defined in the agreements, is achieved.  Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including the Company’s service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter, plus a compounded return on any billed but unpaid overhead and ongoing costs, of 15% per year.  Further, if cost recoupment occurs before the end of the eighth contract year, a one-time “cost recoupment bonus” is payable by the studios to the Company.  Any other cash flows, net of expenses, received by Phase 2 DC following the achievement of cost recoupment are required to be returned to the distributors on a pro-rata basis. At this time, the Company cannot estimate the timing or probability of the achievement of cost recoupment.

Alternative content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors, whereby amounts are payable to Phase 1 DC, CDF I and to Phase 2 DC, generally either a fixed amount or as a percentage of the applicable box office revenue derived from the exhibitor’s showing of content other than feature films, such as concerts and sporting events (typically referred to as “alternative content”). ACF revenue is recognized in the period in which the alternative content first opens for audience viewing.


13


Revenues are deferred for up front exhibitor contributions and are recognized over the cost recoupment period, which is a period of ten years.

Services

For software multi-element licensing arrangements that do not require significant production, modification or customization of the licensed software, revenue is recognized for the various elements as follows: revenue for the licensed software element is recognized upon delivery and acceptance of the licensed software product, as that represents the culmination of the earnings process and the Company has no further obligations to the customer, relative to the software license. Revenue earned from consulting services is recognized upon the performance and completion of these services. Revenue earned from annual software maintenance is recognized ratably over the maintenance term (typically one year).

Revenue is deferred in cases where:  (1) a portion or the entire contract amount cannot be recognized as revenue, due to non-delivery or pre-acceptance of licensed software or custom programming, (2) uncompleted implementation of application service provider arrangements (“ASP Service”), or (3) unexpired pro-rata periods of maintenance, minimum ASP Service fees or website subscription fees. As license fees, maintenance fees, minimum ASP Service fees and website subscription fees are often paid in advance, a portion of this revenue is deferred until the contract ends. Such amounts are classified as deferred revenue and are recognized as earned revenue in accordance with the Company’s revenue recognition policies described above.

Exhibitors who will purchase and own Systems using their own financing in the Phase II Deployment, will pay an upfront activation fee that is generally $2 thousand per screen to the Company (the “Exhibitor-Buyer Structure”).  These upfront activation fees are recognized in the period in which these exhibitor owned Systems are ready for content, as the Company has no further obligations to the customer, and are generally paid quarterly from VPF revenues over approximately one year.  Additionally, the Company recognizes activation fee revenue of between $1 thousand and $2 thousand on Phase 2 DC Systems and for Systems installed by Holdings upon installation and are generally collected upfront upon installation. The Company will then manage the billing and collection of VPFs and will remit all VPFs collected to the exhibitors, less an administrative fee that will approximate up to 10% of the VPFs collected.

The administrative fee related to the Phase I Deployment approximates 5% of the VPFs collected. This administrative fee is recognized in the period in which the billing of VPFs occurs, as performance obligations have been substantially met at that time.

Content & Entertainment

CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video-on-demand, and physical goods (e.g. DVD and Blu-Ray Disc). The fee rate earned by the Company varies depending upon the nature of the agreements with the platform and content providers. Generally, revenues are recognized at the availability date of the content for a subscription digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and video-on-demand services.
CEG also has contracts for the theatrical distribution of third party feature films and alternative content. CEG’s distribution fee revenue and CEG's participation in box office receipts is recognized at the time a feature film and alternative content is 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 films’ or alternative content’s theatrical release date.

DIRECT OPERATING COSTS

Direct operating costs consist of facility operating costs such as rent, utilities, real estate taxes, repairs and maintenance, insurance and other related expenses, direct personnel costs, and amortization of capitalized software development costs.

STOCK-BASED COMPENSATION

During the three months ended December 31, 2012 and 2011, the Company recorded employee stock-based compensation from continuing operations expense of $513 and $561, respectively.  During the nine months ended December 31, 2012 and 2011, the Company recorded employee stock-based compensation from continuing operations expense of $1,527 and $1,479, respectively.

The weighted-average grant-date fair value of options granted during the three months ended December 31, 2012 and 2011 was $0.88 and $1.37, respectively.  The weighted-average grant-date fair value of options granted during the nine months ended

14


December 31, 2012 and 2011 was $0.92. There were no stock options exercised during the three and nine months ended December 31, 2012 and 2011.
 
The Company estimated the fair value of stock options at the date of each grant using a Black-Scholes option valuation model with the following assumptions:
 
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
Assumptions for Option Grants
 
2012
 
2011
 
2012
 
2011
Range of risk-free interest rates
 
0.6 - 0.7%

 
0.9 - 2.1%

 
0.6 - 0.9%

 
0.9 - 2.1%

Dividend yield
 
—

 
—

 
—

 
—

Expected life (years)
 
5

 
5

 
5

 
5

Range of expected volatilities
 
 74.5 - 75.2%

 
76.7 - 78.2%

 
74.5 - 76.2%

 
76.7 - 78.1%


The risk-free interest rate used in the Black-Scholes option pricing model for options granted under the Company’s stock option plan awards is the historical yield on U.S. Treasury securities with equivalent remaining lives. The Company does not currently anticipate paying any cash dividends on common stock in the foreseeable future. Consequently, an expected dividend yield of zero is used in the Black-Scholes option pricing model.  The Company estimates the expected life of options granted under the Company’s stock option plans using both exercise behavior and post-vesting termination behavior, as well as consideration of outstanding options.   The Company estimates expected volatility for options granted under the Company’s stock option plans based on a measure of historical volatility in the trading market for the Company’s common stock.

