Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 1 – Organization
Description of business –
Sonar Entertainment, Inc. and Subsidiaries (the “Company” or “Sonar”) was incorporated in the state of Delaware.
It is a multi-faceted independent entertainment company designed to meet today’s ever-changing landscape in global television production
and distribution. With headquarters in Los Angeles and offices around the world, Sonar is uniquely positioned to produce and distribute
premium television content for global audiences. The Company develops, produces, acquires, finances, packages, and distributes content
both internationally and domestically such as Hunters, Mr. Mercedes, The Shannara Chronicles, Taboo, The Son,
and Das Boot.
While primarily focused on the development,
production, and distribution of new content, Sonar is also the distributor of over 1,000 library titles totaling more than 4,000 hours
comprised of award-winning programs from RHI Entertainment, Hallmark Entertainment, and Hal Roach Studios, among others. Titles in the
library have captured 446 Emmy® Nominations, 105 Emmy® Awards, 15 Golden Globe® Awards, and numerous Peabody, SAG, Christopher,
and Genesis Awards. These titles include Lonesome Dove, Merlin, Gulliver’s Travels, Dinotopia, The
Odyssey, The Ten Commandments, The Temptations, Human Trafficking, Moby Dick, Cleopatra, Earthsea, The Lion in Winter, and
Tin Man.
Impact of COVID-19 – During
fiscal 2020 and continuing into fiscal 2021, the world has been, and continues to be, impacted by the novel coronavirus (COVID-19) pandemic.
COVID-19 and measures to prevent its spread impacted our business. Since March 2020, we have experienced significant disruptions in production
of most film and television content. The impact of these disruptions and the extent of their adverse impact on our financial and operating
results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable
duration and severity of the impacts of COVID-19.
Going concern – The Company’s
operations in fiscal 2020 and 2019 were largely financed through borrowings under credit facilities provided by related parties in addition
to a revolving credit facility and term loan provided by third-party lenders (see Note 5 and Note 6). The Company’s consolidated
financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring losses and
an accumulated deficit since its inception, related primarily to production of film content and other operations.
Management has concluded that there
is substantial doubt about the entities ability to continue as a going concern within one year after the date that the financial statements
are issued.
On April 8, 2021, the Company entered
into an asset purchase agreement (“Agreement”) with Chicken Soup for the Soul Entertainment, Inc. (“CSSE”). CSSE
is an SEC registrant (ticker: CSSE) which operates video-on-demand networks and is an independent television and film distribution company.
Based on the terms of this proposed agreement, CSSE will acquire substantially all of the Company’s film library and other related
assets.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 2 – Summary of Significant
Accounting Policies
Basis of presentation –
The consolidated financial statements of the Company are presented on the basis of generally accepted accounting principles in the United
States of America (GAAP) and include the accounts of Sonar Entertainment, Inc. and its wholly owned subsidiaries. References to the Accounting
Standards Codification (ASC) and Accounting Standards Updates (ASU) included hereafter refer to the ASC and ASUs established by the Financial
Accounting Standards Board (FASB) as the source of authoritative GAAP.
Principles of consolidation –
The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation. The Company’s accounts include wholly owned subsidiaries
whose principal operations are denominated in the Canadian dollar. The assets and liabilities of the wholly owned Canadian subsidiaries
are translated from their local functional currencies at the exchange rate in effect at the consolidated balance sheet date, and income
and expense accounts are translated at the average exchange rate during the reporting period. Gains or losses from translational adjustments
are presented as comprehensive income (loss) on the consolidated statement of comprehensive loss. The cumulative effect of such translation
adjustments are included within accumulated other comprehensive income (loss) which is presented as a separate component of stockholders’
deficit on the consolidated statement of stockholders’ deficit.
Use of estimates – The
preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that
affect the reported amounts in the consolidated financial statements and notes thereto. Significant estimates and judgments relied upon
in preparing these consolidated financial statements affect the following items:
|
|
·
|
Story
development costs recoverability,
|
|
|
·
|
Recoverability
of content assets and other long-lived assets,
|
|
|
·
|
Ultimate
revenue estimates per title,
|
|
|
·
|
Allowance
for uncollectible accounts receivable,
|
|
|
·
|
Useful
lives of tangible and intangible assets,
|
|
|
·
|
Accrued
participation liabilities, and
|
The Company regularly assesses these
estimates and records changes to estimates in the period in which they become known. The Company bases its estimates on historical experience
and various other assumptions believed to be reasonable under the circumstances. Changes in the economic environment, financial markets,
and any other parameters used in determining these estimates could cause actual results to differ from those estimates.
