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

[February 13, 2013]

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

(Edgar Glimpses Via Acquire Media NewsEdge) 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 Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 ("Cinedigm", and collectively with its subsidiaries, the "Company").

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

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

In April 2012, the Company issued 7,857,143 shares of Class A common stock at a public offering price of $1.40 per share, less stock issuance fees and expenses of approximately $1.0 million, resulting in net proceeds to the Company of $10.0 million.

On April 19, 2012, the Company entered into a stock purchase agreement for the purchase of all of the issued and outstanding capital stock of New Video Group, Inc. ("New Video"), an independent home entertainment distributor of quality packaged goods entertainment and digital content that provides distribution services in the DVD, BD, Digital and VOD channels for more than 500 independent rights holders (the "New Video Acquisition"). The Company agreed to pay $10.0 million in cash and 2,525,417 shares of Class A common stock at $1.51 per share, subject to certain transfer restrictions, plus up to an additional $6.0 million in cash or Class A common stock, at the Company's discretion, if certain business unit financial performance targets are met during the fiscal years ended March 31, 2013, 2014 and 2015. In addition, the Company has agreed to register the resale of the shares of Class A common stock paid as part of the purchase price. The New Video Acquisition was consummated on April 20, 2012. The 31 -------------------------------------------------------------------------------- Company is currently in the process of finalizing the fair value of assets acquired and liabilities assumed. Merger and acquisition expenses, consisting primarily of professional fees, directly related to the New Video Acquisition totaled $1.9 million, of which $1.3 million was incurred during the three months ended June 30, 2012.

The following organizational chart provides a graphic representation of our business and our four reporting segments: [[Image Removed]] We have incurred consolidated net losses, including the results of our non-recourse deployment subsidiaries, of $1,784 and $10,640 during the three months ended December 31, 2012 and 2011, respectively, and $9,547 and $17,263 for the nine months ended December 31, 2012 and 2011, respectively, and we have an accumulated deficit of $230,858 as of December 31, 2012. Included in our consolidated net losses were $6,889 during the three months ended December 31, 2011 of income attributed to discontinued operations. We also have significant contractual obligations related to our debt for the remainder of the fiscal year ended March 31, 2013 and beyond. We may continue generating consolidated net losses, including our non-recourse deployment subsidiaries, for the foreseeable future. Based on our cash position at December 31, 2012, and expected cash flows from operations, we believe that we have the ability to meet our obligations through at least December 31, 2013. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on our financial position, results of operations or liquidity.

32 -------------------------------------------------------------------------------- Results of Continuing Operations for the Three Months Ended December 31, 2012 and 2011 Revenues For the Three Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 10,282 $ 10,530 $ (248 ) (2 )% Phase II Deployment 3,321 2,976 345 12 % Services 3,979 5,736 (1,757 ) (31 )% Content & Entertainment 5,630 551 5,079 922 % $ 23,212 $ 19,793 $ 3,419 17 % Revenues increased $3.4 million or 17% during the three months ended December 31, 2012 with the organic growth in revenues in Content and Entertainment as well as the New Video Acquisition, more than offsetting a decrease in Services revenues. Total deployment revenues were approximately flat year on year as total Cinedigm financed Systems grew by 688 screens and average screen turns declined modestly compared to the prior year period. Additionally, two studio releases were moved into fourth quarter of the current fiscal year.

Total Phase 2 DC financed Systems installed and ready for content increased to 2,503 at December 31, 2012 from 1,652 Systems at December 31, 2011. Non-deployment revenues grew 53% period over period inclusive of New Video and declined 14% period on period assuming New Video had been included on a pro-forma basis within the three months ended December 31, 2011 operating results.

In the Services segment, a $1.8 million, or 31%, decrease in revenues net of intercompany services and $1.1 million, or 17.6%, decrease inclusive of intercompany service fees, was primarily due to a decrease in software revenues year over year. In the prior period, the Company earned a significant one-time license fee tied to the sale of its digital delivery business to Technicolor. In addition, certain exhibitor and distributor installations were delayed until the fiscal fourth quarter by installation and acceptance testing schedules of our customers. Digital cinema servicing fees increased modestly as 845 Phase 2 DC Cinedigm-Financed and Exhibitor-Buyer Structure Systems were installed during the three months ended December 31, 2012. A total of 7,963 Phase 2 Systems were generating service fees at December 31, 2012 versus 5,012 Phase 2 Systems at December 31, 2011. The deployment period for Phase 2 Systems ended at January 31, 2013. Cinedigm also services an additional 3,724 screens in its Phase I deployment subsidiary. We expect growth in services as we (i) commence international servicing and software installations in Australia, the Caribbean, Brazil and Europe in the fourth quarter of the current fiscal year from our over 1,000 international screen backlog; (ii) recognize additional revenues from existing software installations as well as recently signed software customers upon installation in the remainder of this fiscal year and next fiscal year; and (iii) continued growth in software and cinema services from our strong sales pipeline.

