10-Q


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 fiscal period ended: September 30, 2015

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 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)
(212) 206-8600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of each class
 
Name of each exchange on which registered
CLASS A COMMON STOCK, PAR VALUE $0.001 PER SHARE
 
NASDAQ GLOBAL MARKET
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
NONE

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  x
Non-accelerated filer  o
Smaller reporting company o
 
 
(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 November 4, 2015, 75,085,433 shares of Class A Common Stock, $0.001 par value were outstanding, which number includes 11,791,384 shares subject to our forward purchase transaction and excludes 2,772,440 shares held in treasury.






CINEDIGM CORP.
TABLE OF CONTENTS
 
Page
PART I --
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
 
Condensed Consolidated Balance Sheets at September 30, 2015 (Unaudited) and March 31, 2015
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended September 30, 2015 and 2014
 
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months ended September 30, 2015 and 2014
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended September 30, 2015 and 2014
 
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 CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
 
September 30, 2015
 
March 31, 2015
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
18,963

 
$
18,999

Accounts receivable, net of allowance for doubtful accounts of $936 and $597, respectively
64,867

 
59,591

Inventory
2,938

 
3,210

Unbilled revenue
4,096

 
5,065

Prepaid and other current assets
18,714

 
20,078

Total current assets
109,578

 
106,943

Restricted cash
8,983

 
6,751

Property and equipment, net
80,826

 
98,561

Intangible assets, net
28,865

 
31,784

Goodwill
8,701

 
26,701

Other assets
1,953

 
2,277

Total assets
$
238,906

 
$
273,017

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued expenses
$
75,817

 
$
77,147

Current portion of notes payable, non-recourse (see Note 5)
30,840

 
32,973

Current portion of notes payable

 
24,294

Current portion of capital leases
673

 
640

Current portion of deferred revenue
2,629

 
2,760

Total current liabilities
109,959

 
137,814

Notes payable, non-recourse, net of current portion and unamortized debt issuance costs of $5,164 and $5,938, respectively (see Note 5)
101,555

 
118,387

Notes payable, net of current portion and unamortized debt issuance costs of $3,392 and $750, respectively
79,667

 
21,000

Capital leases, net of current portion
4,520

 
4,855

Deferred revenue, net of current portion
9,274

 
10,098

Total liabilities
304,975

 
292,154

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 September 30, 2015 and March 31, 2015, respectively. Liquidation preference of $3,648
3,559

 
3,559

Common stock, $0.001 par value; Class A and Class B stock; Class A stock 210,000,000 stock authorized; 77,857,873 and 77,178,494 stock issued and 75,085,433 and 77,075,614 stock outstanding at September 30, 2015 and March 31, 2015, respectively; 1,241,000 Class B stock authorized and issued and zero stock outstanding at September 30, 2015 and March 31, 2015, respectively
78

 
77

Additional paid-in capital
267,660

 
277,984

Treasury stock, at cost; 2,772,440 and 51,440 Class A common shares at September 30, 2015 and March 31, 2015, respectively
(2,839
)
 
(172
)
Accumulated deficit
(333,746
)
 
(300,350
)
Accumulated other comprehensive loss
(27
)
 
(57
)
Total stockholders’ deficit of Cinedigm Corp.
(65,315
)
 
(18,959
)
Deficit attributable to noncontrolling interest
(754
)
 
(178
)
Total deficit
(66,069
)
 
(19,137
)
Total liabilities and stockholders' deficit
$
238,906

 
$
273,017

See accompanying notes to Condensed Consolidated Financial Statements

3



CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for share and per share data)

    
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
27,704

 
$
23,721

 
$
50,532

 
$
46,578

Costs and expenses:
 
 
 
 
 
 
 
Direct operating (excludes depreciation and amortization shown below)
8,388

 
3,311

 
15,680

 
11,815

Selling, general and administrative
9,509

 
8,213

 
18,327

 
15,811

Provision for doubtful accounts

 
78

 
339

 
172

Restructuring, transition and acquisition expenses, net
63

 
817

 
196

 
1,763

Goodwill impairment
18,000

 

 
18,000

 

Litigation settlement recovery, net of expenses
(1,208
)
 
91

 
(410
)
 
202

Depreciation and amortization of property and equipment
9,427

 
9,391

 
18,784

 
18,767

Amortization of intangible assets
1,463

 
1,464

 
2,922

 
3,349

Total operating expenses
45,642

 
23,365

 
73,838

 
51,879

Income (loss) from operations
(17,938
)
 
356

 
(23,306
)
 
(5,301
)
Interest expense, net
(5,192
)
 
(4,993
)
 
(10,322
)
 
(10,028
)
Loss on extinguishment of debt

 

 
(931
)
 

Other income (expense), net
124

 
(39
)
 
232

 
100

Change in fair value of interest rate derivatives
(68
)
 
84

 
(66
)
 
(175
)
Loss from continuing operations
(23,074
)
 
(4,592
)
 
(34,393
)
 
(15,404
)
Income from discontinued operations

 
293

 

 
442

Loss on sale of discontinued operations

 
(3,045
)
 

 
(3,045
)
Net loss
(23,074
)
 
(7,344
)
 
(34,393
)
 
(18,007
)
Net loss attributable to noncontrolling interest
741

 

 
1,175

 

Net loss attributable to controlling interests
(22,333
)
 
(7,344
)
 
(33,218
)
 
(18,007
)
Preferred stock dividends
(89
)
 
(89
)
 
(178
)
 
(178
)
Net loss attributable to common stockholders
$
(22,422
)
 
$
(7,433
)
 
$
(33,396
)
 
$
(18,185
)
Net loss per Class A and Class B common stock attributable to common stockholders - basic and diluted:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.35
)
 
$
(0.06
)
 
$
(0.51
)
 
$
(0.20
)
Loss from discontinued operations

 
(0.04
)
 

 
(0.03
)
  Net loss attributable to common stockholders
$
(0.35
)
 
$
(0.10
)
 
$
(0.51
)
 
$
(0.23
)
Weighted average number of Class A and Class B common stock outstanding: basic and diluted
63,236,908

 
76,748,753

 
65,200,093

 
76,659,162


See accompanying notes to Condensed Consolidated Financial Statements

4



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

 
 
For the Three Months Ended September 30,
 
For the Six Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net loss
 
$
(23,074
)
 
$
(7,344
)
 
$
(34,393
)
 
$
(18,007
)
Other comprehensive income (loss): foreign exchange translation
 
32

 
(54
)
 
30

 
2

Comprehensive loss
 
(23,042
)
 
(7,398
)
 
(34,363
)
 
(18,005
)
Less: comprehensive loss attributable to noncontrolling interest
 
741

 

 
1,175

 

Comprehensive loss attributable to controlling interests
 
$
(22,301
)
 
$
(7,398
)
 
$
(33,188
)
 
$
(18,005
)

See accompanying notes to Condensed Consolidated Financial Statements


5



CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
For the Six Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(34,393
)
 
$
(18,007
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Loss on disposal of business

 
3,045

Depreciation and amortization of property and equipment and amortization of intangible assets
21,706

 
22,116

Goodwill impairment
18,000

 

Amortization of debt issuance costs included in interest expense
1,203

 
886

Provision for doubtful accounts
339

 
172

Provision for inventory reserve
500

 
900

Stock-based compensation and expenses
1,073

 
1,073

Change in fair value of interest rate derivatives
66

 
175

Accretion and PIK interest expense added to note payable
1,124

 
1,222

Loss on extinguishment of debt
931

 

Changes in operating assets and liabilities, net of acquisitions and dispositions:
 
 
 
     Accounts receivable
(5,562
)
 
(17,743
)
Inventory
(228
)
 
(921
)
     Unbilled revenue
969

 
2,072

     Prepaid expenses and other assets
1,287

 
(8,853
)
     Accounts payable, accrued expenses and other liabilities
(1,434
)
 
17,667

     Deferred revenue
(955
)
 
(1,257
)
Net cash provided by operating activities
4,626

 
2,547

Cash flows from investing activities:
 
 
 
Contributions from noncontrolling interest
599

 

Purchases of property and equipment
(1,049
)
 
(620
)
Purchases of intangible assets
(3
)
 
(6
)
Proceeds from sale of business

 
2,950

Additions to capitalized software costs

 
(855
)
Net cash (used in) provided by investing activities
(453
)
 
1,469

Cash flows from financing activities:
 
 
 
