Image Entertainment Inc. (OTC:DISK) F2Q10 Earnings Call November 12, 2009 4:30 PM ET
Jeff Framer - Chief Financial Officer
Derek Eiberg - Chief Operating Officer
Bill Bromiley - Chief Acquisitions Officer
Michael Bayer - General Counsel & Vice President of Business & Legal Affairs
Good day everyone and welcome to the Q2 2010 Image Entertainment financial results conference call. This call is being recorded. With us today from the company is President and Chief Financial Officer, Jeff Framer; Chief Operating Officer, Derek Eiberg; Chief Acquisitions Officer, Bill Bromiley, and General Counsel and Vice President of Business and Legal Affairs, Michael Bayer.
At this time, I’d like to turn the call over to Michael Bayer; please go ahead, sir.
Thank you, operator. This conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, among other things, the company’s goals, plans and projections regarding the company’s financial position, results of operations, market position, product development and business strategy.
These statements may be identified by the use of words such as will, may, estimate, expect, intend, plan, believe, and other terms of similar meaning in connection with any discussion of future operating or financial performance or other events or developments.
All forward-looking statements are based on management’s current expectations and involve inherent risks and uncertainties including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations.
These factors include, but are not limited to, (a) the company’s ability to continue as a going concern, (b) the company’s ability to serve its principal and interest obligations on our outstanding debt or otherwise renegotiate or refinance such outstanding debt including the November 15 2009 principal and interest payment on its convertible note, which renegotiation may not be successful and refinancing may not be available on acceptable terms it at all, which may trigger defaults under out other debt agreements and create liquidity issues, potentially force the company to file for protection from its creditors under chapter 11 at the US bankruptcy code and prevent the company from continuing as going concern, (c) the company’s limited funds and the company’s in ability to raise additional on a acceptable terms or it all, (d) the company’s ability to borrow against the company’s revolving line of credit, (e) the company’s ability to secure media content on acceptable terms, (f) the company’s DVA manufacturer continue to manufacture and fulfill orders, the company’s customers, while the company’s pass through on its payable to such manufacture, (g) the ability of the company’s common stock to continue trading on the NASDAQ stock market, (h) the performance of business partners upon whom the company depends upon, (i) changes in the retail DVD a digital media and entertainment industries, (j) changing public and consumer taste and changes in customers pending patterns, (k) decreasing retail shelf space for the company’s industry, (l) further sales or dilution of the company’s equity which may adversely effect the market price of the company’s common stock, (m) changes in the company’s business plan, (n) heightened competition including with respective pricing entry of new competitors the development of new products by new and existing competitors, (o) changes in general economy conditions including the performance of financial markets and interest rates, (p) typical adverse and volatile conditions in the global and domestic capital and credit markets, (q) claims of the company in difference other party’s intellectual property, (r) changes in accounting standards practices or policies and, (s) adverse results or other consequences from litigation, arbitration or regulatory investigations.
For further details and a discussion of these and other risks and uncertainties, please see forward-looking statements and Risk Factors in the company’s most recent Annual Report on Form 10-K, and the company’s most recent Quarterly Reports on Form 10-Q. Many of the factors that will determine the outcome of the subject matter of this conference call are beyond Image Entertainment’s ability to control or predict.
Actual results for the periods identified may differ materially from management’s expectations. Unless otherwise required by law, the company undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
I would like to now turn the call over to our President and Chief Financial Officer, Jeff Framer.
Thank you, Michael. Good afternoon everyone. On the strength of our September 29, DVD release of the Jennifer Aniston, Steve Zahn romantic comedy management and our September 1, DVD release of America’s got “America`s Got Talent” Winner plus Terry Fator live from Las Vegas and the growth of our recurring sales, we had net revenues during the quarter of $29.8 million, which we felt was fairly strong considering our performance in our first quarter.
As I will discuss in a financial summary review a little bit later, our generated operating income for the quarter of $1.5 million and that concluding $370,000 in cost relating to our financial advisory process. The amendment with our convertible debt holder on July 30, increased the balance of our outstanding loan by almost $2.7 million and that created a non-operating accounting loss on extinguishment of debt $2,180,000 and the non-operating loss of $405,000 due to the change in fair value of a warrant and embedded derivatives, also associated with this convertible debt contributed to the $1.6 million net loss for the September quarter.
Today we received notice from our convertible debt holder that the $4 million principle payment will be to on November 15. We’re working with the lender to extend or for a bear that payment, while our financial advisors continue their process. We can’t give any assurance that the lender will work with us, but we are currently working them.
As we announced in May, we retained Houlihan Lokey Howard & Zukin Capital as our financial advisor to assist us and processing and analyzing a wide range of strategic alternatives. Their work is ongoing. It is impossible to predict, when we would be able to effect the transaction or rough form any transaction would take. If we have something to announce, I assure you that we will announce it at the appropriate time. However, at this point we cannot speak further to the process.
Now, I’ll turn the call over to Rick Eiberg, our Chief Operating Officer to update you on the progress of our cost reduction plan.
Thanks, Jeff. As we reported on our first quarter filings, in calendar 2009, we began a comprehensive cost reduction plan. I’m pleased to say, the plan is on track and meeting or exceeding our expectations, between two payroll cuts, which occurred in a February and June 2009, we reduce salaries and benefits by 22%, driving expense reductions a just over $3 million per year, because we reported severance charges relating to these reductions in the fourth quarter of 2009 and the first fiscal quarter of 2010. It was until this second quarter of fiscal 2010 as the full P&L impact of these initiatives was realized.
