Cinedigm Corp. (now Cineverse Corp.) — Form 10-Q Summary
Business context and period. This unaudited filing covers the fiscal third quarter and nine months ended December 31, 2018; the fiscal year ends March 31. Cinedigm reported two segments: Cinema Equipment and Content & Entertainment. The company distributes independent content and provides digital-cinema equipment and related services. Dollar figures below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $14.6 million | $18.5 million | $41.5 million | $50.0 million |
| Operating loss | $0.6 million | $1.4 million | $1.9 million | $2.3 million |
| Net loss | $3.3 million | $5.9 million | $10.0 million | $18.5 million |
| Net loss attributable to common stockholders | $3.3 million | $6.0 million | $10.3 million | $18.8 million |
| Adjusted EBITDA (non-GAAP) | $3.6 million | $5.5 million | $9.6 million | $16.7 million |
| Operating cash flow | Not separately presented | Not separately presented | $6.3 million | $14.1 million |
Quarterly operating margin was approximately negative 4.2%, versus negative 7.4% a year earlier; nine-month operating margin was approximately negative 4.7%, versus negative 4.5%. These percentages are calculated from reported revenue and operating loss. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP results or cash flow.
Balance sheet, debt and liquidity
- At December 31, cash and cash equivalents were $17.1 million; restricted cash was $1.0 million. Total assets were $105.8 million, total liabilities $137.0 million and total deficit $31.2 million.
- Management reported negative working capital of $26.3 million and an accumulated deficit of $389.5 million.
- Reported debt principal was approximately $68.5 million: $41.8 million recourse and $26.7 million non-recourse. The balance-sheet carrying value was lower after unamortized discounts and issuance costs.
- Cash from operations fell to $6.3 million for the nine-month period from $14.1 million. Investing used $1.2 million and financing used $6.0 million; cash and restricted cash declined $0.8 million from March 31.
- The company said cash, expected operating cash flows and support or available funding from Bison and other parties should meet liquidity needs for at least one year. This expectation depends in part on obtaining funding; it is not a disclosed committed financing arrangement.
Material changes and management commentary
- Revenue declined 21% for the quarter and 17% for the nine months. Cinema Equipment revenue fell 37% and 30%, respectively, primarily as major-studio virtual print fee (VPF) payments ended on more Phase I systems. Content & Entertainment revenue declined 7% for the quarter and 1% year to date.
- Lower operating expenses and interest expense helped reduce GAAP net losses compared with the prior periods. Prior-year SG&A included a $1.5 million incentive bonus and approximately $1.2 million of accelerated stock compensation following the Bison transaction. The nine-month Adjusted EBITDA nevertheless declined 42%, to $9.6 million; non-cinema equipment Adjusted EBITDA was a $5.1 million loss.
- The $5.0 million 2013 Notes were repaid in October 2018 using proceeds from a new $5.0 million subordinated convertible note. The new note bears 8% interest, matures October 9, 2019, and is convertible at an initial $1.50 per share, subject to the note terms.
- Key 2019 maturities include approximately $11.0 million of Second Lien Loans due June 30, $10.0 million of Bison Global debt due July 20, and the $5.0 million convertible note due October 9. Management planned to seek Bison-related funding for the Second Lien repayment. The Bison Global loan may be payable on demand and is guaranteed by a Bison affiliate under specified conditions.
- The revolving credit facility had $3.2 million of borrowing availability at December 31. After a $3.0 million draw on January 11, 2019, reported availability was $0.2 million.
- In January and February 2019, the company completed sales of 311 digital projection systems; total systems sold reached 328 for aggregate stated consideration of approximately $3.8 million.
- The company received a Nasdaq notice concerning minimum market value of publicly held shares, with a compliance deadline of June 10, 2019. A separate minimum-bid-price deficiency was cured by February 11, 2019. The CFO announced his resignation effective February 28, 2019; the COO assumed oversight of the finance team.
- The company adopted Topic 606 revenue accounting on April 1, 2018 and said it did not change the accounting treatment of its revenue streams. It was evaluating lease-accounting adoption and could not quantify the expected balance-sheet effect.
Risks, contingencies and unusual items
- Ongoing losses, negative working capital, significant debt obligations and dependence on refinancing or additional capital create liquidity risk. Failure to raise capital, generate revenue or control discretionary spending could adversely affect financial condition.
- VPF revenue is declining as deployment-payment periods end; management expected remaining Phase I VPF revenue to become less material and continue only through December 2020 for certain studios.
- Potential dilution includes the convertible note, outstanding warrants, stock appreciation rights and performance stock units. The filing excluded potentially dilutive securities from loss-per-share calculations because they were anti-dilutive.
- Management reported no material changes to previously disclosed risk factors and no legal proceedings in this filing. It reported disclosure controls effective as of December 31, 2018, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether funding is secured to meet the June and July 2019 debt maturities, and the precise terms of any extension, repayment or demand rights.
- Post-quarter borrowing-base availability and liquidity after the January $3.0 million credit-facility draw, along with subsequent cash flows and system-sale proceeds.
- Revenue and cash-flow trends as major-studio VPF receipts continue to decline, and the performance of Content & Entertainment.
- Compliance with Nasdaq’s minimum market-value requirement and any subsequent listing notices.
- The potential share dilution from convertible debt and equity awards, and the effects of the CFO transition.