Payment of notes payable
(38,820
)
 
(29,115
)
Net (repayments) borrowings under revolving credit agreement
(9,167
)
 
5,000

Proceeds from issuance of 5.5% Convertible Notes
64,000

 

Payment for structured stock repurchase forward contract
(11,440
)
 

Repurchase of Class A common stock
(2,667
)
 

Principal payments on capital leases
(302
)
 
(298
)
Payments of debt issuance costs
(3,581
)
 

Restricted cash
(2,232
)
 

Costs associated with issuance of Class A common stock

 
(72
)
Net cash used in financing activities
(4,209
)
 
(24,485
)
Net change in cash and cash equivalents
(36
)
 
(20,469
)
Cash and cash equivalents at beginning of period
18,999

 
50,215

Cash and cash equivalents at end of period
$
18,963

 
$
29,746


See accompanying notes to Condensed Consolidated Financial Statements

6



CINEDIGM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.
NATURE OF OPERATIONS

Cinedigm Corp. was incorporated in Delaware on March 31, 2000 (“Cinedigm”, and collectively with its subsidiaries, the “Company,” "we," "us," or similar pronouns). We are (i) a leading distributor and aggregator of independent movie, television and other short form content, managing a distribution rights library of close to 50,000 titles and episodes released across digital, physical, theatrical, home and mobile entertainment platforms and (ii) a leading servicer of digital cinema assets on more than 12,000 movie screens in both North America, Australia and New Zealand.

We report our financial results in the following reportable segments: (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 group (“Content & Entertainment” or "CEG"). The Phase I Deployment and Phase II Deployment segments are the financing vehicles and administrators for our digital cinema equipment (the “Systems”) installed in movie theatres throughout the United States, and in Australia and New Zealand, which are non-recourse to the other segments of our business. Our Services segment provides fee based support to more than 12,000 movie screens in our Phase I Deployment and Phase II Deployment segments as well as directly to exhibitors and other third party customers in the form of monitoring, billing, collections and verification services. Our Content & Entertainment segment is focused on: (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. We are structured so that our digital cinema business (collectively, the Phase I Deployment, Phase II Deployment and Services segments) operates independently from our Content & Entertainment segment.

Investments in which we do not have a controlling interest or are not the primary beneficiary but have the ability to exert significant influence, are accounted for under the equity method of accounting. Noncontrolling interests for which we have been determined to have a controlling financial interest are consolidated and recorded net of tax as net income (loss) attributable to noncontrolling interest. See Note 4 - Other Interests to the Condensed Consolidated Financial Statements for a discussion of our noncontrolling interests.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION

We have incurred net losses historically and have an accumulated deficit of $333.7 million as of September 30, 2015. We also have significant contractual obligations related to our recourse and non-recourse debt for the remainder of the fiscal year ending March 31, 2016 and beyond. We may continue to generate net losses for the foreseeable future. We believe the combination of: (i) our cash and restricted cash balances at September 30, 2015, (ii) the remaining availability under our revolving line of credit, (iii) planned cost reduction initiatives, and (iv) expected cash flows from operations will be sufficient to satisfy our liquidity and capital requirements for the next twelve months. Our capital requirements will depend on many factors, and we may need to use available capital resources and raise additional capital. As a result of our ongoing process of exploring and evaluating potential significant strategic and capital raising opportunities with the help of our financial advisor, we are in discussions with a potential investor to help meet our ongoing capital raising requirements. There can be no assurance that the transaction under discussion will be consummated. 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.

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

We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation. Effective September 30, 2015, we elected to change our method of presentation relating to debt issuance costs in accordance with Financial Accounting Standards Board ("FASB") ASU 2015-03 - Simplifying the Presentation of Debt Issuance Costs.  Prior to September 30, 2015, our policy was to present debt issuance costs in Other Assets on the Condensed Consolidated Balance Sheets, net of accumulated amortization. Beginning with the period ended September 30, 2015, we have presented these costs as a direct deduction to notes payable. Unamortized debt issuance costs of $6.7 million previously reported as assets on our Consolidated Balance Sheet as of March 31, 2015 have been reclassified as a direct deduction to notes payable.


7



USE OF ESTIMATES

The preparation of these Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. As permitted under GAAP, interim accounting for certain expenses, such as the adequacy of accounts receivable reserves, return reserves, inventory reserves, recoupment of advances, minimum guarantees, assessment of goodwill and intangible asset impairment and valuation reserve for income taxes, are based on full year assumptions when appropriate. Actual results could differ materially from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the respective interim periods are not necessarily indicative of the results expected for the full year. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

CASH AND CASH EQUIVALENTS

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We maintain bank accounts with major banks, which from time to time may exceed the Federal Deposit Insurance Corporation’s insured limits. We periodically assess the financial condition of the institutions and believe that the risk of any loss is minimal.

ACCOUNTS RECEIVABLE

We maintain reserves for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

Our Content & Entertainment segment recognizes accounts receivable, net of an estimated allowance for product returns and customer chargebacks, at the time that it recognizes revenue from a sale. We base the amount of the returns allowance and customer chargebacks upon historical experience and future expectations.

We record accounts receivable, long-term in connection with activation fees that we earn from Systems deployments that have extended payment terms. Such accounts receivable are discounted to their present value at prevailing market rates and are recorded as other assets in the Condensed Consolidated Balance Sheets.

ADVANCES
Advances are recorded within prepaid and other current assets within the Condensed Consolidated Balance Sheets and represent amounts prepaid to studios or content producers for which we provide content distribution services. We evaluate advances regularly for recoverability and record charges for amounts that we expect may not be recoverable as of the balance sheet date.

INVENTORY

Inventory consists of finished goods of Company owned, physical DVD and Blu-ray Disc titles and is stated at the lower of cost (determined based on weighted average cost) or market. We identify inventory items to be written down for obsolescence based on their sales status and condition. We write down discontinued or slow moving inventories based on an estimate of the markdown to retail price needed to sell through our current stock level of the inventories.

RESTRICTED CASH

Our 2013 Term Loans, Prospect Loan and Cinedigm Credit Agreement require that we maintain specified cash balances that are restricted to repayment of interest (see Note 5 - Notes Payable).

PROPERTY AND EQUIPMENT

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

8



Computer equipment and software
3 - 5 years
Digital cinema projection systems
10 years
Machinery and equipment
3 - 10 years
Furniture and fixtures
3 - 6 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Repair and maintenance costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized. Upon the sale or other disposition of any property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss on disposal is included in the Condensed Consolidated Statements of Operations.

ACCOUNTING FOR DERIVATIVE ACTIVITIES

Derivative financial instruments are recorded at fair value. Changes in the fair value of derivative financial instruments are either recognized in accumulated other comprehensive loss (a component of stockholders' deficit) or in the Condensed Consolidated Statements of Operations depending on whether the derivative qualifies for hedge accounting. We have entered into two separate interest rate cap transactions to limit our exposure to interest rates related to our 2013 Term Loans and Prospect Loan. The interest rate caps on the 2013 Term Loans and Prospect Loan mature in March of 2016 and 2018, respectively. We have not sought hedge accounting treatment for these instruments and therefore, changes in the value of our interest rate derivatives were recorded in the Condensed Consolidated Statements of Operations.

FAIR VALUE MEASUREMENTS

The fair value measurement disclosures are grouped into three levels based on valuation factors:
 
Level 1 – quoted prices in active markets for identical investments
Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs)
Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments)
 
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.

The following tables summarize the levels of fair value measurements of our financial assets and liabilities:
 
 
As of September 30, 2015
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Restricted cash
 
$
8,983

 
$

 
$

 
$
8,983

Interest rate derivatives
 

 
172

 

 
172

 
 
$
8,983

 
$
172

 
$

 
$
9,155

 
 
As of March 31, 2015
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Restricted cash
 
$
6,751

 
$

 
$

 
$
6,751

Interest rate derivatives
 

 
208

 

 
208

 
 
$
6,751

 
$
208

 
$

 
$
6,959


Our cash and cash equivalents, accounts receivable, unbilled revenue and accounts payable and accrued expenses are financial instruments and are recorded at cost in the Condensed Consolidated Balance Sheets. The estimated fair values of these financial instruments approximate their carrying amounts because of their short-term nature.  The carrying amount of accounts receivable, long-term and notes receivable approximates fair value based on the discounted cash flows of such instruments using current assumptions at the balance sheet date. At September 30, 2015 and March 31, 2015, the estimated fair value of our fixed rate debt approximated its carrying amounts. We estimated the fair value of debt based upon current interest rates available to us at the respective balance sheet dates for arrangements with similar terms and conditions. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of notes payable and capital lease obligations approximates fair value.


