Cinedigm Corp. (now Cineverse Corp.) — Form 10-Q summary
Reporting period: Three months ended June 30, 2017, the first quarter of fiscal 2018; compared with the three months ended June 30, 2016. The filing was signed August 14, 2017. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Cinedigm operated four segments: Phase I and Phase II digital-cinema deployments, digital-cinema Services, and Content & Entertainment (CEG), including content distribution and OTT channels. It supported more than 12,000 screens. The filing identifies the company as Cinedigm Corp.; “Cineverse Corp.” is the name in the request metadata.
Financial performance and liquidity
| Metric | Quarter ended June 30, 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $15.240 | $22.475 | Down $7.235, or 32% |
| Operating income (loss) | $(0.896) | $0.275 | Declined $1.171 |
| Net loss | $(5.152) | $(4.575) | Loss widened $0.577 |
| Net loss attributable to common stockholders | $(5.235) | $(4.643) | Loss widened $0.592 |
| Loss per share, basic and diluted | $(0.48) | $(0.70) | Per-share loss narrowed |
| Adjusted EBITDA | $5.379 | $10.651 | Down 49% |
| Cash provided by operating activities | $4.626 | $6.752 | Down $2.126 |
Operating margin was approximately negative 5.9%, versus positive 1.2% in the prior-year quarter, calculated from reported revenue and operating results. Adjusted EBITDA is a non-GAAP measure; Cinedigm reported a $1.435 million adjusted EBITDA loss for its non-deployment businesses, versus a $1.225 million loss in the prior-year quarter.
Revenue by segment: Phase I $4.331 million (down 53%); Phase II $3.061 million (down 4%); Services $2.396 million (down 27%); and CEG $5.452 million (down 20%). The filing does not provide a consolidated gross-margin figure.
At June 30, cash and cash equivalents were $9.792 million and restricted cash was $1.000 million. Current assets were $68.381 million versus current liabilities of $89.126 million. Total assets were $128.210 million, total liabilities $202.878 million, and total stockholders’ deficit $74.668 million. Accounts receivable fell to $40.262 million from $53.608 million at March 31.
Reported notes payable, net of issuance costs and discounts, totaled $133.869 million: $54.262 million non-recourse and $79.607 million recourse. The filing also reports approximate outstanding principal of $56.8 million non-recourse and $84.4 million recourse. The $19.599 million revolving facility was nearly fully drawn, with $0.2 million available at June 30; its maximum was reduced to $17.1 million in August. Debt-related contractual obligations, including estimated interest, totaled $223.986 million. Cash interest paid during the quarter was $3.449 million.
Investing activities used $0.227 million; financing activities used $7.173 million, primarily for $6.976 million of note repayments. Cash declined by $2.774 million during the quarter.
Material changes and management commentary
- Phase I revenue dropped as systems reached the end of periods in which certain major studios paid virtual print fees (VPFs). By June 30, 2,837 Phase I systems—about 73% of the segment’s systems—no longer earned a significant portion of those VPFs. Cinedigm expected nearly all remaining Phase I systems to lose those major-studio VPFs by December 2017.
- CEG revenue declined due to lower physical-product sales and a shift toward licensed content, which earns lower fees. A $0.7 million increase in OTT-channel sales partly offset the decline.
- Management attributed lower depreciation and amortization mainly to Phase I projection systems reaching the end of their ten-year useful lives. SG&A was down slightly year over year; restructuring and workforce reductions were ongoing. The prior-year quarter included $0.090 million of restructuring and related expenses; none was reported in this quarter.
- Management expected VPF receipts to decline further and said reduced cash outflows on related non-recourse debt would partly offset the revenue decline. It expected positive operating cash flow and believed available cash, cost reductions, financing, the proposed strategic-partner transaction, and operating cash flows would meet liquidity and capital needs for at least one year after issuance of the statements. This expectation depends in part on the transaction closing.
Outlook, risks, and unusual items
- No specific revenue, earnings, or other quantitative operating guidance was provided. Management warned that additional capital may be needed and that failure to increase revenue, raise capital, or control discretionary spending could harm liquidity and financial condition.
- On June 29, 2017, Cinedigm agreed to sell up to 20 million Class A shares for up to $30 million to a strategic partner, with up to 400,000 shares potentially sold to management instead. Closing required customary approvals and completion of note exchanges. The partner would obtain majority ownership and the right to designate two directors if all shares were issued. The filing says $15 million was placed in escrow pending closing.
- In July, exchange agreements covering holders of approximately 99% of the outstanding 5.5% convertible notes contemplated exchanges for cash, shares, second-lien debt, or a combination. The filing reports an initial exchange of $3.650 million principal for $1.462 million of second-lien notes and 1,215,326 shares. Completion of the broader exchanges and share sale remained subject to conditions.
- On August 10, 2017, the company obtained a waiver of a covenant under its credit agreement and second-lien notes for the June-quarter test. The filing also says minimum-liquidity terms included a $0.8 million threshold through October 13, 2017, followed by a $5 million minimum; verify the waiver and applicable covenant terms.
- Risks include continuing losses and accumulated deficit, substantial debt and interest obligations, restrictive covenants and limited revolver availability, and declining Phase I VPF revenue. Content distribution also faces changing consumer demand and competition for third-party content. The filing reported no legal proceedings and no material changes to the risk factors in its latest annual report.
Important facts for investors to verify
- Whether the strategic-partner share sale and the broader convertible-note exchanges closed, their final cash and debt effects, and the resulting dilution and control changes.
- Current cash availability, covenant compliance and waiver terms, revolver availability after its reduction, and ability to meet near-term debt and interest obligations.
- The timing and scale of further Phase I VPF declines, and whether anticipated reductions in related debt outflows adequately offset lost revenue and cash receipts.
- CEG revenue trends, including OTT growth, physical-product declines, and the impact of licensed-versus-owned content mix.
- Adjusted EBITDA reconciliation and the distinction between this non-GAAP measure and GAAP operating results and cash flow.