Employee stock-based compensation expense related to the Company’s stock-based awards was as follows:
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
2012
 
2011
 
2012
 
2011
Direct operating
$
18

 
$
11

 
$
66

 
$
32

Selling, general and administrative
457

 
481

 
1,350

 
1,304

Research and development
38

 
69

 
111

 
143

 
$
513

 
$
561

 
$
1,527

 
$
1,479


NET LOSS PER SHARE

Basic and diluted net loss per common share has been calculated as follows:

Basic and diluted net loss per common share =
Net loss + preferred dividends
 
Weighted average number of common stock
 outstanding during the period

Shares issued and any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.

The Company incurred net losses for each of the three and nine months ended December 31, 2012 and 2011 and, therefore, the impact of dilutive potential common shares from outstanding stock options and warrants, totaling 20,766,397 shares and 25,375,245 shares as of December 31, 2012 and 2011, respectively, were excluded from the computation as it would be anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Standards
In July 2012, the Financial Accounting Standards Board ("FASB") issued a new accounting standard update, which amends guidance allowing an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite – lived intangible asset is impaired. This assessment should be used as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity would not be required to calculate the fair value of the intangible asset and perform the quantitative test unless the entity determines, based upon its qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The update provides further guidance

15


of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite – lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. This update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. The Company adopted this standard on October 1, 2012. The adoption of this standard did not have a material impact on the condensed consolidated financial statements and disclosures.
In October 2012, the FASB issued a new accounting standard update, which aligns the guidance on fair value measurements in the impairment test of unamortized film costs with the guidance on fair value measurements in other instances within GAAP. The amendments in this update eliminate certain requirements related to an impairment assessment of unamortized film costs and clarify when unamortized film costs should be assessed for impairment. This update does not add any new guidance to the FASB's codification for Entertainment - Films. This update is effective for the Company's impairment assessments performed on or after December 15, 2012. The Company adopted this standard on January 1, 2013. The adoption of this standard did not have a material impact on the condensed consolidated financial statements and disclosures.

3.
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

USM had contracts with exhibitors to display pre-show advertisements on their screens, in exchange for certain fees paid to the exhibitors. USM then contracted with businesses of various types to place their advertisements in select theatre locations, designed the advertisement, and placed it on-screen for specific periods of time, generally ranging from three to twelve months.  The Company determined that this business did not meet its strategic plan and sold USM in September 2011 for $6,000, before transaction expenses of $226, and recognized a gain on the sale of $846 for the fiscal year ended March 31, 2012. USM was formerly part of the Content & Entertainment segment.

In November 2011, pursuant to an asset purchase agreement, the Company sold to a third party the majority of assets of Cinedigm's physical and electronic distribution business and trailer distribution business for $1,000 before transaction expenses of $277, and recognized a loss on the sale of $4,606 for the fiscal year ended March 31, 2012. Concurrently on completion of this transaction, the Company classified $200 of net assets of its non-theatrical DMS business which were not sold as part of this transaction as held for sale and classified these assets as discontinued operations which the Company intended to sell within the next twelve months. These DMS non-theatrical assets were written down in value by $800 during the fiscal year ended March 31, 2012. DMS was formerly part of the Services segment.

In May 2012, pursuant to an asset purchase agreement, the Company sold to a third party the remaining net assets of its non-theatrical DMS business for $200. The Company did not recognize a gain or loss on the sale during the three months ended June 30, 2012. In connection with the sale and in consideration of other payments made by the Company on behalf of the buyer, the Company received a secured promissory note from the third party for $260 representing the sale proceeds and other amounts advanced by the Company on behalf of the third party. The promissory note, which bears interest of 5% per annum, was originally due on October 19, 2012 and has an outstanding balance of $152 as of December 31, 2012. The promissory note will now be satisfied in exchange for cash payments and services with the third party through December 31, 2013.

With the sale of the remaining net assets of its non-theatrical DMS business, there are no assets or liabilities held for sale as of December 31, 2012. The assets and liabilities held for sale as of March 31, 2012 were comprised of the following:
 
 
As of March 31, 2012
Accounts receivable, net and notes receivable
 
$
14

Property and equipment, net
 
200

Assets held for sale
 
$
214

Accounts payable and accrued expenses
 
$
75

Liabilities as part of assets held for sale
 
$
75


For the three and nine months ended December 31, 2012, the loss from discontinued operations is comprised of DMS. There is no tax provision or benefit related to any of the discontinued operations. For the three and nine months ended December 31, 2011, the loss from discontinued operations is comprised of USM, DMS and the Pavilion Theatre. The loss from discontinued operations was as follows:

16


    
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
2012
 
2011
 
2012
 
2011
Revenues
$
—

 
$
904

 
$
67

 
$
11,236

Costs and Expenses:
 
 
 
 
 
 
 
