Cinedigm Corp. (now identified in the request as Cineverse Corp.) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017. The filing is by Cinedigm Corp.; it is unaudited and was filed February 14, 2018. Dollar amounts below are U.S. dollars.
Business context and reporting period
Cinedigm operated digital cinema deployment and servicing businesses alongside its Content & Entertainment business, including content distribution and OTT networks. Its digital cinema operations supported more than 12,000 screens. Results compare the three and nine months ended December 31, 2017 with the corresponding 2016 periods.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2017 | Prior comparable period |
|---|---|---|---|
| Revenue | $18.5 million | $50.0 million | $24.4 million and $70.8 million; down 24% and 29%, respectively |
| Operating income (loss) | $(1.4) million | $(2.3) million | $3.0 million and $7.7 million |
| Net loss | $(5.9) million | $(18.5) million | $(0.5) million and $(5.5) million |
| Net loss per share, basic and diluted | $(0.20) | $(1.02) | $(0.07) and $(0.78) |
| Adjusted EBITDA (non-GAAP) | $5.5 million | $16.7 million | $11.5 million and $36.6 million; down 52% and 54% |
| Net cash from operating activities | $14.1 million for nine months | $24.6 million |
Quarterly revenue fell across Phase I Deployment, Services, and Content & Entertainment; Phase II revenue increased modestly. For the nine months, every segment reported lower revenue. Phase I VPF revenue continued to decline as systems reached the end of payment periods. Content & Entertainment faced weaker physical and digital sales volumes and a shift toward lower-margin licensed content. OTT sales increased $0.7 million over the nine-month comparison.
At December 31, 2017, cash and cash equivalents were $17.2 million, with another $1.0 million restricted; current assets were $71.5 million and current liabilities $84.8 million. Total assets were $122.2 million, total liabilities $144.6 million, and total stockholders’ deficit $22.4 million. The company reported $43.6 million of non-recourse debt principal and $37.3 million of recourse debt principal. Nine-month investing cash outflow was $0.5 million and financing cash outflow was $8.9 million.
Material changes versus the prior period
- Revenue declined as Phase I systems ceased earning significant VPFs from major studios; management expected further declines. Services revenue also weakened because it earns fees tied to VPF collections.
- Operating expenses included higher SG&A: nine-month SG&A rose $4.1 million, reflecting a $1.5 million transaction-related bonus, increased stock compensation, and other costs. Change-of-control vesting on November 1 contributed to the stock-compensation increase.
- Depreciation and amortization of property and equipment declined substantially as many Phase I projection systems completed their ten-year useful lives. Interest expense also fell with debt repayments.
- Operating cash flow decreased by $10.5 million year over year. The filing attributes cash flows partly to working-capital movements, including collections of accounts receivable.
Outlook, management commentary, risks, and unusual items
- Liquidity outlook: Management said cash and restricted cash, cost reductions, retirement of the convertible notes, and expected operating cash flows were expected to cover liquidity and capital needs for at least one year after issuance of the statements. It cautioned that additional capital may be needed and that failure to grow revenue, raise capital, or control spending could harm liquidity.
- Financing and control: In November, Bison became the majority shareholder after a $30.0 million stock purchase and designated two directors. In December, the company borrowed $10.0 million from a Bison affiliate at 5% interest, due June 2021, and issued warrants for 1.4 million shares at $1.80. The company exchanged or repurchased its remaining $5.5% convertible notes, retiring them.
- Near-term debt: The $11.8 million revolving facility matured March 31, 2018, with no borrowing availability at December 31, 2017. A January 31, 2018 payment of $2.0 million reduced the balance to $9.8 million. The filing describes amendments to minimum-liquidity and debt-service covenants and scheduled reductions in the facility limit.
- Operating risks: Phase I VPF revenue was expected to continue declining; most Phase II VPF revenue was expected to end by December 2022 or earlier if contractual cost recoupment occurs. Content distribution faces changing consumer behavior, digital-market shifts, and collection risk from financially troubled content providers.
- Unusual items: Nine-month debt-conversion expense and loss on extinguishment totaled $4.5 million. The December 2017 tax-law change led to a $35.5 million write-down of gross deferred tax assets and the related valuation allowance, with no impact on reported interim results. No goodwill or long-lived-asset impairment charge was recorded.
- Other disclosures: Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no legal proceedings and no material changes to previously disclosed risk factors. No formal revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether cash generation and cost reductions can offset continuing VPF declines and operating losses, particularly in Content & Entertainment.
- The status, repayment terms, covenant compliance, and refinancing of the revolving facility and other recourse debt after March 31, 2018.
- Actual post-period liquidity, including the January 2018 $2.0 million revolver payment and any subsequent financing or operating developments.
- The performance and margins of OTT channels and whether growth can offset weaker physical and licensed-content sales.
- Potential dilution and governance effects from Bison’s majority ownership, issued warrants, and other outstanding equity awards.
- The collection and recoverability of receivables involving content providers identified as financially or legally troubled.