The CEG business expanded significantly to revenues of $5.6 million due to organic growth and the acquisition of New Video which was completed on April 20, 2012 during the first quarter of the fiscal year ending March 31, 2013. Total CEG revenues increased 3%, period over period, inclusive of New Video in both periods on a pro-forma basis. CEG has grown its historical fee-for-service theatrical releasing efforts (Indie Direct) as well as expanded the New Video ancillary market distribution efforts of distributing both movies and television entertainment content into digital, video on demand and physical goods (DVDs and Blu-Ray discs). CEG is utilizing the combined resources of its existing theatrical releasing infrastructure and the New Video home entertainment distribution capabilities to acquire the North American distribution rights in all media for independent films as well as to launch several programmatic alternative content channels. During the three months ended December 31, 2012, CEG acquired the distribution rights to 3 additional independent film and ended the quarter with 11 independent films under contract. Subsequent to quarter end, CEG has acquired 2 additional independent films for a total of 13 acquired during this fiscal year and has an active acquisition pipeline. CEG has released 4 movies from this slate year to date and expects to release an additional 2 of these movies in our fiscal fourth quarter. The Citadel was released theatrically on November 9th and In Our Nature was released theatrically on December 7th.

Both of these titles will be released into the home entertainment markets in our fiscal fourth quarter. CEG recognized modest theatrical and ancillary revenues in this quarter from these 2 releases and incurred "J-Curve" costs on its current quarter and future releases of $0.4 million in the quarter. Based upon ancillary revenue pre-sales, as well as preliminary DVD purchases and expected transactional video-on-demand results, CEG expects to be profitable on these titles.

33-------------------------------------------------------------------------------- Direct Operating Expenses For the Three Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 138 $ 238 $ (100 ) (42 )% Phase II Deployment 189 132 57 43 % Services 1,247 1,033 214 21 % Content & Entertainment 1,595 701 894 128 % $ 3,169 $ 2,104 $ 1,065 51 % Direct operating expenses increased by 51% primarily due to the acquisition of New Video and the resulting 53% total non-deployment revenue growth. Excluding the impact of the purchase of New Video, direct operating costs decreased by $0.4 million from the three months ended December 31, 2011 on a pro-forma basis.

The decrease in direct operating costs in the Phase I Deployment segment was primarily due to modest decreases in property taxes and insurance incurred on deployed Systems. The increase in direct operating costs in the Phase II Deployment segment was primarily due to increases in property taxes and insurance incurred as a result of increased deployed Systems. The increase in the Services segment was primarily related to (i) additional administrative and financial personnel required to service our growing Phase 2 screens; and (ii) additional personnel costs to support the software development requirements of our current and new customers as well as new product development efforts. The increase in the Content & Entertainment segment was directly related to our acquisition of New Video and the approximately $0.4 million of "J-Curve" expenses related to advances and marketing for movie releases during the three months ended December 31, 2012. We expect such expenses to be offset by revenues in future quarters from ancillary home entertainment revenue streams. In accordance with GAAP, Cinedigm must recognize its upfront content acquisition and marketing expenses at the time of a theatrical release of a movie. We expect to recover those expenses as well as earn our fee based profits over the ensuing 12-36 months from revenues earned on the distribution of the movie in the ancillary home entertainment markets. This timing difference creates a "J-Curve" and will continue in future periods as we increase our distribution activities and we will also experience an increase in direct operating expenses corresponding with additional revenue growth.

Selling, General and Administrative Expenses For the Three Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 16 $ 24 $ (8 ) (33 )% Phase II Deployment 36 44 (8 ) (18 )% Services 1,035 830 205 25 % Content & Entertainment 2,307 381 1,926 506 % Corporate 2,871 3,024 (153 ) (5 )% $ 6,265 $ 4,303 $ 1,962 46 % Selling, general and administrative expenses increased $2.0 million or 46% in support of the 53% increase in non-deployment revenues. Total selling, general and administrative expense declined by approximately 8% inclusive of New Video in both periods on a pro-forma basis. This limited expense growth rate is the result of the restructuring activities undertaken by the Company in the second half of the fiscal year ended March 31, 2012 and focused expense management. The increase in the Services segment was mainly due to payroll and related employee expenses for additional management, sales resources, software development and quality assurance staff to support the significant recent software customer additions. The Content & Entertainment segment increased 506% as a result of our acquisition of New Video and the additional staff to support our expanded releasing activities this year. The decrease within Corporate was mainly due to (i) reduced personnel expenses and (ii) insurance, accounting and legal expenses partially offset by increased financial staffing, travel and sales costs. Future increases in selling, general and administrative expenses will be tied to additional revenues as we support our recent new software business contracts and expanding sales pipeline and our additional content acquisition and distribution activities with additional sales and service headcount.

Restructuring expense During the three months ended December 31, 2011, the Company completed a strategic assessment of its resource requirements within its ongoing businesses which resulted in a workforce reduction, severance and employee related expense of $832. The Company had no restructuring expenses in this quarter.

34 --------------------------------------------------------------------------------Depreciation and Amortization Expense on Property and Equipment For the Three Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 7,137 $ 7,138 $ (1 ) - % Phase II Deployment 1,849 1,682 167 10 % Services 37 75 (38 ) (51 )% Content & Entertainment 7 2 5 250 % Corporate 125 99 26 26 % $ 9,155 $ 8,996 $ 159 2 % Depreciation and amortization expense increased $0.2 million or 2%. The increase in the Phase II Deployment segment represents depreciation on the increased number of Phase 2 DC Systems which were not in service during the fiscal year ended March 31, 2012. We expect the depreciation and amortization expense in the Phase II Deployment segment to remain at similar levels as the Phase 2 deployment period has ended and we do not expect to add international Systems that require consolidation on our balance sheet. We expect modest additional growth in Services and Corporate depreciation and amortization expense tied to technology investments supporting our software expansion. Content depreciation will in the future reflect the additional depreciation from New Video and additional depreciation and amortization related to our acquisition of content distribution rights.

Amortization of intangible assets Amortization of intangible assets increased to $0.7 million from $0.1 million for the three months ended December 31, 2012, principally due to the amortization of intangible assets that were allocated preliminary purchase in connection with the New Video Acquisition.