9



IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS

We review the recoverability of our long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on our ability to recover the carrying value of our long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the asset, the asset is deemed not to be recoverable and possibly impaired. We then estimate the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the asset's fair value is determined to be less than its carrying value. Fair value is determined by computing the expected future discounted cash flows. During the six months ended September 30, 2015 and 2014, no impairment charge was recorded from continuing operations for long-lived assets or finite-lived assets.

GOODWILL

Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is tested for impairment on an annual basis at the end of the fourth quarter of each fiscal year, or more often if warranted by events or changes in circumstances indicating that the carrying value of a reporting unit may exceed fair value, also known as impairment indicators. Our process of evaluating goodwill for impairment involves the determination of fair value of goodwill compared to its carrying value. Our only reporting unit with goodwill is our Content & Entertainment reporting unit, which had a goodwill carrying value that was materially derived from our October 2013 acquisition of a division of Gaiam, Inc. and Gaiam Americas, Inc. (the "GVE acquisition").

Inherent in the fair value determination for each reporting unit are certain judgments and estimates relating to future cash flows, including management’s interpretation of current economic indicators and market conditions, and assumptions about our strategic plans with regard to its operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that the conclusion regarding whether our remaining goodwill is impaired could change and result in future goodwill impairment charges that will have a material effect on our consolidated financial position or results of operations.

As a result of factors discussed in detail below, we performed a quantitative fair value assessment for our CEG reporting unit as of September 30, 2015, and determined that the reporting unit had a fair value less than its carrying amount. As a result, we recorded a goodwill impairment charge of $18.0 million for the three months and six months ended September 30, 2015. In determining fair value we used various assumptions, including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects, economic or market trends and any regulatory changes that may occur. We estimated the fair value of the reporting unit using a net present value methodology, which is dependent on significant assumptions related to estimated future discounted cash flows, discount rates and tax rates. The assumptions used in our goodwill impairment tests should not be construed as earnings guidance or long-term projections. Our cash flow assumptions are based on a 5-year internal projection of adjusted EBITDA for the Content & Entertainment reporting unit. We assumed a market-based weighted average cost of capital of 17% to discount cash flows for our CEG segment and used a blended federal and state tax rate of 40%.

We reassessed the fair value of our CEG reporting unit in the second quarter of 2015 because the reporting unit is expected to perform below the fiscal year 2016 forecast that we had established during our annual testing of goodwill at March 31, 2015. The Company faced challenges in the first half of fiscal 2016 that significantly impacted our ability to establish the new contracts, customer relationships and OTT channels that we had originally anticipated and shifted a portion of management's focus away from business operations. As a result, our fiscal 2016 projections for revenue and adjusted EBITDA are expected to fall materially below our original estimates, particularly those for the second half of the fiscal year. Future decreases in the fair value of our CEG reporting unit may require us to record additional goodwill impairment, particularly if our expectations of future cash flows are not achieved.

Information related to the goodwill allocated to our Content & Entertainment segment is as follows:

(In thousands)
 
Goodwill
As of March 31, 2015
 
$
26,701

Goodwill impairment
 
(18,000
)
As of September 30, 2015
 
$
8,701


Gross amounts of goodwill and accumulated impairment charges that we have recorded are as follows:

10



(In thousands)
 
Goodwill
Goodwill
 
$
32,701

Accumulated impairment losses
 
(24,000
)
Net goodwill at September 30, 2015
 
$
8,701


No goodwill impairment charge was recorded in the six months ended September 30, 2014.

PARTICIPATIONS AND ROYALTIES PAYABLE

We record liabilities within accounts payable and accrued expenses on the Condensed Consolidated Balance Sheet, that represent amounts owed to studios or content producers for royalties owed under licensing arrangements when we provide content distribution services. We identify and record as a reduction to the liability any expenses that are to be reimbursed to us by such studios or content producers.

DEBT ISSUANCE COSTS

We incur debt issuance costs in connection with long-term debt financings. Such costs are recorded as a direct deduction to notes payable and amortized over the terms of the respective debt obligations using the effective interest rate method (see Note 5 - Notes Payable). Debt issuance costs recorded in connection with revolving debt arrangements are presented in other assets on the Condensed Consolidated Balance Sheets and are amortized over the term of the revolving debt agreements using the effective interest rate method.

REVENUE RECOGNITION

Phase I Deployment and Phase II Deployment

Virtual print fees (“VPFs”) are earned, net of administrative fees, pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase 1 DC and to Phase 2 DC when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. VPFs are earned and payable to Phase 1 DC 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, at which point the VPFs phase out.  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 and Phase 2 DC’s performance obligations have been substantially met at that time. Beginning in December 2015, certain Phase 1 DC Systems will have reached the conclusion of their deployment payment period. In accordance with existing agreements with distributors, a substantial portion of VPF revenues will cease to be recognized on such Systems. Because the Phase I deployment installation period ended in November 2007, a majority of the VPF revenue associated with the Phase I systems will end by November 2017. While the absence of such revenue is not expected to be material to the Condensed Consolidated Statements of Operations during the fiscal year ending March 31, 2016, it is expected to have a material cumulative impact in subsequent periods.

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 service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter.  Further, if cost recoupment occurs before the end of the eighth contract year, the studio will pay us a one-time “cost recoupment bonus”. 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. Beginning in December 2018, certain Phase 2 DC Systems will have reached the conclusion of their deployment payment period, subject to earlier achievement of cost recoupment. In accordance with existing agreements with distributors, VPF revenues will cease to be recognized on such Systems. Because the Phase II deployment installation period ended in December 2012, a majority of the VPF revenue associated with the Phase I systems will end by December 2022 or earlier if cost recoupment is achieved.

Alternative content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors, whereby amounts are payable to Phase 1 DC and to Phase 2 DC, generally either a fixed amount or as a percentage of the applicable box office revenue derived from the

11



exhibitor’s showing of content other than feature movies, 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.

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

Exhibitors who purchased and own Systems using their own financing in the Phase II Deployment paid us an upfront activation fee that is generally $2.0 thousand per screen (the “Exhibitor-Buyer Structure”). These upfront activation fees are recognized in the period in which these Systems were delivered and are ready for content, as we had no further obligations to the customer after that time and collection was reasonably assured. In addition, we recognize activation fee revenue of between $1.0 thousand and $2.0 thousand on Phase 2 DC Systems and for Systems installed by CDF2 Holdings (See Note 4 - Other Interests) upon installation and such fees are generally collected upfront upon installation. Our services segment manages and collects VPFs on behalf of exhibitors, for which it earns an administrative fee equal to 10% of the VPFs collected.

Our Services segment earns an administrative fee of approximately 5% of VPFs collected and, in addition, earns an incentive service fee equal to 2.5% of the VPFs earned by Phase 1 DC. 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, VOD, and physical goods (e.g., DVD and Blu-ray Discs). Fees earned are typically based on the gross amounts billed to our customers less the amounts owed to the media studios or content producers under distribution agreements, and gross media sales of owned or licensed content. Depending upon the nature of the agreements with the platform and content providers, the fee rate that we earn varies. Generally, revenues are recognized when content is available for subscription on the digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services. Reserves for sales returns and other allowances are recorded based upon historical experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. Sales returns and allowances are reported as a reduction of revenues.

CEG also has contracts for the theatrical distribution of third party feature movies and alternative content. CEG’s distribution fee revenue and CEG's participation in box office receipts is recognized at the time a feature movie and alternative content are viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the theatrical release date of the third party feature movie or alternative content.

DIRECT OPERATING COSTS

Direct operating costs primarily consist of operating costs such as cost of goods sold, fulfillment expenses, shipping costs, royalty expenses, participation expenses, marketing and direct personnel costs.

