CINEVERSE CORP.
10-Ks and 10-Qs
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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:
June 30, 2014
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)
___________________________________
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Delaware
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22-3720962
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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902 Broadway, 9th Floor New York, NY
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10010
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(Address of principal executive offices)
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(Zip Code)
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(212) 206-8600
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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CLASS A COMMON STOCK, PAR VALUE $0.001 PER SHARE
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NASDAQ GLOBAL MARKET
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Securities registered pursuant to Section 12(g) of the Act:
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NONE
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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.
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Yes
x
No
o
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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).
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Yes
x
No
o
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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.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
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Yes
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No
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As of August 11, 2014,
76,774,253
shares of Class A Common Stock, $0.001 par value were outstanding.
CINEDIGM CORP.
TABLE OF CONTENTS
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Page
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PART I --
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements (Unaudited)
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Condensed Consolidated Balance Sheets at June 30, 2014 (Unaudited) and March 31, 2014
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Unaudited Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2014 and 2013
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Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months ended June 30, 2014 and 2013
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Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2014 and 2013
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Notes to Unaudited Condensed Consolidated Financial Statements
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 4.
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Controls and Procedures
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PART II --
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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Item 3.
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Defaults Upon Senior Securities
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Item 4.
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Mine Safety Disclosures
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Item 5.
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Other Information
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Item 6.
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Exhibits
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Signatures
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Exhibit Index
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CINEDIGM CORP.
(In thousands, except for share and per share data)
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June 30, 2014
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March 31, 2014
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ASSETS
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(Unaudited)
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Current assets
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||||||
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Cash and cash equivalents
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$
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36,742
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$
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50,215
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Accounts receivable, net
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37,506
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56,863
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Inventory
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2,870
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3,164
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Unbilled revenue
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5,122
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5,144
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Prepaid and other current assets
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8,392
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8,698
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Note receivable, current portion
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101
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112
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Assets of discontinued operations, net of current liabilities
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—
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278
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Total current assets
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90,733
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124,474
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Restricted cash
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6,751
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6,751
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Security deposits
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269
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269
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Property and equipment, net
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125,642
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134,936
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Intangible assets, net
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35,757
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37,639
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Goodwill
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27,944
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25,494
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Deferred costs, net
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8,618
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9,279
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Accounts receivable, long-term
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1,343
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1,397
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Note receivable, net of current portion
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91
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99
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Assets of discontinued operations, net of current portion
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6,238
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5,660
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Total assets
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$
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303,386
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$
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345,998
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See accompanying notes to Condensed Consolidated Financial Statements
3
CINEDIGM CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
(continued)
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June 30, 2014
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March 31, 2014
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LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
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(Unaudited)
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Current liabilities
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Accounts payable and accrued expenses
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$
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55,537
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$
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72,604
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Current portion of notes payable, non-recourse
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33,540
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33,825
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Current portion of notes payable
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15,608
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19,219
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Current portion of capital leases
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609
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614
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Current portion of deferred revenue
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3,025
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3,214
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Total current liabilities
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108,319
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129,476
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Notes payable, non-recourse, net of current portion
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155,388
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164,779
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Notes payable, net of current portion
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22,499
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23,525
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Capital leases, net of current portion
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5,330
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5,472
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Deferred revenue, net of current portion
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11,899
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12,519
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Total liabilities
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303,435
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335,771
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Commitments and contingencies (see Note 6)
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Stockholders’ (Deficit) Equity
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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 June 30, 2014 and March 31, 2014, respectively. Liquidation preference of $3,648 |
3,559
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3,559
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Class A common stock, $0.001 par value per share; 118,759,000 shares authorized; 76,656,587 and 76,571,972 shares issued and 76,605,147
and 76,520,532 shares outstanding at June 30, 2014 and March 31, 2014, respectively
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77
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76
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Class B common stock, $0.001 par value per share; 1,241,000 shares authorized; 1,241,000 shares issued and 0 shares outstanding, at June 30, 2014 and March 31, 2014, respectively
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—
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—
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Additional paid-in capital
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275,938
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275,519
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Treasury stock, at cost; 51,440 Class A shares
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(172
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)
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(172
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)
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Accumulated deficit
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(279,438
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)
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(268,686
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)
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Accumulated other comprehensive loss
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(13
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)
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(69
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)
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Total stockholders’ (deficit) equity
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(49
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)
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10,227
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Total liabilities and stockholders’ (deficit) equity
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$
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303,386
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$
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345,998
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See accompanying notes to Condensed Consolidated Financial Statements
4
CINEDIGM CORP.
(In thousands, except for share and per share data)
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For the Three Months Ended June 30,
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2014
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2013
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Revenues
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$
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22,857
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$
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18,537
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Costs and expenses:
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Direct operating (exclusive of depreciation and amortization shown below)
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8,504
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3,779
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Selling, general and administrative
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7,709
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6,204
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Provision for doubtful accounts
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94
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62
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Transition and acquisition expenses
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946
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—
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Depreciation and amortization of property and equipment
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9,376
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9,245
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Amortization of intangible assets
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1,885
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418
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Total operating expenses
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28,514
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19,708
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Loss from operations
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(5,657
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)
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(1,171
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)
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Interest expense, net
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(5,035
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)
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(4,924
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)
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Loss on investment in non-consolidated entity
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—
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(1,252
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)
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Other income, net
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139
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134
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Change in fair value of interest rate derivatives
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(259
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)
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829
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Loss from continuing operations
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(10,812
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)
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(6,384
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)
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Income (loss) from discontinued operations
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149
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(604
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)
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Net loss
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(10,663
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)
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(6,988
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)
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Preferred stock dividends
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(89
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)
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(89
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)
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Net loss attributable to common stockholders
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$
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(10,752
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)
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$
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(7,077
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)
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Net loss per Class A and Class B common share attributable to common shareholders - basic and diluted:
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Loss from continuing operations
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$
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(0.14
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)
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$
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(0.13
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)
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Income (loss) from discontinued operations
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—
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(0.02
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)
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$
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(0.14
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)
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$
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(0.15
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)
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Weighted average number of Class A and Class B common shares outstanding: basic and diluted
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76,567,128
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48,357,020
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See accompanying notes to Condensed Consolidated Financial Statements
5
CINEDIGM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
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For the Three Months Ended June 30,
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||||||||
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2014
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2013
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|||||||
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Net loss
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$
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(10,663
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)
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$
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(6,988
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)
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Other comprehensive income: foreign exchange translation
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56
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—
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Comprehensive loss
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$
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(10,607
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)
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$
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(6,988
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)
|
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See accompanying notes to Condensed Consolidated Financial Statements
6
CINEDIGM CORP.
(In thousands)
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For the Three Months Ended June 30,
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||||||
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2014
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2013
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Cash flows from operating activities
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Net loss
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$
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(10,663
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)
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$
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(6,988
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)
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Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization of property and equipment and
amortization of intangible assets
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11,261
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9,700
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Amortization of capitalized software costs
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—
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314
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Amortization of debt issuance costs
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437
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288
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Provision for doubtful accounts
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94
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62
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Stock-based compensation and expenses
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651
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737
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Change in fair value of interest rate derivatives
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259
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(829
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)
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Accretion and PIK interest expense added to note payable
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631
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472
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Loss on investment in non-consolidated entity
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—
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1,252
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Changes in operating assets and liabilities, net of acquisitions:
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|||||||
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Accounts receivable
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19,301
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(3,496
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)
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Inventory
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294
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—
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Unbilled revenue
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394
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3,103
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|||
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Prepaid expenses and other current assets
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228
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(1,314
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)
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Other assets
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243
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(599
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)
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Accounts payable and accrued expenses
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(19,823
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)
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7,216
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Deferred revenue
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(591
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)
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(604
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)
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Other liabilities
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(292
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)
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364
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Net cash provided by operating activities
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2,424
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9,678
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Cash flows from investing activities:
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|||||||
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Purchases of property and equipment
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(331
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)
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(141
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)
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Purchases of intangible assets
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(4
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)
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—
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Additions to capitalized software costs
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(483
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)
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(731
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)
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Restricted cash
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—
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(2
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)
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Net cash used in investing activities
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(818
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)
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(874
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)
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Cash flows from financing activities:
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|||||||
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Repayment of notes payable
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(14,862
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)
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(8,610
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)
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Principal payments on capital leases
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(147
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)
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(31
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)
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|||
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Costs associated with issuance of Class A common stock
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(70
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)
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—
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|||
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Net cash used in financing activities
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(15,079
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)
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(8,641
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)
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Net change in cash and cash equivalents
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(13,473
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)
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163
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|||
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Cash and cash equivalents at beginning of period
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50,215
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13,448
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Cash and cash equivalents at end of period
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$
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36,742
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$
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13,611
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See accompanying notes to Condensed Consolidated Financial Statements
7
CINEDIGM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the fiscal periods ended June 30, 2014 and 2013
($ in thousands, except for share and per share data)
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1.
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NATURE OF OPERATIONS
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Cinedigm Corp. (formerly known as Cinedigm Digital Cinema Corp.) was incorporated in Delaware on March 31, 2000 (“Cinedigm”, and collectively with its subsidiaries, the “Company”). Cinedigm is (i) a leading distributor and aggregator of independent movie, television and other short form content managing a library of distribution rights to over
52,000
titles and episodes released across digital, physical, theatrical, home and mobile entertainment platforms as well as (ii) a leading servicer of digital cinema assets in over
12,000
movie screens in both North America and several international countries.
The Company reports its financial results in
four
primary segments as follows: (1) the first digital cinema deployment (“Phase I Deployment”), (2) the second digital cinema deployment (“Phase II Deployment”), (3) digital cinema services (“Services”) and (4) media content and entertainment (“Content & Entertainment”). The Phase I Deployment and Phase II Deployment segments are the non-recourse, financing vehicles and administrators for the Company's digital cinema equipment (the “Systems”) installed in movie theatres nationwide. The Services segment provides services and support to over
12,000
movie screens in the Phase I Deployment and Phase II Deployment segments as well as directly to exhibitors and other third party customers. Included in these services are Systems management services for a specified fee via service agreements with Phase I Deployment and Phase II Deployment as well as third party exhibitors as buyers of their own digital cinema equipment. These services primarily facilitate the conversion from analog to digital cinema and have positioned the Company at what it believes to be the forefront of a rapidly developing industry relating to the distribution and management of digital cinema and other content to theatres and other remote venues worldwide. The Content & Entertainment segment provides content marketing and distribution services in both theatrical and ancillary home entertainment markets to independent movie, television and other short form content owners and to theatrical exhibitors. As a leading distributor of independent content, the Company collaborates with producers, major brands and other content owners to market, source, curate and distribute quality content to targeted and profitable audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to, iTunes, Amazon Prime, Netflix, Hulu, Xbox, Playstation, cable video-on-demand ("VOD") and curated over-the-top ("OTT") digital entertainment channels and applications, (ii) physical goods, including DVD and Blu-ray and (iii) theatrical releases.
Gaiam Acquisition
On October 21, 2013, the Company and Cinedigm Entertainment Holdings, LLC ("CHE"), a newly-formed, wholly-owned subsidiary of the Company, acquired from Gaiam Americas, Inc. and Gaiam, Inc. (together, “Gaiam”) their division ("GVE") that maintains exclusive distribution rights agreements with large independent studios/content providers, and distributes entertainment content through home video, digital and television distribution channels (the “GVE Acquisition”). The Company agreed to an aggregate purchase price of
$51,500
, subject to a working capital adjustment, with (i)
$47,500
paid in cash and
666,978
shares of Class A Common Stock valued at
$1,000
issued upon the closing of the GVE Acquisition, and (ii)
$3,000
to be paid on a deferred basis, of which
$1,000
was paid during the fiscal year ended March 31, 2014 and the remainder was settled through the collection of a receivable during the fiscal year ended March 31, 2014. The working capital adjustment related to the purchase price has not yet been finalized between the Company and the sellers of GVE. Pending final resolution, such working capital adjustment, if any, will be recorded as adjustments to purchase considerations during the fiscal year ending March 31, 2015. Upon the closing of the GVE Acquisition, GVE became part of the Company's Content & Entertainment segment.
Upon concluding the purchase price allocation for the GVE Acquisition during the three months ended June 30, 2014, a measurement period adjustment of
$2,450
was made to write off advances on the opening balance sheet of GVE due to conditions that existed at the time of the GVE Acquisition. Such conditions, had they been identified as of March 31, 2014, would have reduced the previously reported prepaid and other current assets to
$6,222
and increased goodwill to
$27,944
on the consolidated balance sheets as of March 31, 2014, respectively.
