Cineverse Corp. annual report, FY2019

Business context and reporting period

This is Cinedigm Corp.’s Form 10-K for the fiscal year ended March 31, 2019, filed July 15, 2019. It is an annual report, not a standalone 2018 fourth-quarter filing; the filing provides only limited unaudited fourth-quarter segment data. Cinedigm distributed independent film and television content, operated OTT channels, and serviced digital cinema systems. It reported two segments: Cinema Equipment and Content & Entertainment (CEG), retrospectively recasting prior-period segment results.

Financial performance

Amounts are in millions of dollars except per-share data. Fiscal 2018 is the comparable prior year.

Adjusted EBITDA was reported as $11.7 million, versus $23.0 million in FY2018, a 49% decline. The filing defines this as a non-GAAP measure; the non-cinema equipment business’s Adjusted EBITDA loss was $7.9 million, versus $2.7 million. Interest expense was $10.3 million, down from $14.3 million. Gross margin is not clearly presented in the filing.

Revenue and segment trends

• Cinema Equipment revenue fell 30.3% to $26.2 million, primarily from fewer systems generating virtual print fees (VPFs) and service fees. System sales partly offset the decline.
• CEG revenue declined 9.2% to $27.3 million. Lower DVD and licensing revenue was partly offset by increased digital transactional revenue.
• CEG’s OTT Streaming and Digital revenue was $9.7 million; Base Distribution revenue was $17.6 million.
• The filing reports unaudited fourth-quarter FY2019 revenue of $12.1 million and an operating loss of $3.7 million.

Debt, liquidity and capital structure

At March 31, 2019, reported debt principal totaled approximately $65.4 million: $44.8 million recourse debt and $20.6 million non-recourse debt. The balance sheet reports notes payable net of discounts and issuance costs of $62.5 million. Current recourse debt was $43.3 million, while current liabilities totaled $113.7 million against current assets of $64.9 million. Cash and cash equivalents were $17.9 million, plus $1.0 million of restricted cash. Stockholders’ deficit was $36.6 million.

Operating cash flow remained positive but declined materially. Management said liquidity for at least 12 months depended on operating cash flows, available cash and financing support from Bison and other parties, including transactions completed after year-end. The East West Bank facility had $18.6 million outstanding and no borrowing-base availability at year-end. The filing identifies substantial refinancing, debt-service and covenant risks.

Material changes, outlook and risks

• Major studio VPF revenue on all 3,480 Phase I systems had largely ended by year-end; remaining, less material fees from smaller studios were expected to continue through December 2020. Management noted that lower VPF receipts were partly offset by reduced non-recourse debt outflows.
• Cinedigm sold 321 digital projection systems for approximately $3.7 million in proceeds; $2.8 million was recognized as revenue.
• After year-end, lenders extended the remaining Second Lien Loans to September 30, 2019 following partial repayment. The company also sold 2.0 million shares to a Bison affiliate for $3.0 million and replaced a $10.0 million Bison loan with a $10.0 million convertible note due March 2020. These transactions provided liquidity but involved a major shareholder.
• The East West Bank facility was amended after year-end: its size was reduced to $18.0 million, maturity extended to June 30, 2020, and prepayment and daily cash-sweep terms added.
• Management planned to expand its OTT portfolio, with four to five channels in development targeted for rollout over the following 12 months. No consolidated revenue or earnings guidance was provided.
• Key risks include persistent losses, negative working capital, near-term maturities, dependence on Bison-related support, declining physical-media demand and studio VPF revenue, customer concentration, competition, and potential dilution. Walmart and Amazon each represented at least 10% of CEG revenue; Amazon was approximately 10% of consolidated revenue.
• The company disclosed that Bison’s ownership and related transactions could increase its control and create dilution or governance risks. Nasdaq minimum-bid-price and market-value deficiencies reported in December 2018 were subsequently cured.
• The company adopted ASC 606 in FY2019 with no change in treatment of revenue streams. It expected lease-accounting adoption on April 1, 2019 to add approximately $2.4 million of right-of-use assets and $2.5 million of lease liabilities.

Important facts for investors to verify

• Whether subsequent repayments, the Second Lien maturity extension, Bison-related financing and the amended bank facility actually resolved the near-term liquidity and refinancing pressure.
• Current debt balances, borrowing-base availability, covenant compliance, cash-sweep effects and the company’s reliance on support from affiliated parties.
• Whether OTT and digital revenue growth can offset continued declines in physical distribution and cinema VPF revenue, and whether planned channel launches achieve scale.
• The precise basis and reconciliation of Adjusted EBITDA, including its reported decline and the divergence between consolidated and non-cinema segment results.
• Potential dilution from convertible notes, warrants, equity issuances and the July 2019 share sale, alongside the resulting concentration of voting control.
• The status, financing and integration risks of the announced Future Today acquisition; the filing describes it as being in process.

The independent auditor issued an unqualified opinion on the financial statements. Management stated that disclosure controls and internal control over financial reporting were effective as of March 31, 2019; the auditor did not express an opinion on internal control.