Business context and reporting period
Cinedigm Corp. filed this unaudited Form 10-Q for the quarter and six months ended September 30, 2017, its fiscal second quarter. The company distributes independent entertainment content and operates digital cinema deployment and servicing businesses covering more than 12,000 screens. Results below are in U.S. dollars; financial-statement amounts are converted from thousands to millions where applicable.
Financial performance and position
| Metric | Three months ended Sep. 30, 2017 | Six months ended Sep. 30, 2017 | Comparison |
|---|---|---|---|
| Revenue | $16.3 million | $31.5 million | Down 32% in both periods year over year |
| Operating income (loss) | $0.0 million | $(0.9) million | Prior-year periods: $4.5 million and $4.8 million income |
| Net loss | $(7.5) million | $(12.6) million | Prior-year periods: $(0.5) million and $(5.1) million |
| Net loss per common share | $(0.60) | $(1.07) | Prior-year periods: $(0.08) and $(0.75) |
| Adjusted EBITDA (non-GAAP) | $5.9 million | $11.3 million | Down 59% and 55%, respectively |
| Operating cash flow | $20.5 million for six months | Prior-year six-month inflow: $13.9 million |
The filing does not present a consolidated gross margin figure. Six-month revenue fell in every segment: Phase I Deployment 48%, Phase II Deployment 12%, Services 30%, and Content & Entertainment 21%. Content & Entertainment reported an operating loss of $8.2 million for the six months; digital cinema deployment and Services operating income partly offset that loss.
At September 30, 2017, cash was $9.7 million and restricted cash was $1.0 million. Total assets were $108.7 million, total liabilities $185.1 million, and total stockholders’ deficit $76.4 million. Notes payable, net of issuance costs, totaled approximately $116.7 million. Contractual debt principal was $74.6 million recourse and $48.8 million non-recourse; the latter is generally limited to specified subsidiary assets. Current liabilities of $125.9 million substantially exceeded current assets of $54.0 million. Six-month investing cash use was $0.3 million and financing cash use was $23.0 million.
Material changes versus the prior comparable period
- Revenue declined 32% year over year in both the quarter and six-month period. Phase I declines reflected the end of studio VPF payments on many systems; 89% of Phase I systems had ceased earning a significant portion of VPF revenue from certain major studios by September 30.
- Content & Entertainment sales were pressured by lower physical and digital sales volumes and a shift toward lower-margin licensed content. Management also cited reduced demand for third-party content amid changing consumer behavior and more platform investment in original productions.
- Operating expenses benefited from substantially lower depreciation as Phase I projection systems reached the end of their useful lives. Interest expense also fell year over year, mainly with lower deployment debt balances.
- Net loss worsened despite lower interest and depreciation, reflecting lower revenue, operating performance, and a $3.2 million debt-conversion and extinguishment charge. The company also recorded a $0.9 million doubtful-account provision related to two content providers.
- Operating cash flow improved, in part from a $26.5 million reduction in accounts receivable. Cash nevertheless fell $2.9 million over the six months, reflecting debt repayments and other financing uses.
Outlook, liquidity, risks and unusual items
- Management expected Phase I VPF revenue to decline further: nearly all Phase I systems were expected to stop earning significant VPF revenue from certain major studios by December 2017. Services revenue was expected to fall in relation to Phase I VPF receipts. Management expected reduced related debt cash outflows to partly offset lower VPF receipts.
- Phase II VPF revenue on a majority of systems is expected to end by December 2022 or earlier if contractual cost recoupment occurs. The company said it could not estimate the timing or probability of cost recoupment.
- No specific revenue or earnings guidance was provided. Management stated that cash, cost reductions, financing, the strategic-partner transaction and expected operating cash flows were expected to cover liquidity and capital requirements for at least one year after issuance of the interim statements. It also warned that failure to grow revenue, raise capital or control discretionary spending could harm liquidity.
- Subsequent to quarter-end, on November 1, 2017, the company sold 20.0 million Class A shares for $30.0 million; the strategic partner became a majority shareholder and obtained the right to designate two of seven directors. The company exchanged $46.3 million of convertible-note principal for $17.1 million cash and 2.22 million shares; together with earlier exchanges, $50.1 million principal was retired through cash, shares and $1.5 million of second-lien notes. The remaining $0.5 million notes were retired on November 7.
- The November equity transaction was completed before a final CFIUS determination under a waiver that could require return of the strategic partner’s purchase price in specified adverse CFIUS outcomes. The strategic-partner transaction and note exchanges materially changed ownership, capitalization and debt after quarter-end.
- The revolving credit facility matured March 31, 2018, had no additional borrowing availability at September 30, and carried a $5.0 million minimum-liquidity requirement after a temporary waiver. A November 9 amendment extended a $0.8 million minimum-liquidity threshold to maturity and provided for step-downs in the facility limit if obligations were not repaid; the stated maximum was reduced to $11.8 million as of November 14. The company also received a covenant waiver on November 9 for the September quarter and subsequent fiscal quarters.
- Other items include $1.3 million in employee and officer bonuses paid November 7 in connection with the strategic-partner transaction, and accelerated vesting of outstanding options and restricted shares upon the change of control. Management reported no material change in previously disclosed risk factors and no legal proceedings.
Most important facts for investors to verify
- Whether post-quarter-end equity proceeds, convertible-note retirements and amended credit terms provide durable liquidity, and the remaining debt’s maturity, interest and covenant requirements.
- The final CFIUS outcome and any related refund or divestment consequences, as well as the strategic partner’s control, board rights and resulting share dilution.
- The pace and cash-flow impact of Phase I VPF expiration, Phase II recoupment provisions, and the related reduction in non-recourse debt service.
- Whether Content & Entertainment and OTT initiatives can improve revenue, margins and cash generation as physical-content sales weaken.
- The collectability of the receivables that prompted the $0.9 million doubtful-account provision and the quality and sustainability of operating cash flow, which benefited from receivable collections.