The purchase price has been allocated to the identifiable net assets acquired as of the date of acquisition including any measurement period adjustments as follows pending any final working capital adjustment:
8
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Accounts receivable
|
$
|
15,524
|
|
|
Inventory
|
2,224
|
|
|
|
Advances
|
5,248
|
|
|
|
Other assets
|
152
|
|
|
|
Content library
|
17,211
|
|
|
|
Supplier contracts and relationships
|
11,691
|
|
|
|
Goodwill
|
19,402
|
|
|
|
Total assets acquired
|
71,452
|
|
|
|
Total liabilities assumed
|
(19,952
|
)
|
|
|
Total net assets acquired
|
$
|
51,500
|
|
The Company estimates the useful life of the content library and supplier contracts and relationships to be
6
years and
8
years, respectively.
The fair values assigned to intangible assets were determined through the application of various commonly used and accepted valuation procedures and methods, including the multi-period excess earnings method. These valuation methods rely on management judgment, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates, and other factors. The valuation of tangible assets was preliminarily determined to approximate book value at the time of the GVE Acquisition. Useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. Goodwill is mainly attributable to the assembled workforce and synergies expected to arise from the GVE Acquisition.
Pro forma Information Related to the Acquisition of GVE
The following unaudited consolidated pro forma summary information for the three months ended
June 30, 2014
and
2013
has been prepared by adjusting the historical data as set forth in the accompanying condensed consolidated statements of operations for the three months ended
June 30, 2014
and
2013
to give effect to the GVE Acquisition as if it had occurred at April 1, 2013. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the GVE Acquisition, nor does the pro forma reflect additional revenue opportunities following the GVE Acquisition.
|
For the Three Months Ended June 30,
|
||||||||
|
2014
|
2013
|
|||||||
|
Revenue
|
$
|
22,857
|
|
$
|
27,006
|
|
||
|
Loss from continuing operations
|
$
|
(10,812
|
)
|
$
|
(6,606
|
)
|
||
|
Net loss
|
$
|
(10,663
|
)
|
$
|
(7,210
|
)
|
||
|
Net loss per share (basic and diluted)
|
$
|
(0.14
|
)
|
$
|
(0.15
|
)
|
||
Sale of Software
During the fiscal year ended March 31, 2014, the Company made the strategic decision to discontinue, exit its software business and execute a plan of sale for Hollywood Software, Inc. d/b/a Cinedigm Software (“Software”), the Company's direct, wholly-owned subsidiary. Management concluded that it would be in the best interests of shareholders for the Company’s focus to be toward theatrical releasing and aggregation and distribution of independent content, digitally and in the form of DVDs and Blu-Ray discs, and VOD, along with the growth and servicing of the existing digital cinema business. Further, management believed that Software, which was previously included in our Services segment, no longer yielded the same synergies across the Company’s businesses as once existed.
As a consequence, it was determined that Software met the criteria for classification as held for sale/discontinued operations. As such, Software has been adjusted to reflect the fair value of its net assets and the consolidated financial statements and the notes to consolidated financial statements presented herein have been recast solely to reflect, for all periods presented, the adjustments resulting from these changes in classification for discontinued operations.
9
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
BASIS OF PRESENTATION AND CONSOLIDATION
The Company has incurred net losses historically and has an accumulated deficit of
$279,438
as of
June 30, 2014
. The Company also has significant contractual obligations related to its recourse and non-recourse debt for the remainder of the fiscal year ending March 31, 2015 and beyond. The Company may continue to generate net losses for the foreseeable future. Based on the Company’s cash position at
June 30, 2014
, and expected cash flows from operations, management believes that the Company has the ability to meet its obligations through at least
June 30, 2015
. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on the Company’s financial position, results of operations or liquidity.
The Company’s consolidated financial statements include the accounts of Cinedigm, Access Digital Media, Inc. (“AccessDM”), FiberSat Global Services, Inc. d/b/a Cinedigm Satellite and Support Services (“Satellite”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre (certain assets and liabilities of which were sold in May 2011), Christie/AIX, Inc. ("C/AIX") d/b/a Cinedigm Digital Cinema (“Phase 1 DC”), Vistachiara Productions, Inc. f/k/a The Bigger Picture, currently d/b/a Cinedigm Content and Entertainment Group, Cinedigm Entertainment Corp. f/k/a New Video Group, Inc. ("New Video"), CHE, Access Digital Cinema Phase 2 Corp. (“Phase 2 DC”), Cinedigm Digital Cinema Australia Pty Ltd, Access Digital Cinema Phase 2 B/AIX Corp. (“Phase 2 B/AIX”), Cinedigm Digital Funding I, LLC (“CDF I”) and Cinedigm DC Holdings LLC ("DC Holdings LLC"). Cinedigm Content and Entertainment Group, New Video and CHE are together referred to as CEG. Software comprises discontinued operations. All intercompany transactions and balances have been eliminated in consolidation.
The condensed consolidated balance sheet as of March 31, 2014, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements were prepared following the interim reporting requirements of the Securities and Exchange Commission ("SEC"). They do not include all disclosures normally made in financial statements contained in the Company’s Annual Report on Form 10-K ("Form 10-K"). In management’s opinion, all adjustments necessary for a fair presentation of financial position, the results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the periods presented have been made. The results of operations for the respective interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2014 filed with the SEC on June 26, 2014.
INVESTMENT IN NON-CONSOLIDATED ENTITY
The Company indirectly owns
100%
of the common equity of CDF2 Holdings, LLC ("Holdings"), which is a Variable Interest Entity (“VIE”), as defined in Accounting Standards Codification Topic 810 ("ASC 810"), “Consolidation". Holdings, a subsidiary of Phase 2 DC, which is wholly owned by the Company, and its wholly owned limited liability company, Cinedigm Digital Funding 2, LLC, were created for the purpose of capitalizing on the conversion of the exhibition industry from film to digital technology. Holdings assists customers in procuring the necessary equipment in the conversion of their Systems by providing the necessary financing, equipment, installation and related ongoing services. Holdings is a VIE, as defined in ASC 810, indirectly wholly owned by the Company. ASC 810 requires the consolidation of VIEs by an entity that has a controlling financial interest in the VIE which entity is thereby defined as the primary beneficiary of the VIE. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, among other factors. Although Holdings is indirectly wholly owned by the Company, a third party, which also has a variable interest in Holdings, along with an independent third party manager and the Company must mutually approve all business activities and transactions that significantly impact Holdings' economic performance. The Company has thus assessed its variable interests in Holdings and determined that it is not the primary beneficiary of Holdings and therefore accounts for its investment in Holdings under the equity method of accounting. In completing our assessment, the Company identified the activities that it considers most significant to the economic performance of Holdings and determined that we do not have the power to direct those activities. As a result, Holdings' financial position and results of operations are not consolidated in the financial position and results of operations of the Company. The Company's net investment in Holdings is reflected as “Investment in non-consolidated entity, net" in the accompanying condensed consolidated balance sheets.
The Holding’s total stockholder’s deficit at
June 30, 2014
was
$3,512
. The Company has no obligation to fund the operating loss or the deficit beyond its initial investment, and accordingly, the Company carried its investment in Holdings at
$0
.
Accounts receivable due from Holdings for service fees under its master service agreement as of
June 30, 2014
and
March 31, 2014
were
$352
and
$346
, respectively, are included within accounts receivable, net on the accompanying condensed consolidated balance sheets.
10
During the three months ended
June 30, 2014
and
2013
, the Company received
$294
and
$262
in aggregate revenues through digital cinema servicing fees from Holdings, respectively, which are included in revenues on the accompanying condensed consolidated statements of operations.
RECLASSIFICATION
Certain reclassifications, principally for discontinued operations (see Note 3) have been made to the fiscal period ended June 30, 2013 condensed consolidated financial statements to conform to the current fiscal period ended
June 30, 2014
presentation.
USE OF ESTIMATES
The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include 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, among others. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be “cash equivalents.” The Company maintains bank accounts with major banks, which from time to time may exceed the Federal Deposit Insurance Corporation’s insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.
ACCOUNTS RECEIVABLE
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful accounts amounted to
$980
and
$898
as of
June 30, 2014
and March 31, 2014, respectively.
Within the Content & Entertainment segment, the Company recognizes the accounts receivable net of an estimated allowance for product returns and customer chargebacks at the time we recognize the original sale. We base the amount of the returns allowance and customer chargebacks upon historical experience and future expectations.
Accounts receivable, long-term result from up-front activation fees earned from the Company's Systems deployments with extended payment terms that are discounted to their present value at prevailing market rates.
ADVANCES
Advances, which are recorded within prepaid and other current assets on the condensed consolidated balance sheets, represent amounts prepaid to studios or content producers for which the Company provides content distribution services and such advances, net of any impairment charges, are estimated to be fully recoupable as of the balance sheet dates.
INVENTORY
Inventory consists of finished goods of owned physical DVD titles and is stated at the lower of cost (determined based on weighted average cost) or market. The Company identifies inventory items to be written down for obsolescence based on the item’s sales status and condition. The Company writes 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
In connection with the 2013 Term Loans issued in February 2013 and the 2013 Prospect Loan Agreement issued in February 2013 (collectively, see Note 4), the Company maintains cash restricted for repaying interest on the respective loans as follows:
11
|
|
As of June 30, 2014
|
As of March 31, 2014
|
||||||
|
Reserve account related to the 2013 Term Loans (See Note 4)
|
$
|
5,751
|
|
$
|
5,751
|
|
||
|
Reserve account related to the 2013 Prospect Loan Agreement (See Note 4)
|
1,000
|
|
1,000
|
|
||||
|
$
|
6,751
|
|
$
|
6,751
|
|
|||
DEFERRED COSTS
Deferred costs primarily consist of unamortized debt issuance costs related to the 2013 Term Loans, 2013 Prospect Loan and Cinedigm Credit Agreement (see Note 4) which are amortized under the effective interest rate method over the terms of the respective debt. All other unamortized debt issuance costs are amortized on a straight-line basis over the term of the respective debt. For such debt, amortization on a straight-line basis is not materially different from the effective interest method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
|
Computer equipment and software
|
3 - 5 years
|
|
Digital cinema projection systems
|
10 years
|
|
Machinery and equipment
|
3 - 10 years
|
|
Furniture and fixtures
|
3 - 6 years
|
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the leasehold improvements. Maintenance and repair costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized. Upon the sale or other disposition of any property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss on disposal is included in the condensed consolidated statements of operations.
ACCOUNTING FOR DERIVATIVE ACTIVITIES
Derivative financial instruments are recorded at fair value. The Company had three separate interest rate swap agreements (the “Interest Rate Swaps”) to limit the Company’s exposure to changes in interest rates related to the 2013 Term Loans which matured in June 2013. Additionally, the Company entered into two separate interest rate cap transactions during the fiscal year ended March 31, 2013, recorded in prepaid and other current assets on the condensed consolidated balance sheets, to limit the Company's exposure to interest rates related to the 2013 Term Loans and 2013 Prospect Loan. Changes in 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. The Company has not sought hedge accounting treatment for these instruments and therefore, changes in the value of its Interest Rate Swaps and caps were recorded in the condensed consolidated statements of operations (See Note 4).
FAIR VALUE MEASUREMENTS
The fair value measurement disclosures are grouped into three levels based on valuation factors:
|
•
|
Level 1 – quoted prices in active markets for identical investments
|
|
•
|
Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs)
|
|
•
|
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)
|
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.
The following tables summarize the levels of fair value measurements of the Company’s financial assets and liabilities:
12
|
|
As of June 30, 2014
|
|||||||||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Restricted cash
|
$
|
6,751
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,751
|
|
||||
|
Interest rate derivatives
|
—
|
|
519
|
|
—
|
|
519
|
|
||||||||
|
|
$
|
6,751
|
|
$
|
519
|
|
$
|
—
|
|
$
|
7,270
|
|
||||
|
|
As of March 31, 2014
|
|||||||||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Restricted cash
|
$
|
6,751
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,751
|
|
||||
|
Interest rate derivatives
|
—
|
|
787
|
|
—
|
|
787
|
|
||||||||
|
|
$
|
6,751
|
|
$
|
787
|
|
$
|
—
|
|
$
|
7,538
|
|
||||
The Company’s 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 that instrument using current assumptions at the balance sheet date. The fair value of fixed rate and variable rate debt is estimated by management based upon current interest rates available to the Company at the respective balance sheet date for arrangements with similar terms and conditions. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of notes payable and capital lease obligations approximates fair value.