Direct operating (exclusive of depreciation and amortization shown below)
—

 
642

 
178

 
7,902

Selling, general and administrative
—

 
995

 
107

 
3,989

Provision for doubtful accounts
—

 
390

 
36

 
561

Stock-based compensation
—

 
23

 
—

 
63

Impairment of assets
—

 
800

 
—

 
800

Depreciation of property and equipment
—

 
345

 
—

 
1,957

Amortization of intangible assets
—

 
1

 
—

 
912

Total operating expenses
—

 
3,196

 
321

 
16,184

Loss from operations
—

 
(2,292
)
 
(254
)
 
(4,948
)
Interest expense
—

 
—

 
—

 
(185
)
Other expense, net
—

 
9

 
(20
)
 
3

Gain on disposal
—

 
(4,606
)
 
—

 
(3,696
)
Loss from discontinued operations
$
—

 
$
(6,889
)
 
$
(274
)
 
$
(8,826
)


4. INVESTMENT IN NON-CONSOLIDATED ENTITY
 
Investment in Holdings
 
As discussed in Note 2, Holdings, a subsidiary of Access Digital Cinema Phase 2, Corp. ("ADCP2"), which is wholly owned by the Company, and its wholly owned limited liability company, Cinedigm Digital Funding 2, LLC, were created for the purpose of capitalizing on the conversion of the exhibition industry from film to digital technology. Holdings assists customers in procuring the necessary equipment in the conversion of their Systems by providing the necessary financing, equipment, installation and related ongoing services. Holdings is a VIE, as defined in ASC 810, indirectly wholly owned by the Company. ASC 810 requires the consolidation of VIEs by an entity that has a controlling financial interest in the VIE which entity is thereby defined as the primary beneficiary of the VIE. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, among other factors. Although Holdings is indirectly wholly owned by the Company, a third party, which also has a variable interest in Holdings, along with an independent third party manager and the Company must mutually approve all business activities and transactions that significantly impact Holdings' economic performance. The Company has thus assessed its variable interests in Holdings and determined that it is not the primary beneficiary of Holdings and therefore accounts for its investment in Holdings under the equity method of accounting. In completing our assessment, the Company identified the activities that it considers most significant to the economic performance of Holdings and determined that we do not have the power to direct those activities. As a result, Holdings' financial position and results of operations are not consolidated in the financial position and results of operations of the Company.
The Company's maximum exposure to loss as it relates to Holdings as of December 31, 2012 includes:

•
The investment in the equity of Holdings of $2,830; and
•
Accounts receivable due from Holdings for service fees under its master service agreement of $610.

During the three and nine months ended December 31, 2012, the Company received $434 and $1,328 in aggregate revenues through digital cinema servicing fees from Holdings, respectively, included in revenues on the accompanying condensed consolidated statements of operations. During the three and nine months ended December 31, 2011, the Company received $248 in aggregate revenues through digital cinema servicing fees from Holdings, respectively, included in revenues on the accompanying condensed consolidated statements of operations.


17


The changes in the carrying amount of our investment in Holdings for the nine months ended December 31, 2012 are as follows:
Balance at March 31, 2012
 
$
1,490

Equity contributions
 
—

Equity in income of Holdings
 
1,340

Balance at December 31, 2012
 
$
2,830


5.
NOTES PAYABLE

Notes payable consisted of the following:
 
 
As of December 31, 2012
 
As of March 31, 2012
Notes Payable
 
Current Portion
 
Long Term Portion
 
Current Portion
 
Long Term Portion
2010 Term Loans, net of debt discount
 
$
25,300

 
$
65,353

 
$
24,151

 
$
93,399

KBC Facilities
 
8,095

 
37,534

 
11,339

 
40,929

P2 Vendor Note
 
104

 
492

 
94

 
623

P2 Exhibitor Notes
 
63

 
347

 
60

 
394

Total non-recourse notes payable
 
$
33,562

 
$
103,726

 
$
35,644

 
$
135,345

 
 
 
 
 
 
 
 
 
2010 Note, net of debt discount
 
$
—

 
$
94,442

 
$
—

 
$
87,354

Total recourse notes payable
 
$
—

 
$
94,442

 
$
—

 
$
87,354

Total notes payable
 
$
33,562

 
$
198,168

 
$
35,644

 
$
222,699


Non-recourse debt is generally defined as debt whereby the lenders’ sole recourse with respect to defaults by the Company is limited to the value of the asset collateralized by the debt.  The 2010 Term Loans are not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC. The KBC Facilities, the P2 Vendor Note and the P2 Exhibitor Notes are not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.

In August 2009, the Company entered into a securities purchase agreement (the “Sageview Purchase Agreement”) with an affiliate of Sageview Capital LP (“Sageview” or the “Purchaser”) pursuant to which the Company agreed to issue a Senior Secured Note (the “2009 Note”) in the aggregate principal amount of $75,000 and warrants (the “Sageview Warrants”) to purchase 16,000,000 shares of its Class A Common Stock (the “2009 Private Placement”).  The 2009 Note was later amended and restated on May 6, 2010 (as so amended and restated, the “2010 Note”).  The balance of the 2010 Note, net of the discount associated with the issuance of the Sageview Warrants and the interest of 8% per annum on the 2010 Note to be accrued as an increase in the aggregate principal amount of the 2010 Note (“PIK Interest”), was as follows:
    