STOCK-BASED COMPENSATION

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

 
 
For the Three Months Ended September 30,
 
For the Six Months Ended September 30,
(In thousands)
 
2015
 
2014
 
2015
 
2014
Direct operating
 
$
4

 
$
3

 
$
10

 
$
6

Selling, general and administrative
 
397

 
404

 
1,063

 
1,019

 
 
$
401

 
$
407

 
$
1,073

 
$
1,025


The weighted-average grant-date fair value of options granted during the three months ended September 30, 2015 and 2014 was $0.35 and $1.09, respectively, and $0.52 and $1.27 for the six months ended September 30, 2015 and 2014, respectively. There were zero and 6,673 stock options exercised during the three months ended September 30, 2015 and September 30, 2014, res

12



pectively, and 25,000 and 41,066 stock options exercised for the six months ended September 30, 2015 and 2014, respectively.
We 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 September 30,
 
For the Six Months Ended September 30,
Assumptions for Option Grants
 
2015

2014
 
2015
 
2014
Range of risk-free interest rates
 
1.5% - 1.6%

 
 1.6 - 1.8%

 
 1.4% - 1.7%

 
 1.6 - 1.8%

Dividend yield
 

 

 

 

Expected life (years)
 
5

 
5

 
5

 
5

Range of expected volatilities
 
70.7 - 70.7%

 
 71.4 - 71.5%

 
 70.6 - 70.9%

 
 71.4 - 72.3%


The risk-free interest rate used in the Black-Scholes option pricing model for options granted under our stock option plan awards is the historical yield on U.S. Treasury securities with equivalent remaining lives. We do 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.  We estimate the expected life of options granted under our stock option plans using both exercise behavior and post-vesting termination behavior, as well as consideration of outstanding options. We estimate expected volatility for options granted under our stock option plans based on a measure of our Class A common stock's historical volatility in the trading market.

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS

Basic and diluted net loss per common share has been calculated as follows:
Basic and diluted net loss per common share attributable to common stockholders =
Net loss attributable to common stockholders
Weighted average number of common stock
 outstanding during the period

Stock issued and treasury stock repurchased during the period are weighted for the portion of the period that they are outstanding. The shares to be repurchased in connection with the forward stock purchase transaction discussed in Note 6 - Stockholders' Deficit are considered repurchased for the purposes of calculating earnings per share and therefore the calculation of weighted average shares outstanding as of September 30, 2015 excludes approximately 11.8 million shares that will be repurchased as a result of the forward stock purchase transaction.

Loss per share from continuing operations is calculated similarly to basic and diluted loss per common share attributable to common shareholders, except that it uses loss from continuing operations in the numerator and takes into account the net loss attributable to noncontrolling interest.

We incurred net losses for each of the three months and six months ended September 30, 2015 and 2014, and therefore the impact of potentially dilutive common shares from outstanding stock options and warrants, totaling 29,135,181 shares and 29,113,797 shares as of September 30, 2015 and 2014, respectively, were excluded from the computation of earnings per share as their impact would have been anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued new accounting guidance on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance will be effective during our fiscal year ending March 31, 2019 with early adoption permitted. We are evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

In June 2014, the FASB issued an accounting standards update, which provides additional guidance on how to account for share-based payments where the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite period is treated as a performance condition. The guidance will be effective during our fiscal year ending March 31, 2017. We are currently evaluating the impact of the adoption of this accounting standard update on our

13



consolidated financial statements. The standards update may be applied (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In August 2014, the FASB amended accounting guidance pertaining to going concern considerations by company management. The amendments in this update state that in connection with preparing financial statements for each annual and interim reporting period, an entity's management should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable). The guidance will be effective during our fiscal year ending March 31, 2018. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In February 2015, the FASB issued an accounting standards update, which amended accounting guidance on consolidation. The amendments affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The update will be effective during our fiscal year ending March 31, 2017. We are evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

In April 2015, the FASB issued new guidance related to the customer’s accounting for fees paid in a cloud computing arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In July 2015, the FASB issued an accounting standards update that requires an entity to measure inventory balances at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We are evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

In September 2015, the FASB issued new guidance with respect to Business Combinations. The new guidance requires the acquirer in a Business Combination to recognize provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new guidance is effective for public entities for which fiscal years begin after December 15, 2016, and interim periods within the fiscal years beginning after December 31, 2017. The accounting standard must be applied prospectively to adjustments to provisional amounts that occur after the effective date, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

3.
DISCONTINUED OPERATIONS

During the fiscal year ended March 31, 2014, we made the strategic decision to discontinue and exit our software business and therefore executed a plan of sale for Hollywood Software, Inc. d/b/a Cinedigm Software (“Software”), our direct, wholly owned subsidiary, in order to focus on physical and digital distribution of entertainment content and servicing our existing digital cinema business. Furthermore, we believed that Software, which was previously included in our Services segment, no longer complemented our businesses. On September 23, 2014, we completed the sale of Software to a third party and recognized a $3.0 million loss on the sale of the business for the three and six months ended September 30, 2014. As a result, Software has been reclassified as discontinued operations for the three and six months ended September 30, 2014.

Details of income from discontinued operations are as follows:

14



(In thousands)
 
For the Three Months Ended September 30, 2014
 
For the Six Months Ended September 30, 2014
Revenues
 
$
919

 
$
1,968

Costs and Expenses:
 
 
 
 
Direct operating
 
151

 
326

Selling, general and administrative
 
561

 
1,093

Research and development
 
5

 
14

Total operating expenses
 
717

 
1,433

Income from operations
 
202

 
535

Other expense, net
 
(8
)
 
(93
)
Income before provision for income taxes
 
194

 
442

Provision for income taxes
 
99

 

Income from discontinued operations, net of taxes
 
$
293

 
$
442


4.
OTHER INTERESTS

Investment in CDF2 Holdings
 
We indirectly own 100% of the common equity of CDF2 Holdings, LLC ("CDF2 Holdings"), which was created for the purpose of capitalizing on the conversion of the exhibition industry from film to digital technology. CDF2 Holdings assists its customers in procuring the equipment necessary to convert their Systems to digital technology by providing financing, equipment, installation and related ongoing services.

CDF2 Holdings is a Variable Interest Entity (“VIE”), as defined in Accounting Standards Codification Topic 810 ("ASC 810"), “Consolidation." 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 we indirectly, wholly own CDF2 Holdings, we, a third party that also has a variable interest in CDF2 Holdings, and an independent third party manager must mutually approve all business activities and transactions that significantly impact CDF2 Holdings' economic performance. We have therefore assessed our variable interests in CDF2 Holdings and determined that we are not the primary beneficiary of CDF2 Holdings. As a result, CDF2 Holdings' financial position and results of operations are not consolidated in our financial position and results of operations. In completing our assessment, we identified the activities that we consider most significant to the economic performance of CDF2 Holdings and determined that we do not have the power to direct those activities, and therefore we account for our investment in CDF2 Holdings under the equity method of accounting.

As of September 30, 2015 and March 31, 2015, our maximum exposure to loss, as it relates to the non-consolidated CDF2 Holdings entity, represents accounts receivable for service fees under a master service agreement with CDF2 Holdings. Such accounts receivable were $0.4 million and $ $0.3 million as of September 30, 2015 and March 31, 2015, which are included in accounts receivable, net on the accompanying Condensed Consolidated Balance Sheets.

During each of the three months and six months ended September 30, 2015 and 2014, we received $0.3 million and $0.6 million, respectively, in aggregate revenues through digital cinema servicing fees from CDF2 Holdings, which are included in our revenues on the accompanying Condensed Consolidated Statements of Operations.

Total Stockholder's Deficit of CDF2 Holdings at September 30, 2015 and March 31, 2015 was $9.7 million and $6.7 million, respectively. We have no obligation to fund the operating loss or the stockholder's deficit beyond our initial investment of $2.0 million and, accordingly, our in investment in CDF2 Holdings as of September 30, 2015 and March 31, 2015 is carried at $0.

Noncontrolling Interest in CONtv

In June 2014, we and Wizard World, Inc. formed CON TV, LLC (“CONtv”) to fund, design, create, launch, and operate a worldwide digital network that creates original content, and sells and distributes on-demand digital content via the Internet and other consumer digital distribution platforms, such as gaming consoles, set-top boxes, handsets, and tablets.

15




We have determined that we have a controlling financial interest in CONtv. As a result, and in accordance with ASC 810, we have consolidated the financial position and results of operations of CONtv as of and for the six months ended September 30, 2015.

During the six months ended September 30, 2015, we made total contributions of $0.6 million in CONtv. Wizard World Inc.'s share of stockholders' deficit in CONtv is reflected as noncontrolling interest in our Condensed Consolidated Balance Sheets and was $0.8 million and $0.2 million as of September 30, 2015 and March 31, 2015, respectively. The noncontrolling interest's share of net loss was $1.2 million for the six months ended September 30, 2015.

