Cinedigm Digital Cinema Corp. — FY2013 Form 10-K
Reporting period: Fiscal year ended March 31, 2013, with comparison to FY2012. This is an annual report, not a report for calendar-year 2012 Q4. The filing identifies the registrant as Cinedigm Digital Cinema Corp.
Business context
Cinedigm operated four segments: Phase I Deployment, Phase II Deployment, digital cinema Services and Content & Entertainment. Deployment revenue primarily came from virtual print fees (VPFs) tied to films shown on financed screens; Services included cinema servicing and software; Content & Entertainment distributed independent films and home-entertainment content. The company reported nearly 12,000 transitioned screens. Its North American deployment period ended in January 2013, apart from a limited drive-in program.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $88.1 million | $76.6 million |
| Operating income | $12.2 million | $15.2 million |
| Operating margin | 13.8% | 19.8% |
| Loss from continuing operations | $20.6 million | $14.0 million |
| Net loss | $21.1 million | $23.0 million |
| Net cash provided by operating activities | $29.4 million | $39.9 million |
| Adjusted EBITDA, non-GAAP | $55.6 million | $58.0 million |
Revenue increased 15%, largely from Content & Entertainment and the April 2012 acquisition of New Video. Segment revenue was $39.6 million for Phase I, $12.5 million for Phase II, $19.9 million for Services and $16.1 million for Content & Entertainment. New Video contributed approximately $13.4 million in revenue and $1.5 million in net income after acquisition.
Operating income declined despite higher revenue as operating expenses rose, including acquisition-related costs, higher content and servicing costs, and increased depreciation and amortization. Annual cash interest paid was $18.4 million; reported interest expense was $28.3 million. FY2013 net loss included $3.7 million of debt prepayment fees and a $7.9 million loss on extinguishment of notes, partly offset by a $4.9 million income-tax benefit related primarily to the New Video acquisition. In the quarter ended March 31, 2013, revenue was $21.4 million and loss from continuing operations was $16.3 million; the filing attributes the period’s large loss in part to those debt charges.
At March 31, 2013, cash and cash equivalents were $13.4 million and restricted cash was $6.8 million; working capital was negative $17.5 million. Total assets were $284.1 million and stockholders’ deficit was $17.3 million. Notes payable classified as non-recourse totaled $237.9 million, with an additional $4.5 million capital lease obligation. Non-recourse status is not uniform across entities: certain subsidiaries guarantee or secure particular facilities, and the company provides limited Prospect-loan support capped at $1.5 million annually under specified performance conditions.
Material changes and transactions
- In April 2012, Cinedigm acquired New Video for $10.0 million cash, 2.5 million shares and up to $6.0 million of additional contingent consideration. It also issued 7.86 million shares in a public offering, generating $10.0 million net proceeds.
- In February 2013, the company refinanced the Phase I term loan and corporate note through new facilities: a $125 million Phase I facility and a $70 million Prospect loan. Management cited lower borrowing costs for the Phase I facility and maturities extending to 2018 and 2021, respectively. The Prospect loan carries a stated 13.5% rate, including cash and payment-in-kind components.
- Phase I revenue declined 6% and Services revenue declined 6%; Phase II revenue increased 6%. Content & Entertainment revenue rose sharply following the acquisition, though pro forma year-over-year segment growth was 13%.
- Operating cash flow fell by $10.6 million year over year. Investing used $4.3 million and financing used $29.5 million. Cash and cash equivalents declined to $13.4 million from $17.8 million.
Outlook, risks and unusual items
Management expected Phase I and Phase II deployment revenue to be relatively flat after the domestic deployment period ended. It expected Services growth from international servicing and software installations, delayed software customer deployments, and its sales pipeline. Management expected Adjusted EBITDA to improve in FY2014, while emphasizing continued investment in content rights, marketing, software and services. These expectations are forward-looking and are not guarantees.
Management stated that available cash and expected operating cash flows should meet obligations through at least March 31, 2014, assuming no material adverse developments. The company had incurred losses since inception and reported an accumulated deficit of $242.5 million. It warned that additional financing might be needed and that failure to grow revenue, raise capital or control discretionary spending could harm liquidity. Significant risks include debt-service demands and restrictive covenants, negative working capital, dependence on studio and exhibitor relationships, film-release timing and theatre attendance, competition, acquisition integration, technology changes, and possible limits on use of tax-loss carryforwards after ownership changes.
Other items include approximately $0.8 million of upfront content acquisition and marketing costs expected to be recovered through later ancillary revenues, creating a timing “J-curve”; no goodwill impairment was recorded, but future impairment depends on achieving projected cash flows. The filing reported compliance with debt covenants at March 31, 2013, no pending, threatened or contemplated litigation in the business section, and effective management-assessed disclosure controls and internal control over financial reporting. The auditor expressed an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness.
Important facts for investors to verify
- Reconcile the $237.9 million of reported non-recourse notes, the $4.5 million capital lease, subsidiary guarantees and collateral, and the stated limited support obligation; review maturity, interest and covenant terms in the debt notes.
- Assess near-term liquidity against negative working capital, the $34.4 million of scheduled FY2014 principal payments, restricted cash, and management’s cash-flow assumptions.
- Separate recurring operating performance from the $11.6 million combined debt prepayment and extinguishment charges, the tax benefit, and acquisition-related costs; assess the drivers of the Q4 loss.
- Test whether New Video’s growth and the company’s FY2014 Adjusted EBITDA outlook are supported by realized cash collections, content performance and software customer acceptance. Adjusted EBITDA is a non-GAAP measure.
- Review customer concentration disclosures, including major-studio dependence and the reported A&E contribution to CEG revenue despite A&E no longer being a customer as of March 31, 2013.
- Consider dilution and ownership effects from the April 2012 share issuance, 16 million Sageview warrants, and outstanding options; confirm the potential effect of Section 382 limits on tax-loss carryforwards.