 
As of December 31, 2012
 
As of March 31, 2012
2010 Note, at issuance
$
75,000

 
$
75,000

Discount on 2010 Note
(3,635
)
 
(5,066
)
PIK Interest
23,077

 
17,420

2010 Note, net
$
94,442

 
$
87,354

Less current portion
—

 
—

Total long term portion
$
94,442

 
$
87,354


In May 2010, CDF I, an indirectly wholly-owned, special purpose, non-recourse subsidiary of the Company, formed in April 2010, entered into a definitive credit agreement (the “2010 Credit Agreement”) with Société Générale, New York Branch (“SocGen”), as co-administrative agent, paying agent for the lenders party thereto and certain other secured parties and subsequently as collateral agent.  Pursuant to the 2010 Credit Agreement, CDF I borrowed term loans (the “2010 Term Loans”) in the principal amount of $172,500.  These 2010 Term Loans are non-recourse to the Company.  The proceeds of the 2010 Term Loans were used by CDF I to pay all costs, fees and expenses relating to the transaction and to pay $157,456 to Phase 1 DC, as part of the consideration for the acquisition by CDF I of all of the assets and liabilities of Phase 1 DC pursuant to a Sale and Contribution Agreement between CDF I and Phase 1 DC.  Phase 1 DC acquired all of the outstanding membership interests in CDF I pursuant to this Sale and Contribution Agreement.  Phase 1 DC, in turn, extinguished all of its outstanding obligations with respect to a credit facility with

18


General Electric Capital Corporation and the $9,600 vendor financing obtained previously in August 2007, and its intercompany obligations owed to the Company.   Under the 2010 Credit Agreement, each of the 2010 Term Loans will bear interest, at the option of CDF I and subject to certain conditions, based on the base rate (generally, the bank prime rate) plus a margin of 2.50% or the Eurodollar rate (subject to a floor of 1.75%), plus a margin of 3.50%.  All collections and revenues of CDF I are deposited into designated accounts. These amounts are included in cash and cash equivalents in the condensed consolidated balance sheets and are only available to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the 2010 Credit Agreement according to certain designated priorities, which totaled $6,787 and $8,447 as of December 31, 2012 and March 31, 2012, respectively.  On a quarterly basis, if funds remain after the payment of all such amounts, they will be applied to prepay the 2010 Term Loans.  After certain conditions are met, CDF I may use up to 50% of the remaining funds to pay dividends or distributions to Phase 1 DC.  The Company also set up a debt service fund under the 2010 Credit Agreement for future principal and interest payments, classified as restricted cash of $5,751 as of both December 31, 2012 and March 31, 2012.

The 2010 Term Loans mature and must be paid in full by April 29, 2016.  In addition, CDF I may prepay the 2010 Term Loans, without premium or penalty, in whole or in part, subject to paying certain breakage costs, if applicable.  The 2010 Credit Agreement also requires each of CDF I’s existing and future direct and indirect domestic subsidiaries (the "Guarantors") to guarantee, under a Guaranty and Security  Agreement dated as of May 6, 2010 by and among CDF I, the Guarantors and SocGen (the “Guaranty and Security Agreement”), the obligations under the 2010 Credit Agreement, and all such obligations to be secured by a first priority perfected security interest in all of the collective assets of CDF I and the Guarantors, including real estate owned or leased, and all capital stock or other equity interests in Phase 1 DC, CDF I and CDF I’s subsidiaries.  In connection with the 2010 Credit Agreement, AccessDM, the direct parent of Phase 1 DC, entered into a pledge agreement dated as of May 6, 2010 in favor of SocGen (the “ADM Pledge Agreement”) pursuant to which AccessDM pledged to SocGen all of the outstanding shares of common stock of Phase 1 DC, and Phase 1 DC entered into a pledge agreement dated as of May 6, 2010 in favor of SocGen (the “Phase 1 DC Pledge Agreement”) pursuant to which Phase 1 DC pledged to SocGen all of the outstanding membership interests of CDF I.  The 2010 Credit Agreement contains customary representations, warranties, affirmative covenants, negative covenants and events of default, as well as conditions to borrowings.  The balance of the 2010 Term Loans, net of the original issue discount, was as follows:
 
As of December 31, 2012
 
As of March 31, 2012
2010 Term Loans, at issuance
$
172,500

 
$
172,500

Payments to date
(80,889
)
 
(53,777
)
Discount on 2010 Term Loans
(958
)
 
(1,173
)
2010 Term Loans, net
90,653

 
117,550

Less current portion
(25,300
)
 
(24,151
)
Total long term portion
$
65,353

 
$
93,399


In June 2010, CDF I executed the three separate Interest Rate Swaps with counterparties for a total notional amount of approximately 66.67% of the amounts to be outstanding at June 15, 2011 under the 2010 Term Loans or an initial amount of $100,000. Under the Interest Rate Swaps, CDF I will effectively pay a fixed rate of 2.16%, to guard against CDF I’s exposure to increases in the variable interest rate under the 2010 Term Loans. SocGen arranged the transaction, which took effect commencing June 15, 2011 as required by the 2010 Term Loans and will remain in effect until at least June 15, 2013.  As principal repayments of the 2010 Term Loans occur, the notional amount will decrease by a pro rata amount, such that approximately $80,000 of the remaining principal amount will be covered by the Interest Rate Swaps at any time. The Company has not sought hedge accounting and therefore, changes in the value of its Interest Rate Swaps will be recorded in the condensed consolidated statements of operations (see Note 2).