IMPAIRMENT OF LONG-LIVED AND FINITE-LIVED ASSETS
The Company reviews the recoverability of its long-lived assets and finite-lived intangible assets, when events or conditions occur that indicate a possible impairment exists. The assessment for recoverability is based primarily on the Company’s ability to recover the carrying value of its long-lived and finite-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the assets the asset is deemed not to be recoverable and possibly impaired. The Company then estimates the fair value of the asset to determine whether an impairment loss should be recognized. An impairment loss will be recognized if the difference between the fair value and the carrying value of the asset exceeds its fair value. Fair value is determined by computing the expected future undiscounted cash flows. During the three months
ended
June 30, 2014
and
2013
, no impairment charge from continuing operations for long-lived assets or finite-lived assets was recorded.
GOODWILL
Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. The Company’s process of evaluating goodwill for impairment involves the determination of fair value of its CEG goodwill reporting unit over its carrying value. The Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year, measured as of March 31, unless triggering events occur which require goodwill to be tested at another date.
Information related to the goodwill allocated to the Company's Content & Entertainment segment is as follows:
|
As of March 31, 2013
|
$
|
8,542
|
|
|
Goodwill resulting from the GVE Acquisition
|
16,952
|
|
|
|
As of March 31, 2014
|
25,494
|
|
|
|
Measurement period adjustment - GVE Acquisition
|
2,450
|
|
|
|
As of June 30, 2014
|
$
|
27,944
|
|
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
13
utilizing the Company’s 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.
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.
Phase 2 DC’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for
ten
years from the date each system is installed; however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as defined in the agreements, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including the Company’s service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the
eighth
contract year, a one-time “cost recoupment bonus” is payable by the studios to the Company. Any other cash flows, net of expenses, received by Phase 2 DC following the achievement of cost recoupment are required to be returned to the distributors on a pro-rata basis. At this time, the Company cannot estimate the timing or probability of the achievement of cost recoupment.
Alternative content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors, whereby amounts are payable to Phase 1 DC and to Phase 2 DC, generally either a fixed amount or as a percentage of the applicable box office revenue derived from the exhibitor’s showing of content other than feature 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 are deferred for up front exhibitor contributions and are recognized over the cost recoupment period, which is expected to be
ten
years.
Services
Exhibitors who purchased and own Systems using their own financing in the Phase II Deployment, paid an upfront activation fee that is generally
$2 thousand
per screen to the Company (the “Exhibitor-Buyer Structure”). These upfront activation fees are recognized in the period in which these exhibitor owned Systems are ready for content, as the Company has no further obligations to the customer, and are generally paid quarterly from VPF revenues over approximately one year. Additionally, the Company recognizes activation fee revenue of between
$1 thousand
and
$2 thousand
on Phase 2 DC Systems and for Systems installed by Holdings upon installation and such fees are generally collected upfront upon installation. The Company will then manage the billing and collection of VPFs and will remit all VPFs collected to the exhibitors, less an administrative fee that will approximate up to
10%
of the VPFs collected.
The administrative fee related to the Phase I Deployment approximates
5%
of the VPFs collected and 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) is 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. The fee rate earned by the Company varies depending upon the nature of the agreements with the platform and content providers. Generally, revenues are recognized at the availability date of the content for a subscription digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and VOD services. Reserves for sales returns and other allowances are provided based upon past experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. Sales returns and allowances are reported net in accounts receivable and 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 is viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature movies’ or alternative content’s theatrical release date.
14
Movie Cost Amortization
Once a movie is released, capitalized acquisition costs are amortized and participations and residual costs are accrued on an individual title basis in the proportion to the revenue recognized during the period for each title ("Period Revenue") bears to the estimated remaining total revenue to be recognized from all sources for each title ("Ultimate Revenue"). The amount of movie and other costs that is amortized each period will depend on the ratio of Period Revenue to Ultimate Revenue for each movie. The Company makes certain estimates and judgments of Ultimate Revenue to be recognized for each title. Ultimate Revenue does not include estimates of revenue that will be earned beyond
5
years of a movie’s initial theatrical release date. Movie cost amortization is a component of direct operating costs within the condensed consolidated statements of operations.
Estimates of Ultimate Revenue and anticipated participation and residual costs are reviewed periodically in the ordinary course of business and are revised if necessary. A change in any given period to the Ultimate Revenue for an individual title will result in an increase or decrease in the percentage of amortization of capitalized movie and other costs and accrued participation and residual costs relative to a previous period. Depending on the performance of a title, significant changes to the future Ultimate Revenue may occur, which could result in significant changes to the amortization of the capitalized acquisition costs.
DIRECT OPERATING COSTS
Direct operating costs consist of operating costs such as cost of goods sold, fulfillment expenses, shipping costs, property taxes and insurance on Systems, royalty expenses, marketing and direct personnel costs.
PARTICIPATIONS PAYABLE
The Company records liabilities within accounts payable and accrued expenses on the condensed consolidated balance sheet, that represent amounts owed to studios or content producers for which the Company provides content distribution services for royalties owed under licensing arrangements. The Company identifies and records as a reduction to the liability any expenses that are to be reimbursed to the Company by such studios or content producers.
STOCK-BASED COMPENSATION
During the three months
ended
June 30, 2014
and
2013
, the Company recorded stock-based compensation from continuing operations of
$618
and
$684
, respectively.
The weighted-average grant-date fair value of options granted during the three months
ended
June 30, 2014
and
2013
was
$1.60
and
$0.89
, respectively. There were
34,443
and
42,640
stock options exercised during the three months
ended
June 30, 2014
and
2013
, respectively.
The Company estimated the fair value of stock options at the date of each grant using a Black-Scholes option valuation model with the following assumptions:
|
|
For the Three Months Ended June 30,
|
|||||
|
Assumptions for Option Grants
|
2014
|
2013
|
||||
|
Range of risk-free interest rates
|
1.6 - 1.7%
|
|
0.7 - 1.2%
|
|
||
|
Dividend yield
|
—
|
|
—
|
|
||
|
Expected life (years)
|
5
|
|
5
|
|
||
|
Range of expected volatilities
|
71.7 - 72.1%
|
|
73.4 - 73.8%
|
|
||
The risk-free interest rate used in the Black-Scholes option pricing model for options granted under the Company’s stock option plan awards is the historical yield on U.S. Treasury securities with equivalent remaining lives. The Company does not currently anticipate paying any cash dividends on common stock in the foreseeable future. Consequently, an expected dividend yield of zero is used in the Black-Scholes option pricing model. The Company estimates the expected life of options granted under the Company’s stock option plans using both exercise behavior and post-vesting termination behavior, as well as consideration of outstanding options. The Company estimates expected volatility for options granted under the Company’s stock option plans based on a measure of historical volatility in the trading market for the Company’s common stock.
15
Employee and director stock-based compensation expense from continuing operations related to the Company’s stock-based awards was as follows:
|
|
For the Three Months Ended June 30,
|
||||||
|
2014
|
2013
|
||||||
|
Direct operating
|
$
|
3
|
|
$
|
2
|
|
|
|
Selling, general and administrative
|
615
|
|
682
|
|
|||
|
$
|
618
|
|
$
|
684
|
|
||
NET LOSS PER SHARE
Basic and diluted net loss per common share has been calculated as follows:
|
Basic and diluted net loss per common share =
|
Net loss + preferred dividends
|
|
|
Weighted average number of common stock shares
outstanding during the period
|
Shares issued and any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.
The Company incurred net losses for each of the three months
ended
June 30, 2014
and
2013
and, therefore, the impact of dilutive potential common shares from outstanding stock options and warrants, totaling
28,819,170
shares and
20,485,290
shares as of
June 30, 2014
and
2013
, respectively, were excluded from the computation as it would be anti-dilutive.
COMPREHENSIVE LOSS
As of
June 30, 2014
, the Company’s other comprehensive loss consisted of net loss and foreign currency translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. The update will be effective for the Company during the fiscal year ending March 31, 2015. The adoption of the update may impact whether future disposals qualify as discontinued operations and therefore could impact the Company's financial statement presentation and disclosures.
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 for the Company during the fiscal year ending March 31, 2018. The Company intends to evaluate the impact of the adoption of this accounting standard update on its consolidated financial statements.
16
|
3.
|
DISCONTINUED OPERATIONS
|
As discussed in Note 1, discontinued operations is principally comprised of the operations of Software. There is no tax provision or benefit related to any of the discontinued operations.
The assets and liabilities of discontinued operations were comprised of the following:
|
As of June 30, 2014
|
As of March 31, 2014
|
|||||||
|
Current assets of discontinued operations:
|
||||||||
|
Accounts receivable, net
|
$
|
1,852
|
|
$
|
1,835
|
|
||
|
Unbilled revenue
|
215
|
|
534
|
|
||||
|
Prepaid and other current assets
|
7
|
|
11
|
|
||||
|
Total current assets of discontinued operations
|
2,074
|
|
2,380
|
|
||||
|
Current liabilities of discontinued operations:
|
||||||||
|
Accounts payable and accrued expenses
|
422
|
|
668
|
|
||||
|
Deferred revenue
|
1,652
|
|
1,434
|
|
||||
|
Total current liabilities of discontinued operations
|
2,074
|
|
2,102
|
|
||||
|
Current assets of discontinued operations, net of current liabilities
|
$
|
—
|
|
$
|
278
|
|
||
|
Property and equipment, net
|
$
|
723
|
|
$
|
474
|
|
||
|
Capitalized software, net
|
5,346
|
|
4,862
|
|
||||
|
Unbilled revenue, net of current portion
|
169
|
|
324
|
|
||||
|
Assets of discontinued operations, net of current portion
|
$
|
6,238
|
|
$
|
5,660
|
|
||
The results of Software have been reported as discontinued operations for all periods presented. The income (loss) from discontinued operations was as follows:
|
For the Three Months Ended June 30,
|
||||||||
|
2014
|
2013
|
|||||||
|
Revenues
|
$
|
1,049
|
|
$
|
1,088
|
|
||
|
Costs and Expenses:
|
||||||||
|
Direct operating (exclusive of depreciation and amortization shown below)
|
175
|
|
703
|
|
||||
|
Selling, general and administrative
|
532
|
|
950
|
|
||||
|
Research and development
|
9
|
|
6
|
|
||||
|
Depreciation of property and equipment
|
—
|
|
30
|
|
||||
|
Amortization of intangible assets
|
—
|
|
7
|
|
||||
|
Total operating expenses
|
716
|
|
1,696
|
|
||||
|
Income (loss) from operations
|
333
|
|
(608
|
)
|
||||
|
Interest income
|
—
|
|
4
|
|
||||
|
Other expense, net
|
(85
|
)
|
—
|
|
||||
|
Income (loss) before provision for income taxes
|
248
|
|
(604
|
)
|
||||
|
Provision for income taxes
|
99
|
|
—
|
|
||||
|
Income (loss) from discontinued operations, net of taxes
|
$
|
149
|
|
$
|
(604
|
)
|
||
17
|
4.
|
NOTES PAYABLE
|
Notes payable consisted of the following:
|
|
As of June 30, 2014
|
As of March 31, 2014
|
||||||||||||||
|
Notes Payable
|
Current Portion
|
Long Term Portion
|
Current Portion
|
Long Term Portion
|
||||||||||||
|
2013 Term Loans, net of debt discount
|
$
|
25,500
|
|
$
|
60,884
|
|
$
|
25,688
|
|
$
|
68,590
|
|
||||
|
2013 Prospect Loan Agreement
|
—
|
|
68,714
|
|
—
|
|
68,454
|
|
||||||||
|
KBC Facilities
|
7,858
|
|
25,098
|
|
7,961
|
|
27,009
|
|
||||||||
|
P2 Vendor Note
|
110
|
|
450
|
|
105
|
|
466
|
|
||||||||
|
P2 Exhibitor Notes
|
72
|
|
242
|
|
71
|
|
260
|
|
||||||||
|
Total non-recourse notes payable
|
$
|
33,540
|
|
$
|
155,388
|
|
$
|
33,825
|
|
$
|
164,779
|
|
||||
|
Cinedigm Term Loans
|
$
|
4,000
|
|
$
|
18,923
|
|
$
|
3,750
|
|
$
|
20,015
|
|
||||
|
Cinedigm Revolving Loans
|
11,608
|
|
—
|
|
15,469
|
|
—
|
|
||||||||
|
2013 Notes
|
—
|
|
3,576
|
|
—
|
|
3,510
|
|
||||||||
|
Total recourse notes payable
|
$
|
15,608
|
|
$
|
22,499
|
|
$
|
19,219
|
|
$
|
23,525
|
|
||||
|
Total notes payable
|
$
|
49,148
|
|
$
|
177,887
|
|
$
|
53,044
|
|
$
|
188,304
|
|
||||
Non-recourse debt is generally defined as debt whereby the lenders’ sole recourse with respect to defaults by the Company is limited to the value of the asset collateralized by the debt. The 2013 Term Loans are not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC. The 2013 Prospect Loan Agreement is not guaranteed by the Company or its other subsidiaries and the service fees of Phase 1 DC and Phase 2 DC were assigned by the Company to DC Holdings LLC. The KBC Facilities, the P2 Vendor Note and the P2 Exhibitor Notes are not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.
