Business Context and Reporting Period
Cinedigm Digital Cinema Corp. (the filing registrant) reported its unaudited fiscal second quarter and six months ended September 30, 2012. The company operates digital cinema deployment, services and software, and content distribution businesses. Its April 2012 acquisition of New Video expanded its home-entertainment distribution business.
Unless otherwise stated, financial amounts below are in millions of dollars. The filing’s stated period is September 30, 2012; it does not identify this as “2012 Q2” in calendar-quarter terms.
Financial Results and Liquidity
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $22.6 | $43.5 | $21.0 and $39.1 |
| Operating income | $3.6 | $5.5 | $6.3 and $10.3 |
| Net loss from continuing operations | $2.6 | $7.5 | $0.7 and $4.7 |
| Net loss attributable to common stockholders | $2.7 | $7.9 | $0.3 and $6.8 |
| Operating margin | 15.8% | 12.7% | 29.9% and 26.4% |
For the six-month period, operating cash flow was $15.2, down from $17.7 a year earlier. Investing activities provided $1.2, compared with $10.9 used in the prior-year period; financing activities used $14.0, compared with $0.3 provided. Cash and cash equivalents were $20.3 at September 30, with another $5.8 classified as restricted cash. Working capital was negative $6.7.
Total debt, including capital leases, was approximately $244.9 at September 30, versus $263.8 at March 31. This includes $92.2 of recourse notes payable and $147.4 of non-recourse notes payable; non-recourse debt is generally limited to specified collateral and subsidiaries. Total liabilities were $304.4, exceeding total assets of $300.0, leaving a stockholders’ deficit of $4.4. The company reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue rose 8% for the quarter and 11% for the six months. Growth in Content & Entertainment, including New Video, and Services offset lower Phase I deployment revenue.
- New Video contributed approximately $5.0 of revenue and $0.3 of net income from its acquisition date through September 30. The acquisition’s preliminary net purchase price was $17.6, net of cash acquired, and includes up to $6.0 of additional contingent consideration.
- Operating income and operating margins declined as operating costs increased. For the six months, selling, general and administrative expense rose to $12.2 from $7.5; depreciation and amortization was $18.6.
- Adjusted EBITDA, a company-defined non-GAAP measure, fell to $14.1 from $16.9 for the quarter and to $27.6 from $30.6 for six months. Non-deployment Adjusted EBITDA was $1.2 for the quarter and $2.0 for six months, down from $3.2 and $4.1, respectively.
- In April, the company raised $10.0 net through a common-stock offering. Shares outstanding increased, including shares issued for the New Video acquisition.
Outlook, Risks, Contingencies and Unusual Items
- Management expected Adjusted EBITDA to improve during the remainder of fiscal 2013 versus the prior year, while investing in content rights, marketing, software products and services. It expected Phase I and Phase II deployment revenue to be relatively flat and operating activities to remain a positive source of cash.
- Management believed cash on hand and expected operating cash flows would allow the company to meet obligations through at least September 30, 2013. It cautioned that failure to grow revenue, raise capital or control discretionary spending could adversely affect liquidity.
- Management attributed weaker deployment results partly to studios delaying or narrowing releases around the Olympics, the Aurora shooting and the release of The Dark Knight Rises, as well as production, marketing and 3D-conversion delays. It expected the delayed releases to shift into later periods and did not expect the quarter’s release pattern to negatively affect the rest of fiscal 2013.
- Results are exposed to film-release timing and seasonality. Phase II VPF collection ends upon contractual cost recoupment, but the company could not estimate when or whether that threshold would be reached.
- Content distribution produces upfront acquisition and marketing costs that may precede ancillary-market revenue by 12–36 months (“J-Curve” timing). The company recorded approximately $0.4 of these costs in the six-month period.
- The 2010 Note carries 8% PIK interest and 7% cash interest; the balance was $92.2. The filing describes significant debt commitments and notes that debt restrictions may limit additional financing and constrain cash available for other needs.
- The New Video contingent consideration was valued at $3.8 using significant unobservable assumptions, including forecast performance. The acquisition valuation was preliminary. No continuing-operations impairment charge was recorded for the periods presented.
- The company reported no legal proceedings in Part II and said ordinary-course legal matters were not expected to have a significant impact. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether New Video meets its performance targets and how the final purchase-price allocation and contingent consideration change.
- Cash availability and debt-service capacity, distinguishing unrestricted cash from restricted cash and non-recourse debt from recourse obligations.
- Subsequent revenue, margins and Adjusted EBITDA, including the effect of studio release timing and the content business’s upfront costs.
- Progress on the Phase II screen backlog, new software contracts and international deployments, and the conversion of these activities into cash flow.
- Potential dilution from the expanded share count, acquisition shares, options and warrants; the filing reported 48.3 million Class A shares outstanding as of November 9, 2012.