Interest expense For the Three Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 1,686 $ 2,527 $ (841 ) (33 )% Phase II Deployment 592 680 (88 ) (13 )% Corporate 4,412 4,396 16 - % $ 6,690 $ 7,603 $ (913 ) (12 )% Interest expense decreased $0.9 million or 12%. The 33% decrease in interest paid and accrued within the non-recourse Phase I Deployment segment relates to the continued repayment of Phase 1 DC's 2010 Term Loans from free cash flow and the resulting reduced debt balance offset by additional hedging costs from the hedge put in place in June 2010. Interest decreased within the Phase II Deployment segment related to the non-recourse credit facilities with KBC Bank NV (the "KBC Facilities") as we are continuing to repay the KBC Facilities from free cash flow and benefiting from the resulting reduced debt balance. The increase in interest paid and accrued within Corporate is related to the amended and restated note with an affiliate of Sageview Capital LP (the "2010 Note"). Interest on the 2010 Note is 8% PIK Interest and 7% per annum paid in cash. Through September 30, 2011, the Company had an interest reserve set aside to cover cash interest payments on this note. Beginning October 1, 2011, the Company has paid its cash interest expense through the cash flows from operations.

Non-cash interest expense was approximately $2.4 million and $2.3 million for the three months ended December 31, 2012 and 2011, respectively. PIK interest was $1.9 million and $1.8 million for the three months ended December 31, 2012 and 2011, respectively. The remaining amounts for the three months ended December 31, 2012 and 2011 represent the accretion of $0.4 million and $0.5 million, respectively, on the note payable discount associated with the 2010 Note which will continue over the term of the 2010 Note and the accretion of approximately $0.1 million in each of the periods on the note payable discount associated with the 2010 Term Loans which will continue over the term of the 2010 Term Loans.

Change in fair value of interest rate swaps The change in fair value of the interest rate swaps was a gain of $0.3 million for the three months ended December 31, 2012 and a gain of $0.6 million for the three months ended December 31, 2011. The swap agreement in the prior year related to the prior credit facility, which was terminated on May 6, 2010 upon the completion of the Phase I Deployment refinancing. It has been 35 --------------------------------------------------------------------------------replaced by new swap agreements related to the 2010 Term Loans entered into on June 7, 2010 which became effective on June 15, 2011.

Adjusted EBITDA The Company measures its financial success based upon growth in revenues and earnings before interest, depreciation, amortization, other income (expense), net, stock-based compensation, allocated costs attributable to discontinued operations, restructuring expenses, merger and acquisition expenses and certain other items ("Adjusted EBITDA"). Further, the Company analyzes this measurement excluding the results of its Phase 1 DC and Phase 2 DC subsidiaries, and includes in this measurement intercompany service fees earned by its digital cinema servicing group from the Phase I and Phase II Deployments, which are eliminated in consolidation (See Note 9 Segment Information for further details). This measure isolates the financial and capital structure impact of the Company's non-recourse Phase 1 DC and Phase 2 DC subsidiaries.

The Company reported increased Adjusted EBITDA (including its Phase 1 DC and Phase 2 DC subsidiaries) of $14.5 million for the three months ended December 31, 2012 in comparison to $14.3 million for the three months ended December 31, 2011. Adjusted EBITDA from non-deployment businesses increased 59% to $2.2 million during the three months ended December 31, 2012 from $1.4 million during the three months ended December 31, 2011 and grew 81% from the three months ended September 30, 2012. These results reflect the growth of CEG, which more than offset declines in Services. Finally, as previously described and inclusive in these results, the Company incurred approximately $0.4 million of "J-Curve" content distribution costs in the three months ended December 31, 2012 in advance of earning ancillary home entertainment revenues. The Company continues to benefit from growth in its installed Systems, growth in software license and maintenance fees and the inherent operating leverage embedded in its business model. Phase 1 DC and Phase 2 DC revenues are expected to be relatively flat going forward as the domestic deployment period ended at January 31, 2013 and any remaining domestic and international installations will be through an Exhibitor-Buyer structure or other servicing partnerships. Based on the expected growth in and recently signed software contracts and the expansion in CEG driven by the acquisition of New Video and the Company's independent film releasing slate, the Company expects Adjusted EBITDA performance to continue to improve during the remainder of the fiscal year ended March 31, 2013 relative to prior year results. The Company intends to invest in the growth of its business through the acquisition of content distribution rights, related marketing related expenditures and through the continued development of additional software products and services.

Adjusted EBITDA is not a measurement of financial performance under U.S.

generally accepted accounting principles ("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 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 condensed consolidated financial statements prepared in accordance with GAAP.

36 --------------------------------------------------------------------------------Following is the reconciliation of the Company's consolidated Adjusted EBITDA to consolidated GAAP net loss from continuing operations: For the Three Months Ended December 31, ($ in thousands) 2012 2011 Net loss from continuing operations $ (1,784 ) $ (3,751 ) Add Back: Amortization of capitalized software costs 302 130 Depreciation and amortization of property and equipment 9,155 8,996 Amortization of intangible assets 739 84 Interest income (2 ) (21 ) Interest expense 6,690 7,603 Other income, net (103 ) (175 ) Income on investment in non-consolidated entity (678 ) 343 Change in fair value of interest rate swap (349 ) (597 ) Stock-based expenses 43 142 Stock-based compensation 513 561 Restructuring expenses - 832 Allocated costs attributable to discontinued operations - 119 Adjusted EBITDA $ 14,526 $ 14,266 Adjustments related to the Phase I and Phase II Deployments: Depreciation and amortization of property and equipment $ (8,986 ) $ (8,820 ) Amortization of intangible assets (13 ) (12 ) Income from operations (4,159 ) (4,275 ) Intersegment services fees earned (1) 845 245 Adjusted EBITDA from non-deployment businesses $ 2,213 $ 1,404 (1) Intersegment revenues of the Services segment represent service fees earned from the Phase I and Phase II Deployments.