Concentrations of credit risk
– The Company regularly assesses the adequacy of its allowance for uncollectible accounts receivable by evaluating historical bad
debt experience, customer creditworthiness, and changes in our customer payment history and records an allowance for doubtful accounts
based on such factors. At December 31, 2020 and 2019, the Company recorded an allowance for doubtful accounts of $20 and $206, respectively.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 2 – Summary of Significant
Accounting Policies (continued)
The Company’s significant customers
include networks and other licensees of programming. For the years ended December 31, 2020 and 2019, two customers individually comprised
greater than 10% of consolidated revenues.
Financial instruments, which potentially
subject the Company to a concentration of credit risk, consist primarily of accounts receivable. At December 31, 2020 and 2019, approximately
7% and 8% of the Company’s accounts receivable was due from foreign customers, respectively. At December 31, 2020, the Company
had a total of $16,561 of accounts receivable due from two major customers. At December 31, 2019, the Company had a total of $16,111
of accounts receivable due from one major customer.
Fair value – Fair value
is defined as the amount that would be received upon sale of an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance
establishes a fair value hierarchy which prioritizes the types of inputs to valuation techniques that companies may use to measure fair
value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level
1). The next highest priority is given to inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly (Level 2). The lowest priority is given to unobservable inputs in which there is little or no market data
available and which require the reporting entity to develop its own assumptions (Level 3).
In estimating the fair value of financial
instruments, the Company has assumed that the carrying amount of cash, current receivables and payables approximates the fair value because
of the short-term maturity of these instruments. Long-term receivables arising from licensing agreements are reflected discounted to
their present value. The carrying amount of the Company’s debt approximates fair value as the interest rates approximate market
rates.
Content assets, net – The
Company acquires, produces, and licenses content. The Company capitalizes costs incurred for the acquisition and development of story
rights, film production costs and overhead, and licensing costs. Story development costs are stated at the lower of cost or net realizable
value.
Parties involved in the production of
a title may be compensated in part by contingent payments based on the financial results of a title pursuant to contractual formulas
(participations) and by contingent amounts due under provisions of collective bargaining agreements (residuals). Such costs are collectively
referred to as participation costs. Participations may be given to creative talent, such as actors or writers, or to entities from whom
distribution rights are licensed. As of December 31, 2020 and 2019, the Company has recorded accrued participation liabilities of $10,527
and $9,548, respectively.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 2 – Summary of Significant
Accounting Policies (continued)
Capitalized content assets are amortized,
and participation and residual costs are accrued in the proportion of each title’s
current revenue to management’s estimate of total revenue. Estimates of total revenue and expense are periodically evaluated by
management and can change due to a variety of factors, including the level of market acceptance of films. These evaluations may result
in revised amortization rates and, if applicable, write-downs to net realizable value. Refer to Note 3 “Content Assets, Net”
for discussion of the content asset impairments recorded during the years ended December 31, 2020 and 2019. Film development costs for
projects that have been abandoned or have not been set for production within three years are generally written off. Film abandonment
charges amounted to $7,256 and $5,899 for the years ended December 31, 2020 and 2019, respectively.
Amortization of capitalized content
assets are expensed on a title-by-title basis over a period not exceeding 10 years which begins when a title is released, and the Company
begins to recognize revenue from that title. For episodic television series, the
Company utilizes a period not to exceed 10 years from the date of delivery of the first episode or, if still in production, 5 years from
the date of delivery of the most recent episode, if later. Acquired film libraries are amortized as a single film asset using
the same methodology described above over a period not exceeding 20 years.
The Company’s produced content
primarily consists of films that were made or acquired for initial exhibition on a broadcast or cable network in the United States. Films
initially produced for domestic networks are licensed for pay television, free television, and home video throughout the world.
Property and equipment, net –
Property and equipment are recorded at cost net of accumulated depreciation and amortization. Depreciation and amortization of property
and equipment are computed using the straight-line method over the estimated useful lives of the respective assets, ranging from three
to ten years. The cost of normal repairs and maintenance is expensed as incurred.
Impairment of other long-lived assets
– The Company reviews its long-lived assets, such as property and equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount
of the asset exceeds the fair value of the asset.