5.
NOTES PAYABLE

Notes payable consisted of the following:
 
 
September 30, 2015
 
March 31, 2015
(In thousands)
 
Current Portion
 
Long Term Portion
 
Current Portion
 
Long Term Portion
2013 Term Loans, net of debt discount
 
$
22,976

 
$
23,471

 
$
25,125

 
$
36,418

Prospect Loan
 

 
67,204

 

 
67,967

KBC Facilities
 
7,646

 
15,541

 
7,649

 
19,361

P2 Vendor Note
 
141

 
356

 
125

 
393

P2 Exhibitor Notes
 
77

 
147

 
74

 
186

Total non-recourse notes payable
 
30,840

 
106,719

 
32,973

 
124,325

Less: Unamortized debt issuance costs
 

 
(5,164
)
 

 
(5,938
)
Total non-recourse notes payable, net of unamortized debt issuance costs
 
$
30,840

 
$
101,555

 
$
32,973

 
$
118,387

 
 
 
 
 
 
 
 
 
5.5% Convertible Notes Due 2035
 
$

 
$
64,000

 
$

 
$

Cinedigm Term Loans
 

 

 

 
17,965

Cinedigm Revolving Loans
 

 
15,127

 
24,294

 

2013 Notes
 

 
3,932

 

 
3,785

Total recourse notes payable
 

 
83,059

 
24,294

 
21,750

Less: Unamortized debt issuance costs
 

 
(3,392
)
 

 
(750
)
Total recourse notes payable, net of unamortized debt issuance costs
 
$

 
$
79,667

 
$
24,294

 
$
21,000

Total notes payable, net of unamortized debt issuance costs
 
$
30,840

 
$
181,222

 
$
57,267

 
$
139,387


Non-recourse debt is generally defined as debt whereby the lenders’ sole recourse with respect to defaults, is limited to the value of the asset, which is collateral for the debt. Certain of our subsidiaries are liable with respect to, and their assets serve as collateral for, certain indebtedness for which our assets and the assets of our other subsidiaries that are not parties to the transaction are generally not liable. 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 Note.

2013 Term Loans

In February 2013, CDF I, our wholly owned subsidiary, entered into an amended and restated credit agreement (the “2013 Credit Agreement”) with Société Générale and other lenders. Under the terms of the 2013 Credit Agreement, CDF I may borrow an aggregate principal amount of $130.0 million, $5.0 million of which was allowed to be assigned to an affiliate of CDF I.

Under the 2013 Credit Agreement, each of the 2013 Term loans bear interest, at the option of CDF I, based on a base rate (generally, the bank prime rate) or the one-month LIBOR rate set at a minimum of 1.00%, plus a margin of 1.75% (in the case of base rate loans) or 2.75% (in the case of LIBOR rate loans). The 2013 Term Loans mature and must be paid in full by February 28, 2018. In addition, CDF I may prepay the 2013 Term Loans, in whole or in part, subject to paying certain breakage costs, if applicable. The one-month LIBOR rate at September 30, 2015 was 0.19%.

The 2013 Credit Agreement also requires each of CDF I’s existing and future direct and indirect domestic subsidiaries (the "Guarantors") to guarantee the obligations under the 2013 Credit Agreement with a first priority perfected security interest in all

16



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 C/AIX, our wholly owned subsidiary and the direct holder of CDF I’s equity. The 2013 Credit Agreement contains customary representations, warranties, affirmative covenants, negative covenants and events of default.

Collections of CDF I accounts receivable are deposited into accounts designated to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the 2013 Credit Agreement. Amounts designated for these purposes totaled $3.8 million and $3.9 million as of September 30, 2015 and March 31, 2015, respectively, and are included in cash and cash equivalents on our Condensed Consolidated Balance Sheets. We also maintain a debt service fund under the 2013 Credit Agreement for future principal and interest payments. As of September 30, 2015 and March 31, 2015, the debt service fund had a balance of $5.8 million, which is classified as restricted cash on our Condensed Consolidated Balance Sheets.

The balance of the 2013 Term Loans, net of the original issue discount, was as follows:
(In thousands)
 
September 30, 2015
 
March 31, 2015
2013 Term Loans, at issuance, net
 
$
125,087

 
$
125,087

Payments to date
 
(78,476
)
 
(63,348
)
Discount on 2013 Term Loans
 
(164
)
 
(196
)
2013 Term Loans, net
 
46,447

 
61,543

Less current portion
 
(22,976
)
 
(25,125
)
Total long term portion
 
$
23,471

 
$
36,418


Prospect Loan

In February 2013, our DC Holdings, AccessDM and Phase 2 DC subsidiaries entered into a term loan agreement (the “Prospect Loan”) with Prospect Capital Corporation (“Prospect”), pursuant to which DC Holdings borrowed $70.0 million. The Prospect Loan bears interest at LIBOR plus 9.0% (with a 2.0% LIBOR floor), which is payable in cash, and at an additional 2.50% to be accrued as an increase to the aggregate principal amount of the Prospect Loan until the 2013 Credit Agreement is paid off, at which time all accrued interest will be payable in cash.

Collections of DC Holdings accounts receivable are deposited into accounts designated to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the Prospect Loan. On a quarterly basis, if funds remain after the payment of all such amounts, they are applied to prepay the Prospect Loan. Amounts designated for these purposes, included in cash and cash equivalents on the Condensed Consolidated Balance Sheets, totaled $1.9 million and $6.5 million as of September 30, 2015 and March 31, 2015, respectively. We also maintain a debt service fund under the Prospect Loan for future principal and interest payments. As of September 30, 2015 and March 31, 2015, the debt service fund had a balance of $1.0 million, which is classified as restricted cash on our Condensed Consolidated Balance Sheets.

The Prospect Loan matures on March 31, 2021 and may be accelerated upon a change in control (as defined in the agreement) or other events of default as set forth therein and would be subject to mandatory acceleration upon insolvency of DC Holdings. We are permitted to pay the full outstanding balance of the Prospect Loan at any time after the second anniversary of the initial borrowing, subject to the following prepayment penalties:

5.0% of the principal amount prepaid between the second and third anniversaries of issuance;
4.0% of the principal amount prepaid between the third and fourth anniversaries of issuance;
3.0% of the principal amount prepaid between the fourth and fifth anniversaries of issuance;
2.0% of the principal amount prepaid between the fifth and sixth anniversary of issuance;
1.0% of the principal amount prepaid between the sixth and seventh anniversaries of issuance; and
No penalty if the balance of the Prospect Loan, including accrued interest, is prepaid thereafter.

The Prospect Loan is primarily secured by a first priority pledge of the stock of CDF2 Holdings, our wholly owned unconsolidated subsidiary, the stock of AccessDM, which is owned by DC Holdings, and the stock of our Phase 2 DC subsidiary. The Prospect Loan is also guaranteed by our AccessDM and Phase 2 DC subsidiaries. We provide limited financial support to the Prospect Loan not to exceed $1.5 million per year in the event financial performance does not meet certain defined benchmarks.

The Prospect Loan contains customary representations, warranties, affirmative covenants, negative covenants and events of default. The following table summarizes the activity related to the Prospect Loan:


17



(In thousands)
 
September 30, 2015
 
March 31, 2015
Prospect Loan, at issuance
 
$
70,000

 
$
70,000

PIK Interest
 
4,495

 
3,640

Payments to date
 
(7,291
)
 
(5,673
)
Prospect Loan, net
 
67,204

 
67,967

Less current portion
 

 

Total long term portion
 
$
67,204

 
$
67,967


KBC Facilities

In December 2008 we began entering into multiple credit facilities to fund the purchase of Systems to be installed in movie theatres as part of our Phase II Deployment. There were no borrowings under the KBC Facilities during the six months ended September 30, 2015. The following table presents a summary of the KBC Facilities (dollar amounts in thousands):

 
 
 
 
 
 
 
 
Outstanding Principal Balance
Facility1
 
Credit Facility
 
Interest Rate2
 
Maturity Date
 
September 30, 2015
 
March 31, 2015
1

 
22,336

 
3.75
%
 
September 2018
 
8,776

 
10,371

2

 
13,312

 
3.75
%
 
March 2018
 
5,705

 
6,656

3

 
11,425

 
3.75
%
 
March 2019
 
5,712

 
6,528

4

 
6,450

 
3.75
%
 
September 2018
 
2,994

 
3,455

 
 
$
53,523

 
 
 
 
 
23,187

 
27,010


1. 
For each facility, principal is to be repaid in twenty-eight quarterly installments.
2. 
Each of the facilities bears interest at the three-month LIBOR rate, which was 0.33% at September 30, 2015, plus the interest rate noted above.