37 -------------------------------------------------------------------------------- Results of Continuing Operations for the Nine Months Ended December 31, 2012 and 2011 Revenues For the Nine Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 31,332 $ 33,859 $ (2,527 ) (7 )% Phase II Deployment 10,398 9,877 521 5 % Services 12,997 13,674 (677 ) (5 )% Content & Entertainment 11,998 1,452 10,546 726 % $ 66,725 $ 58,862 $ 7,863 13 % Revenues increased $7.9 million or 13% during the nine months ended December 31, 2012 with the organic growth in revenues in Content and Entertainment as well as the New Video Acquisition, more than offsetting decreases in deployment and Services revenues. Phase 1 and Phase 2 Deployment revenues declined by $2.0 million for the nine months ended December 31, 2012 partially due to a number of unexpected releasing decisions made by the major studios during the Company's fiscal second quarter: (i) studios avoided releasing wide titles in the weekends around the Dark Knight Rises; (ii) studios reduced the breadth of releases and/or delayed releases in light of the shootings at a Dark Knight Rises screening in Aurora, CO in July; (iii) studios reduced the breadth and/or number of releases around the Olympics in August; and (iv) several wide releases were delayed due to production, marketing or 3D conversion issues. The delayed releases have been moved to the fourth quarter of this fiscal year as well as the first and second quarters of the next fiscal year. Based on announced release plans, actual results and our internal estimates, we do not expect studio releasing patterns like those experienced during the fiscal quarter ended September 30, 2012 to negatively impact the remainder of the fiscal year. Phase 2 DC's financed Systems installed and ready for content were 2,503 at December 31, 2012, up from 1,652 at December 31, 2011. Non-deployment revenues grew 65% inclusive of New Video and declined 1% assuming New Video had been included within the nine months ended December 31, 2011 operating results on a pro-forma basis.

In the Services segment, a $0.7 million, or 5%, decrease in revenues was primarily due to (i) lower results in Software license fees reflecting the decline in Phase 2 installations year over year as well as several exhibitor and studio distributor customers delaying software installations until the fiscal fourth quarter and (ii) decreased exhibitor activation fees, partially offset by increased digital cinema servicing fees. During the nine months ended December 31, 2012, 1,519 Phase 2 DC Cinedigm-Financed and Exhibitor-Buyer Structure Systems were installed and a total of 7,963 installed Phase 2 Systems were generating service fees versus 5,012 Phase 2 Systems at December 31, 2011.

Cinedigm also services an additional 3,724 screens in its Phase I deployment subsidiary. We expect growth in Services as we (i) commence international servicing and software installations in Australia, the Caribbean, Brazil and Europe in the fourth quarter of the current fiscal year from our over 1,000 international screen backlog; (ii) recognize additional revenues from existing software installations as well as recently signed software customers upon installation in the remainder of this fiscal year and next fiscal year; and (iii) continued growth in software and cinema services from our strong sales pipeline.

The CEG business expanded significantly to revenues of $12.0 million due to organic growth and the acquisition of New Video which was completed on April 20, 2012 during the first quarter of the fiscal year ending March 31, 2013. Total CEG revenues increased by $0.4 million, period over period, inclusive of New Video in both periods. CEG has grown its historical fee-for-service theatrical releasing efforts (Indie Direct) as well as has expanded the New Video ancillary market distribution efforts of distributing both movies and television entertainment content into digital, video on demand and physical goods (DVDs and Blu-Ray discs). CEG is utilizing the combined resources of its existing theatrical releasing infrastructure and the New Video home entertainment distribution capabilities to acquire the North American distribution rights in all media for independent films as well as to launch several programmatic alternative content channels. During the nine months ended December 31, 2012, CEG acquired the distribution rights to 7 additional independent films and ended the period with 11 independent films acquired. CEG has acquired a total of 13 acquired this fiscal year and has an active acquisition pipeline. CEG expects to release 6 of these movies during this fiscal year, including The Invisible War having been released theatrically on June 22nd and into home entertainment markets in September, The Citadel having been released theatrically on November 9th and In Our Nature having been released theatrically on December 7th. CEG has been achieved strong profitability on The Invisible War and expects additional positive results due to movie's nomination for the Academy Award for Best Documentary. In addition, CEG expects both fiscal third quarter releases to be profitable based upon ancillary revenue pre-sales, DVD pre-orders as well as projected transactional video-on-demand results.

