Business Context and Reporting Period
Company: Cinedigm Digital Cinema Corp. (f/k/a Access Integrated Technologies, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2010
Business Overview: Cinedigm is a digital cinema services and content marketing company driving the industry's conversion from film to digital technology. Operations are organized into four segments: Phase I Deployment (financing/administration of installed systems), Phase II Deployment (financing/administration of new systems), Services (software, content delivery, and asset management), and Content & Entertainment (advertising and film distribution). The company has classified its former "Other" segment (including Pavilion Theatre and IT services) as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Dec 31, 2010 | Nine Months Ended Dec 31, 2010 | Dec 31, 2010 Balance Sheet |
|---|---|---|---|
| Total Revenues | $21,100 | $59,349 | - |
| Net Loss (Continuing Ops) | $(3,862) | $(20,162) | - |
| Net Loss (Total) | $(4,080) | $(21,974) | - |
| Net Loss Attributable to Common | $(4,180) | $(22,279) | - |
| Operating Cash Flow | - | $15,281 | - |
| Cash & Equivalents | - | - | $9,036 |
| Total Debt (Recourse + Non-Recourse) | - | - | $273,231 |
| Working Capital | - | - | $5,750 |
Note: Working Capital calculated as Current Assets ($50,909) less Current Liabilities ($45,159).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7% ($1.4M) for the three months ended Dec 31, 2010, compared to the prior year. This was driven by a 388% increase in Phase II Deployment revenue and a 106% increase in Services revenue, offset by a 4% decline in Phase I Deployment (due to contractual VPF rate reductions) and a 32% decline in Content & Entertainment.
- Net Loss Improvement: Net loss from continuing operations narrowed from $(6.1M) to $(3.9M) for the quarter, primarily due to a significant reduction in interest expense following the refinancing of the GE Credit Facility in May 2010.
- Interest Expense: Interest expense decreased 24% ($2.2M) for the quarter, attributed to lower rates on the new 2010 Term Loans compared to the previous GE facility.
- Discontinued Operations: The company recorded a $1.8M loss from discontinued operations for the nine-month period, including a $1.8M goodwill impairment charge related to the Pavilion Theatre.
Guidance, Outlook, and Risks
- Outlook: Management expects Adjusted EBITDA (excluding deployment subsidiaries) to improve for the remainder of the fiscal year due to intercompany service fees and software license fees from growing Phase II system installations. They anticipate continued net losses for the foreseeable future.
- Liquidity: Management believes current cash and expected operating cash flows are sufficient to meet obligations through December 31, 2011. However, the company has signed commitment letters for additional non-recourse debt for Phase II Deployment, with no assurance that financing will be completed on acceptable terms.
- Going Concern: The filing includes a "Going Concern" warning. Failure to generate additional revenues, raise capital, or manage spending could materially adversely affect the company's ability to continue operations.
- Key Risks:
- Dependence on the pace of digital cinema conversion and studio release schedules.
- Significant debt obligations ($367M total debt-related obligations) and interest payments.
- Uncertainty regarding the completion of Phase II financing.
- Unusual Items:
- CEO Transition: One-time transition costs of $1.2M were incurred related to the retirement of the former CEO.
- Warrant Liability: A $16.1M warrant liability was reclassified to equity in September 2010 after the underlying shares were registered for resale.
- Derivatives: The company recorded a $1.1M loss on the change in fair value of interest rate swaps for the nine-month period.
Investor Verification Checklist
- Debt Covenants: Verify compliance with covenants on the $172.5M 2010 Term Loans and the $75M 2010 Note (Sageview), particularly regarding interest coverage and liquidity ratios.
- Phase II Financing: Confirm the status of the commitment letters for additional non-recourse debt required to fund the remaining Phase II system deployments.
- VPF Rate Reductions: Assess the long-term impact of the contractual 7% reduction in Virtual Print Fee (VPF) rates that began in November 2010 on Phase I revenue stability.
- Discontinued Operations: Monitor the progress of the sale of the Pavilion Theatre assets, which are currently held for sale.
- Stock-Based Compensation: Review the impact of the new CEO's option grants (4.5M shares) and accelerated vesting from the prior CEO's retirement on future expense recognition.