2013 Term Loans
On February 28, 2013, CDF I entered into an amended and restated credit agreement (the “2013 Credit Agreement”) with Société Générale, New York Branch, as administrative agent and collateral agent for the lenders party thereto and certain other secured parties (the “Collateral Agent”), and the lenders party thereto. The 2013 Credit Agreement amended and restated its prior credit agreement. The primary changes effected by the Amended and Restated Credit Agreement were (i) changing the aggregate principal amount of the term loans to
$130,000
, which included an assignment of
$5,000
of the principal balance to an affiliate of CDF I, (ii) changing the interest rate (described further below) and (iii) extending the term of the credit facility to February 2018. The proceeds of the term loans ("2013 Term Loans") under the 2013 Credit Agreement were used by CDF I to refinance its prior credit agreement.
Under the 2013 Credit Agreement, each of the 2013 Term loans bears interest, at the option of CDF I and subject to certain conditions, based on the base rate (generally, the bank prime rate) or the 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). All collections and revenues of CDF I are deposited into designated accounts, from which amounts are paid out on a monthly basis to pay certain operating expenses and principal, interest, fees, costs and expenses relating to the 2013 Credit Agreement according to certain designated priorities. On a quarterly basis, if funds remain after the payment of all such amounts, they will be applied to prepay the 2013 Term 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, and a
1.0%
prepayment premium if a prepayment is made during the first year of the 2013 Term Loans. The LIBOR rate at
June 30, 2014
was
0.15%
.
The 2013 Credit Agreement also requires each of CDF I’s existing and future direct and indirect domestic subsidiaries (the "Guarantors") to guarantee, under an Amended and Restated Guaranty and Security Agreement dated as of February 28, 2013 by and among CDF I, the Guarantors and the Collateral Agent (the “Guaranty and Security Agreement”), the obligations under the 2013 Credit Agreement, and all such obligations to be secured by a first priority perfected security interest in all of the collective assets of CDF I and the Guarantors, including real estate owned or leased, and all capital stock or other equity interests in C/AIX, the direct holder of CDF I’s equity, CDF I and CDF I’s subsidiaries. In connection with the 2013 Credit Agreement, AccessDM, a wholly-owned subsidiary of the Company and the direct parent of C/AIX, entered into an amended and restated pledge agreement dated as of February 28, 2013 (the “AccessDM Pledge Agreement”) in favor of the Collateral Agent pursuant to which AccessDM pledged to the Collateral Agent all of the outstanding shares of common stock of C/AIX, and C/AIX entered into an amended and
18
restated pledge agreement dated as of February 28, 2013 (the “C/AIX Pledge Agreement”) in favor of the Collateral Agent pursuant to which C/AIX pledged to the Collateral Agent all of the outstanding membership interests of CDF I. The 2013 Credit Agreement contains customary representations, warranties, affirmative covenants, negative covenants and events of default.
All collections and revenues of CDF I are deposited into designated accounts. These amounts are included in cash and cash equivalents in the condensed consolidated balance sheets and are only available to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the 2013 Credit Agreement, according to certain designated priorities, which totaled
$5,919
and
$6,493
as of
June 30, 2014
and
March 31, 2014
, respectively. The Company also set up a debt service fund under the 2013 Credit Agreement for future principal and interest payments, classified as restricted cash of
$6,751
as of
June 30, 2014
and
March 31, 2014
, respectively.
The balance of the 2013 Term Loans, net of the original issue discount, at
June 30, 2014
was as follows:
|
|
As of June 30, 2014
|
As of March 31, 2014
|
|||||
|
2013 Term Loans, at issuance, net
|
$
|
125,087
|
|
$
|
125,087
|
|
|
|
Payments to date
|
(38,456
|
)
|
(30,543
|
)
|
|||
|
Discount on 2013 Term Loans
|
(247
|
)
|
(266
|
)
|
|||
|
2013 Term Loans, net
|
86,384
|
|
94,278
|
|
|||
|
Less current portion
|
(25,500
|
)
|
(25,688
|
)
|
|||
|
Total long term portion
|
$
|
60,884
|
|
$
|
68,590
|
|
|
2013 Prospect Loan Agreement
On February 28, 2013, DC Holdings LLC, AccessDM and Phase 2 DC entered into a term loan agreement (the “2013 Prospect Loan Agreement”) with Prospect Capital Corporation (“Prospect”), as administrative agent (the “Prospect Administrative Agent”) and collateral agent (the “Prospect Collateral Agent”) for the lenders party thereto, and the other lenders party thereto pursuant to which DC Holdings LLC borrowed
$70,000
(the “2013 Prospect Loan”). The 2013 Prospect Loan, as subsequently amended, will bear interest annually in cash at LIBOR plus
9.00%
(with a
2.00%
LIBOR floor) and at
2.50%
to be accrued as an increase in the aggregate principal amount of the 2013 Prospect Loan until the 2013 Credit Agreement is paid off, at which time all interest will be payable in cash.
The 2013 Prospect Loan matures on March 31, 2021. The 2013 Prospect Loan may be accelerated upon a change in control (as defined in the Term Loan Agreement) or other events of default as set forth therein and would be subject to mandatory acceleration upon an insolvency of DC Holdings LLC. The 2013 Prospect Loan is payable on a voluntary basis after the
second
anniversary of the initial borrowing in whole but not in part, subject to a prepayment penalty equal to
5.00%
of the principal amount prepaid if the 2013 Prospect Loan is prepaid after the
second
anniversary but prior to the
third
anniversary of issuance, a prepayment penalty of
4.00%
of the principal amount prepaid if the 2013 Prospect Loan is prepaid after such
third
anniversary but prior to the
fourth
anniversary of issuance, a prepayment penalty of
3.00%
of the principal amount prepaid if the 2013 Prospect Loan is prepaid after such
fourth
anniversary but prior to the
fifth
anniversary of issuance, a prepayment penalty of
2.00%
of the principal amount prepaid if the 2013 Prospect Loan is prepaid after such
fifth
anniversary but prior to the
sixth
anniversary of issuance, a prepayment penalty of
1.00%
of the principal amount prepaid if the 2013 Prospect Loan is prepaid after such
sixth
anniversary but prior to the
seventh
anniversary of issuance, and without penalty if the 2013 Prospect Loan is prepaid thereafter, plus cash in an amount equal to the accrued and unpaid interest amount with respect to the principal amount through and including the prepayment date.
In connection with the 2013 Prospect Loan, the Company assigned to DC Holdings LLC its rights to receive servicing fees under the Company’s Phase I and Phase II deployments. Pursuant to a Limited Recourse Pledge Agreement (the “Limited Recourse Pledge”) executed by the Company and a Guaranty, Pledge and Security Agreement (the “Prospect Guaranty and Security Agreement”) among DC Holdings LLC, AccessDM, Phase 2 DC and Prospect, as Prospect Collateral Agent, the Prospect Loan is secured by, among other things, a first priority pledge of the stock of Holdings owned by the Company, the stock of AccessDM owned by DC Holdings LLC and the stock of Phase 2 DC owned by the Company, and guaranteed by AccessDM and Phase 2 DC. The Company provides limited financial support to the 2013 Prospect Loan not to exceed
$1,500
per year in the event financial performance does not meet certain defined benchmarks.
19
The 2013 Prospect Loan Agreement contains customary representations, warranties, affirmative covenants, negative covenants and events of default. The balance of the 2013 Prospect Loan Agreement at
June 30, 2014
and
March 31, 2014
was as follows:
|
|
As of June 30, 2014
|
As of March 31, 2014
|
|||||
|
2013 Prospect Loan Agreement, at issuance
|
$
|
70,000
|
|
$
|
70,000
|
|
|
|
PIK Interest
|
2,338
|
|
1,906
|
|
|||
|
Payments to date
|
(3,624
|
)
|
(3,452
|
)
|
|||
|
2013 Prospect Loan Agreement, net
|
68,714
|
|
68,454
|
|
|||
|
Less current portion
|
—
|
|
—
|
|
|||
|
Total long term portion
|
$
|
68,714
|
|
$
|
68,454
|
|
|
KBC Facilities
In December 2008, Phase 2 B/AIX, a direct wholly-owned subsidiary of Phase 2 DC and an indirect wholly-owned subsidiary of the Company, began entering into multiple credit facilities to fund the purchase of Systems from Barco, Inc. to be installed in movie theatres as part of the Company’s Phase II Deployment. A summary of the credit facilities is as follows:
|
Outstanding Principal Balance
|
Draw as of
|
|||||||||||||||||||||
|
Facility
1
|
Credit Facility
|
Interest Rate
2
|
Maturity Date
|
As of June 30, 2014
|
As of March 31, 2014
|
As of June 30, 2014
|
||||||||||||||||
|
1
|
|
$
|
8,900
|
|
8.50
|
%
|
December 2016
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||||
|
2
|
|
2,890
|
|
3.75
|
%
|
December 2017
|
212
|
|
315
|
|
—
|
|
||||||||||
|
3
|
|
22,336
|
|
3.75
|
%
|
September 2018
|
12,764
|
|
13,561
|
|
—
|
|
||||||||||
|
4
|
|
13,312
|
|
3.75
|
%
|
September 2018
|
8,082
|
|
8,558
|
|
—
|
|
||||||||||
|
5
|
|
11,425
|
|
3.75
|
%
|
March 2019
|
7,752
|
|
8,160
|
|
—
|
|
||||||||||
|
6
|
|
6,450
|
|
3.75
|
%
|
December 2018
|
4,146
|
|
4,376
|
|
—
|
|
||||||||||
|
$
|
65,313
|
|
$
|
32,956
|
|
$
|
34,970
|
|
$
|
—
|
|
|||||||||||
1
For each facility, principal is to be repaid in twenty-eight quarterly installments.
2
The interest rate for facilities 2 through 6 are the three month LIBOR rate of
0.23%
at
June 30, 2014
, plus the interest rate noted above.
Cinedigm Credit Agreement
On October 17, 2013, the Company entered into a credit agreement (the “Cinedigm Credit Agreement”) with Société Générale, New York Branch, as administrative agent and collateral agent for the lenders party thereto and certain other secured parties (the “Collateral Agent”). Under the Cinedigm Credit Agreement and subject to the terms and conditions thereof, the Company may borrow an aggregate principal amount of up to
$55,000
, including term loans of
$25,000
(the “Cinedigm Term Loans”) and revolving loans of up to
$30,000
(the “Cinedigm Revolving Loans”).
All
of the Cinedigm Term Loans, for which principal will be paid quarterly, and
$15,000
of the Cinedigm Revolving Loans were drawn at closing in connection with funding the GVE Acquisition upon the Company’s contribution of such funds. Each of the Cinedigm Term Loans and the Cinedigm Revolving Loans bears interest at the base rate plus
3.0%
or the eurodollar rate plus
4.0%
. 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%
. All collections and revenues of CEG will be deposited into a special blocked account, from which amounts are paid out on a monthly basis to pay certain operating expenses and principal, interest, fees, costs and expenses relating to the Cinedigm Credit Agreement according to certain designated priorities. On a quarterly basis, if funds remain after the payment of all such amounts, a portion of such funds will be applied to prepay the Cinedigm Term Loans. The Cinedigm Term Loans and Cinedigm Revolving Loans mature and must be paid in full by October 21, 2016. In addition, the Company may prepay the Cinedigm Term Loans and Cinedigm Revolving Loans, in whole or in part, subject to paying certain breakage costs, as applicable.
20
The balance of the Cinedigm Term Loans as of
June 30, 2014
was as follows:
|
|
As of June 30, 2014
|
As of March 31, 2014
|
|||||
|
Cinedigm Term Loans, at issuance, net
|
$
|
25,000
|
|
$
|
25,000
|
|
|
|
Payments to date
|
(1,750
|
)
|
(875
|
)
|
|||
|
Discount on Cinedigm Term Loans
|
(327
|
)
|
(360
|
)
|
|||
|
Cinedigm Term Loans, net
|
22,923
|
|
23,765
|
|
|||
|
Less current portion
|
(4,000
|
)
|
(3,750
|
)
|
|||
|
Total long term portion
|
$
|
18,923
|
|
$
|
20,015
|
|
|
At
June 30, 2014
and March 31, 2014, the balances of the Cinedigm Revolving Loans was
$11,608
and
$15,469
, respectively.