CREDIT FACILITIES

In December 2008, Phase 2 B/AIX, a direct wholly-owned subsidiary of Phase 2 DC and an indirect wholly-owned subsidiary of the Company, entered into a credit facility of up to a maximum of $8,900 with KBC Bank NV (the “KBC Facility #1”) to fund the purchase of Systems from Barco, Inc. (“Barco”), to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Facility #1 required interest-only payments at 7.3% per annum through December 31, 2009.  The principal is to be repaid in 28 equal quarterly installments commencing in March 2010 and ending December 31, 2016 (the “Repayment Period”) at an interest rate of 8.5% per annum during the Repayment Period.  The KBC Facility #1 may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.  During the three months ended December 31, 2012, there was no amount drawn down on the KBC Facility #1. As of December 31, 2012, there was no outstanding principal balance of the KBC Facility #1. As of March 31, 2012, the outstanding principal balance of the KBC Facility #1 was $3,059.


19


In February 2010, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #2”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Facility #2 provides for borrowings of up to a maximum of $2,890 through December 31, 2010 (the “Draw Down Period”) and requires interest-only payments based on the three month London Interbank Offered Rate ("LIBOR") plus 3.75% per annum during the Draw Down Period.  For any funds drawn, the principal is to be repaid in 28 equal quarterly installments commencing in March 2011 and ending December 2017 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period.  The KBC Facility #2 may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC. During the three months ended December 31, 2012, there was no amount drawn down on the KBC Facility #2. As of December 31, 2012 and March 31, 2012, the outstanding principal balance of the KBC Facility #2 was $2,037 and $2,347, respectively.

In May 2010, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #3”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Facility #3 provides for borrowings of up to a maximum of $22,336 through December 31, 2010 (the “Draw Down Period”) and requires interest-only payments based on the three month LIBOR plus 3.75% per annum during the Draw Down Period.  For any funds drawn, the principal is to be repaid in 28 equal quarterly installments commencing in December 2011 and ending September 2018 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period.  The KBC Facility #3 may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.  During the three months ended December 31, 2012, $64 has been drawn down on the KBC Facility #3. As of December 31, 2012 and March 31, 2012, the outstanding principal balance of the KBC Facility #3 was $16,952 and $20,221, respectively.

In May 2010, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #4”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Facility #4 provides for borrowings of up to a maximum of $13,312 through December 31, 2010 (the “Draw Down Period”) and requires interest-only payments based on the three month LIBOR plus 3.75% per annum during the Draw Down Period.  For any funds drawn, the principal is to be repaid in 28 equal quarterly installments commencing in December 2011 and ending September 2018 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period.  The KBC Facility #4 may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.  During the three months ended December 31, 2012, there was no amount drawn down on the KBC Facility #4. As of December 31, 2012 and March 31, 2012, the outstanding principal balance of the KBC Facility #4 was $10,935 and $12,361, respectively.

In May 2011, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #5”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment. The KBC Facility #5 provides for borrowings of up to a maximum of $11,425 through March 31, 2012 (the “Draw Down Period”) and requires interest-only payments based on the three month LIBOR plus 3.75% per annum during the Draw Down Period. For any funds drawn, the principal is to be repaid in 28 equal quarterly installments commencing in June 2012 and ending March 2019 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period. The KBC Facility #5 may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC. During the three months ended December 31, 2012, there was no amount drawn down on the KBC Facility #5. As of December 31, 2012 and March 31, 2012, the outstanding principal balance of the KBC Facility #5 was $10,201 and $11,425, respectively.

In June 2011, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #6”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment. The KBC Facility #6 provides for borrowings of up to a maximum of $6,450 through December 31, 2011 (the “Draw Down Period”) and requires interest-only payments based on the three month LIBOR plus 3.75% per annum during the Draw Down Period. For any funds drawn, the principal is to be repaid in 28 equal quarterly installments commencing in March 2012 and ending December 2018 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period. The KBC Facility #6 may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC. During the three months ended December 31, 2012, $3,405 has been drawn down on the KBC Facility #6. As of December 31, 2012 and March 31, 2012, the outstanding principal balance of the KBC Facility #6 was $5,504 and $2,855, respectively.

At December 31, 2012, the Company was in compliance with all of its debt covenants.


