Cinedigm Corp. (now Cineverse Corp.) — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017; filed June 29, 2017. This is an annual report, not a standalone fourth-quarter report. The filing identifies the registrant as Cinedigm Corp.
Business context
The company operates digital cinema deployment and servicing businesses, alongside a content distribution and OTT channel business. Its digital cinema infrastructure covered more than 12,000 screens. Content activities include independent film and television distribution and branded channels such as Docurama, CONtv and Dove Channel; Wham Network was announced for a planned fall 2017 launch.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $90.4 million | $104.4 million |
| Operating income (loss) | $6.8 million | $(21.1) million |
| Net loss | $(15.2) million | $(42.5) million |
| Net loss attributable to common shareholders | $(15.5) million; $(1.92) per share | $(42.1) million; $(6.51) per share |
| Cash provided by operating activities | $31.7 million | $25.5 million |
| Cash used in investing activities | $(0.5) million | $(1.4) million |
| Cash used in financing activities | $(44.1) million | $(17.6) million |
| Cash and restricted cash at year-end | $13.6 million | $34.5 million |
| Working capital | $(15.4) million | $1.0 million |
Revenue fell 13.5%. Segment revenue was $32.1 million for Phase I Deployment, $12.5 million for Phase II Deployment, $11.6 million for Services and $34.2 million for Content & Entertainment. No consolidated gross margin is presented in the supplied filing text. Operating margin was approximately 7.5%, calculated from reported operating income and revenue.
Adjusted EBITDA, a non-GAAP measure defined by the company, was $43.4 million versus $43.2 million. The filing reports $1.0 million of Adjusted EBITDA from non-deployment businesses, compared with a $3.4 million loss in FY2016. These measures do not replace GAAP earnings or operating cash flow.
At March 31, 2017, reported debt principal was approximately $148.1 million in total: about $84.3 million attributable to Content & Entertainment and Corporate, and $63.8 million related to digital cinema subsidiaries. The company reported $19.6 million drawn on its revolving facility, with only $0.2 million available; the facility matured March 31, 2018. Total stockholders’ deficit was $70.7 million.
Material changes versus FY2016
- Content & Entertainment revenue declined 22.2%, mainly from lower physical product sales and a shift toward licensed content, which generally earns lower fees. OTT-related sales increased $1.5 million but did not offset the decline.
- Phase I Deployment revenue declined 12.1% as virtual print fees (VPFs) ended on more systems. By year-end, 2,467 systems—about 66% of Phase I systems—had ceased earning a significant portion of VPF revenue from certain major studios.
- Selling, general and administrative expense declined 28.7%, reflecting workforce and other cost reductions. Depreciation and amortization fell 25.8%, mainly as Phase I equipment reached the end of its useful life.
- Operating results improved substantially, including the absence of FY2016’s $18.0 million goodwill impairment. FY2017 still included $4.4 million of debt-conversion expense and a $2.5 million gain from terminating the Pavilion Theater capital lease.
- The company repaid its 2013 Term Loans in November 2016, issued $9.0 million of 12.75% Second Secured Lien Notes, and exchanged $13.4 million principal amount of convertible notes for shares, warrants and $3.5 million of those notes.
Outlook, risks and unusual items
- Management outlook: Management said cash, cost reductions, financing availability and expected operating cash flows were expected to cover liquidity needs for at least a year after the financial statements became available. This depended on assumptions, including no material adverse developments; the filing also warned that additional capital might be needed. No quantified revenue or earnings guidance was provided.
- VPF runoff: The company expected nearly all Phase I systems to stop earning VPF revenue from certain major studios by December 2017. Remaining Phase I VPF and ancillary revenue was expected to be materially lower; reduced related debt cash outflows were expected to partly offset the revenue decline. Phase II VPF revenue was expected to end on some systems beginning in December 2018, or earlier if cost recoupment is achieved.
- Subsequent financing transaction: On June 29, 2017, the company agreed to sell 20 million Class A shares for up to $30 million to a strategic partner, subject to approvals and other closing conditions. If completed, the partner was expected to hold a majority stake and appoint two directors. The company was also in advanced discussions with holders of approximately 99% of its convertible notes regarding an exchange. Neither the sale nor the note exchange was reported as completed in this filing.
- Debt and liquidity risks: The company had negative working capital, substantial debt service commitments, restrictive covenants and a covenant waiver obtained May 31, 2017 for the quarter ended March 31, 2017. Management’s liquidity assessment and the contemplated strategic transaction are important to evaluating its financing position.
- Concentration and industry risks: Walmart and Amazon each represented at least 10% of CEG revenue, with one representing about 34% of consolidated revenue. Five major studios generated 21% of consolidated revenue. Physical media demand was declining, OTT growth was uncertain, and customer, content performance and theatre attendance were risks.
- Other items: The company recorded $3.6 million of impairments and accelerated amortization related to content advances. It reported no material legal proceedings, and said disclosure controls and internal control over financial reporting were effective; a prior-year material weakness was reported as remediated.
Most important facts for investors to verify
- Whether the strategic share sale and proposed convertible-note exchange closed, on what terms, and with what resulting dilution, control changes and debt reduction.
- Available cash and borrowing capacity, compliance with debt covenants, the status of the revolving facility, and the company’s ability to meet near-term debt and interest obligations.
- Actual pace and financial impact of Phase I VPF expirations, and whether lower digital cinema revenue is offset by lower debt service and growth in other businesses.
- Whether OTT revenue, margins and audience reach improve enough to compensate for physical product declines and licensed-content economics.
- Customer and studio concentration, receivable collectability, content-advance recoverability, and any subsequent goodwill or other asset impairment indicators.