2013 Notes
On October 17, 2013 and October 21, 2013, the Company entered into securities purchase agreements (the “Securities Purchase Agreements”) with certain investors party thereto (the “Investors”) pursuant to which the Company agreed to sell to the Investors notes in the aggregate principal amount of
$5,000
(the “2013 Notes”) and warrants to purchase an aggregate of
1,500,000
shares of Class A Common Stock (the “2013 Warrants”). The sales were consummated on October 21, 2013. The proceeds of the sales of the 2013 Notes and 2013 Warrants were used for working capital and general corporate purposes, including to finance, in part, the GVE Acquisition. The Company allocated a proportional value of
$1,598
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
|
%
|
|
The Company has treated the proportional value of the 2013 Warrants of
$1,598
as a debt discount. The debt discount of the 2013 Notes will be amortized through the maturity of the 2013 Notes as interest expense.
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 entitle the Company to redeem the 2013 Notes any time on or after October 21, 2015, subject to certain premiums.
Letters of Credit
As of
June 30, 2014
, outstanding letters of credit amounted to
$4,000
. No amounts were drawn upon during the three months ended
June 30, 2014
.
At
June 30, 2014
, the Company was in compliance with all of its debt covenants.
|
5.
|
STOCKHOLDERS’ (DEFICIT) EQUITY
|
CAPITAL STOCK
COMMON STOCK
As of
June 30, 2014
and
March 31, 2014
, the Company has
118,759,000
authorized shares of Class A Common Stock and
1,241,000
shares of authorized Class B Common Stock of which none remain available for issuance.
PREFERRED STOCK
Cumulative dividends in arrears on the preferred stock at
June 30, 2014
and
March 31, 2014
were
$89
on each date. In July 2014, the Company paid its preferred stock dividends accrued at
June 30, 2014
in the form of
33,531
shares of its Class A Common Stock.
21
CINEDIGM’S EQUITY INCENTIVE PLAN
Stock Options
Awards under the Company's 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 the Company’s Class A Common Stock on the date of grant. ISOs granted to shareholders of 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 the Company’s 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 the Company’s 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, the Company and the participants have executed stock option agreements setting forth the terms of the grants.
During the three months ended
June 30, 2014
, the Company granted stock options to purchase
260,000
shares of its Class A Common Stock to its employees at exercise prices ranging from
$2.35
to
$2.66
per share, which will vest ratably over a
four
year period. As of
June 30, 2014
, the weighted average exercise price for outstanding stock options was
$1.80
and the weighted average remaining contractual life was
6.03
years.
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, 2014
|
6,072,986
|
|
$
|
1.74
|
|
|
|
Granted
|
260,000
|
|
2.65
|
|
||
|
Exercised
|
(34,443
|
)
|
1.49
|
|
||
|
Canceled
|
(265,248
|
)
|
1.50
|
|
||
|
Balance at June 30, 2014
|
6,033,295
|
|
1.80
|
|
||
OPTIONS GRANTED OUTSIDE CINEDIGM’S EQUITY INCENTIVE PLAN
In October 2013, the Company issued options outside of the Equity Incentive Plan to
10
employees who joined the Company following the GVE Acquisition. The employees received options to purchase an aggregate of
620,000
shares of the Company's Class A Common Stock. The options have
ten
-year terms and an exercise price of
$1.75
per share.
As of June 30, 2014
, there were
545,000
unvested shares outstanding.
WARRANTS
As of June 30, 2014
, outstanding warrants consisted of
16,000,000
held by Sageview ("Sageview Warrants"),
525,000
held by a strategic management service provider and the 2013 Warrants.
The Sageview Warrants were exercisable beginning on September 30, 2009 at an exercise price of
$1.37
, contain a customary cashless exercise provision and anti-dilution adjustments, and expire on August 11, 2016 (subject to extension in limited circumstances).
The strategic management service provider warrants were issued in connection with a consulting management services agreement entered into with the Company. These warrants for the purchase of
525,000
shares of Class A common stock vested over
18
months commencing in July 2011, are subject to termination with
90
days notice in the event of termination of the consulting management services agreement and expire on July 1, 2021.
The 2013 Warrants will be exercisable through October 21, 2018 at an exercise price per share of
$1.85
. The 2013 Warrants and 2013 Notes are subject to certain transfer restrictions.
As of June 30, 2014
,
1,250,625
of the 2013 Warrants were outstanding.
22
|
6.
|
COMMITMENTS AND CONTINGENCIES
|
The Company is subject to a capital lease obligation where we have no continuing involvement other than being the primary obligor. A sub-lease agreement, through which an unrelated third party purchaser pays the capital lease, was amended during January 2013. The impact of the capital lease amendment to the Company's condensed consolidated financial statements was not material.
LITIGATION
We are subject to certain legal proceedings in the ordinary course of business. We do not expect any such items to have a significant impact on our financial position and results of operations and liquidity.
|
7.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
For the Three Months Ended June 30,
|
||||||
|
|
2014
|
2013
|
|||||
|
Cash interest paid
|
$
|
4,475
|
|
$
|
6,064
|
|
|
|
Accretion of preferred stock discount
|
$
|
—
|
|
$
|
27
|
|
|
|
Accrued dividends on preferred stock
|
$
|
89
|
|
$
|
89
|
|
|
|
Issuance of common stock for payment of preferred stock dividends
|
$
|
89
|
|
$
|
—
|
|
|
23
|
8.
|
SEGMENT INFORMATION
|
The Company is comprised of four reportable segments: Phase I Deployment, Phase II Deployment, Services and Content & Entertainment. The segments were determined based on the products and services provided by each segment and how management reviews and makes decisions regarding segment operations. Performance of the segments is evaluated on the segment’s income (loss) from continuing operations before interest, taxes, depreciation and amortization.
The Phase I Deployment and Phase II Deployment segments consist of the following:
|
Operations of:
|
Products and services provided:
|
|
Phase 1 DC
|
Financing vehicles and administrators for the Company’s 3,724 Systems installed nationwide in Phase 1 DC’s deployment to theatrical exhibitors. The Company retains ownership of the Systems and the residual cash flows related to the Systems after the repayment of all non-recourse debt at the expiration of exhibitor master license agreements.
|
|
Phase 2 DC
|
Financing vehicles and administrators for the Company’s 8,917 Systems installed in the second digital cinema deployment and international deployments, through Phase 2 DC. The Company retains no ownership of the residual cash flows and digital cinema equipment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.
|
The Services segment provides monitoring, billing, collection, verification and other management services to the Company’s Phase I Deployment, Phase II Deployment, Holdings, as well as to exhibitors who purchase their own equipment. Services also collects and disburses VPFs from motion picture studios and distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors.
The Content & Entertainment segment, or CEG, is a leading distributor of independent content, 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.
24
Information related to the segments of the Company and its subsidiaries is detailed below:
|
|
As of June 30, 2014
|
|||||||||||||||||||||||
|
|
Phase I
|
Phase II
|
Services
|
Content & Entertainment
|
Corporate
|
Consolidated
|
||||||||||||||||||
|
Total intangible assets, net
|
$
|
286
|
|
$
|
—
|
|
$
|
—
|
|
$
|
35,463
|
|
$
|
8
|
|
$
|
35,757
|
|
||||||
|
Total goodwill
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
27,944
|
|
$
|
—
|
|
$
|
27,944
|
|
||||||
|
Assets from continuing operations
|
$
|
101,884
|
|
$
|
69,485
|
|
$
|
3,591
|
|
$
|
95,000
|
|
$
|
27,188
|
|
297,148
|
|
|||||||
|
Net assets from discontinued operations
|
6,238
|
|
||||||||||||||||||||||
|
Total assets
|
$
|
303,386
|
|
|||||||||||||||||||||
|
Notes payable, non-recourse
|
$
|
155,098
|
|
$
|
33,830
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
188,928
|
|
||||||
|
Notes payable
|
—
|
|
—
|
|
—
|
|
—
|
|
38,107
|
|
38,107
|
|
||||||||||||
|
Capital leases
|
—
|
|
—
|
|
—
|
|
82
|
|
5,857
|
|
5,939
|
|
||||||||||||
|
Total debt
|
$
|
155,098
|
|
$
|
33,830
|
|
$
|
—
|
|
$
|
82
|
|
$
|
43,964
|
|
$
|
232,974
|
|
||||||
|
|
As of March 31, 2014
|
|||||||||||||||||||||||
|
|
Phase I
|
Phase II
|
Services
|
Content & Entertainment
|
Corporate
|
Consolidated
|
||||||||||||||||||
|
Total intangible assets, net
|
$
|
298
|
|
$
|
—
|
|
$
|
—
|
|
$
|
37,333
|
|
$
|
8
|
|
$
|
37,639
|
|
||||||
|
Total goodwill
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
25,494
|
|
$
|
—
|
|
$
|
25,494
|
|
||||||
|
Assets from continuing operations
|
$
|
109,538
|
|
$
|
66,957
|
|
$
|
3,848
|
|
$
|
124,226
|
|
$
|
35,491
|
|
340,060
|
|
|||||||
|
Net assets from discontinued operations
|
5,938
|
|
||||||||||||||||||||||
|
Total assets
|
$
|
345,998
|
|
|||||||||||||||||||||
|
Notes payable, non-recourse
|
$
|
162,732
|
|
$
|
35,872
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
198,604
|
|
||||||
|
Notes payable
|
—
|
|
—
|
|
—
|
|
—
|
|
42,744
|
|
42,744
|
|
||||||||||||
|
Capital leases
|
—
|
|
—
|
|
—
|
|
81
|
|
6,005
|
|
6,086
|
|
||||||||||||
|
Total debt
|
$
|
162,732
|
|
$
|
35,872
|
|
$
|
—
|
|
$
|
81
|
|
$
|
48,749
|
|
$
|
247,434
|
|
||||||
25
|
|
Statements of Operations
|
|||||||||||||||||||||||
|
For the Three Months Ended June 30, 2014
|
||||||||||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||||
|
|
Phase I
|
Phase II
|
Services
|
Content & Entertainment
|
Corporate
|
Consolidated
|
||||||||||||||||||
|
Revenues from external customers
|
$
|
9,484
|
|
$
|
3,171
|
|
$
|
3,060
|
|
$
|
7,142
|
|
$
|
—
|
|
$
|
22,857
|
|
||||||
|
Intersegment revenues
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||
|
Total segment revenues
|
9,484
|
|
3,171
|
|
3,060
|
|
7,142
|
|
—
|
|
22,857
|
|
||||||||||||
|
Less: Intersegment revenues
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||
|
Total consolidated revenues
|
$
|
9,484
|
|
$
|
3,171
|
|
$
|
3,060
|
|
$
|
7,142
|
|
$
|
—
|
|
$
|
22,857
|
|
||||||
|
Direct operating (exclusive of depreciation and amortization shown below)
|
244
|
|
137
|
|
51
|
|
8,072
|
|
—
|
|
8,504
|
|
||||||||||||
|
Selling, general and administrative
|
95
|
|
39
|
|
200
|
|
4,494
|
|
2,881
|
|
7,709
|
|
||||||||||||
|
Plus: Allocation of Corporate overhead
|
—
|
|
—
|
|
466
|
|
1,353
|
|
(1,819
|
)
|
—
|
|
||||||||||||
|
Provision for doubtful accounts
|
60
|
|
21
|
|
13
|
|
—
|
|
—
|
|
94
|
|
||||||||||||
|
Transition and acquisition expenses, net
|
—
|
|
—
|
|
—
|
|
842
|
|
104
|
|
946
|
|
||||||||||||
|
Depreciation and amortization of property and equipment
|
7,137
|
|
1,881
|
|
53
|
|
41
|
|
264
|
|
9,376
|
|
||||||||||||
|
Amortization of intangible assets
|
11
|
|
—
|
|
—
|
|
1,873
|
|
1
|
|
1,885
|
|
||||||||||||
|
Total operating expenses
|
7,547
|
|
2,078
|
|
783
|
|
16,675
|
|
1,431
|
|
28,514
|
|
||||||||||||
|
Income (loss) from operations
|
$
|
1,937
|
|
$
|
1,093
|
|
$
|
2,277
|
|
$
|
(9,533
|
)
|
$
|
(1,431
|
)
|
$
|
(5,657
|
)
|
||||||
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
|
—
|
|
—
|
|
4
|
|
64
|
|
547
|
|
615
|
|
||||||||||||
|
Total stock-based compensation
|
$
|
—
|
|
$
|
—
|
|
$
|
4
|
|
$
|
67
|
|
$
|
547
|
|
$
|
618
|
|
||||||
26
|
|
Statements of Operations
|
|||||||||||||||||||||||
|
For the Three Months Ended June 30, 2013
|
||||||||||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||||
|
|
Phase I
|
Phase II
|
Services
|
Content & Entertainment
|
Corporate
|
Consolidated
|
||||||||||||||||||
|
Revenues from external customers
|
$
|
8,919
|
|
$
|
2,954
|
|
$
|
3,390
|
|
$
|
3,274
|
|
$
|
—
|
|
$
|
18,537
|
|
||||||
|
Intersegment revenues (1)
|
—
|
|
—
|
|
6
|
|
11
|
|
—
|
|
17
|
|
||||||||||||
|
Total segment revenues
|
8,919
|
|
2,954
|
|
3,396
|
|
3,285
|
|
—
|
|
18,554
|
|
||||||||||||
|
Less: Intersegment revenues
|
—
|
|
—
|
|
(6
|
)
|
(11
|
)
|
—
|
|
(17
|
)
|
||||||||||||
|
Total consolidated revenues
|
$
|
8,919
|
|
$
|
2,954
|
|
$
|
3,390
|
|
$
|
3,274
|
|
$
|
—
|
|
$
|
18,537
|
|
||||||
|
Direct operating (exclusive of depreciation and amortization shown below)
|
155
|
|
142
|
|
98
|
|
3,384
|
|
—
|
|
3,779
|
|
||||||||||||
|
Selling, general and administrative
|
63
|
|
87
|
|
219
|
|
2,754
|
|
3,081
|
|
6,204
|
|
||||||||||||
|
Plus: Allocation of Corporate overhead
|
—
|
|
—
|
|
500
|
|
733
|
|
(1,233
|
)
|
—
|
|
||||||||||||
|
Provision for doubtful accounts
|
43
|
|
14
|
|
5
|
|
—
|
|
—
|
|
62
|
|
||||||||||||
|
Depreciation and amortization of property and equipment
|
7,137
|
|
1,881
|
|
72
|
|
3
|
|
152
|
|
9,245
|
|
||||||||||||
|
Amortization of intangible assets
|
11
|
|
2
|
|
—
|
|
405
|
|
—
|
|
418
|
|
||||||||||||
|
Total operating expenses
|
7,409
|
|
2,126
|
|
894
|
|
7,279
|
|
2,000
|
|
19,708
|
|
||||||||||||
|
Income (loss) from operations
|
$
|
1,510
|
|
$
|
828
|
|
$
|
2,496
|
|
$
|
(4,005
|
)
|
$
|
(2,000
|
)
|
$
|
(1,171
|
)
|
||||||
(1) Intersegment revenues principally represent personnel expenses.
