Cineverse Corp. quarterly report, Q2 FY2017

Business context and reporting period

This is Cinedigm Corp.’s unaudited Form 10-Q for the fiscal quarter and six months ended September 30, 2016 (fiscal Q2 2017). The filing describes a business distributing independent film and television content and operating digital-cinema deployment and servicing businesses. The supplied filing is for Cinedigm Corp., not a company identified in the filing as Cineverse.

Financial results and liquidity

Quarterly operating margin was approximately 18.8% versus negative 64.7% a year earlier; the prior-year quarter included an $18.0m goodwill impairment. Six-month operating margin was approximately 10.3% versus negative 46.1%. Net margins were approximately negative 2.0% and negative 83.3% for the quarters, and negative 10.9% and negative 68.1% for the six-month periods. These comparisons include material nonrecurring items, so reported margins are not necessarily indicative of underlying performance.

For the six months, investing cash use was $0.2m and financing cash use was $24.7m; cash declined $11.1m to $14.4m. Cash plus restricted cash was $21.2m at September 30. Current assets were $90.3m and current liabilities $89.7m (approximately $0.6m of working capital). Total assets were $176.2m, total liabilities $252.5m, and total stockholders’ deficit $76.3m.

Debt principal was approximately $92.1m non-recourse and $90.4m recourse. Balance-sheet notes payable, net of issuance costs, totaled approximately $172.9m, plus $4.1m of capital leases. The revolving facility had $16.9m drawn and $2.9m available. The company reported compliance with its debt covenants at September 30.

Material changes versus the prior comparable period

• Quarterly revenue fell 14%; six-month revenue fell 8%. Content & Entertainment revenue declined 33% for the quarter and 29% for the six months, while deployment and Services revenue increased modestly over the six-month period.
• Management attributed Content & Entertainment weakness to softer digital performance, reduced demand and shelf space for DVD/Blu-ray, and industry investment shifting toward original content.
• Cost reductions drove lower direct operating and SG&A expenses. Six-month SG&A fell 36%; depreciation and amortization also declined as Phase I equipment reached the end of its useful life.
• Adjusted EBITDA, a non-GAAP measure, rose 27% for the quarter and 28% for the six months. Non-deployment Adjusted EBITDA was $2.0m for the quarter and $0.8m for the six months, versus losses of $0.9m and $3.2m in the respective prior periods.
• Operating cash flow increased to $13.9m from $4.6m for the six-month period, but financing outflows—primarily debt repayments—more than offset operating cash generation.

Outlook, risks and unusual items

• Management said cash and restricted cash, cost reductions, financing obtained in July, September and October, and expected operating cash flows should meet liquidity and capital needs for the next 12 months. It cautioned that additional capital may be needed and that failure to generate revenue, raise capital, or control discretionary spending could adversely affect liquidity and operations.
• Cost-reduction initiatives were expected to continue through fiscal 2017. Management expected deployment cash flows to meet obligations tied to those businesses.
• Phase I virtual print fee revenue is winding down: 655 systems had already lost a significant portion of fees from certain major studios; more than half were expected to lose such fees by December 2016, and nearly all by December 2017. Management expects the resulting revenue reduction to be partly offset by lower related non-recourse debt payments. Phase II fees also face contractual expiration or earlier cost recoupment.
• In July 2016, the company entered into a second-lien facility permitting up to $15.0m of borrowing. It had borrowed $4.5m by September 30 at 12.75% interest, with cash and/or payment-in-kind interest and stock and warrant issuance provisions. It issued another $1.0m in October. The financing is secured by substantially all assets other than digital-cinema deployment assets and included loans from directors/executives.
• Nasdaq notified the company that it did not meet the $15.0m minimum market value of publicly held shares requirement. The stated compliance period ran through December 20, 2016, with potential further review or delisting proceedings if compliance was not restored.
• Management concluded disclosure controls and procedures were ineffective at September 30 because remediation of a material weakness identified in the prior annual report was ongoing.
• The company recorded a $0.3m SG&A charge for extending Sageview warrant expiration dates. No goodwill impairment was recorded in the current period; the prior-year period included an $18.0m impairment. The company reported no legal proceedings in this filing.

Important facts for investors to verify

• Whether the company met Nasdaq’s publicly held market-value requirement by the applicable deadline and whether its listing status changed.
• Cash availability, covenant compliance, revolver access, and the terms and timing of future capital needs, including subsequent second-lien borrowings.
• The pace and financial effect of Phase I and Phase II VPF expirations, cost recoupment, and associated debt paydowns.
• Whether cost cuts and the OTT strategy can stabilize Content & Entertainment revenue and sustain positive cash generation.
• Progress in remediating the material weakness in financial reporting controls, and the potential dilution and related-party implications of stock- and warrant-linked financing.
• Adjusted EBITDA reconciliations and exclusions; the measure is non-GAAP and should not be treated as cash flow or a substitute for GAAP results.