The plan also include significant reductions in advertising, travel, third party sales commission, trade shows, healthcare costs, and technology expenditures. Savings in these areas are now affecting current year fiscal results and are forecasted to exceed $1 million on an annual basis, combined with plans, provide cost savings in excess of $4 million a year. Jeff.
Thanks, Rick. We continue to see positive signs of retail in this very challenging environment. Our higher profile releases for the next quarter ending December 31, 2009 include the big taut thriller, The Other Man, starring Liam Neeson, and Antonio Banderas and Laura Linney, Science Fiction/Fantasy film, Franklyn, starring Ryan Phillippe, Eva Green, True Life Drama, American Violet, starring Will Patton, Charles Dutton and Alfre Woodard, that was released theatrically Goldwyn Film. Programming from comedians Artie Lange, Jack and Coke, and Margaret Cho, called Beautiful and also criterions True Crime Story to Morrah.
I’m going to spend a few minutes reviewing our consolidated financial results for our second quarter and six months in more detail. Net revenues decreased $7.9 million to $29, 840,000 from net revenues of $32, 389,000 for the three months ended September 30, 2008. The reduction in revenues was due to a competitively weaker in new release schedule and also we continue to believe that we’re impacted by economic slowdown.
Our gross profit margins were 25.5%, up from 24.8% for the year ago quarter. The September release of management contributed to the increase gross profit margin for us this quarter. Selling expenses approximated 8.3% of net revenues, which was down from 12.5% of net revenues for the three months ended September 30, 2008, primarily due to reduced advertising and commercial expenditures as well as reduce personal costs.
G&A expenses decreased 1.7% to $3.533 million from $3.514 million for the three months ended September 30, 2008, even though we were able to stop a decrease in G&A, even though we have $346,000 in strategic costs included in this quarter.
Earnings from operations were $1.582 million up from $396,000 for our last year September quarter. Interest expense was down to $606,000 for this quarter, from $863,000 for the year ago quarter. The lost on extinguishment of debt as I previously discussed was $2,181,000, that results from the July 30, 2009 amendment of our senior secured convertible note, which among other things principals balance under the note to $15.7 million from $13 million.
Increased the interest rates to 8.875% from 7.875% and provided for a minimum 90 day extension to that $4 million by annual principal payments that residually due on July 30, and then it was extended until October, 30, 2009, then it was extended to November 15, 2009 that’s the payment I discussed at beginning of this call that we are working to have extended again or forbearance in place to allow our financial advisor to keep moving on with our process.
Other expense of $405,000 represents the non-cash charge, which was the change in the fair market value of warrant in embedded derivatives. The net loss was $1.6 million, or $0.07 per diluted share compared to a net loss a year ago of $465,000 or $0.02 per share. For the six months ended September 30, 2009, net revenues were down 17.6%, to $53.5 million compared with $65 million for the first six months of last year. Gross margins were 23.1% down slightly from 23.6% for the first six months of last year.
Selling expenses were $6.9 million or 12.9% net revenues, compared to $7.8 million, or 12% of net revenues for the first six months of 2009. Included in this year’s first six months was the advertising expense for theatrical release of management, which did not occur in our previous period, that’s why our expenses were higher.
General administrative expenses increased 2.8% to $7.8 million from $7.6 million for this first six months of fiscal 2009. Loss from operations was $2.3 million, compared to earnings from operations of $15,000 for last year’s six months. Net interest expense decreased $1.2 million, compared to $1.7 million for the first six months of fiscal 2009. Other income was $1.1 million compared to $3 million for the first six months of last year.
This year we had a $1.5 million in business interruption fees received from our merger termination in the beginning of this fiscal year and that’s offset by $333,000 in non-cash expense associated with the change in fair value of the warrant and embedded derivative. Net loss was $4.6 million, or $0.21 per diluted share, compared to net earnings of $1.2 million or $0.06 per diluted share for last year’s six months.
On our balance sheet, we had cash of $273,000. However, our trade accounts receivable were $27 million at September 30, an increase from the $19.4 million that they were from March 31, 2009. We had a working capital deficiency of $16.6 million, at September 30, 2009, slightly improved from the $18.5 million deficiency we had at March 31, 2009. We had outstanding borrowings under our Wachovia credit line of $12.7 million. We have a maximum $20 million revolving line of credit that was up from $10.9 million at March 31, 2009.
Our borrowing availability at September 30, 2009, was about $1 million, which is $3.5 million less the $2.5 million minimum requirement that we need to keep it all time. In March 31, it was $2.2 million, which was $4.7 million less the $2.5 million minimum commitment that we have to, minimal reserve we need to keep.
As of November 9, we had $8.2 million borrowed so that was down from the $12.7 million we had at September 30 and our borrowing availability was $2 million, versus the $993 as of September 30, which is $4.5 million less, the $2.5 million minimal requirement and we reduced long term debt by $1.3 million during the last six months, whereas for six months of this fiscal year.
At this time, we’re not providing annual or quarterly guidance and I’m going to turn the call back over to the operator for any questions.
(Operator Instructions) At this time, we have no questions from the phone lines.
Well, thank you operator. Thank you all for attending the call. We’ll obviously have news coming up mostly likely early next week relating to this matter of our convertible debt holder. So again, thank you. Please be patience and we will speak to you soon. Bye-bye.
This does conclude today’s conference. Thank you for your participation.
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