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
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
||||||
|
Selling, general and administrative
|
—
|
|
—
|
|
8
|
|
21
|
|
653
|
|
682
|
|
||||||||||||
|
Total stock-based compensation
|
$
|
—
|
|
$
|
—
|
|
$
|
8
|
|
$
|
23
|
|
$
|
653
|
|
$
|
684
|
|
||||||
27
9.
RESTRUCTURING, TRANSITION AND ACQUISTION EXPENSES
During the fiscal year ended March 31, 2014, the Company completed a strategic assessment of its resource requirements within its Content & Entertainment reporting segment which, based upon the GVE Acquisition, are principally attributed to the integration of the GVE Acquisition and resulted in a transition expenses of
$842
during the three months ended
June 30, 2014
. Transition expenses are a component of transition and acquisition expenses within the condensed consolidated statements of operations.
A summary of activity for the restructuring accrual included within accounts payable and accrued expenses as of
June 30, 2014
is as follows:
|
Balance at March 31, 2014
|
Total Cost
|
Amounts Paid/Adjusted
|
Balance at June 30, 2014
|
|||||||||||
|
$
|
1,019
|
|
$
|
—
|
|
$
|
(367
|
)
|
$
|
652
|
|
|||
28
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
Cinedigm Corp. (formerly known as Cinedigm Digital Cinema Corp.) was incorporated in Delaware on March 31, 2000 (“Cinedigm”, and collectively with its subsidiaries, the “Company”). Cinedigm is (i) a leading distributor of independent movie, television and other short form content managing a library of distribution rights to over
52,000
titles and episodes released across theatrical, digital, physical, home and mobile entertainment platforms as well as (ii) a leading servicer of digital cinema assets on over 12,000 movie screens in both North America and several international countries.
Over the past decade, the Company has played a significant role in the digital distribution revolution that continues to transform the media landscape. In addition to its pioneering role in transitioning over 12,000 movie screens from traditional analog film prints to digital distribution, the Company, through both organic growth and acquisitions, has become a leading distributor of independent content. The Company distributes products for major brands such as the NFL, 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. Cinedigm collaborates with producers, major brands and other content owners to market, source, curate and distribute quality content to targeted and profitable audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to, iTunes, Amazon Prime, Netflix, Hulu, Xbox, Playstation, VOD and curated OTT digital entertainment channels and applications, (ii) physical goods, including DVD and Blu-ray and (iii) theatrical releases.
The Company reports its financial results in four primary segments as follows: (1) Phase I Deployment, (2) Phase II Deployment, (3) Services and (4) Content & Entertainment. The Phase I Deployment and Phase II Deployment segments are the non-recourse, financing vehicles and administrators for the Company's Systems installed in North American movie theatres. The Services segment provides services, software and support to the Phase I Deployment and Phase II Deployment segments as well as directly to exhibitors and other third party customers. Included in these services are asset management services for a specified fee via service agreements with Phase I Deployment and Phase II Deployment as well as third party exhibitors as buyers of their own digital cinema equipment; and software license, maintenance and consulting services to Phase I and Phase II Deployment, various other exhibitors, studios and other content organizations. These services primarily facilitate the conversion from analog to digital cinema and have positioned the Company at what it believes to be the forefront of a rapidly developing industry relating to the distribution and management of digital cinema and other content to theatres and other remote venues worldwide. The Content & Entertainment segment is a market leader in three key areas of entertainment content distribution - ancillary market aggregation and distribution, theatrical releasing and branded and curated OTT digital entertainment channels and applications.
29
The following organizational chart provides a graphic representation of our business and our four reporting segments:
We have incurred consolidated net losses from continuing operations, including the results of our non-recourse deployment subsidiaries, of
$10.8 million
and
$6.4 million
during the three months ended
June 30, 2014
and
2013
, respectively, and we have an accumulated deficit of
$279.4 million
as of
June 30, 2014
. Included within the three months ended June 30, 2014 were
$0.9 million
of transition and acquisition expenses. We also have significant contractual obligations related to our non-recourse and recourse debt for the fiscal year ended
March 31, 2015
and beyond. We may continue generating consolidated net losses for the foreseeable future. Based on our cash position at
June 30, 2014
, and expected cash flows from operations, we believe that we have the ability to meet our obligations through at least
June 30, 2015
. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity.
30
Results of Continuing Operations for the Three Months Ended
June 30, 2014
and
2013
Revenues
|
|
For the Three Months Ended June 30,
|
|||||||||||||
|
($ in thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
Phase I Deployment
|
$
|
9,484
|
|
$
|
8,919
|
|
$
|
565
|
|
6
|
%
|
|||
|
Phase II Deployment
|
3,171
|
|
2,954
|
|
217
|
|
7
|
%
|
||||||
|
Services
|
3,060
|
|
3,390
|
|
(330
|
)
|
(10
|
)%
|
||||||
|
Content & Entertainment
|
7,142
|
|
3,274
|
|
3,868
|
|
118
|
%
|
||||||
|
|
$
|
22,857
|
|
$
|
18,537
|
|
$
|
4,320
|
|
23
|
%
|
|||
Revenues increased
$4.3 million
or
23%
during the three months ended
June 30, 2014
, despite being our industry's seasonally slowest quarter. Growth in revenues in Phase 1 and Phase 2 Deployment and additional net revenues of $2.2 million from the GVE Acquisition, which was not part of the prior comparable period's revenues, were partially offset by a decrease in revenues from Services.
Phase 1 and Phase 2 Deployment revenues increased by
7%
for the three months ended
June 30, 2014
as VPFs increased due to 27 wide release titles being released during the current period as compared to 24 wide release titles in the previous fiscal year period.
In the Services segment, a
$0.3 million
, or
10%
, decrease in revenues was primarily due to the expected reduction of revenues as activation fee revenue recognized in the prior fiscal period of $0.7 million was not present during the current fiscal period. The decrease was partially offset by an increase in servicing fees of $0.3 million due to our international deployment. During the three months ended
June 30, 2014
, 31 Phase 2 DC Exhibitor-Buyer Structure Systems were installed and a total of 8,917 installed Phase 2 Systems were generating service fees at
June 30, 2014
as compared to 8,530 Phase 2 Systems at June 30, 2013. The Company also services an additional 3,724 screens in Phase I. We expect modest growth in Services as we (i) continue with international servicing in Australia and New Zealand during the remaining fiscal year from our 16 international screen backlog; and (ii) secure additional international servicing customers.
The CEG business expanded by
$3.9 million
, or
118%
, year over year, of which $2.2 million is directly attributed to increased net revenues resulting from the GVE Acquisition. The remaining increase is attributed to organic growth from the addition of physical and digital distribution rights of home entertainment titles of our library of over
52,000
movies and television episodes and licensing of original content. This growth was limited due to certain missed sales and from higher than anticipated physical returns resulting from the conversion, as part of the GVE integration, to a new physical goods replication, distribution and fulfillment center partner. In addition, industry wide changes in consumer behavior, declining retail foot traffic and reduced retail shelf space within the industry further impacted physical sales.
Direct Operating Expenses
|
|
For the Three Months Ended June 30,
|
|||||||||||||
|
($ in thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
Phase I Deployment
|
$
|
244
|
|
$
|
155
|
|
$
|
89
|
|
57
|
%
|
|||
|
Phase II Deployment
|
137
|
|
142
|
|
(5
|
)
|
(4
|
)%
|
||||||
|
Services
|
51
|
|
98
|
|
(47
|
)
|
(48
|
)%
|
||||||
|
Content & Entertainment
|
8,072
|
|
3,384
|
|
4,688
|
|
139
|
%
|
||||||
|
|
$
|
8,504
|
|
$
|
3,779
|
|
$
|
4,725
|
|
125
|
%
|
|||
Direct operating expenses increased by
125%
as a result of (i) $2.0 million attributed to the GVE Acquisition during the three months ended
June 30, 2014
; (ii) increased direct expenses for the expanded CEG home entertainment releasing slate as certain selling, general and administrative expenses were shifted to direct costs due to our outsourced DVD replication and manufacturing partnership with Universal Pictures and movie cost amortization; (iii) approximately $1.0 million in impairment and additional amortization of advances based upon revised ultimates and (iv) higher than anticipated expenses resulting from the conversion, as part of the GVE integration, to a new physical goods replication, distribution and fulfillment center partner. These increases were partially offset by reduced upfront theatrical releasing, marketing and acquisitions costs as CEG released three movies during the current fiscal period versus five releases in the prior fiscal period.
31
Selling, General and Administrative Expenses
|
|
For the Three Months Ended June 30,
|
|||||||||||||
|
($ in thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
Phase I Deployment
|
$
|
95
|
|
$
|
63
|
|
$
|
32
|
|
51
|
%
|
|||
|
Phase II Deployment
|
39
|
|
87
|
|
(48
|
)
|
(55
|
)%
|
||||||
|
Services
|
200
|
|
219
|
|
(19
|
)
|
(9
|
)%
|
||||||
|
Content & Entertainment
|
4,494
|
|
2,754
|
|
1,740
|
|
63
|
%
|
||||||
|
Corporate
|
2,881
|
|
3,081
|
|
(200
|
)
|
(6
|
)%
|
||||||
|
|
$
|
7,709
|
|
$
|
6,204
|
|
$
|
1,505
|
|
24
|
%
|
|||
Selling, general and administrative expenses grew by
24%
during the period, consistent with the
23%
increase in consolidated revenues. The Content & Entertainment segment increased
63%
as a result of the inclusion of the GVE Acquisition and increased staffing to support the growth in our home entertainment business. Corporate expenses declined modestly year over year as existing capacity was sufficient to support growth.
Transition and Acquisition Expenses
Transition and acquisition expenses were $0.9 million for the three months ended
June 30, 2014
.
Transition expenses of $0.8 million are principally attributed to the continued integration of GVE and ongoing alignment of resources to our content and entertainment business.
Depreciation and Amortization Expense on Property and Equipment
|
|
For the Three Months Ended June 30,
|
|||||||||||||
|
($ in thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
Phase I Deployment
|
$
|
7,137
|
|
$
|
7,137
|
|
$
|
—
|
|
—
|
%
|
|||
|
Phase II Deployment
|
1,881
|
|
1,881
|
|
—
|
|
—
|
%
|
||||||
|
Services
|
53
|
|
72
|
|
(19
|
)
|
(26
|
)%
|
||||||
|
Content & Entertainment
|
41
|
|
3
|
|
38
|
|
1,267
|
%
|
||||||
|
Corporate
|
264
|
|
152
|
|
112
|
|
74
|
%
|
||||||
|
|
$
|
9,376
|
|
$
|
9,245
|
|
$
|
131
|
|
1
|
%
|
|||
Depreciation and amortization expense remained consistent with the prior fiscal period, increasing by
$0.1 million
or
1%
.
