Business context and reporting period
This is Cinedigm Digital Cinema Corp.’s unaudited Form 10-Q for the quarter ended December 31, 2011, covering its fiscal third quarter and first nine months. The filing is for Cinedigm Digital Cinema Corp.; the company name in the request, Cineverse Corp., does not match the registrant named in this filing.
Cinedigm provides digital cinema deployment and services, software, and content distribution. Its four continuing segments are Phase I Deployment, Phase II Deployment, Services, and Content & Entertainment. The company sold USM in September 2011 and most of its DMS business in November 2011; these and other businesses are reported as discontinued operations.
Financial results and liquidity
Amounts below are in millions of dollars unless otherwise noted. Comparisons are with the corresponding 2010 period.
| Metric | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $19.8, up 23% from $16.1 | $58.9, up 37% from $43.1 |
| Operating income | $3.4, versus $4.1 | $13.7, versus $6.2 |
| Operating margin | 17.2%, versus 25.8% | 23.3%, versus 14.5% |
| Net loss | $10.6, versus $4.1 | $17.3, versus $22.0 |
| Net loss from continuing operations | $3.8, versus $2.4 | $8.4, versus $16.7 |
| Net cash provided by operating activities | $29.8 for nine months, versus $15.3 | |
| Net cash used in investing activities | $17.2 for nine months, versus $31.7 | |
| Net cash used in financing activities | $6.7 for nine months, versus $16.4 provided |
At December 31, cash and cash equivalents were $16.6 million; restricted investments were $9.5 million and restricted cash was $5.8 million. Management reported working capital of $9.8 million and stated it expected to meet obligations through at least December 31, 2012, based on cash and forecast operating cash flows. The company reported an accumulated deficit of $215.2 million and warned it could continue to incur losses.
Total debt and capital leases were approximately $270.2 million: $179.7 million of non-recourse notes, $85.0 million of recourse notes, and $5.5 million of capital leases. Non-recourse debt is generally supported by the relevant deployment assets, though some debt has subsidiary guarantees. The company reported compliance with debt covenants at quarter end. Nine-month interest expense was $22.5 million; interest paid was $15.8 million.
Management’s non-GAAP Adjusted EBITDA for the non-deployment businesses was $1.4 million for the quarter and $5.5 million for nine months, compared with $0.3 million and negative $0.4 million, respectively. Management cautioned that Adjusted EBITDA is not a GAAP performance or liquidity measure.
Material changes versus the prior comparable period
- Revenue growth was led by Services and Phase II Deployment, reflecting more installed systems and increased software license and maintenance revenue. Phase II systems installed rose to 5,032 from 1,654 a year earlier; Phase I serviced 3,724 screens.
- Quarterly operating income declined despite higher revenue, as operating expenses increased, including depreciation, corporate SG&A, and $0.8 million in restructuring charges. Quarterly operating margin fell to 17.2% from 25.8%.
- Quarterly net loss widened, principally alongside a $6.9 million loss from discontinued operations. For the nine months, net loss improved versus 2010, while continuing-operations loss also narrowed.
- Operating cash flow increased, while capital spending fell to $16.9 million from $32.6 million for nine months. Management said Phase II system purchases are funded with non-recourse debt and exhibitor contributions, rather than operating cash.
- The company raised $6.9 million through a July 2011 Class A common-stock sale. Shares issued and outstanding increased from March 31, and stockholders’ equity moved from $1.8 million to a deficit of $6.5 million.
Outlook, risks, contingencies, and unusual items
- Management expected Adjusted EBITDA to improve for the remainder of fiscal 2012, supported by planned Phase II deployments, service fees, and recently signed software contracts. It anticipated continued Services growth and further software and international customer activity; these are expectations, not guarantees.
- The company expected $0.4–$0.5 million of additional severance and occupancy-related restructuring costs in the quarter ending March 31, 2012, and estimated annualized SG&A reductions of approximately $1.5 million from workforce reductions.
- Key risks include continuing losses, substantial debt and contractual obligations, dependence on system deployments and film release patterns, customer receivable growth, competition, and the need to generate revenue, raise capital, or manage discretionary spending. Management noted debt restrictions could limit financing and constrain cash available for other needs.
- The DMS asset sale generated a reported $4.6 million loss; the remaining DMS assets held for sale were written down by $0.8 million. Discontinued operations produced a nine-month loss of $8.8 million, including disposal-related items. The company also recorded a $0.3 million loss on its investment in CDF2.
- Cinedigm retained primary lessee responsibility for the Pavilion Theatre capital lease despite a sublease to the buyer. It also remained lessee on an operating lease pending landlord consent to assignment. No legal proceedings were reported, and management said disclosure controls were effective.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing names Cinedigm Digital Cinema Corp., not Cineverse Corp.
- Review the terms, maturity, cash-interest requirements, and covenants of the recourse 2010 Note, and distinguish it from subsidiary-level non-recourse deployment debt.
- Assess whether forecast operating cash flow can support cash interest, scheduled debt service, and corporate needs, particularly given restricted funds and the working-capital demands of deployments.
- Track Phase II installations, VPF collections, software contract conversions, and the cost and timing of deployments against management’s growth expectations.
- Examine the discontinued-operation and DMS disposal results, remaining assets held for sale, and potential residual lease obligations.
- Consider dilution from issued shares, outstanding options, and warrants, including the 16 million Sageview warrants and 525,000 service-provider warrants.