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Cinedigm Seeks to Calm Investors

29 Apr, 2015 By: Erik Gruenwedel

Indie distributor has seen shares plummet 50% in April

Independent distributor Cinedigm April 29 sought to reassure investors about its business strategies following an ill-received private debt offering of $64 million of 5.5% convertible senior notes.

The April 24 offering affords Los Angeles-based Cinedigm the ability to pay off an existing loan, buy back shares, deal with ongoing litigation surrounding acquisition of Gaiam Vivendi Entertainment and fund rollout of branded over-the-top video services, among other initiatives.

It also dilutes existing shares, among other issues, which doesn’t sit well with some shareholders. As a result, Cinedigm’s stock is down 50% in the past month to close April 29 at 78 cents per share.

The distributor claimed private debt offerings typically result in initial share price declines from 4% to 12%. Cinedigm shares fell 20% and shareholders responded.

“Even if the intent [of the offering] was good, the result was bad,” said one investor on the call.

“Failure to allow existing shareholders to participate [in the debt offering] would create substantial damages to the existing shareholder base,” said another investor.

B. Riley & Co. analyst Eric Wold, a long-time supporter of Cinedigm, disagreed with the offering and has stopped covering the stock.

“The magnitude and terms of this [offering] came as a surprise. While we continue to see value in the cash flows from Cinedigm’s legacy [disc distribution] business, the continued issuance of shares into the market dilutes that value across a larger shareholder base while the core business somewhat struggles,” Wold wrote in an April 24 note.

On the April 29 call, CEO Chris McGurk and CFO Adam Mizel attempted to explain their rationale behind the offering — a move they said has been deployed by other companies in similar financial situations.

“We needed to re-engineer our balance sheet to fully support key growth initiatives,” McGurk said. “[The offering] … now enables Cinedigm to effectively build [its] OTT business in a strong, flexible, and disciplined manner.”

Mizel said home entertainment revenue has been growing 8% annually largely due to digital distribution, including OTT video. To capture market share in the $7 billion SVOD market, Mizel said mandated Cinedigm acquire new funding. The CFO cited research that claimed 82% of connected device owners subscribe to at least one SVOD service, with 43% subscribing to three or more.

“This is where the market is already starting to go, and we think we are ahead of that and capitalizing on that trend,” he said.

Indeed, Cinedigm at the recent Wizard World Comic Con Las Vegas launched CONtv, a SVOD site targeting fans of comic book conventions and featuring 2,500 hours of original programming, curated films and TV episodes.

Mizel said 100,000 attendees downloaded the CONtv app at Wizard World.

A future OTT venture featuring faith-based service in association with The Dove Foundation is expected to launch later this year.

“We need to be full-service in all of those businesses [digital and physical] to meet the needs and requirements of our customers,” Mizel said. “As I like to remind people, there’s only one other publicly traded OTT company, it’s a little company called Netflix.”

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