Amortization of intangible assets
Amortization of intangible assets increased to
$1.9 million
for
the fiscal year ended March 31, 2014
from
$0.4 million
, which is attributed to the finite-lived intangible assets added from the GVE Acquisition.
Interest expense, net
|
|
For the Three Months Ended June 30,
|
|||||||||||||
|
($ in thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
Phase I Deployment
|
$
|
3,528
|
|
$
|
4,156
|
|
$
|
(628
|
)
|
(15
|
)%
|
|||
|
Phase II Deployment
|
412
|
|
516
|
|
(104
|
)
|
(20
|
)%
|
||||||
|
Corporate
|
1,095
|
|
252
|
|
843
|
|
335
|
%
|
||||||
|
|
$
|
5,035
|
|
$
|
4,924
|
|
$
|
111
|
|
2
|
%
|
|||
Interest expense, net increased
$0.1 million
or
2%
due to the increase in recourse debt in corporate offset by the continued repayment of non-recourse and recourse term loan and revolver debt as the Company reduced principal outstanding by
$14.9 million
during the three months ended
June 30, 2014
.
Corporate interest expense during the fiscal year ended March 31, 2014 includes recourse debt from the Cinedigm Term Loans and Cinedigm Revolving Loans and the 2013 Notes. Each of the Cinedigm Term Loans and the Cinedigm Revolving Loans bear interest at the base rate plus 3.0% or the eurodollar rate plus 4.0%. Base rate, per annum, is equal to the highest of (a) the rate
32
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%. The 2013 Notes bear interest at 9.0%.
The
15%
decrease in interest paid and accrued within the non-recourse Phase I Deployment segment is the result of the benefit from the resulting reduced debt balance. The 2013 Term Loans, which are repaid from free cash flow, are at a rate of LIBOR, plus 275 basis points with a 1.0% LIBOR floor, versus the prior credit agreement rate of LIBOR, plus 350 basis points with a 1.75% LIBOR floor. Interest decreased within the Phase II Deployment segment related to the KBC Facilities due to the reduction of outstanding principal. Phase 2 DC’s non-recourse interest expense is expected to continue to decrease as it did during the fiscal year as we continue to repay the KBC Facilities from free cash flow and the benefit from the resulting reduced debt balance. The decrease in interest paid and accrued within Corporate is related to the recourse note, which was paid off in February 2013. The 2013 Prospect Loan carries an interest rate of 13.5%, including a cash rate of LIBOR, plus 9.0% with a 2.0% LIBOR floor, and a PIK rate of 2.5%.
Non-cash interest expense was approximately $0.8 million $1.1 million for the three months ended
June 30, 2014
and 2013, respectively.
Change in fair value of interest rate derivatives
The change in fair value of the interest rate derivatives was a loss of approximately
$0.3 million
and a gain of
$0.8 million
for the three months ended
June 30, 2014
and
2013
, respectively. The interest swap associated with the 2013 Term Loans matured in June 2013.
Income (loss) from discontinued operations
Income (loss) from discontinued operations, which represents the results of Software, was
$0.1 million
and
$(0.6) million
for the three months ended
June 30, 2014
and
2013
, respectively.
Adjusted EBITDA
Adjusted EBITDA is defined by the Company for the periods presented to be earnings before interest, taxes, depreciation and amortization, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring and transition expenses and certain other items.
The Company reported Adjusted EBITDA (including its Phase 1 DC and Phase 2 DC subsidiaries) of
$7.2 million
for the three months ended
June 30, 2014
, a decrease of
26%
in comparison to
$9.7 million
for the three months ended June 30, 2013. Adjusted EBITDA from non-deployment businesses was
$(4.9) million
during the three months ended ended
June 30, 2014
, decreasing
196%
from
$(1.7) million
for the three months ended June 30, 2013. As previously discussed, the decline within non-deployment was attributed to missed sales and higher than anticipated physical returns incurred as a result of a transition to a new physical goods replication, distribution and fulfillment center partner. changes in consumer behavior, along with declining retail foot traffic and shelf space for physical product within the industry. Additionally, industry wide changes in consumer behavior, declining retail foot traffic and reduced retail shelf space within the industry further impacted physical sales.
Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. The Company uses Adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, the Company believes Adjusted EBITDA will also be useful to others, including its stockholders, as a valuable financial metric.
Management presents Adjusted EBITDA because it believes that Adjusted EBITDA is a useful supplement to net loss from continuing operations as an indicator of operating performance. Management also believes that Adjusted EBITDA is a financial measure that is useful both to management and investors when evaluating the Company's performance and comparing our performance with the performance of our competitors. Management also uses Adjusted EBITDA for planning purposes, as well as to evaluate the Company's performance because Adjusted EBITDA excludes certain non-recurring or non-cash items, such as stock-based compensation charges, that management believes are not indicative of the Company's ongoing operating performance.
The Company believes that Adjusted EBITDA is a performance measure and not a liquidity measure, and a reconciliation between net loss from continuing operations and Adjusted EBITDA is provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net loss from continuing operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance
33
with GAAP, or as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. Management does not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.
Following is the reconciliation of the Company's consolidated Adjusted EBITDA to consolidated GAAP net loss from continuing operations:
|
|
|
For the Three Months Ended June 30,
|
||||||
|
($ in thousands)
|
|
2014
|
2013
|
|||||
|
Net loss from continuing operations
|
|
$
|
(10,812
|
)
|
$
|
(6,383
|
)
|
|
|
Add Back
:
|
|
|||||||
|
Depreciation and amortization of property and equipment
|
|
9,376
|
|
9,245
|
|
|||
|
Amortization of intangible assets
|
|
1,885
|
|
418
|
|
|||
|
Interest expense, net
|
5,035
|
|
4,924
|
|
||||
|
Loss on investment in non-consolidated entity
|
—
|
|
1,252
|
|
||||
|
Other income, net
|
|
(139
|
)
|
(134
|
)
|
|||
|
Change in fair value of interest rate derivatives
|
|
259
|
|
(829
|
)
|
|||
|
Stock-based compensation and expenses
|
|
618
|
|
687
|
|
|||
|
Transaction and acquisition expenses
|
946
|
|
—
|
|
||||
|
Allocated costs attributable to discontinued operations
|
—
|
|
534
|
|
||||
|
Adjusted EBITDA
|
|
$
|
7,168
|
|
$
|
9,714
|
|
|
|
Adjustments related to the Phase I and Phase II Deployments
:
|
||||||||
|
Depreciation and amortization of property and equipment
|
$
|
(9,018
|
)
|
$
|
(9,018
|
)
|
||
|
Amortization of intangible assets
|
(11
|
)
|
(14
|
)
|
||||
|
Income from operations
|
(3,030
|
)
|
(2,338
|
)
|
||||
|
Intersegment services fees earned
|
—
|
|
6
|
|
||||
|
Adjusted EBITDA from non-deployment businesses
|
$
|
(4,891
|
)
|
$
|
(1,650
|
)
|
||
34
Critical Accounting Policies
The following is a discussion of our critical accounting policies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets as follows:
|
Computer equipment and software
|
3-5 years
|
|
Digital cinema projection systems
|
10 years
|
|
Machinery and equipment
|
3-10 years
|
|
Furniture and fixtures
|
3-6 years
|
Leasehold improvements are being amortized over the shorter of the lease term or the estimated useful life of the improvement. Maintenance and repair costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized.
Useful lives are determined based on an estimate of either physical or economic obsolescence, or both. During the three months ended
June 30, 2014
and
2013
, the Company has neither made any revisions to estimated useful lives, nor recorded any impairment charges from continuing operations on its property and equipment.
GOODWILL
Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. The Company’s process of evaluating goodwill for impairment involves the determination of fair value of its CEG goodwill reporting unit over its carrying value. The Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year, measured as of March 31, unless triggering events occur which require goodwill to be tested at another date.
DEFINITE-LIVED INTANGIBLE ASSETS
As of June 30, 2014
, the Company’s finite-lived intangible assets consisted of customer relationships, supplier agreements, content libraries, theatre relationships, covenants not to compete, a favorable operating lease, trade names and trademarks. During the three months ended
June 30, 2014
and
2013
, no impairment charge for finite-lived intangible assets was recorded within continuing operations.
REVENUE RECOGNITION
Phase I Deployment and Phase II Deployment
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, CDF I and to Phase 2 DC when movies distributed by the studio are displayed on screens utilizing the Company’s Systems installed in movie theatres. VPFs are earned and payable to Phase 1 DC and CDF I based on a defined fee schedule with a reduced VPF rate year over year until the sixth year (calendar 2011) at which point the VPF rate remains unchanged through the tenth year. One VPF is payable for every digital title displayed per System. The amount of VPF revenue is dependent on the number of movie titles released and displayed using the Systems in any given accounting period. VPF revenue is recognized in the period in which the digital title first plays on a System for general audience viewing in a digitally-equipped movie theatre, as Phase 1 DC’s, CDF I’s and Phase 2 DC’s performance obligations have been substantially met at that time.
Phase 2 DC’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as defined in the contracts with movie studios and distributors, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including the Company’s service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter. Further, if cost recoupment occurs before the end of the eighth contract year, a one-time “cost recoupment bonus” is payable by the studios to the Company. Any other cash flows, net of expenses, received by Phase 2 DC following the achievement of cost recoupment are required to be returned to the distributors on a pro-rata basis. At this time, the Company cannot estimate the timing or probability of the achievement of cost recoupment.
35
Alternative content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors, whereby amounts are payable to Phase 1 DC, CDF I and to Phase 2 DC, generally either a fixed amount or as a percentage of the applicable box office revenue derived from the exhibitor’s showing of content other than feature 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 are deferred for up front exhibitor contributions and are recognized over the cost recoupment period, which is expected to be ten years.
Services
Exhibitors who purchased and own Systems using their own financing in the Phase II Deployment, paid an upfront activation fee that is generally $2 thousand per screen to the Company (the “Exhibitor-Buyer Structure”). These upfront activation fees are recognized in the period in which these exhibitor owned Systems are ready for content, as the Company has no further obligations to the customer, and are generally paid quarterly from VPF revenues over approximately one year. Additionally, the Company recognizes activation fee revenue of between $1 thousand and $2 thousand on Phase 2 DC Systems and for Systems installed by Holdings upon installation and such fees are generally collected upfront upon installation. The Company will then manage the billing and collection of VPFs and will remit all VPFs collected to the exhibitors, less an administrative fee that will approximate up to 10% of the VPFs collected.
The administrative fee related to the Phase I Deployment approximates 5% of the VPFs collected and 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, video-on-demand, and physical goods (e.g. DVD and Blu-ray). The fee rate earned by the Company varies depending upon the nature of the agreements with the platform and content providers. Generally, revenues are recognized at the availability date of the content for a subscription digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and video-on-demand services.
Reserves for sales returns and other allowances are provided based upon past experience. If actual future returns and allowances differ from past experience, adjustments to our allowances may be required. Sales returns and allowances are reported net in accounts receivable and 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 is viewed. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature movies’ or alternative content’s theatrical release date.
Revenue is deferred in cases where a portion or the entire contract amount cannot be recognized as revenue due to non-delivery of services. Such amounts are classified as deferred revenue and are recognized as earned revenue in accordance with the Company’s revenue recognition policies described above.
In connection with revenue recognition for CEG, the following are also considered critical accounting policies:
Advances
Advances, which are recorded within prepaid and other current assets on the consolidated balance sheets, represent amounts prepaid to studios or content producers for which the Company provides content distribution services and such advances are estimated to be fully recoupable as of the consolidated balance sheet date.
Participations payable
The Company records liabilities within accounts payable and accrued expenses on the consolidated balance sheet, that represent amounts owed to studios or content producers for which the Company provides content distribution services for royalties owed under licensing arrangements. The Company identifies and records as a reduction to the liability any expenses that are to be reimbursed to the Company by such studios or content producers.
36
Movie Cost Amortization
Once a movie is released, capitalized acquisition costs are amortized and participations and residual costs are accrued on an individual title basis in the proportion to the revenue recognized during the period for each title ("Period Revenue") bears to the estimated remaining total revenue to be recognized from all sources for each title ("Ultimate Revenue"). The amount of movie and other costs that is amortized each period will depend on the ratio of Period Revenue to Ultimate Revenue for each movie. The Company makes certain estimates and judgments of Ultimate Revenue to be recognized for each title. Ultimate Revenue does not include estimates of revenue that will be earned beyond
5
years of a movie’s initial theatrical release date. Movie cost amortization is a component of direct operating costs within the consolidated statements of operations.