5.5% Convertible Notes Due April 2035

On April 29, 2015, we issued $64.0 million aggregate principal amount of unsecured senior convertible notes payable (the "Convertible Notes") that bear interest at a rate of 5.5% per year, payable semiannually. The Convertible Notes will mature on April 15, 2035, unless repurchased earlier, redeemed or converted and will be convertible at the option of the holders at any time until the close of business on the business day immediately preceding the maturity date. Upon conversion, we will deliver to holders in respect of each $1,000 principal amount of Convertible Notes being converted a number of shares of our Class A common stock equal to the conversion rate, together with a cash payment in lieu of delivering any fractional share of Class A common stock. The conversion rate applicable to the Convertible Notes on the offering date was 824.5723 shares of Class A common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $1.21 per share of Class A common stock), which is subject to adjustment if certain events occur. Holders of the Convertible Notes may require us to repurchase all or a portion of the Convertible Notes on April 20, 2020, April 20, 2025 and April 20, 2030 and upon the occurrence of certain fundamental changes at a repurchase price in cash equal to 100% of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest, if any. The Convertible Notes will be redeemable by us at our option on or after April 20, 2018 upon the satisfaction of a sale price condition with respect to our Class A common stock and on or after April 20, 2020 without regard to the sale price condition, in each case, at a redemption price in cash equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any.

The net proceeds from the Convertible Note offering was $60.9 million, after deducting offering expenses. We used $18.6 million of the net proceeds from the offering to repay borrowings under and terminate one of our term loans under our 2013 Credit Agreement, of which $18.2 million was used to pay the remaining principal balance. Concurrently with the closing of the Convertible Notes transaction, we repurchased 2.7 million shares of our Class A common stock from certain purchasers of Convertible Notes in privately negotiated transactions for $2.7 million. In addition, $11.4 million of the net proceeds was used to fund the cost of repurchasing 11.8 million shares of our Class A common stock pursuant to the forward stock purchase agreement described in Note 6 - Stockholders' Deficit. We recorded interest expense of $0.9 million and $1.5 million during the three months and six months ended September 30, 2015, respectively, related to the Convertible Notes.

We recorded debt issuance costs of $3.6 million related to the issuance of the Convertible Notes during the six months ended September 30, 2015.

18




Cinedigm Credit Agreement

On October 17, 2013, we entered into a credit agreement (the “Cinedigm Credit Agreement”) with Société Générale. Under the Cinedigm Credit Agreement, as amended in February 2015 and April 2015, we were permitted to borrow an aggregate principal amount of up to $55.0 million, including term loans of $25.0 million (the “Cinedigm Term Loans”) and revolving loans of up to $30.0 million (the “Cinedigm Revolving Loans”). Interest under the Cinedigm Term Loans was charged at a base rate plus 5.0%, or the Eurodollar rate plus 6.0% until the Cinedigm Term Loan was repaid on April 29, 2015 in connection with the Convertible Notes offering. The Cinedigm Revolving Loans bear interest at the base rate plus 4.0% or the Eurodollar rate plus 5.0%. The Base rate, per annum, is equal to the highest of (a) the rate quoted by the Wall Street Journal as the “base rate on corporate loans by at least 75% of the nation’s largest banks,” (b) 0.50% plus the federal funds rate, and (c) the Eurodollar rate plus 1.0%.

We repaid the entire outstanding balance of the Cinedigm Term Loans and amended the terms of the Cinedigm Revolving Loans in connection with our issuance of the Convertible Notes. In connection with the repayment of the Cinedigm Term Loans, we wrote-off certain unamortized debt issuance costs and the discount that remained on the balance of the note payable. As a result, we recorded $0.9 million as a loss on extinguishment of debt for the six months ended September 30, 2015.

The April 2015 amendment to the Cinedigm Revolving Loans extended the term of the agreement to March 31, 2018, provided for the release of the equity interests in the subsidiaries that we had previously pledged as collateral, changed the interest rate and replaced all financial covenants with a single debt service coverage ratio test commencing at June 30, 2016 and a $5.0 million minimum liquidity covenant. The Cinedigm Revolving Loans, as amended, bear interest at Base Rate (as defined in the amendment) plus 3% or LIBOR plus 4%, at our election, but in no event may the elected Base Rate or LIBOR rate be less than 1%. Availability under the Cinedigm Revolving Loans was $17.5 million, of which we borrowed $15.1 million as of September 30, 2015. We are permitted to repay the Cinedigm Revolving Loans, at our option, in whole or in part.

In accordance with the April 2015 amendment to the Cinedigm Revolving Loans, we maintain a debt service reserve account for the aggregate amount of scheduled interest and principal payments due on the Cinedigm Revolving Loans and Convertible notes over the next six months. As of September 30, 2015, we recorded restricted cash of $2.2 million related to the debt service reserve account. No such debt service account was maintained as of March 31, 2015.

2013 Notes

In October 2013, we entered into securities purchase agreements with certain investors, pursuant to which we sold notes in the aggregate principal amount of $5.0 million (the “2013 Notes”) and warrants to purchase an aggregate of 1,500,000 shares of Class A Common Stock (the “2013 Warrants”) to such investors. The proceeds of the sales of the 2013 Notes and 2013 Warrants were primarily used for working capital and general corporate purposes, including financing an acquisition. We allocated a proportional value of $1.6 million to the 2013 Warrants using a Black-Scholes option valuation model with the following assumptions:

Risk free interest rate
 
1.38
%
Dividend yield
 

Expected life (years)
 
5

Expected volatility
 
76.25
%

We have treated the implied fair value of the 2013 Warrants as a discount to the debt that was issued. The debt discount associated with the 2013 Notes is being amortized as interest expense, using the effective interest method, through the maturity of the 2013 Notes.

The principal amount outstanding under the 2013 Notes is due on October 21, 2018. The 2013 Notes bear interest at 9.0% per annum, payable in quarterly installments over the term of the 2013 Notes. The 2013 Notes may be redeemed at any time on or after October 21, 2015, subject to certain premiums.

At September 30, 2015, we were in compliance with all of our debt covenants.


19



6.
STOCKHOLDERS’ DEFICIT

COMMON STOCK

During the six months ended September 30, 2015, we issued 679,379 shares of Class A common stock as payment for services rendered by our Board of Directors and certain other third-party advisory services, payment of preferred stock dividends and the exercise of employee stock options.

PREFERRED STOCK

Cumulative dividends in arrears on preferred stock at September 30, 2015 and March 31, 2015 were $0.1 million. In October 2015, we paid preferred stock dividends accrued at September 30, 2015 in the form of 114,644 shares of Class A Common Stock.

TREASURY STOCK

In connection with the offering of Convertible Notes, on April 29, 2015, we repurchased 2,721,000 shares of our Class A common stock from certain purchasers of Convertible Notes in privately negotiated transactions for $2.7 million, which is reflected as treasury stock in our Condensed Consolidated Balance Sheet as of September 30, 2015. In addition, we entered into a privately negotiated forward stock purchase transaction with a financial institution, which is one of the lenders under our credit agreement (the "Forward Counterparty"), pursuant to which we paid $11.4 million to purchase 11,791,384 shares of our Class A common stock for settlement that may be settled at any time prior to the fifth year anniversary of the issuance date of the notes. The payment for the forward contract has been reflected as a reduction of Additional Paid-in Capital on our Condensed Consolidated Balance Sheet until such time that the forward contract is settled and the shares are legally delivered to and owned by us. Upon settlement of the forward contract and delivery of the stock, we will reclassify such amount to treasury stock.

CINEDIGM’S EQUITY INCENTIVE PLAN

Stock Options

Awards issued under our equity incentive plan (the "Plan") may be in any of the following forms (or a combination thereof) (i) stock option awards; (ii) stock appreciation rights; (iii) stock or restricted stock or restricted stock units; or (iv) performance awards. The Plan provides for the granting of incentive stock options (“ISOs”) with exercise prices not less than the fair market value of our Class A Common Stock on the date of grant. ISOs granted to shareholders having more than 10% of the total combined voting power of the Company must have exercise prices of at least 110% of the fair market value of our Class A Common Stock on the date of grant. ISOs and non-statutory stock options granted under the Plan are subject to vesting provisions, and exercise is subject to the continuous service of the participant. The exercise prices and vesting periods (if any) for non-statutory options are set at the discretion of our compensation committee. Upon a change of control of the Company, all stock options (incentive and non-statutory) that have not previously vested will vest immediately and become fully exercisable. In connection with the grants of stock options under the Plan, we and the participants have executed stock option agreements setting forth the terms of the grants. The Plan provides for the issuance of up to 14,300,000 shares of Class A Common Stock to employees, outside directors and consultants.