38 -------------------------------------------------------------------------------- Direct Operating Expenses For the Nine Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 347 $ 466 $ (119 ) (26 )% Phase II Deployment 513 256 257 100 % Services 3,643 3,003 640 21 % Content & Entertainment 4,029 1,669 2,360 141 % $ 8,532 $ 5,394 $ 3,138 58 % Direct operating expenses increased by 58% due to the acquisition of New Video and the resulting 65% total non-deployment revenue growth. Excluding the impact of the purchase of New Video, direct operating costs increased by $0.2 million from the nine months ended December 31, 2011 on a pro-forma basis. The decreased operating costs in the Phase I Deployment segment and the modest increase in direct operating costs in the Phase II Deployment segment was primarily due to respective decreases and increases in property taxes and insurance incurred on deployed Systems. The increase in the Services segment was primarily related to (i) additional administrative and financial personnel required to service our growing Phase 2 screens; and (ii) additional personnel costs to support the software development requirements of our current and new customers as well as new product development efforts. The increase in the Content & Entertainment segment was directly related to our acquisition of New Video along with a large indie direct fee for service movie release. In addition, we incurred approximately $1.0 million of expenses related to advances and marketing for movie releases during the nine months ended December 31, 2012 that we expect to result in revenues in future quarters from ancillary home entertainment revenue streams. In accordance with GAAP, Cinedigm must recognize its upfront content acquisition and marketing expenses at the time of a theatrical release of a movie. We expect to recover those expenses as well as earn our fee based profits over the ensuing 12-36 months from revenues earned on the distribution of the movie in the ancillary home entertainment markets. This timing difference creates a "J-Curve" and will continue in future periods as we increase our distribution activities and we will also experience an increase in direct operating expenses corresponding with additional revenue growth.

Selling, General and Administrative Expenses For the Nine Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 89 $ 199 $ (110 ) (55 )% Phase II Deployment 87 134 (47 ) (35 )% Services 2,831 2,420 411 17 % Content & Entertainment 6,194 1,390 4,804 346 % Corporate 9,263 7,641 1,622 21 % $ 18,464 $ 11,784 $ 6,680 57 % Selling, general and administrative expenses increased $6.7 million or 57% in support of the 65% increase in non-deployment revenues. Total selling, general and administrative expense declined approximately 2% inclusive of New Video in both periods on a pro-forma basis. This expense growth rate below the revenue growth rate is the result of the restructuring activities undertaken by the Company in the second half of the fiscal year ended March 31, 2012 and focused expense management. The increase in the Services segment was mainly due to payroll and related employee expenses for increased staffing as we added servicing resources to support the expanding digital cinema exhibitor management efforts as well as additional management, sales resources, software development and quality assurance staff to support the significant recent software customer additions. The Content & Entertainment segment increased 21% as a result of our acquisition of New Video and the additional staff to support our expanded releasing activities this year. The increase within Corporate was mainly due to (i) the addition of financial and corporate resources from New Video; (ii) increased insurance, accounting and legal expenses related to our business growth and the acquisition of New Video; and (iii) increased travel and sales costs. Future increases in selling, general and administrative expenses will be tied to additional revenues as we support our recent new software business contracts and expanding sales pipeline and our additional content acquisition and distribution activities with additional sales and service headcount.

39 --------------------------------------------------------------------------------Merger and Acquisition Expenses Merger and acquisition expenses included in corporate expenses for the nine months ended December 31, 2012 of $1.3 million include professional fees incurred which pertained to the purchase of New Video which was consummated in April 2012.

Restructuring expense During the nine months ended December 31, 2012, the Company completed a strategic assessment of its resource requirements within its Content & Entertainment reporting segment which, based upon the continued integration of the New Video Acquisition, continued to shift in its business from physical to digital content distribution and shift to a greater share of its own theatrical releasing product, resulting in a workforce reduction and severance and employee related expense of $340. During the nine months ended December 31, 2011, the Company completed a strategic assessment of its resource requirements within its ongoing businesses which resulted in a workforce reduction, severance and employee related expense of $832.

Depreciation and Amortization Expense on Property and Equipment For the Nine Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 21,412 $ 21,416 $ (4 ) - % Phase II Deployment 5,478 4,914 564 11 % Services 114 121 (7 ) (6 )% Content & Entertainment 17 4 13 325 % Corporate 351 264 87 33 % $ 27,372 $ 26,719 $ 653 2 % Depreciation and amortization expense increased $0.7 million or 2%. The increase in the Phase II Deployment segment represents depreciation on the increased number of Phase 2 DC Systems which were not in service during the fiscal year ended March 31, 2012. We expect the depreciation and amortization expense in the Phase II Deployment segment to remain at similar levels as the Phase 2 deployment period has ended and we do not expect to add international Systems that require consolidation on our balance sheet. In addition, we expect modest additional growth in Services and Corporate depreciation and amortization expense tied to technology investments supporting our software expansion.

Content depreciation will in the future reflect the acquisition of New Video results and additional depreciation and amortization related to our acquisition of content distribution rights.

Amortization of intangible assets Amortization of intangible assets increased to $1.1 million from $0.3 million for the nine months ended December 31, 2012, principally due to the amortization of intangible assets that were allocated preliminary purchase in connection with the New Video Acquisition.

Interest expense For the Nine Months Ended December 31, ($ in thousands) 2012 2011 $ Change % Change Phase I Deployment $ 6,078 $ 7,969 $ (1,891 ) (24 )% Phase II Deployment 1,809 1,739 70 4 % Corporate 13,557 12,835 722 6 % $ 21,444 $ 22,543 $ (1,099 ) (5 )% Interest expense decreased $1.1 million or 5%. The 24% decrease in interest paid and accrued within the non-recourse Phase I Deployment segment relates to the continued repayment of Phase 1 DC's 2010 Term Loans from free cash flow and the resulting reduced debt balance offset by additional hedging costs from the hedge put in place in June 2010. Interest increased within the Phase II Deployment segment related to the KBC Facilities as we added approximately $14.0 million and $3.5 million of additional non-recourse Phase 2 debt during the fiscal year ended March 31, 2012 and nine months ended December 31, 2012, respectively, to fund the purchase of Systems from Barco. Phase 2 DC's non-recourse interest expense is expected to continue to decrease as it did this quarter as we continue to repay the KBC Facilities from free cash flow and the benefit from the resulting reduced debt balance. The increase in interest paid and accrued within Corporate is related to the 2010 Note. Interest on the 2010 Note is 8% PIK Interest and 7% per annum paid in cash. Through September 30, 2011, the Company had an interest reserve set aside to cover 40 --------------------------------------------------------------------------------cash interest payments on this note. Beginning October 1, 2011, the Company has paid its cash interest expense through the cash flows from operations.