Estimates of Ultimate Revenue and anticipated participation and residual costs are reviewed periodically in the ordinary course of business and are revised if necessary. A change in any given period to the Ultimate Revenue for an individual title will result in an increase or decrease in the percentage of amortization of capitalized movie and other costs and accrued participation and residual costs relative to a previous period. Depending on the performance of a title, significant changes to the future Ultimate Revenue may occur, which could result in significant changes to the amortization of the capitalized acquisition costs.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. The update will be effective for the Company during the fiscal year ending March 31, 2015. The adoption of the update may impact whether future disposals qualify as discontinued operations and therefore could impact the Company's financial statement presentation and disclosures.
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 for the Company during the fiscal year ending March 31, 2018. The Company intends to evaluate the impact of the adoption of this accounting standard update on its financial statements.
Liquidity and Capital Resources
We have incurred net losses each year since we commenced our operations. Since our inception, we have financed our operations substantially through the private placement of shares of our common and preferred stock, the issuance of promissory notes, our initial public offering and subsequent private and public offerings, notes payable and common stock used to fund various acquisitions.
Our business is primarily driven by the growth in global demand for entertainment content in all forms, and in particular, the shifting consumer demand for content in digital forms within home and mobile devices as well as the maturing digital cinema marketplace. Primary revenue drivers will be the increasing number of digitally equipped devices/screens and the demand for entertainment content in theatrical, home and mobile ancillary markets. According to the Motion Picture Association of America, during 2013 there were approximately 43,000 domestic (United States and Canada) movie theatre screens and approximately 135,000 screens worldwide, of which approximately 40,000 of the domestic screens were equipped with digital cinema technology, and 12,641 of those screens contained our Systems. Historically, the number of digitally-equipped screens in the marketplace has been a significant determinant of our potential revenue streams. Going forward, the expansion of our content business into the ancillary distribution markets as well into the acquisition and distribution of new movie releases expands our market opportunities and will be the primary driver of our revenue streams as the rapidly evolving digital and entertainment landscape creates significant new growth potential for the Company.
Beginning in May 2010, Phase 2 B/AIX, an indirect wholly-owned subsidiary of the Company, entered into additional credit facilities, the KBC Facilities, to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment. As of
June 30, 2014
, the outstanding principal balance of the KBC Facilities was
$33.0 million
.
In February 2013, the Company refinanced its existing non-recourse senior 2010 Term Loan and recourse 2010 Note with a $125.0 million senior non-recourse credit facility led by Société Générale, New York Branch and a $70.0 million non-recourse credit facility provided by Prospect Capital Corporation. These two new non-recourse credit facilities will be supported by the cash flows
37
of the Phase 1 deployment and the Company’s digital cinema servicing business. As of
June 30, 2014
, the outstanding principal balance of these non-recourse credit facilities was
$155.1 million
.
In October 2013, the Company entered the Cinedigm Credit Agreement pursuant to which the Company borrowed term loans of $25.0 million and revolving loans of up to $30.0 million, of which all of the term loans and $15.0 million of the revolving loans were drawn upon in connection with the GVE Acquisition. The Cinedigm Credit Agreement, which further enhances the Company's working capital needs and ability to further invest in entertainment content, will be supported by the cash flows of the Company's media library, acquired in connection with the GVE Acquisition. Additionally, the Company entered into an agreement providing $5.0 million of financing. As of
June 30, 2014
, the outstanding principal balance of these recourse credit facilities was
$39.5 million
.
As of
June 30, 2014
, we had negative working capital, defined as current assets less current liabilities, of
$17.6 million
and cash and cash equivalents and restricted cash totaling
$43.5 million
.
Operating activities provided net cash of
$2.4 million
and
$9.7 million
for the three months ended
June 30, 2014
and
2013
, respectively. Cash flows from VPFs are expected to remain consistent with the current fiscal year and support non-recourse debt paydown. Generally, changes in accounts receivable from our studio customers and others are a large component of operating cash flow and will vary based on the seasonality of movie release schedules by the major studios. The CEG business differs from our deployment business as we build receivables, the amount of cash flows and timing which will depend upon the success of the theatrical and home entertainment releases. The Company has put in place an up to $30.0 million revolver to support these working capital fluctuations. In addition, the Company makes advances towards theatrical releases and expects to recover the initial expenditures within nine to twelve months and advances to certain home entertainment distribution clients which it expects to recover within the same period. CEG also generates additional operating cash flows during the Company's fiscal third and fourth quarter resulting from holiday revenues and distributes royalties from such revenues in the subsequent one to two fiscal quarters.
Investing activities used net cash of
$0.8 million
and
$0.9 million
for the three months ended
June 30, 2014
and
2013
, respectively principally for capital expenditures.
Financing activities used net cash of
$15.1 million
and
$8.6 million
for the three months ended
June 30, 2014
and
2013
, respectively. The increase reflects the Cinedigm Credit Facility which was not present during the prior year period in addition to normal principal reduction of other notes payables during the three months ended
June 30, 2014
as well as the seasonally expected reduction in outstanding revolver balance. Financing activities are expected to continue using the net cash generated from the Phase 1 and Phase 2 DC operations as well as a portion of the cash generated from CEG, primarily for principal repayments on the 2013 Term Loans, 2013 Prospect Loan, the Cinedigm Credit Facility and other existing debt facilities.
We have contractual obligations that include long-term debt consisting of notes payable, credit facilities, non-cancelable long-term capital lease obligations for the Pavilion Theatre, capital leases for information technology equipment and other various computer related equipment, non-cancelable operating leases consisting of real estate leases, and minimum guaranteed obligations under theatre advertising agreements with exhibitors for displaying cinema advertising. The capital lease obligation of the Pavilion Theatre is paid by an unrelated third party, although Cinedigm remains the primary lessee and would be obligated to pay if the unrelated third party were to default on its rental payment obligations.
38
The following table summarizes our significant contractual obligations as of
June 30, 2014
:
|
|
Payments Due
|
||||||||||||||||||
|
Contractual Obligations ($ in thousands)
|
Total
|
2015
|
2016 &
2017
|
2018 &
2019
|
Thereafter
|
||||||||||||||
|
Long-term recourse debt
(1)
|
$
|
39,858
|
|
$
|
15,608
|
|
$
|
19,250
|
|
$
|
5,000
|
|
$
|
—
|
|
||||
|
Long-term non-recourse debt
(2)
|
201,996
|
|
33,538
|
|
59,754
|
|
27,170
|
|
81,534
|
|
|||||||||
|
Capital lease obligations
(3)
|
5,923
|
|
616
|
|
1,386
|
|
1,199
|
|
2,722
|
|
|||||||||
|
Debt-related obligations, principal
|
$
|
247,777
|
|
$
|
49,762
|
|
$
|
80,390
|
|
$
|
33,369
|
|
$
|
84,256
|
|
||||
|
Interest on recourse debt
(1)
|
$
|
4,441
|
|
$
|
1,724
|
|
$
|
2,128
|
|
$
|
589
|
|
$
|
—
|
|
||||
|
Interest on non-recourse debt
(2)
|
65,637
|
|
11,859
|
|
20,607
|
|
17,592
|
|
15,579
|
|
|||||||||
|
Interest on capital leases
(3)
|
4,365
|
|
842
|
|
1,498
|
|
1,181
|
|
844
|
|
|||||||||
|
Total interest
|
$
|
74,443
|
|
$
|
14,425
|
|
$
|
24,233
|
|
$
|
19,362
|
|
$
|
16,423
|
|
||||
|
Total debt-related obligations
|
$
|
322,220
|
|
$
|
64,187
|
|
$
|
104,623
|
|
$
|
52,731
|
|
$
|
100,679
|
|
||||
|
Total non-recourse debt including interest
|
$
|
267,633
|
|
$
|
45,397
|
|
$
|
80,361
|
|
$
|
44,762
|
|
$
|
97,113
|
|
||||
|
Operating lease obligations
(4)
|
$
|
10,611
|
|
$
|
1,976
|
|
$
|
2,932
|
|
$
|
2,509
|
|
$
|
3,194
|
|
||||
|
(1)
|
Recourse debt includes the Cinedigm Credit Agreement and the 2013 Notes.
|
|
(2)
|
Non-recourse debt is generally defined as debt whereby the lenders’ sole recourse with respect to defaults by the Company is limited to the value of the asset, which is collateral for the debt. The 2013 Term Loans are not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC and CDF I, the 2013 Prospect Loan is not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC and DC Holdings LLC and the KBC Facilities are not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.
|
|
(3)
|
Represents the capital lease and capital lease interest for the Pavilion Theatre and capital leases on information technology equipment. The Company has remained the primary obligor on the Pavilion capital lease, and therefore, the capital lease obligation and related assets under the capital lease remain on the Company's consolidated financial statements as of
June 30, 2014
. The Company has, however, entered into a sub-lease agreement with the unrelated third party purchaser which pays the capital lease and as such, has no continuing involvement in the operation of the Pavilion Theatre. This capital lease was previously included in discontinued operations.
|
|
(4)
|
Includes the remaining operating lease agreement for one IDC lease now operated and paid for by FiberMedia, consisting of unrelated third parties. FiberMedia currently pays the lease directly to the landlord and the Company will attempt to obtain landlord consent to assign the facility lease to FiberMedia. Until such landlord consent is obtained, the Company will remain as the lessee.
|
We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, interest on the
2013 Term Loans,
2013 Prospect Loan and Cinedigm Credit Agreement, marketing and promotional activities, content acquisition and marketing costs and the development of our digital OTT channels. Certain of these costs, including costs of content acquisition, marketing and promotional activities and digital channels, could be reduced if necessary. The restrictions imposed by the 2013 Term Loans and 2013 Prospect Loan may limit our ability to obtain financing, make it more difficult to satisfy our debt obligations or require us to dedicate a substantial portion of our cash flow to payments on our existing debt obligations. The 2013 Prospect Loan requires certain screen turn performance from Phase 1 DC and Phase 2 DC. While such restrictions may reduce the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements, we do not have similar restrictions imposed upon our CEG business. We may seek to raise additional capital for strategic acquisitions or working capital as necessary. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity.
Seasonality
Revenues from our Phase I Deployment and Phase II Deployment segments derived from the collection of VPFs from motion picture studios are seasonal, coinciding with the timing of releases of movies by the motion picture studios. Generally, motion picture studios release the most marketable movies during the summer and the winter holiday season. The unexpected emergence of a hit movie during other periods can alter the traditional trend. The timing of movie releases can have a significant effect on our results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter or any other quarter. While CEG benefits from the winter holiday season, we believe the seasonality of motion picture exhibition, however, is becoming less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout the year.
39
Off-balance sheet arrangements
We are not a party to any off-balance sheet arrangements, other than operating leases in the ordinary course of business, which are disclosed above in the table of our significant contractual obligations, and Holdings. In addition, as discussed further in Note 2 to the Consolidated Financial Statements, the Company holds a 100% equity interest in Holdings, which is an unconsolidated variable interest entity (“VIE”), which wholly owns Cinedigm Digital Funding 2, LLC; however, the Company is not the primary beneficiary of the VIE.
Impact of Inflation
The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse impact on our operating results.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.
Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
None.
None.
Not Applicable.
None.
The exhibits are listed in the Exhibit Index on page 40 herein.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CINEDIGM CORP.
|
|
|
|
|
|
Date:
|
August 13, 2014
|
By:
|
/s/ Christopher J. McGurk
|
|
|
|
|
Christopher J. McGurk
Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
|
|
|
|
|
|
|
Date:
|
August 13, 2014
|
By:
|
/s/ Jeffrey S. Edell
|
|
|
|
|
Jeffrey S. Edell
Chief Financial Officer (Principal Financial Officer) |
41
EXHIBIT INDEX
|
Exhibit
Number
|
|
Description of Document
|
|
31.1
|
‑‑
|
Officer's Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
‑‑
|
Officer's Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
32.1
|
‑‑
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
32.2
|
‑‑
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
101.INS
|
‑‑
|
XBRL Instance Document.*
|
|
101.SCH
|
‑‑
|
XBRL Taxonomy Extension Schema.*
|
|
101.CAL
|
‑‑
|
XBRL Taxonomy Extension Calculation.*
|
|
101.DEF
|
‑‑
|
XBRL Taxonomy Extension Definition.*
|
|
101.LAB
|
‑‑
|
XBRL Taxonomy Extension Label.*
|
|
101.PRE
|
‑‑
|
XBRL Taxonomy Extension Presentation.*
|
42
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial Statements (unaudited)Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits