Business context and reporting period
This is Cinedigm Corp.’s Form 10-K for the fiscal year ended March 31, 2016, filed July 14, 2016. Although the request metadata says “2015 Q4,” the filing is an annual report for fiscal 2016, with fiscal 2015 as the main comparison. The company distributed independent film and television content, operated OTT channels, and serviced digital cinema systems on more than 12,000 screens. The registrant was named Cinedigm Corp. at the time of filing.
In May 2016, after year-end, the company effected a 1-for-10 reverse stock split; share and per-share amounts in the filing reflect the split.
Financial results and key metrics
| Metric | FY ended March 31, 2016 | FY ended March 31, 2015 |
|---|---|---|
| Revenue | $104.4 million | $105.5 million |
| Operating loss | $21.1 million | $8.8 million |
| Net loss | $42.5 million | $32.2 million |
| Net loss attributable to common shareholders | $42.1 million | $31.7 million |
| Adjusted EBITDA, non-GAAP | $43.2 million | $47.7 million |
| Cash provided by operating activities | $25.5 million | $9.2 million |
| Cash and cash equivalents | $25.5 million | $19.0 million |
Revenue declined 1.0%. Content & Entertainment revenue fell 2.6% to $43.9 million, as packaged-goods sales weakened; OTT growth partly offset the decline. Phase I revenue rose 0.9% to $36.5 million, while Phase II and Services revenue each dipped slightly. Operating performance included $18.0 million of goodwill impairment, compared with $6.0 million in fiscal 2015. Interest expense was $20.6 million, up from $19.9 million; the company also recorded a $0.9 million loss on extinguishment of debt. No clear consolidated gross-margin figure is provided in the filing text.
Operating cash flow improved, aided in part by noncash expenses and working-capital movements. Investing activities used $1.4 million; financing activities used $17.6 million. At year-end, working capital was positive by $1.0 million, total assets were $209.4 million, total liabilities were $282.4 million, and total stockholders’ deficit was $73.0 million.
Debt, liquidity, and material changes
At March 31, 2016, debt principal was approximately $207.8 million: $116.9 million of non-recourse digital-cinema debt and $90.9 million attributed to Content & Entertainment and Corporate. The company reported $34.5 million of cash and restricted cash combined, but only $25.5 million was unrestricted cash and $8.98 million was restricted. Revolver availability was approximately $0.2 million. Debt principal and carrying values differ because of debt issuance costs and other accounting adjustments.
The company issued $64.0 million of 5.5% convertible senior notes due 2035 in April 2015, used part of the proceeds to repay its term loan, and drew $21.9 million under its revolving facility. Debt repayments were $59.9 million during fiscal 2016. The filing says the company was in compliance with debt covenants at March 31, 2016.
After year-end, a May 2016 credit amendment increased cash available for operations by about $6.2 million through September 30, 2016 and about $2.0 million thereafter, while reducing revolver capacity from $30 million to $22 million. In July 2016, the company raised $2.0 million through second-lien loans bearing 12.75% interest and issued shares and warrants to lenders. Additional financing commitments were described, but other proposed loans and a debt exchange were not definitive and were not assured.
Outlook, risks, contingencies, and unusual items
- Digital-cinema revenue runoff: 101 Phase I systems had already ceased earning VPFs from certain major studios. The company expected more than half of Phase I systems to lose those VPFs by December 2016 and nearly all by December 2017. It expected lower related non-recourse debt outflows to partly offset reduced revenue after November 2017. Phase II VPFs were expected to end on some systems beginning in 2018, with most ending by 2022 or earlier if cost recoupment occurs.
- Content business performance: The $18.0 million goodwill impairment reflected lower expectations for packaged-goods demand and slower-than-expected OTT growth. Further impairment was possible if forecasts were not achieved.
- Liquidity: Management expected cash, remaining borrowing capacity, cost reductions, subsequent financing and operating cash flows to meet needs for at least the next 12 months. The auditor’s report included an emphasis-of-matter paragraph regarding limited liquidity and significant contractual obligations. Proposed financing and the exchange transaction were partly uncommitted; failure to raise capital, grow revenue or control spending could harm liquidity.
- Nasdaq listing: In June 2016, Nasdaq notified the company that it did not meet the $15 million minimum market value of publicly held shares. The company had until December 20, 2016 to regain compliance, subject to potential extensions.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because accounting staffing and expertise were insufficient, constituting a material weakness. The independent auditor gave an unqualified opinion on the financial statements but did not express an opinion on internal controls.
- Customer concentration: Five major studios together generated 31% of consolidated revenue; one Content & Entertainment customer represented about 21% of consolidated revenue. Walmart and Amazon each represented at least 10% of Content & Entertainment revenue.
- Settlements and other items: Gaiam disputes were fully settled; payments totaling $3.9 million were recorded, resulting in $2.2 million net litigation recovery after related expenses. The company also recorded $1.1 million of restructuring expenses and a $0.9 million inventory reserve provision.
The company planned fiscal 2017 cost reductions, including personnel and occupancy costs, and continued to pursue OTT channel growth and content distribution. It provided no specific revenue or earnings guidance in the filing.
Most important facts for investors to verify
- Whether subsequent financing commitments, proposed debt exchanges and credit amendments were completed, and their effects on cash, debt service and dilution.
- Actual unrestricted liquidity and covenant compliance after year-end, including the impact of restricted cash and near-term debt maturities.
- Actual pace and financial effect of Phase I VPF expirations and any offset from debt repayment or other revenue.
- Whether OTT growth and content-distribution economics improved enough to offset declining DVD and Blu-ray sales, and whether further goodwill impairment was required.
- Progress in remediating the material weakness in financial reporting controls and regaining Nasdaq listing compliance.