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, 2015
5,908,670

 
$
1.72

Granted
130,000

 
1.51

Exercised
(25,000
)
 
0.89

Canceled/forfeited
(364,438
)
 
1.92

Balance at September 30, 2015
5,649,232

 
1.69


Stock options granted under the Plan during the six months ended September 30, 2015 vest and become exercisable in 25% increments over four years from their grant dates. The weighted average remaining contractual life for stock options outstanding as of September 30, 2015 was 6.78 years.


20



OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN

In October 2013, we issued options outside of the Plan to 10 individuals that became employees as a result of a business combination. The employees received options to purchase an aggregate of 620,000 shares of our Class A Common Stock at an exercise price of $1.75 per share. The options vest and become exercisable in 25% increments over four years from their grant dates and expire 10 years from the date of grant, if unexercised. As of September 30, 2015, there were 348,750 unvested options outstanding.

In December 2010, we issued options to purchase 4,500,000 shares of Class A Common Stock outside of the Plan as part of our Chief Executive Officer's initial employment agreement with the Company. Such options have exercise prices per share between $1.50 and $5.00, all of which were vested as of December 2013 and will expire in December 2020. As of September 30, 2015, all such options remained outstanding.

WARRANTS

The following table presents information about outstanding warrants to purchase shares of our Class A common stock as of September 30, 2015. All of the outstanding warrants are fully vested and exercisable.

Recipient
 
Amount outstanding
 
Expiration
 
Exercise price per share
Sageview Capital, L.P
 
16,732,824

 
August 2016
 
$1.31
Strategic management service provider
 
525,000

 
July 2021
 
$1.72 - $3.00
Warrants issued to creditors in connection with the 2013 Notes (the "2013 Warrants")
 
1,250,625

 
October 2018
 
$1.85

Outstanding warrants held by Sageview Capital, L.P. ("Sageview") contain customary provisions for cashless exercises and anti-dilution adjustments. In addition, the warrants' expiration date may be extended in limited circumstances.  On April 29, 2015, the number of shares underlying the warrants issued to Sageview and their related exercise price were adjusted from 16,000,000 and $1.37 to 16,732,824 and $1.31, respectively, to give effect to an anti-dilution adjustment that resulted from the issuance of the Convertible Notes.

Outstanding warrants held by the strategic management service provider were issued in connection with a consulting management services agreement ("MSA"). The warrants may be terminated with 90 days' notice in the event of termination of the MSA.

The 2013 Warrants and related 2013 Notes are subject to certain transfer restrictions.

7.
COMMITMENTS AND CONTINGENCIES

LEASES

We have capital lease obligations covering a facility and computer equipment. In May 2011, we completed the sale of certain assets and liabilities of the Pavilion Theatre and ceased to operate it at that time. We have remained the primary obligor on the Pavilion capital lease and therefore, the capital lease obligation and the related assets under the capital lease continue to be reflected on our Consolidated Balance Sheets as of September 30, 2015 and March 31, 2015. We have entered into a sub-lease agreement with an unrelated third party purchaser who makes all payments related to the lease and therefore, we have no continuing involvement in the operation of the Pavilion Theatre.
We also operate from leased properties under non-cancelable operating lease agreements, certain of which contain escalating lease clauses.

LITIGATION

Gaiam Dispute
On September 30, 2015, we entered into a Confidential Settlement Agreement and Release (the “Settlement”) with Gaiam, Inc. and Gaiam Americas, Inc. (together, “Gaiam”) relating to disputes arising from our October 2013 acquisition of a division of Gaiam that maintained exclusive distribution rights agreements with large independent studios/content providers, and distributed entertainment content through home video, digital and television distribution channels (the “GVE Acquisition”).

As previously disclosed, we initiated mediation with Gaiam in August 2014 with respect to certain claims resulting from the GVE Acquisition in accordance with the requirements of the Membership Interest Purchase Agreement (the “MIPA”). In January 2015, we participated in a two-day mediation with Gaiam to determine whether the parties’ disputes could be resolved informally without arbitration. The mediation was not successful, and, therefore, the parties pursued their claims and counterclaims against each other through arbitration. After certain procedural disputes, the parties proceeded with two arbitrations, one before a nationally recognized accounting firm to determine the value of the working capital in accordance with the relevant procedures set forth in the MIPA and the other before the American Arbitration Association to resolve the parties’ non-working capital disputes.

The Settlement resolved the claims and counterclaims in both arbitrations and Gaiam agreed to an initial Settlement payment of $2.3 million and a subsequent Settlement payment in an amount to be determined in arbitration.  The Settlement sets a schedule for the arbitration that contemplates its conclusion within approximately 90 days, subject to either party’s right to file a petition to vacate and/or modify the final award determined by the arbitrator. As a result, for the three months and six months ended September 30, 2015, we have recorded the initial Settlement payment as litigation recovery, net of expenses in the Condensed Consolidated Statement of Operations. The initial settlement payment was received in October 2015.

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 INFORMATION
 
 
For the Six Months Ended September 30,
(in thousands)
 
2015
 
2014
Cash interest paid
 
$
6,571

 
$
8,474

Accrued dividends on preferred stock
 
$
89

 
$
178

Issuance of common stock for payment of preferred stock dividends
 
$
178

 
$
178

Deferred consideration recorded in connection with sale of business
 
$

 
$
1,050


9.
SEGMENT INFORMATION

We operate in four reportable segments: Phase I Deployment, Phase II Deployment, Services and Content & Entertainment or CEG. Our segments were determined based on the economic characteristics of our products and services, our internal organizational structure, the manner in which our operations are managed and the criteria used by our Chief Operating Decision Maker to evaluate performance, which is generally the segment’s income (loss) from continuing operations before interest, taxes, depreciation and amortization. Certain Corporate assets, liabilities and operating expenses are not allocated to our reportable segments.
 

21



Operations of:
Products and services provided:
Phase I Deployment
Financing vehicles and administrators for our 3,724 Systems installed nationwide, for which we retain ownership of the Systems and the residual cash flows related to the Systems after the repayment of all non-recourse debt at the expiration of exhibitor master license agreements.
Phase II Deployment
Financing vehicles and administrators for our 8,904 Systems installed domestically and internationally, for which we retain 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.
Services
Provides monitoring, collection, verification and other management services to our Phase I Deployment, Phase II Deployment, CDF2 Holdings, as well as to exhibitors who purchase their own equipment. Services also collects and disburses VPFs from motion picture studios, distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors.
Content & Entertainment
Leading distributor of independent content, and collaborates with producers and other content owners to market, source, curate and distribute independent content to targeted and profitable audiences in theatres and homes, and via mobile and emerging platforms.

The following tables present certain financial information related to our reportable segments and Corporate:

 
 
As of September 30, 2015
(In thousands)
 
Intangible Assets, net
 
Goodwill
 
Total Assets
 
Notes Payable, Non-Recourse
 
Notes Payable
 
Capital Leases
Phase I Deployment
 
$
233

 
$

 
$
60,682

 
$
108,979

 
$

 
$

Phase II Deployment
 

 

 
58,483

 
23,416

 

 

Services
 

 

 
1,597

 

 

 

Content & Entertainment
 
28,620

 
8,701

 
99,916

 

 

 
86

Corporate
 
12

 

 
18,228

 

 
79,667

 
5,107

Total
 
$
28,865

 
$
8,701

 
$
238,906

 
$
132,395

 
$
79,667

 
$
5,193


 
 
As of March 31, 2015
(In thousands)
 
Intangible Assets, net
 
Goodwill
 
Total Assets
 
Notes Payable, Non-Recourse
 
Notes Payable
 
Capital Leases
Phase I Deployment
 
$
252

 
$

 
$
74,595

 
$
123,722

 
$

 
$

Phase II Deployment
 

 

 
61,350

 
27,638

 

 

Services
 

 

 
1,084

 

 

 

Content & Entertainment
 
31,520

 
26,701

 
122,610

 

 

 
84

Corporate
 
12

 

 
13,378

 

 
45,294

 
5,411

Total
 
$
31,784

 
$
26,701

 
$
273,017

 
$
151,360

 
$
45,294

 
$
5,495



22




 
 
Statements of Operations
 
 
For the Three Months Ended September 30, 2015
 
 
(Unaudited, in thousands)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues
 
$
9,721

 
$
3,173

 
$
3,109

 
$
11,701

 
$

 
$
27,704

Direct operating (exclusive of depreciation and amortization shown below)
 
333

 
109

 
3

 
7,943

 

 
8,388

Selling, general and administrative
 
85

 
23

 
225

 
5,768

 
3,408

 
9,509

Allocation of Corporate overhead
 

 

 
405

 
1,354

 
(1,759
)
 

Provision for doubtful accounts
 

 

 

 

 

 

Restructuring, transition and acquisition expenses, net
 

 

 

 

 
63

 
63

Goodwill impairment
 

 

 

 
18,000

 

 
18,000

Litigation settlement recovery, net of expenses
 

 

 

 
(1,208
)
 

 
(1,208
)
Depreciation and amortization of property and equipment
 
7,151

 
1,881

 

 
111

 
284

 
9,427

Amortization of intangible assets
 
11

 

 

 
1,449

 
3

 
1,463

Total operating expenses
 
7,580

 
2,013

 
633

 
33,417

 
1,999

 
45,642

Income (loss) from operations
 
$
2,141

 
$
1,160

 
$
2,476

 
$
(21,716
)
 
$
(1,999
)
 
$
(17,938
)

The following employee and director 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
 
$

 
$

 
$
3

 
$
1

 
$

 
$
4

Selling, general and administrative
 

 

 
1

 
68

 
328

 
397

Total stock-based compensation
 
$

 
$

 
$
4

 
$
69

 
$
328

 
$
401




23



 
 
Statements of Operations
 
 
For the Three Months Ended September 30, 2014
 
 
(Unaudited, in thousands)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues
 
$
8,812

 
$
3,038

 
$
2,863

 
$
9,008

 
$

 
$
23,721

Direct operating (exclusive of depreciation and amortization shown below)
 
221

 
137

 
1

 
2,952

 

 
3,311

Selling, general and administrative
 
183

 
34

 
212

 
4,717

 
3,067

 
8,213

Allocation of Corporate overhead
 

 

 
459

 
1,336

 
(1,795
)
 

Provision for doubtful accounts
 
36

 
34

 
8

 

 

 
78

Restructuring, transition and acquisition expenses, net
 

 

 

 
576

 
241

 
817

Litigation and related expenses
 

 

 

 
91

 

 
91

Depreciation and amortization of property and equipment
 
7,138

 
1,881

 
53

 
51

 
268

 
9,391

Amortization of intangible assets
 
12

 

 

 
1,451

 
1

 
1,464

Total operating expenses
 
7,590

 
2,086

 
733

 
11,174

 
1,782

 
23,365

Income (loss) from operations
 
$
1,222

 
$
952

 
$
2,130

 
$
(2,166
)
 
$
(1,782
)
 
$
356


The following employee and director 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
 
$

 
$

 
$

 
$
3

 
$

 
$
3

Selling, general and administrative
 

 

 
6

 
65

 
333

 
404

Total stock-based compensation
 
$

 
$

 
$
6

 
$
68

 
$
333

 
$
407




24



 
 
Statements of Operations
 
 
For the Six Months Ended September 30, 2015
 
 
(Unaudited, in thousands)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues
 
17,863

 
6,068

 
5,802

 
20,799

 

 
50,532

Direct operating (exclusive of depreciation and amortization shown below)
 
558

 
200

 
7

 
14,915

 

 
15,680

Selling, general and administrative
 
338

 
64

 
435

 
10,996

 
6,494

 
18,327

Allocation of Corporate overhead
 

 

 
807

 
2,701

 
(3,508
)
 

Provision for doubtful accounts
 
241

 
98

 

 

 

 
339

Restructuring, transition and acquisition expenses, net
 

 

 

 

 
196

 
196

Litigation settlement recovery, net of expenses
 

 

 

 
(410
)
 

 
(410
)
Goodwill impairment
 

 

 

 
18,000

 

 
18,000

Depreciation and amortization of property and equipment
 
14,304

 
3,762

 

 
151

 
567

 
18,784

Amortization of intangible assets
 
19

 

 

 
2,899

 
4

 
2,922

Total operating expenses
 
15,460

 
4,124

 
1,249

 
49,252

 
3,753

 
73,838

Income (loss) from operations
 
$
2,403

 
$
1,944

 
$
4,553

 
$
(28,453
)
 
$
(3,753
)
 
$
(23,306
)
 
 
 
 
 
 
 
 
 
 
 
 
 

The following employee and director 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
 

 

 
7

 
3

 

 
10

Selling, general and administrative
 

 

 
1

 
136

 
926

 
1,063

Total stock-based compensation
 

 

 
8

 
139

 
926

 
1,073






25



 
 
Statements of Operations
 
 
For the Six Months Ended September 30, 2014
 
 
(Unaudited, in thousands)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues
 
18,296

 
6,209

 
5,923

 
16,150

 

 
46,578

Direct operating (exclusive of depreciation and amortization shown below)
 
465

 
274

 
52

 
11,024

 

 
11,815

Selling, general and administrative
 
278

 
73

 
412

 
9,100

 
5,948

 
15,811

Allocation of Corporate overhead
 

 

 
925

 
2,689

 
(3,614
)
 

Provision for doubtful accounts
 
96

 
55

 
21

 

 

 
172

Restructuring, transition and acquisition expenses, net
 

 

 

 
1,418

 
345

 
1,763

Litigation and related expenses
 

 

 

 
202

 

 
202

Depreciation and amortization of property and equipment
 
14,275

 
3,762

 
106

 
92

 
532

 
18,767

Amortization of intangible assets
 
23

 

 

 
3,324

 
2

 
3,349

Total operating expenses
 
15,137

 
4,164

 
1,516

 
27,849

 
3,213

 
51,879

Income (loss) from operations
 
3,159

 
2,045

 
4,407

 
(11,699
)
 
(3,213
)
 
(5,301
)

The following employee and director 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
 

 

 

 
6

 

 
6

Selling, general and administrative
 

 

 
10

 
129

 
880

 
1,019

Total stock-based compensation
 

 

 
10

 
135

 
880

 
1,025





ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the Company’s control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.  
 
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 traditional analog film prints to digital distribution, we have become a leading distributor of independent content, both through 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 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 group (“Content & Entertainment” or "CEG"). The Phase I Deployment and Phase II Deployment segments are the non-recourse, financing vehicles and administrators for our digital cinema equipment (the “Systems”) installed in movie theatres throughout the United States and in Australia and New Zealand. Our Services segment provides fee based support to over 12,000 movie screens in our Phase I Deployment, Phase II Deployment segments 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 focused on: (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.

We are structured so that our digital cinema business (collectively, the Phase I Deployment, Phase II Deployment and Services segments) operates independently from our Content & Entertainment segment. As of September 30, 2015, we had approximately $137.7 million of scheduled principal payments outstanding on non-recourse debt, which exclude debt discounts and unamortized debt issuance costs, that are serviced by our digital cinema business. We also had approximately $84.1 million of scheduled outstanding principal payments on recourse debt that are not attributable to a particular reportable segment and are therefore reported as part of our Corporate operations.

We reported consolidated net losses from continuing operations of $23.1 million during the three months ended September 30, 2015 and we have an accumulated deficit of $333.7 million as of September 30, 2015. We also have significant contractual obligations related to our non-recourse and recourse debt. We may continue generating consolidated net losses for the foreseeable future. We believe the combination of: (i) our cash and restricted cash balances at September 30, 2015, (ii) the remaining availability under our revolving line of credit, (iii) planned cost reduction initiatives, and (iv) expected cash flows from operations will be sufficient to satisfy our liquidity and capital requirements for the next twelve months. Our capital requirements will depend on many factors, and we may need to use available capital resources and raise additional capital. As a result of our ongoing process of exploring and evaluating potential significant strategic and capital raising opportunities with the help of our financial advisor, we are in discussions with a potential investor to help meet our ongoing capital raising requirements. There can be no assurance that the transaction under discussion will be consummated. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.


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