Non-cash interest expense was approximately $7.3 million and $7.0 million for the nine months ended December 31, 2012 and 2011, respectively. PIK interest was $5.7 million and $5.2 million for the nine months ended December 31, 2012 and 2011, respectively. The remaining amounts for the nine months ended December 31, 2012 and 2011 represent the accretion of $1.4 million and $1.6 million, respectively, on the note payable discount associated with the 2010 Note which will continue over the term of the 2010 Note and the accretion of $0.2 million for both periods on the note payable discount associated with the 2010 Term Loans which will continue over the term of the 2010 Term Loans.

Change in fair value of interest rate swaps The change in fair value of the interest rate swaps was a gain of $1.0 million for the nine months ended December 31, 2012 and a gain of less than $0.1 million for the nine months ended December 31, 2011. The swap agreement in the prior year related to the prior credit facility, which was terminated on May 6, 2010 upon the completion of the Phase I Deployment refinancing. It has been replaced by new swap agreements related to the 2010 Term Loans entered into on June 7, 2010 which became effective on June 15, 2011.

Adjusted EBITDA The Company reported lower Adjusted EBITDA (including its Phase 1 DC and Phase 2 DC subsidiaries) of $42.1 million for the nine months ended December 31, 2012 in comparison to $44.8 million for the nine months ended December 31, 2011.

Adjusted EBITDA from non-deployment businesses was $4.3 million during the nine months ended December 31, 2012, declining from $5.5 million during the nine months ended December 31, 2011. This decline was primarily driven by two factors: (i) the fiscal year 2012 period was Cinedigm's largest deployment period ever with approximately 3,419 screens installed versus 2,356 screens this fiscal year representing an approximately $3.2 million difference period over period in digital cinema services and software EBITDA all other factors held constant from the reduction in installations; (ii) as previously discussed, a number of unexpected releasing decisions made by the major studios reduced deployment EBITDA by $2.0 million predominantly in fiscal second quarter as compared to prior year: (i) studios avoided releasing wide titles in the weekends around the Dark Knight Rises; (ii) studios reduced the breadth of releases and/or delayed releases in light of the shootings at a Dark Knight Rises screening in Aurora, CO in July; (iii) studios reduced the breadth and/or number of releases around the Olympics in August; and (iv) several wide releases were delayed due to production, marketing or 3D conversion issues. The delayed releases have been moved to the third and fourth quarters of this fiscal year as well as the first and second quarters of the next fiscal year. Based on announced release plans, actual results and our internal estimates, we do not expect studio releasing patterns like those experienced during the fiscal quarter ended September 30, 2012 to negatively impact the remainder of the fiscal year. Finally, as previously described and inclusive in these results, the Company incurred approximately $1.0 million of "J-Curve" content distribution costs and $0.6 million of related revenues in the nine months ended December 31, 2012 in advance of earning additional ancillary home entertainment revenues. The Company continues to benefit from growth in its installed Systems, growth in software license and maintenance fees and the inherent operating leverage embedded in its business model. Phase 1 DC and Phase 2 DC revenues are expected to be relatively flat going forward as the domestic deployment period ended at January 31, 2013 and any remaining domestic and international installations will be through an Exhibitor-Buyer structure or other servicing partnerships. Based on the expected growth in and recently signed software contracts and the expansion in CEG driven by the acquisition of New Video and our independent film release slate, the Company expects Adjusted EBITDA performance to continue to improve during the remainder of the fiscal year ended March 31, 2013 relative to prior year results. The Company intends to invest in the growth of its business through the acquisition of content distribution rights, related marketing related expenditures and through the continued development of additional software products and services.

Adjusted EBITDA is not a measurement of financial performance under U.S.

generally accepted accounting principles ("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.

41 -------------------------------------------------------------------------------- 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 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 condensed 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 Nine Months Ended December 31, ($ in thousands) 2012 2011 Net loss from continuing operations $ (9,273 ) $ (8,437 ) Add Back: Amortization of capitalized software costs 829 494 Depreciation and amortization of property and equipment 27,372 26,719 Amortization of intangible assets 1,120 253 Interest income (20 ) (96 ) Interest expense 21,444 22,543 Other income, net (494 ) (606 ) Income on investment in non-consolidated entity (1,340 ) 343 Change in fair value of interest rate swap (1,025 ) (29 ) Stock-based expenses 343 704 Stock-based compensation 1,527 1,479 Merger and acquisition expenses 1,267 - Restructuring expenses 340 832 Allocated costs attributable to discontinued operations - 623 Adjusted EBITDA $ 42,090 $ 44,822 Adjustments related to the Phase I and Phase II Deployments: Depreciation and amortization of property and equipment $ (26,890 ) $ (26,330 ) Amortization of intangible assets (39 ) (39 ) Income from operations (13,563 ) (16,312 ) Intersegment services fees earned (1) 2,661 3,323 Adjusted EBITDA from non-deployment businesses $ 4,259 $ 5,464 (1) Intersegment revenues of the Services segment represent service fees earned from the Phase I and Phase II Deployments.