Deferred rent – Rent expense
is recorded on a straight-line basis over the term of the lease.
The difference between rent expense and amounts paid under the lease agreement is recorded as deferred rent. Lease incentives, including
tenant improvement allowances, are also recorded as deferred rent and amortized on a straight-line
basis over the lease term.
Sonar
Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 2 – Summary of Significant
Accounting Policies (continued)
Deferred debt financing costs –
The costs incurred in connection with the issuance of debt obligations, principally financing, and legal costs, are deferred and amortized
over the term of the related debt facility using the using the straight-line method, which approximates the effective interest method.
Amortization expense related to deferred debt financing costs amounted to $556 and $625 for the years ended December 31, 2020 and 2019,
respectively, and is included in interest expense on the accompanying consolidated statement of operations and comprehensive loss. Deferred
financing costs are presented net of debt in the consolidated balance sheets.
Revenue recognition – In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09, is a comprehensive
new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer
at an amount that reflects the consideration expected to be received in exchange for those goods or services.
The Company adopted ASC 606 effective
January 1, 2019, using the modified retrospective method. The adoption of ASC 606 did not have a significant effect on timing or amount
recognized as revenue for the Company’s most significant types of transactions, and therefore, the cumulative effect of initially
applying the new guidance was not material and no adjustment was made to retained earnings as of January 1, 2019.
The Company primarily earns
revenue from production revenue, library revenue, and other revenue. The table below includes the Company’s revenue by major source
for the years ended December 31, 2020 and 2019:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Production revenue
|
|
$
|
11,421
|
|
|
$
|
57,207
|
|
|
Library revenue
|
|
|
2,848
|
|
|
|
3,081
|
|
|
Other revenue
|
|
|
3,045
|
|
|
|
2,633
|
|
|
|
|
$
|
17,314
|
|
|
$
|
62,921
|
|
Under ASC 606, the Company determines
revenue recognition through the following steps:
|
|
·
|
Identification
of the contract, or contracts, with a customer,
|
|
|
·
|
Identification
of the performance obligations in the contract,
|
|
|
·
|
Determination
of the transaction price,
|
|
|
·
|
Allocation
of the transaction price to the performance obligations in the contract, and
|
|
|
·
|
Recognition
of revenue when, or as, the Company satisfies a performance obligation.
|
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 2 – Summary of Significant
Accounting Policies (continued)
The Company’s revenue recognition
policies associated with each major source of revenue from contracts with customers are as follows:
Production revenue – Revenue
under these contracts are associated with titles delivered in the past three calendar years and executive producer fees earned.
Library revenue – Library
revenue represents revenue from titles delivered earlier than three years.
Other revenue – These represent
revenue that do not arise from television and distribution licensing agreements in the broadcast and pay TV medium, primarily from third-party
royalties.
Foreign currency – Certain
revenue and receivable transactions are designated in foreign currencies. Realized foreign exchange transaction gains/(losses) are included
in Revenue, net, in the Consolidated Statements of Comprehensive Loss. Unrealized foreign exchange transaction gains/(losses) have been
included in Other Income/Other Expense, in the Consolidated Statements Comprehensive Loss. For both realized and unrealized foreign exchange
transaction gains/(losses), the amounts recognized were not material for 2020 and 2019.
Cost of sales – Cost of
sales for the years ended December 31, 2020 and 2019, includes the amortization of capitalized content assets of $15,474 and $51,389,
respectively.
Included in cost of sales are also participation
and residual costs as well as exploitation costs associated with bringing a title to market such as freight, mastering and film specific
marketing. The Company expenses exploitation costs as incurred.
Income taxes – The provision
for income taxes includes U.S. federal, state and local, and foreign taxes. Income taxes are accounted for under the liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial
statement carrying amounts and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that
the Company expects to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effects on deferred tax assets and liabilities of a change in tax rates are recognized in income in the period that includes the
enactment date.
A valuation allowance to reduce deferred
tax assets to the amount that is more-likely-than-not to be realized is recognized based on existing facts and circumstances. Valuation
allowances are assessed and adjusted during each reporting period.
Uncertain tax positions are recorded
based on a cumulative probability assessment if it is more-likely-than-not that the tax position will be sustained upon examination by
the appropriate tax authorities. Amounts recorded for uncertain tax positions are periodically assessed, including the evaluation of
new facts and circumstances, to ensure sustainability of the position. The Company’s policy is to classify interest and penalties
accrued on unrecognized tax benefits as a component of income tax expense.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 2 – Summary of Significant
Accounting Policies (continued)
Recent accounting pronouncements
– In March 2019, the FASB issued ASU 2019-02, Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill
and Other (Subtopic 920-350). Amongst other changes, the amendments in this standard align the accounting for production costs of
an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization.