20


6.
STOCKHOLDERS’ EQUITY

CAPITAL STOCK

COMMON STOCK

In September 2012, the Company increased the number of shares of Class A Common Stock authorized for issuance by 30,000,000 shares and redesignated the 13,759,000 unissued shares of Class B Common Stock as shares of Class A Common Stock, resulting in a total of 118,759,000 authorized shares of Class A Common Stock and 1,241,000 shares of authorized Class B Common Stock of which none remain available for issuance.
On April 26, 2012, the holder of 25,000 shares of the Company's Class B common stock converted all of the Class B shares into 25,000 Class A common stock shares. Accordingly the Company no longer has any Class B common stock outstanding.
On April 19, 2012, the Company entered into an underwriting agreement (the “First Underwriting Agreement”) with B. Riley & Co., LLC (“B. Riley”) pursuant to which B. Riley agreed to act as underwriter of 3,885,004 shares of the Company’s Class A common stock being offered, and on April 20, 2012, the Company entered into an underwriting agreement (the “Second Underwriting Agreement” and, together with the First Underwriting Agreement, the “Underwriting Agreements”) with B. Riley as Representative of the several underwriters (the “Underwriters”), pursuant to which the Underwriters agreed to act as underwriters of an additional 3,257,853 shares of the Company’s Class A common stock being offered. The securities, consisting of a total of 7,142,857 shares, were offered by the Company pursuant to a shelf registration statement on Form S-3 declared effective by the Securities and Exchange Commission on April 9, 2012 (File No. 333-179970) and an applicable prospectus supplement (the “Underwritten Offering”). Pursuant to the Underwriting Agreements and subject to the terms and conditions expressed therein (i) the Underwriters offered such securities to the public at the public offering price of $1.40 and (ii) the Company agreed to sell these securities to the Underwriters at a purchase price equal to $1.316 per share, representing a per security discount equal to 6.0% of the public offering price per security, provided that, with respect to the shares sold pursuant to the First Underwriting Agreement, the discount also included an aggregate amount equal to $100. At the Underwriters’ discretion, the Underwriters had a 30 day option to buy up to an additional 714,286 shares from the Company at the public offering price less the underwriting discounts and commissions to cover these sales. On April 23, 2012, the Underwriters exercised the entire over-allotment option. The Company also agreed to bear the expenses of the Underwritten Offering. The closing of the Underwritten Offering occurred on April 25, 2012, resulting in net proceeds to the Company of $10.0 million.

PREFERRED STOCK

Cumulative dividends in arrears on the Preferred Stock at December 31, 2012 and March 31, 2012 was $89 and $67, respectively.

CINEDIGM’S EQUITY INCENTIVE PLAN

The Company’s equity incentive plan (“the Plan”) previously provided for the issuance of up to 6,300,000 shares of Class A Common Stock to employees, outside directors and consultants. At the Annual Meeting of Stockholders on September 12, 2012 of the Company, the stockholders of the Company approved an amendment to the Plan to increase the total number of shares of the Company's Class A Common Stock available for issuance to 9,300,000 shares.

Stock Options

During the nine months ended December 31, 2012, under the Plan, the Company granted stock options to purchase 657,000 shares of its Class A Common Stock to its employees at exercise prices ranging from $1.37 to $1.72 per share, which will vest equally over a 4 year period.  As of December 31, 2012, the weighted average exercise price for outstanding stock options is $2.15 and the weighted average remaining contractual life is 7.19 years.
 

21


The following table summarizes the activity of the Plan related to shares issuable pursuant to outstanding options:
 
Shares Under Option
 
Weighted Average Exercise Price Per Share
Balance at March 31, 2012
3,690,790

 
$
2.27

Granted
657,000

 
1.52

Exercised
—

 
—

Cancelled
(131,150
)
 
3.25

Balance at December 31, 2012
4,216,640

 
2.15


Restricted Stock Awards

The Plan also provides for the issuance of restricted stock and restricted stock unit awards.  During the nine months ended December 31, 2012, the Company did not grant any restricted stock or restricted stock units.

The following table summarizes the activity of the Plan related to restricted stock awards:
 
Restricted Stock Awards
 
Weighted Average Market Price Per Share
Balance at March 31, 2012
157,198

 
$
1.18

Granted
—

 
—

Vested
(122,601
)
 
1.12

Cancelled
(9,840
)
 
1.34

Balance at December 31, 2012
24,757

 
1.40


WARRANTS

At December 31, 2012, outstanding warrants consisted of 16,000,000 held by Sageview ("Sageview Warrants") and 525,000 held by a strategic management service provider.

The Sageview Warrants were exercisable beginning on September 30, 2009, contain a customary cashless exercise provision and anti-dilution adjustments, and expire on August 11, 2016 (subject to extension in limited circumstances).  The Company also entered into a Registration Rights Agreement with Sageview pursuant to which the Company agreed to register the resale of the Sageview Warrants and the underlying shares of the Sageview Warrants from time to time in accordance with the terms of such Registration Rights Agreement. Based on the terms of the Sageview Warrants and the Registration Rights Agreement, the Company determined that the fair value of the Sageview Warrants represents a liability until such time when the underlying common shares are registered. The shares underlying the Sageview Warrants were registered with the SEC for resale in September 2010 and the Company reclassified the warrant liability of $16,054 to stockholders' equity.

The strategic management service provider warrants were issued in connection with a consulting management services agreement entered into with the Company. These warrants for the purchase of 525,000 shares of Class A common stock vested over 18 months commencing in July 2011 and are subject to termination with 90 days notice in the event of termination of the consulting management services agreement.


22


7.
COMMITMENTS AND CONTINGENCIES

As of December 31, 2012, in connection with the Phase II Deployment, Phase 2 DC has entered into digital cinema deployment agreements with various motion picture studios for the distribution of digital movie releases to motion picture exhibitors equipped with Systems, and providing for payment of VPFs to Phase 2 DC. 

