Cinedigm Corp. — Form 10-Q Summary
Identity and period: The supplied filing is for Cinedigm Corp. (not Cineverse Corp.) and covers the quarter and six months ended September 30, 2015. This was the second quarter of fiscal 2016. Financial amounts below are in U.S. dollars; “$m” means millions.
Business context
Cinedigm operated digital cinema deployment and servicing businesses, alongside Content & Entertainment (CEG), which distributed independent content and developed OTT channels. It reported four segments: Phase I Deployment, Phase II Deployment, Services, and CEG. The company said it supported more than 12,000 screens and managed a library of nearly 50,000 titles and episodes.
Financial results and liquidity
| Metric | Three months ended September 30, 2015 | Six months ended September 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $27.7m | $50.5m | $23.7m / $46.6m |
| Operating income (loss) | ($17.9m) | ($23.3m) | $0.4m / ($5.3m) |
| Net loss | ($23.1m) | ($34.4m) | ($7.3m) / ($18.0m) |
| Net loss attributable to common stockholders | ($22.4m), or ($0.35) per share | ($33.4m), or ($0.51) per share | ($7.4m), or ($0.10) / ($18.2m), or ($0.23) per share |
| Adjusted EBITDA (non-GAAP) | $11.4m | $19.2m | $12.6m / $19.8m |
| Operating cash flow | Not separately stated for quarter | $4.6m | $2.5m for six months |
Revenue increased 17% for the quarter and 8% for the six-month period. The filing does not present a consolidated gross margin; direct operating costs were $8.4m for the quarter and $15.7m for six months. Adjusted EBITDA is a non-GAAP measure and should not be treated as operating cash flow or liquidity.
At September 30, cash and cash equivalents were $19.0m and restricted cash was $9.0m. Current assets of $109.6m were slightly below current liabilities of $110.0m, leaving negative working capital of $0.4m. Total assets were $238.9m and total liabilities were $305.0m, resulting in a $66.1m total deficit.
Balance-sheet notes payable, net of debt issuance costs, totaled approximately $212.1m: $132.4m non-recourse and $79.7m recourse, plus $5.2m of capital leases. Separately, management reported scheduled principal of approximately $137.7m on non-recourse debt and $84.1m on recourse debt. Six-month cash interest paid was $6.6m. The company reported compliance with all debt covenants at September 30.
Material changes versus prior periods
- Quarterly CEG revenue rose 30% to $11.7m; six-month CEG revenue rose 29% to $20.8m. Management cited fewer product returns and growth in digital distribution, partly offset over six months by declining packaged DVD and Blu-ray sales.
- Digital cinema and Services revenue rose in the quarter, supported by two blockbuster releases, but declined slightly for the six-month period because there were fewer wide releases than in the prior year.
- CEG recorded an $18.0m goodwill impairment after revised fiscal 2016 expectations fell materially below prior forecasts. Goodwill declined from $26.7m to $8.7m.
- Quarterly operating results also included a $1.2m net litigation settlement recovery. The six-month net recovery was $0.4m; the initial $2.3m settlement payment was received in October 2015, with a further amount still subject to arbitration.
- In April 2015, Cinedigm issued $64.0m of 5.5% convertible notes due 2035. Net proceeds were approximately $60.9m; uses included repayment of a term loan, a forward stock purchase for about 11.8m shares, and repurchase of about 2.7m shares. The notes have an initial conversion price of approximately $1.21 per share and specified holder repurchase dates.
- Six-month financing cash flows included $38.8m of note repayments, $9.2m of net revolving-credit repayments, the stock transactions, and the convertible-note proceeds. Cash and cash equivalents decreased only $0.04m overall, to $19.0m.
Outlook, commentary, and risks
- Management expected cash, restricted cash, remaining revolving-credit availability, planned cost reductions, and anticipated operating cash flows to meet liquidity and capital needs for the next 12 months. It also said additional capital might be required and disclosed discussions with a potential investor, with no assurance of a transaction.
- The revolving facility allowed up to $30.0m; $15.1m was drawn and $17.5m remained available at September 30. The company also had a $5.0m minimum-liquidity covenant under the amended agreement.
- Management said fiscal 2016 CEG revenue and adjusted EBITDA projections were expected to be materially below original estimates, particularly in the second half, after challenges securing anticipated contracts, customer relationships, and OTT channels. Further goodwill impairment was possible if cash-flow expectations were not achieved.
- Phase I virtual print fee (VPF) revenue was expected to begin ending on certain systems in December 2015; a majority of Phase I VPF revenue was expected to end by November 2017, with a material cumulative effect in later periods. Phase II VPFs may also end earlier if contractual cost recoupment is achieved; timing was uncertain.
- Management cited continuing net losses, substantial debt and interest obligations, reliance on additional revenues or capital, and the risk that spending reductions or financing may not be sufficient. It expected VPF cash receipts to support non-recourse debt payments and said operating activities should remain a positive cash source.
- The Gaiam acquisition dispute was settled subject to a further arbitration-determined payment. The company said ordinary-course legal matters were not expected to have a significant financial effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and security: this filing names Cinedigm Corp., and the reported period is the quarter ended September 30, 2015.
- Assess the CEG forecast shortfall, the assumptions supporting the $18.0m goodwill impairment, and the possibility of further impairment.
- Review liquidity against upcoming debt service, restricted-cash requirements, revolver availability and covenants, and the status and terms of the potential capital raise.
- Track the Gaiam arbitration and any additional settlement proceeds, and distinguish the cash received from the net recovery recorded in earnings.
- Evaluate the expected decline in Phase I VPF revenue, Phase II cost-recoupment terms, and the effect on segment cash flows and debt repayment.
- Review the convertible-note conversion and repurchase terms, forward stock-purchase settlement, and resulting share-count and dilution effects.