The amendments also require that an entity reassess estimates of the use of a film for a film in a film group and account for any changes
prospectively.
The amendments further address presentation,
require that an entity provide new disclosures about content that is either produced or licensed, and address cash flow classification
for license agreements. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2020, and
interim periods within those fiscal years. Nonpublic entities are permitted to adopt the guidance early for periods for which financial
statements have not yet been made available for issuance. The Company is currently evaluating the impact of the guidance on the Company’s
consolidated financial statements.
Subsequent events – Subsequent
events are events or transactions that occur after the balance sheet date but before the consolidated financial statements are available
to be issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional
evidence about conditions that existed at the date of the consolidated balance sheet, including the estimates inherent in the process
of preparing the consolidated financial statements. The Company’s consolidated financial statements do not recognize subsequent
events that provide evidence about conditions that did not exist at the date of the consolidated balance sheet but arose after the balance
sheet date and before the consolidated financial statements are available to be issued.
The Company has evaluated subsequent
events through May 12, 2021, which is the date the consolidated financial statements are available for issuance.
Note 3 – Content Assets,
Net
Content assets consist of the following:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Acquired film libraries, net
|
|
$
|
40,519
|
|
|
$
|
44,380
|
|
|
Licensed content, net
|
|
|
32,041
|
|
|
|
34,368
|
|
|
Produced content, net
|
|
|
42,439
|
|
|
|
60,943
|
|
|
Films in process and development
|
|
|
3,667
|
|
|
|
9,282
|
|
|
Other
|
|
|
-
|
|
|
|
2,998
|
|
|
|
|
$
|
118,666
|
|
|
$
|
151,971
|
|
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 3 – Content Assets,
Net (continued)
The Company reviews the ultimate revenues
associated with its titles. This analysis considers various data points, including current market conditions, library sales activity,
pricing, the delivery of the Company’s annual film slate, and the results of the annual independent valuation of the unsold rights
to the Company’s acquired film library. A reduction in the ultimate revenue associated with a title results in a higher rate of
amortization over that title’s remaining useful life and causes a reduction in that title’s prospective profit margin.
As of December 31, 2020 and 2019, the
Company performed a fair value assessment of titles produced prior to April 1, 2011. These titles are treated as if they were an acquired
“film library” due to the application of fresh start accounting effective April 1, 2011. Based on the assessment as of December
31, 2020 and 2019, impairment charges totaling $2,340 and $11,843, respectively, were booked in order to reduce the net book value of
the film library to an amount approximating fair value.
As of December 31, 2020 and 2019, the
Company also performed a title-by-title analysis of ultimate revenue of those titles produced since April 1, 2011. Based on this analysis
as of December 31, 2020 and 2019, impairment charges totaling $15,746 and $6,937, respectively, were booked.
In using the income approach to test
the film library for impairment as of December 31, 2020 and 2019, the Company made the following assumptions: (a) the discount rate range
was based on weighted-average cost of capital, and (b) cash flow projections were based upon management’s estimates of future performance.
The Company expects to amortize approximately
44% of unamortized, released titles, excluding acquired film libraries, at December 31, 2020, within the next three years and expects
to reach 75% amortization level in fiscal 2023. As of December 31, 2020, the unamortized acquired film libraries remain to be amortized
using respective film ultimate’s over a period of 10 years.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 4 – Property and Equipment,
Net
Property and equipment, net is comprised
of the following:
|
|
|
|
|
December 31,
|
|
|
|
|
Average useful life
|
|
2020
|
|
|
2019
|
|
|
Production equipment
|
|
3 years
|
|
$
|
-
|
|
|
$
|
109
|
|
|
Vehicles
|
|
5 years
|
|
|
-
|
|
|
|
1
|
|
|
Furniture and fixtures
|
|
3 years
|
|
|
490
|
|
|
|
492
|
|
|
Leasehold improvements
|
|
Shorter of useful life or lease term
|
|
|
578
|
|
|
|
578
|
|
|
Computers and other equipment
|
|
3 years
|
|
|
593
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,661
|
|
|
|
1,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(1,661
|
)
|
|
|
(1,772
|
)
|
|
|
|
|
|
$
|
-
|
|
|
$
|
106
|
|
Depreciation and amortization expense
for the years ended December 31, 2020 and 2019, was $104 and $122, respectively.