In November 2008, in connection with the Phase II Deployment, Phase 2 DC entered into a supply agreement with Christie, for the purchase of up to 10,000 Systems at agreed upon pricing, as part of the Phase II Deployment.  As of December 31, 2012, the Company has purchased Systems under this agreement for $898 and has no purchase obligations for additional Systems.

In November 2008, in connection with the Phase II Deployment, Phase 2 DC entered into a supply agreement with Barco, for the purchase of up to 5,000 Systems at agreed upon pricing, as part of the Phase II Deployment.  As of December 31, 2012, the Company has purchased Systems under this agreement for an accumulated total of $66,301 and has purchase obligations of $1,294 for additional Systems.

The Company is subject to a capital lease obligation where we have no continuing involvement other than being the primary obligor. A sub-lease agreement, through which an unrelated third party purchaser pays the capital lease, was amended during January 2013. The impact of the capital lease amendment to the Company's condensed consolidated financial statements is not expected to be material.

LITIGATION

We are subject to certain legal proceedings in the ordinary course of business. We do not expect any such items to have a significant impact on our financial position and results of operations and liquidity.

8.
SUPPLEMENTAL CASH FLOW DISCLOSURE
 
For the Nine Months Ended December 31,
 
2012
 
2011
Cash interest paid
$
12,835

 
$
15,777

Accretion of preferred stock discount
$
82

 
$
82

Accrued dividends on preferred stock
$
267

 
$
267

Issuance of Class A Common Stock in connection with New Video acquisition
$
3,813

 
$
—

Issuance of Class A Common Stock to Board of Directors for services
$
300

 
$
370



23


9.
SEGMENT INFORMATION

The Company is comprised of four reportable segments: Phase I Deployment, Phase II Deployment, Services and Content & Entertainment. The segments were determined based on the products and services provided by each segment and how management reviews and makes decisions regarding segment operations. Performance of the segments is evaluated on the segment’s income (loss) from continuing operations before interest, taxes, depreciation and amortization.  
 
The Phase I Deployment and Phase II Deployment segments consist of the following:
Operations of:
Products and services provided:
Phase 1 DC
Financing vehicles and administrators for the Company’s 3,724 Systems installed nationwide in Phase 1 DC’s deployment to theatrical exhibitors.  The Company retains ownership of the Systems and the residual cash flows related to the Systems after the repayment of all non-recourse debt and the Company retains at the expiration of exhibitor master license agreements.
Phase 2 DC
Financing vehicles and administrators for the Company’s second digital cinema deployment, through Phase 2 DC.  The Company retains no ownership of the residual cash flows and digital cinema equipment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
The Services segment consists of the following:
Operations of:
Products and services provided:
Services
Provides monitoring, billing, collection, verification and other management services to the Company’s Phase I Deployment, Phase II Deployment as well as to exhibitors who purchase their own equipment. Collects and disburses VPFs from motion picture studios and distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors.
Software
Develops and licenses software to the theatrical distribution and exhibition industries, provides ASP services, and provides software enhancements and consulting services.

The Content & Entertainment segment consists of the following:
Operations of:
Products and services provided:
CEG
Acquires, distributes and provides the marketing for programs of alternative content and feature films to movie exhibitors and ancillary home entertainment markets, including, digital, video-on-demand, Blu-Ray discs and DVD.



24


Information related to the segments of the Company and its subsidiaries is detailed below:

 
 
As of December 31, 2012
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Total intangible assets, net
 
$
355

 
$
8

 
$
55

 
$
14,021

 
$
—

 
$
14,439

Total goodwill
 
$
—

 
$
—

 
$
4,197

 
$
2,904

 
$
—

 
$
7,101

Total assets
 
$
140,243

 
$
85,120

 
$
22,319

 
$
38,347

 
$
8,853

 
$
294,882

 
 
 
 
 
 
 
 
 
 
 
 
 
Notes payable, non-recourse
 
$
90,653

 
$
46,635

 
$
—

 
$
—

 


 
$
137,288

Notes payable
 
—

 
—

 
—

 
—

 
94,442

 
94,442

Capital leases
 
—

 
—

 
—

 
—

 
5,281

 
5,281

Total debt
 
$
90,653

 
$
46,635

 
$
—

 
$
—

 
$
99,723

 
$
237,011


 
 
As of March 31, 2012
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Total intangible assets, net
 
$
390

 
$
13

 
$
46

 
$
17

 
$
—

 
$
466

Total goodwill
 
$
—

 
$
—

 
$
4,197

 
$
1,568

 
$
—

 
$
5,765

Assets from continuing operations
 
$
166,020

 
$
84,394

 
$
15,364

 
$
2,284

 
$
21,861

 
$
289,923

Assets held for sale
 
 
 
 
 
 
 
 
 
 
 
214

Total assets
 
 
 
 
 
 
 
 
 
 
 
$
290,137

 
 
 
 
 
 
 
 
 
 
 
 
 
Notes payable, non-recourse
 
$
117,550

 
$
53,439

 
$
—

 
$
—

 
$
—

 
$
170,989

Notes payable
 
—

 
—

 
—

 
—

 
87,354

 
87,354

Capital leases
 
—

 
—

 
—

 
—

 
5,430

 
5,430

Total debt
 
$
117,550

 
$
53,439

 
$
—

 
$
—

 
$
92,784

 
$
263,773





25



 
 
