Business context and reporting period
Cinedigm Corp. (the filing-era registrant name; the request identifies Cineverse Corp.) filed this unaudited Form 10-Q for the three months ended June 30, 2015, its fiscal first quarter of 2016. The company distributes independent entertainment content and operates digital-cinema deployment and servicing businesses across four reporting segments.
Financial performance and liquidity
| Metric | Quarter ended June 30, 2015 | Comparable 2014 quarter |
|---|---|---|
| Revenue | $22.8 million | $22.9 million |
| Operating loss | $5.4 million | $5.7 million |
| Net loss | $11.3 million | $10.7 million |
| Net loss attributable to common shareholders | $11.0 million; $0.16 per share | $10.8 million; $0.14 per share |
| Operating cash flow | $2.1 million | $2.4 million |
| Adjusted EBITDA (non-GAAP) | $7.8 million | $7.3 million |
Operating loss was about 23.5% of revenue and net loss about 49.6% of revenue. Cash and cash equivalents were $29.2 million; restricted cash was $6.8 million. The company reported negative working capital of $12.0 million and $20.1 million available under its revolving facility. Total liabilities were $320.7 million against a $43.7 million stockholders’ deficit.
At quarter-end, debt principal was approximately $147.3 million of non-recourse digital-cinema debt and $84.1 million of recourse debt. The company reported compliance with all debt covenants. Cash interest paid was $6.8 million.
Material changes versus the prior comparable period
- Revenue was essentially flat: Content & Entertainment rose 27% to $9.1 million, while Phase I, Phase II and Services revenues declined 14%, 9% and 12%, respectively. Management attributed deployment declines mainly to fewer blockbuster releases than in the prior-year quarter.
- Direct operating costs fell 14% to $7.3 million, primarily reflecting reduced theatrical-release, marketing and content-acquisition spending. Selling, general and administrative expense rose 25% to $9.6 million, including $0.8 million of incremental Gaiam-related legal expense.
- Net loss widened, in part because of a $0.9 million loss on extinguishment of debt and higher corporate interest costs. Adjusted EBITDA increased 7%; non-deployment Adjusted EBITDA loss improved to $2.3 million from $4.8 million.
- Cash increased $10.2 million during the quarter, compared with a $13.5 million decrease in the prior-year quarter. Financing included the convertible-note issuance, debt repayments, revolving-credit repayments, and stock repurchases.
Outlook, risks and unusual items
- Management expected operating activities to remain a positive source of cash and said available cash and expected operating cash flows should cover obligations through at least September 30, 2016. It cautioned that further losses may continue and that additional revenue, capital or spending controls may be needed.
- In April 2015, the company issued $64.0 million of unsecured 5.5% convertible senior notes due 2035; net proceeds were $60.9 million. Proceeds funded repayment of a term loan, a $2.6 million repurchase of 2.7 million shares, and an $11.4 million forward purchase transaction covering approximately 11.8 million shares.
- Management warned that VPF revenue on certain Phase I systems will begin to cease in December 2015; the effect was not expected to be material in fiscal 2016 but was expected to have a material cumulative impact in later periods. Phase II cost-recou pment timing and probability could not be estimated.
- The company is shifting Content & Entertainment toward OTT channels, including Docurama and CONtv, and announced plans for the Dove Channel. Traditional DVD and Blu-ray sales and shelf space continue to decline. Film-release seasonality affects deployment revenue and cash flows.
- The Gaiam acquisition dispute was proceeding in working-capital and AAA arbitrations. Cinedigm sought relief exceeding $30.0 million; Gaiam asserted claims including more than $6.0 million in working-capital reimbursement. The company stated that the outcome could not be assured.
- A customer filed for Chapter 11 bankruptcy in July 2015; management said it had recorded an adequate doubtful-account provision. The company also cited substantial debt obligations and the risk that failure to grow revenue, raise capital or manage discretionary spending could harm liquidity.
Important facts for investors to verify
- Whether operating cash flow and the stated liquidity runway remain adequate given negative working capital, debt service and continuing losses.
- The terms, conversion exposure, and eventual settlement of the $64.0 million convertible notes and the forward share-purchase transaction.
- The pace and financial contribution of OTT growth versus continued declines in physical media and digital-cinema VPF revenue.
- Developments in the Gaiam arbitrations, the customer bankruptcy recovery, and the expected later-period impact of Phase I VPF phase-outs.