Note 5 – Related-Party Debt
At December 31, 2020 and 2019, the Company’s
related-party debt payable to stockholders and affiliates of the Company consists of the following:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
First Lien Revolver
|
|
$
|
157,493
|
|
|
$
|
152,370
|
|
|
Second Lien Term Loan
|
|
|
27,039
|
|
|
|
25,450
|
|
|
Third Lien Term Loan
|
|
|
285,181
|
|
|
|
259,887
|
|
|
Receivables Discount Agreement
|
|
|
1,595
|
|
|
|
1,595
|
|
|
Promissory Note
|
|
|
5,500
|
|
|
|
5,500
|
|
|
|
|
$
|
476,808
|
|
|
$
|
444,802
|
|
The Company is required to repay in
full its senior third-party credit facility (see Note 6) prior to making any payments, including interest payments, on the related-party
debt. As such, the maturity dates of the related-party debt are effectively extended to November 2021.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 5 – Related-Party Debt
(continued)
|
|
·
|
First
Lien Revolver, Second Lien Term Loan, and Third Lien Term Loan
|
The First Lien Revolver bears
interest at 20%. The Second Lien Term Loan bears paid in-kind interest at 6% per annum with accruals made on the last day of each quarter.
The Third Lien Term Loan is split into two tranches. Tranche A bears interest at LIBOR or an Alternate Base Rate (ABR) as defined in
the debt agreement plus an applicable margin, payable monthly in arrears. Tranche B bears paid in-kind interest at LIBOR or ABR plus
an applicable margin, with accruals made on the last day of each calendar quarter. As of December 31, 2020, the outstanding balance under
Tranche A and Tranche B was $67,500 and $217,681, respectively. As of December 31, 2019, the outstanding balance under Tranche A and
Tranche B was $67,500 and $192,387, respectively.
The First Lien Revolver,
Second Lien Term Loan, and Third Lien Term Loan are collateralized by substantially all of the Company’s assets. The loans contain
certain non-financial covenants which can trigger an event of default. Compliance with the covenants has been effectively waived until
the third-party debt is repaid in full.
|
|
·
|
Working
Capital Credit Agreement
|
The Company has entered into
a working capital credit agreement with certain affiliated parties. The facility is collateralized by the Company’s accounts receivable
and bears interest at 20%.
At December 31, 2020 and
2019, the Company has a $5,500 note payable to an affiliate of the Company, which bears interest at 20%.
Note 6 – Third-Party Debt
Facilities
At December 31, 2020 and 2019, the Company’s
third-party debt facilities consist of the following:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revolving credit facilities
|
|
$
|
28,165
|
|
|
$
|
32,617
|
|
|
Term loan
|
|
|
26,625
|
|
|
|
31,125
|
|
|
Unamortized deferred financing costs
|
|
|
(510
|
)
|
|
|
(1,066
|
)
|
|
|
|
$
|
54,280
|
|
|
$
|
62,676
|
|
The Company maintains a credit facility
with a maximum revolving loan commitment of $85,000 (“Revolver”) and a term loan commitment of $36,000 (“Term Loan”)
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 6 – Third-Party Debt
Facilities (continued)
The Revolver bears interest at LIBOR
plus an applicable margin which was approximately 9.95%. Interest is payable monthly and the outstanding principal balance under the
Revolver is due on November 13, 2021. Borrowings under the facility are subject to an availability calculation as stipulated in the agreement.
The Revolver is also subject to commitment fees on the undrawn portion of the facility. As of December 31, 2020 and 2019, the outstanding
balance under the facility was $12,060 and $18,192, respectively.
The Company maintains a separate third-party
revolving credit facility (“Facility”) from a Canadian financial institution, Bank of Montreal, in order to fund the production
of certain projects. The credit facility has availability equal to the lesser of and agreed upon amount at the time of the draw (“Production
Tranche”) or a calculation in accordance with the agreement which is largely based on the sum of the cash receipts generated or
due from the exploitation of the production and a percentage of the related film tax credit. The facility bears interest at Canadian
prime rate plus 1.25%, payable monthly and is guaranteed by the assets of Sonar Canada Inc., the Company’s wholly owned Canadian
subsidiary. The following projects were funded with from the Facility:
Go Away Unicorn in January
2018 – Maximum proceeds from the Production Tranche were $7,810 The Production Tranche term was extended to August 31, 2021. As
of December 31, 2020, and 2019, the outstanding balance (in USD) under the Productions Tranche was $1,662 and $1,918, respectively.