Statements of Operations
 
 
For the Three Months Ended December 31, 2012
 
 
(Unaudited)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues from external customers
 
$
10,282

 
$
3,321

 
$
3,979

 
$
5,630

 
$
—

 
$
23,212

Intersegment revenues (1)
 
—

 
—

 
1,025

 
6

 
—

 
1,031

Total segment revenues
 
10,282

 
3,321

 
5,004

 
5,636

 
—

 
24,243

Less: Intersegment revenues
 
—

 
—

 
(1,025
)
 
(6
)
 
—

 
(1,031
)
Total consolidated revenues
 
$
10,282

 
$
3,321

 
$
3,979

 
$
5,630

 
$
—

 
$
23,212

Direct operating (exclusive of depreciation and amortization shown below) (2)
 
138

 
189

 
1,247

 
1,595

 
—

 
3,169

Selling, general and administrative
 
16

 
36

 
1,035

 
2,307

 
2,871

 
6,265

Plus: Allocation of Corporate overhead
 
—

 
—

 
1,401

 
900

 
(2,301
)
 
—

Research and development
 
—

 
—

 
38

 
—

 
—

 
38

Provision for doubtful accounts
 
51

 
15

 
6

 
—

 
—

 
72

Depreciation and amortization of property and equipment
 
7,137

 
1,849

 
37

 
7

 
125

 
9,155

Amortization of intangible assets
 
11

 
2

 
7

 
719

 
—

 
739

Total operating expenses
 
7,353

 
2,091

 
3,771

 
5,528

 
695

 
19,438

Income (loss) from operations
 
$
2,929

 
$
1,230

 
$
208

 
$
102

 
$
(695
)
 
$
3,774


(1) Intersegment revenues of the Services segment principally represent service fees earned from the Phase I and Phase II Deployments.
(2) Included in direct operating of the Services segment is $302 for the amortization of capitalized software development costs.

The following employee stock-based compensation expense related to the Company’s stock-based awards is included in the above amounts as follows:
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Direct operating
 
$
—

 
$
—

 
$
16

 
$
2

 
$
—

 
$
18

Selling, general and administrative
 
—

 
—

 
10

 
25

 
422

 
457

Research and development
 
—

 
—

 
38

 
—

 
—

 
38

Total stock-based compensation
 
$
—

 
$
—

 
$
64

 
$
27

 
$
422

 
$
513



26


 
 
Statements of Operations
 
 
For the Three Months Ended December 31, 2011
 
 
(Unaudited)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues from external customers
 
$
10,530

 
$
2,976

 
$
5,736

 
$
551

 
$
—

 
$
19,793

Intersegment revenues (1)
 
—

 
—

 
245

 
—

 
—

 
245

Total segment revenues
 
10,530

 
2,976

 
5,981

 
551

 
—

 
20,038

Less: Intersegment revenues
 
—

 
—

 
(245
)
 
—

 
—

 
(245
)
Total consolidated revenues
 
$
10,530

 
$
2,976

 
$
5,736

 
$
551

 
$
—

 
$
19,793

Direct operating (exclusive of depreciation and amortization shown below) (2)
 
238

 
132

 
1,033

 
701

 
—

 
2,104

Selling, general and administrative
 
24

 
44

 
830

 
381

 
3,024

 
4,303

Plus: Allocation of Corporate overhead
 
—

 
—

 
1,447

 
237

 
(1,684
)
 
—

Research and development
 
—

 
(39
)
 
111

 
—

 
—

 
72

Restructuring expenses
 
—

 
—

 
—

 
—

 
832

 
832

Depreciation and amortization of property and equipment
 
7,138

 
1,682

 
75

 
2

 
99

 
8,996

Amortization of intangible assets
 
10

 
2

 
4

 
68

 
—

 
84

Total operating expenses
 
7,410

 
1,821

 
3,500

 
1,389

 
2,271

 
16,391

Income (loss) from operations
 
$
3,120

 
$
1,155

 
$
2,236

 
$
(838
)
 
$
(2,271
)
 
$
3,402


(1) Intersegment revenues of the Services segment principally represent service fees earned from the Phase I and Phase II Deployments.
(2) Included in direct operating of the Services segment is $123 for the amortization of capitalized software development costs.

The following employee stock-based compensation expense related to the Company’s stock-based awards is included in the above amounts as follows:
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Direct operating
 
$
—

 
$
—

 
$
2

 
$
9

 
$
—

 
$
11

Selling, general and administrative
 
—

 
—

 
58

 
12

 
411

 
481

Research and development
 
—

 
—

 
69

 
—

 
—

 
69

Total stock-based compensation
 
$
—

 
$
—

 
$
129

 
$
21

 
$
411

 
$
561



27



 
 
Statements of Operations
 
 
For the Nine Months Ended December 31, 2012
 
 
(Unaudited)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues from external customers
 
$
31,332

 
$
10,398

 
$
12,997

 
$
11,998

 
$
—

 
$
66,725

Intersegment revenues (1)
 
—

 
—

 
3,314

 
24

 
—

 
3,338

Total segment revenues
 
31,332

 
10,398

 
16,311

 
12,022

 
—

 
70,063

Less: Intersegment revenues
 
—

 
—

 
(3,314
)
 
(24
)
 
—

 
(3,338
)
Total consolidated revenues