Cinedigm Digital Cinema Corp. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended June 30, 2012; filed August 14, 2012. The registrant was then named Cinedigm Digital Cinema Corp. (now identified in the request as Cineverse Corp.). Dollar figures below are in millions unless stated otherwise.
Business context
Cinedigm provided digital cinema deployment, services and software, and content marketing and distribution. Its four reporting segments were Phase I Deployment, Phase II Deployment, Services, and Content & Entertainment. The quarter included New Video Group, acquired April 20, 2012, expanding the company’s home-entertainment distribution business.
Financial results and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $20.9 | $18.0 |
| Operating income | $1.9 | $4.0 |
| Operating margin | 9.3% | 22.4% |
| Net loss from continuing operations | $4.9 | $4.0 |
| Net loss | $5.2 | $6.4 |
| Net loss attributable to common stockholders | $5.2 | $6.5 |
| Operating cash flow | $2.0 | $7.3 |
- Revenue rose 16%; the filing attributes the increase primarily to New Video and growth in Phase II and Services, partly offset by lower Phase I deployment revenue. Content & Entertainment revenue increased to $2.8 million from $0.3 million; the acquired business contributed about $2.3 million of revenue after acquisition.
- Operating expenses increased 35% to $19.0 million. SG&A rose 73% to $5.9 million, and the company recorded $1.3 million of acquisition expenses. Higher expenses and the changed business mix reduced operating margin.
- Cash and cash equivalents were $19.5 million at quarter-end; restricted cash was $5.8 million. Management reported total cash and restricted cash of $25.3 million and negative working capital of $2.6 million.
- Investing activities provided $3.6 million, principally reflecting the release of $9.5 million of restricted investments, partly offset by acquisition cash paid and capital spending. Financing activities used $3.9 million, including debt repayments, partly offset by equity proceeds.
- Carrying debt comprised $157.3 million of non-recourse notes, $89.7 million of recourse notes, and $5.4 million of capital leases—about $252.4 million in total. Interest expense was $7.5 million. The company reported compliance with all debt covenants.
- Total assets were $303.6 million and total liabilities were $305.8 million; stockholders’ deficit was $2.1 million. Preferred dividends were $0.09 million.
Material changes and notable items
- New Video was acquired for a preliminary aggregate purchase price of $17.6 million, net of $6.9 million cash acquired, including $10.0 million cash and 2,525,417 Cinedigm shares. Up to a further $6.0 million in cash or shares may be payable based on performance targets. Purchase-price allocation remained preliminary.
- The company raised $10.0 million net from an April public offering of 7,857,143 Class A shares. The acquisition and offering increased the share count; 48,342,380 Class A shares were outstanding at June 30.
- Adjusted EBITDA, a non-GAAP measure, was $13.5 million versus $13.6 million. Management’s measure of Adjusted EBITDA from non-deployment businesses was $0.8 million in both periods.
- The remaining non-theatrical DMS assets were sold in May for $0.2 million, with no gain or loss recognized. A subsequent $0.26 million secured note receivable was due October 19, 2012.
Outlook, risks and contingencies
- Management expected positive operating cash flow and believed available cash and expected operating cash flows would fund obligations through at least June 30, 2013. It cautioned that further losses were possible and that failure to grow revenue, obtain capital, or control discretionary spending could harm liquidity.
- Management expected Adjusted EBITDA to improve during the remainder of FY2013, while investing in content rights, marketing, software, and services. This is management’s outlook, not a quantified GAAP earnings forecast.
- Phase II deployment was contractually scheduled to end September 30, 2012; 6,253 Phase II screens were being serviced at quarter-end, with an 825-screen backlog. Management anticipated limited further company-financed deployments and more exhibitor-financed or Holdings deployments.
- Content distribution expenses can precede ancillary-market receipts (“J-curve” timing). Management cited about $0.3 million of such costs in the quarter and said recovery may take 12–36 months.
- Phase II VPF collection ends upon contractual cost recoupment, whose timing and probability the company said it could not estimate. Film-release timing makes deployment revenues seasonal. Debt covenants and restrictions may constrain financing and cash availability.
- Commitments included $3.4 million of remaining Barco system purchases, $5.4 million of capital lease obligations, and $6.6 million of operating leases. The filing said ordinary-course legal proceedings were not expected to have a significant financial impact; no legal proceedings were listed in Part II.
- Management reported effective disclosure controls and no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether New Video meets its performance targets and whether the preliminary acquisition valuation, including customer-relationship intangibles and contingent consideration, changes.
- Cash generation, working-capital requirements, and the company’s ability to meet debt and interest obligations beyond management’s stated liquidity horizon.
- Phase II deployment completion, screen installation and service growth, and the timing of VPF cost recoupment.
- Whether management’s projected Adjusted EBITDA improvement translates into sustained operating cash flow and improved GAAP results; Adjusted EBITDA is non-GAAP and should not be treated as liquidity.
- Content-release performance and recovery of advances and marketing costs, alongside the continuing effects of dilution from equity issuance and potential acquisition consideration.