Texas Metal – Season
2 in September 2018 – Maximum proceeds from the Production Tranche were CDN $360. The facility expired June 30, 2020, and was guaranteed
by the assets of Sonar Canada Inc., the Company’s wholly owned Canadian subsidiary. As of December 31, 2019, the outstanding balance
(in USD) under the Production Tranche was $251.
Utopia Falls in May 2019
– Maximum proceeds from the Production Tranche were CDN $22,082. The facility expired January 31, 2021. As of December 31, 2020
and 2019, the outstanding balance (in USD) under the Production Tranche was $5,146 and $5,756, respectively.
Texas Metal – Season
3 in July 2019 – Maximum proceeds from the Production Tranche were CDN $410. The facility expires June 30, 2021. No amounts were
outstanding under this agreement as of December 31, 2020 and 2019.
Farmhouse Facelift in September
2019 – Maximum proceeds from the Production Tranche were CDN $1,660. This was funded in fiscal 2020 and the facility expires June
31, 2021. As of December 31, 2020, the outstanding balance (in USD) under the Production Tranche was $645.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 6 – Third-Party Debt
Facilities (continued)
The Company entered into a separate
third-party revolving credit facility from C&C Financial Services Lending II, LLC, in order to fund the production of certain projects.
The credit facility has availability equal to the lesser of and agreed upon amount or a calculation in accordance with the agreement
which is largely based on the sum of the cash receipts generated or due from the exploitation of the production and a percentage of the
related film tax credit (“Production Tranche II”) The following projects were funded with from the Facility:
Mr. Mercedes – Season
3 in June 2019 – At December 31, 2020 and 2019, the Company has a $6,500 promissory note, which bears interest at 15%.
Constance in May 2020 –
Maximum proceeds from the Production Tranche II were $2,153. The Production Tranche II bears interest at 4.5% and interest is payable
monthly with term date of January 30, 2023. As of December 31, 2020, the outstanding balance under the facility was $2,153.
The Term Loan requires monthly principal
payments of $375 beginning December 1, 2018, with a balloon payment upon maturity in November 2021. It bears interest at LIBOR plus an
applicable margin, and interest is payable monthly. Scheduled principal payments for future fiscal years are as follows:
Note 7 – Stockholder’s
Deficit
Common stock – At December
31, 2020 and 2019, there were 1,000,000,000 shares of common stock authorized and 849,887,500 shares of common stock issued and outstanding,
respectively, with a par value $0.01. The Company did not hold any shares as treasury shares as of December 31, 2020 or December 31,
2019. The Company’s common stockholders are entitled to one vote per share.
As of December 31, 2020 and 2019, 15%
of the Company’s equity is reserved for issuance of restricted stock to the Company’s management and 112,500 shares are reserved
for warrants.
Share-reservation plan –
There were 77.5 million shares granted to former members of management in February 2013 under the share-reservation plan. The grant date
fair value of the restricted stock units was determined to be de minimis. Approximately 69.3 million of these shares were vested as of
December 31, 2018 and 2017. While these shares may be vested, issuance of these shares is conditional on a successful Initial Public
Offering (IPO) and other certain restrictions.
Warrants – The Company
has warrants outstanding to the providers of the Second Lien Term Loan as additional equity compensation. The exercise of those warrants
is dependent upon the Fair Market Price, as defined in the warrant agreement, of one share of the common stock being greater than $722.53.
Shares reserved for warrant holders are held for such time as the warrant can be exercised.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 8 – Income Taxes
The provision for income taxes for the
years ended December 31, 2020 and 2019, is a current provision of $93 and $233, respectively, primarily attributable to foreign withholding
taxes. The Company has recorded a full valuation allowance for years ended December 31, 2020 and 2019, on its net deferred tax assets
because of uncertainties related to the realization of the net deferred tax assets. The significant types of deferred tax assets are
primarily attributable to current and prior years’ net operating losses (NOLs) tax over book basis in the film library and investment
in partnership. The federal NOLs are carried forward indefinitely and the use of NOLs is limited to 80% of taxable income for losses
from tax years beginning after December 31, 2017. Federal NOLs for 2019, are $44,883, and total accumulated federal NOLs as of December
31, 2019, amounted to $449,723. Federal NOLs for 2020, are estimated to be approximately $48,945. Federal net operating losses will begin
to expire in 2033. State net operating losses will vary and begin expiring 2023.
