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Cinedigm Eyes Distribution Opportunities Following Alchemy Bankruptcy

14 Jul, 2016 By: Erik Gruenwedel

Ongoing SVOD cash burn irks some investors, sends shares falling

Cinedigm Corp. believes it has upwards of $30 million in revenue potential distributing physical and digital content following the bankruptcy filing of Alchemy (formerly Millennium Entertainment) and other industry consolidations.

Los Angeles-based Cinedigm, which markets physical and digital media to Walmart, Target, iTunes, Netflix, Google Play, Vudu and Amazon Video, as well as premium television, saw distribution revenue increase 5% and disc returns decrease 10% in the 2016 fiscal year.

Fourth-quarter (ended March 31) revenue topped $23.2 million, compared with $27.6 million during the previous-year period. Net loss declined to $6.1 million, from $11.6 million. For the year, net loss increased to $42.5 million, from $28.9 million.

Retail performers in the quarter included western Traded, “The Good Witch” movie and TV franchise and "Sharknado" movies, among others.

Speaking July 14 on a fiscal call, CEO Chris McGurk said market conditions have made acquiring and distributing indie films more appealing economically. CFO Jeffrey Edell said payment terms on new distribution deals have been extended from one month to three months.

“It gives us a great look [financially] for the future” Edell said.

With recent consolidation including Lionsgate’s acquisition of Starz, which owns Anchor Bay Home Entertainment, and the Chapter 7 bankruptcy filing of Alchemy, McGurk says Cinedigm is poised to take advantage of the industry changes.

While not identifying either company by name, McGurk contends (Alchemy) filed for bankruptcy due in large part to overpaying for film festival releases and ascribing to “the old acquisition business we basically got out of.”

“All the accounts in that business are now sitting there. We’ve got about $30 million in gross sales [opportunities] sitting in front of us. We think we’re in a unique position … to pick up a lot of this incremental business with no increase in our overhead.”

McGurk expects the retail business to generate sufficient cash to fund the growth capital required by the OTT businesses.

In addition, Cinedigm is working on a series of financing transactions it says will raise capital, strengthen the balance sheet and improve liquidity. The company is also planning to raise $11 million in secured bond funding.

Cinedigm’s subscription streaming services include Dove Channel, Docurama and CONtv. The $4.99 SVOD services have an estimated 50,000-combined “active” (paying) subs, on a base of about 2.5 million app installations, including 500,000 registered users.

Dove Channel, which bowed last September, has more than 1 million installations on Android, iOS and Roku; more than 344,000 registered users and an estimated 35,000 active subs.

“We’re kind of happy with the way the [data is tracking] right now,” McGurk said. “We feel pretty good where we’re at right now.”

That’s a sentiment is not shared by some investors.

Gentry Klein with Littlejohn and Co. questioned why Cinedigm was spending millions establishing SVOD services at the expense of the retail business and weakened market cap.

Indeed, despite enacting a 1-for-10 reverse stock swap to elevate the stock price above Nasdaq’s minimum $1-per-share floor, Cinedigm’s stock closed down nearly 22% at 90 cents.

“I don't understand the investment rationale behind OTT,” Klein said. “We don't have the balance sheet to be funding OTT.”

McGurk said Cinedigm’s agreement with Amazon for its Strategic Partners Program, a platform enabling third-party SVOD services to market to Amazon Prime members, is a revenue-sharing deal. In turn, Amazon handles all marketing, billing and technical issues.

The CEO said Amazon has enabled Cinedigm to reduce from $10 million to less than $5 million its annual investment in SVOD.

“It really reduces our risk and opens up an opportunity to bring in many, many more subscribers on [Amazon Prime]. If we can do two, three, four deals like that over the next three months, I think you're going to see a dramatic improvement in our numbers very, very quickly,” McGurk said.

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