42 --------------------------------------------------------------------------------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 December 31, 2012 and 2011, the Company has not made any revisions to estimated useful lives, nor recorded any impairment charges on its fixed assets of our continuing operations.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS Internal Use Software The Company accounts for internal use software development costs based on three distinct stages. The first stage, the preliminary project stage, includes the conceptual formulation, design and testing of alternatives. The second stage, or the program instruction phase, includes the development of the detailed functional specifications, coding and testing. The final stage, the implementation stage, includes the activities associated with placing a software project into service. All activities included within the preliminary project stage are considered research and development and expensed as incurred. During the program instruction phase, all costs incurred until the software is substantially complete and ready for use, including all necessary testing, are capitalized, Capitalized costs are amortized when the software is ready for its intended use on a straight-line basis over estimated lives ranging from three to five years.

Software to be Sold, Licensed or Otherwise Marketed Software development costs that are incurred subsequent to establishing technological feasibility, when it is determined that the software can be produced to meet its design specifications, are capitalized until the product is available for general release. Amounts capitalized as software development costs are amortized using the greater of revenues during the period compared to the total estimated revenues to be earned or on a straight-line basis over estimated lives ranging from three to five years, except for deployment software which is for ten years. The Company reviews capitalized software costs to determine if any impairment exists on a periodic basis.

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

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

43--------------------------------------------------------------------------------For further details on the Company's process for evaluating goodwill for impairment, refer to the Company's Form 10-K. Information related to the goodwill allocated to the Company is detailed below: Content & ($ in thousands) Phase I Phase II Services Entertainment Corporate Consolidated As of March 31, 2012 $ - $ - $ 4,197 $ 1,568 $ - $ 5,765 Goodwill resulting from the New Video Acquisition - - - 1,336 - 1,336 As of December 31, 2012 $ - $ - $ 4,197 $ 2,904 $ - $ 7,101 As of December 31, 2012, the Company's finite-lived intangible assets consisted of customer relationships and agreements, theatre relationships, covenants not to compete, a favorable operating lease, trade names and trademarks. The Company's indefinite-lived asset resulted from the New Video Acquisition in April 2012. For the three months ended December 31, 2012 and 2011, no impairment charge was recorded for intangible assets.

REVENUE RECOGNITION Phase I Deployment and Phase II Deployment Virtual print fees ("VPFs") are earned pursuant to contracts with movie studios and distributors, whereby amounts are payable by a studio to Phase 1 DC, CDF I and to Phase 2 DC, when movies distributed by the studio are displayed on screens utilizing the Company's Systems installed in movie theatres. VPFs are earned and payable to Phase 1 DC and CDF I based on a defined fee schedule with a reduced VPF rate year over year until the sixth year (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 agreements, is achieved. Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all "overhead and ongoing costs", as defined, and including the Company's service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter, plus a compounded return on any billed but unpaid overhead and ongoing costs, of 15% per year. Further, if cost recoupment occurs before the end of the eighth contract year, a one-time "cost recoupment bonus" is payable by the studios to the Company. Any other cash flows, net of expenses, received by Phase 2 DC following the achievement of cost recoupment are required to be returned to the distributors on a pro-rata basis.

At this time, the Company cannot estimate the timing or probability of the achievement of cost recoupment.

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

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

Services For software multi-element licensing arrangements that do not require significant production, modification or customization of the licensed software, revenue is recognized for the various elements as follows: revenue for the licensed software element is recognized upon delivery and acceptance of the licensed software product, as that represents the culmination of the earnings process and the Company has no further obligations to the customer, relative to the software license. Revenue earned from consulting 44 -------------------------------------------------------------------------------- services is recognized upon the performance and completion of these services.

Revenue earned from annual software maintenance is recognized ratably over the maintenance term (typically one year).

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

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

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

Content & Entertainment CEG earns fees for the distribution of content in the home entertainment markets via several distribution channels, including digital, video-on-demand, and physical goods (e.g. DVD and Blu-Ray Disc). The fee rate earned by the Company varies depending upon the nature of the agreements with the platform and content providers. Generally, revenues are recognized at the availability date of the content for a subscription digital platform, at the time of shipment for physical goods, or point-of-sale for transactional and video-on-demand services.

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

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

The update provides further guidance of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite - lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. This update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. The Company adopted this standard on October 1, 2012. The adoption of this standard did not have a material impact on the condensed consolidated financial statements and disclosures.

In October 2012, the FASB issued a new accounting standard update, which aligns the guidance on fair value measurements in the impairment test of unamortized film costs with the guidance on fair value measurements in other instances within GAAP. The amendments in this update eliminate certain requirements related to an impairment assessment of unamortized film costs and clarify when unamortized film costs should be assessed for impairment. This update does not add any new guidance to the FASB's codification for Entertainment - Films. This update is effective for the Company's impairment assessments performed on or after December 15, 2012. The Company adopted this standard on January 1, 2013.

The adoption of this standard did not have a material impact on the condensed consolidated financial statements and disclosures.