In accordance with ASC 740, Income
Taxes, the Company evaluates its deferred income taxes to determine if valuation allowances are required or should be adjusted. ASC
740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on a consideration
of all available evidence, both positive and negative, using a “more-likely-than-not” standard. This assessment considers,
among other matters, the nature, frequency, and severity of recent losses and forecasts of future profitability. In making such judgments,
significant weight is given to evidence that can be objectively verified. After analyzing these factors, in light of the cumulative losses
in recent periods and the Company’s substantial doubt about its ability to continue as a going concern, the Company has concluded
there is insufficient assurance of future sources of taxable income to realize the benefit of the net deferred tax assets.
Pursuant to Section 382 of the Internal
Revenue Code, the Company underwent an ownership change for tax purposes (i.e., a more than 50% change in the equity ownership) on the
March 29, 2011 emergence date from bankruptcy. As a result, the use of any of the Company’s NOL carryforwards and tax credits generated
prior to the ownership change (that were not reduced pursuant to the provisions discussed in the preceding paragraph) will be subject
to an annual limitation. To the extent there has been an additional change or there are future changes in the Company’s equity
ownership, Section 382 limitations are likely to be applicable and could limit the amount of NOLs, tax credits, and certain tax deductions
that can be used in a given year.
The Company follows the provision of
ASC 740-10, which prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure
of uncertain tax positions taken or expected to be taken in income tax returns. For each tax position, an enterprise must determine whether
it is more-likely than-not-that the position will be sustained upon examination based on the technical merits of the position, including
resolution of any related appeals or litigation. A tax position that meets the more-likely-than-not recognition threshold is then measured
to determine the amount of benefit to recognize within the consolidated financial statements. No benefits may be recognized for tax positions
that do not meet the more-likely-than-not threshold. There were no unrecognized tax benefits recorded as of December 31, 2020 and 2019.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 8 – Income Taxes (continued)
The Company files federal income tax
returns in the U.S. and various states, local, and foreign income tax returns. The Company’s federal and state years open to examination
are 2017 and 2016, respectively.
Note 9 – Retirement Plan
The Company has a savings and investment
plan (a 401(k) plan), which allows eligible employees to allocate up to 50% of their salary through payroll deductions. The Company matches
50% of employees’ pre-tax contributions, up to plan limits. During the years ended December 31, 2020 and 2019, the Company matched
50% of employees’ pre-tax contributions totaling approximately $132 and $57, respectively. The Company may make additional matching
contributions of up to 50% at the discretion of its Board of Directors.
Note 10 – Commitments and Contingencies
The Company is involved in various legal
proceedings and claims incidental to the normal conduct of its business. Although it is impossible to predict the outcome of any outstanding
legal proceedings, the Company believes that such outstanding legal proceedings and claims, individually and in the aggregate, are not
likely to have a material effect on its financial position or results of operations.
Lease commitments – The
Company leases office facilities and various types of office equipment under non-cancelable operating leases. The leases expire at various
dates through 2027, and some contain escalation clauses and renewal options. Rent expense amounted to approximately $1,042 and $1,062
for the years ended December 31, 2020 and 2019, respectively.
Future minimum annual rental commitments
under the leases are as follows:
|
Years Ending December 31,
|
|
|
|
|
|
2021
|
|
|
$
|
773
|
|
|
2022
|
|
|
|
808
|
|
|
2023
|
|
|
|
845
|
|
|
2024
|
|
|
|
883
|
|
|
2025
|
|
|
|
923
|
|
|
Thereafter
|
|
|
|
1,045
|
|
|
Total
|
|
|
$
|
5,277
|
|
Other commitments – The
Company enters into production and other commitments that are customary in the ordinary course of business.
Sonar Entertainment, Inc.
Notes to Consolidated Financial Statements
(In Thousands, except for share amounts)
Note 10 – Commitments and Contingencies
(continued)
Litigation – The Company
from time to time may be involved in claims and legal proceedings in the ordinary course of its business. In the opinion of management,
the Company is adequately insured against such claims and any ultimate liability arising from such proceedings will not have a material
adverse effect on the financial condition, operations, or cash flows of the Company.