45 --------------------------------------------------------------------------------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 rapidly expanding digital cinema marketplace and the primary revenue driver will be the increasing number of digitally equipped screens, the growing demand for software to power these screens and drive other efficiencies and the demand for entertainment content in both theatrical and home ancillary markets. According to the Motion Picture Association of America, during 2011 there were approximately 42,000 domestic (United States and Canada) movie theatre screens and approximately 124,000 screens worldwide, of which approximately 28,000 of the domestic screens were equipped with digital cinema technology, and 11,687 of those screens contained our Systems and software. The Company's North American digital deployment period ended at January 31, 2013 other than a modest special program for drive-in theaters. We have deployed 3,724 screens in our Phase I Deployment, and through December 31, 2012 have deployed 7,963 Phase 2 Systems. To date, the number of digitally-equipped screens in the marketplace has been a significant determinant of our potential revenue streams. The expansion of our content business into the ancillary distribution markets increases our growth opportunities as the rapidly evolving digital and entertainment landscape creates significant new growth opportunities 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 December 31, 2012, the outstanding principal balance of the KBC Facilities was $45.6 million.

As of December 31, 2012, we had negative working capital, defined as current assets less current liabilities, of $8.3 million and cash and cash equivalents and restricted cash totaling $23.1 million.

Operating activities provided net cash of $24.0 million and $29.8 million for the nine months ended December 31, 2012 and 2011, respectively. Our business is primarily driven by the emerging digital cinema marketplace and the primary driver of its operating cash flow is the number of installed Systems and the pace of continued installations. Generally, changes in accounts receivable from our studio customers and others is a large component of operating cash flow, and during a period of increasing system deployments, the Company expects studio receivables to grow and negatively impact working capital and operating cash flow. During periods of fewer deployments, the Company expects receivables to decrease and positively impact cash flow, and eventually to stabilize. The CEG business differs slightly from our deployment business as we will continue to build receivables, the amount of which will depend upon the success of the theatrical releases, through the end of this fiscal year which the Company expects to collect upon during the first quarter of the next fiscal year. The changes in the Company's trade accounts payable is also a significant factor, but even in a period of deployments, the Company does not anticipate major changes in payables activity. The Company is also subject to changes in interest expense due to increasing debt levels to fund digital cinema installations, and also has non-cash expense fluctuations, primarily resulting from the change in the fair value of interest rate swap arrangements. We expect operating activities to continue to be a positive source of cash.

Investing activities used net cash of $0.4 million and used net cash of $17.2 million for the nine months ended December 31, 2012 and 2011, respectively. The decrease is primarily attributed to the sale of previously restricted available for sale investments, more than offsetting cash paid for the purchase of New Video, net of cash acquired. We expect cash used in investing activities to decline significantly as we do not expect many additional Phase 2 DC System deployments to be funded by the Company. All Phase 2 DC Systems purchased are financed with non-recourse debt and exhibitor contributions. Cinedigm does not fund any of the Systems capital expenditures from its operating cash flows.

Financing activities used net cash of $24.2 million and $6.7 million for the nine months ended December 31, 2012 and 2011, respectively. The repayment of the 2010 Term Loans and the KBC facility during the nine months ended December 31, 2012 were offset in part by net proceeds from the sale of common stock in April, 2012. Financing activities are expected to continue using the net cash generated from the Phase 1 and Phase 2 DC operations, primarily for principal repayments on the 2010 Term Loans 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 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 46 -------------------------------------------------------------------------------- obligations. The sub-lease agreement was amended during January 2013. The impact of the capital lease amendment to the Company's condensed consolidated financial statements is not expected to be material.

The following table summarizes our significant contractual obligations as of December 31, 2012: Payments Due Contractual Obligations ($ in 2014 & 2016 & thousands) Total 2013 2015 2017 Thereafter Long-term recourse debt (1) $ 111,446 $ - $ 111,446 $ - $ - Long-term non-recourse debt (2) 138,246 33,562 72,307 27,075 5,302 Capital lease obligations (3) 5,296 230 606 861 3,599 Debt-related obligations, principal 254,988 33,792 184,359 27,936 8,901 Interest on recourse debt 11,698 7,074 4,624 - -Interest on non-recourse debt 14,583 6,118 6,959 1,379 127 Interest on capital leases (3) 5,742 920 1,698 1,443 1,681 Total interest 32,023 14,112 13,281 2,822 1,808 Total debt-related obligations $ 287,011 $ 47,904 $ 197,640 $ 30,758 $ 10,709 Operating lease obligations (4) $ 5,318 $ 1,447 $ 2,887 $ 984 $ - Purchase commitments (5) 2,946 2,946 - - - Obligations to be included in operating expenses $ 8,264 $ 4,393 $ 2,887 $ 984 $ - Total non-recourse debt including interest $ 152,829 $ 39,680 $ 79,266 $ 28,454 $ 5,429 (1) The 2010 Note is due August 2014, but may be extended for one 12 month period at the discretion of the Company to August 2015, if certain conditions set forth in the 2010 Note are satisfied. Includes interest of $23.1 million on the 2010 Note to be accrued as an increase in the aggregate principal amount of the 2010 Note ("PIK Interest").

(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 2010 Term Loans are not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC and CDF I, and the KBC Facilities are not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.

(3) Principally represents the capital lease and capital lease interest for the Pavilion Theatre. 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 condensed consolidated financial statements as of December 31, 2012. 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 consents are obtained, the Company will remain as the lessee.

(5) For additional Phase II Systems to be purchased from Barco with funds from the increase in the non-recourse KBC Facility.

We may continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, interest on the 2010 Term Loans, interest on the 2010 Note, software development, marketing and promotional activities and the development of relationships with other businesses. Certain of these costs, including costs of software development and marketing and promotional activities, could be reduced if necessary. The restrictions imposed by the 2010 Note and the 2010 Credit Agreement 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, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements. 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.

47 --------------------------------------------------------------------------------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 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. 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.

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 Condensed 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.

48--------------------------------------------------------------------------------

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