CINEDIGM CORP CIDM
August 16, 2015 - 8:40pm EST by
vfm343
2015 2016
Price: 0.70 EPS 0 0
Shares Out. (in M): 63 P/E 0 0
Market Cap (in $M): 44 P/FCF 0 0
Net Debt (in $M): 201 EBIT 0 0
TEV ($): 245 TEV/EBIT 0 0

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Description

 
Why is Cinedigm an attractive investment opportunity?
  1. Cinedigm’s current market valuation is depressed since at the current valuation the Company’s legacy digital cinema business will provide the necessary margin of safety and investors will receive the Company’s most attractive digital network business segment for free: The legacy digital cinema (deployment segment) will continue to provide steady free cash flows for the next couple of years. The fair value of the cash flows net off the non-recourse debt tied to the cash flows is estimated to be worth between $50-$100mm (or up to 110% of current market cap). With the legacy deployment segment alone worth more than the current trading valuation, investors will receive the following for free:
    • Cinedigm’s content and distribution business, which is the Company’s growth segment that has the potential to be worth multiple times over its current market valuation
    • Approx. $267mm of NOLs; currently the market ascribes no value to the NOLs.
    • Potential $5 - $20mm in litigation proceedings from settlement with Gaiam in the near future; claims are worth 10% - 50% of current market capitalization.
  2. Digital work has substantial growth potential: Company has recently entered into the digital network business to build narrowcast Over-the-Top (OTT) Channels similar of Netflix and Hulu. The OTT channels are not directly competing with Netflix or Hulu but are aimed to deliver specific content to targeted audience. Cinedigm has the infrastructure, content distribution experience, relationships with distributors and producers, and the potential to build brand relationships to attract customers and launch successful channels.
    • Company plans to launch 3-4 channels per year. The Company has already launched two successful channels (Docurama and CONtv) and plans to launch two additional channels by end of the year.
    • A moderately successful channel has the potential to increase EBITDA by $10mm+ implying that a single moderately successful channel would double the current market valuation.
  3. Scrupulous watch from activist investors: Activist investor Ronald Chez (top investor with 8% share) and Zvi Rhine of Sabra Capital (#8 investor with approx. 2% stake) have been actively campaigning against the management to cut cost, restructure the Board, and increase the current share repurchase program. More recently (June 30th), AOF Management filed Schedule 13D disclosing the funds 5.2% ownership position (#2 holder) and joined Ron and Sabra in the activist campaign. Most of the issues are well summarized in the letter [Link] by Sabra Capital to the Company on May 12th. The activist campaign was recently settled (July 31st) with four new independent board members being added to the Board, including Zvi Rhine and Patrick O’Brien (Director of Board of Merriman Holdings, of which Ronald Chez is a co-chairman). Ron Chez will now act as strategic advisor to the Company to advice on financings and capital structure related issues. The recent development should see material changes in the near future including:
    • Additional share repurchase - I believe that the Company will announce $10mm of additional share repurchase in the near future
    • Increased cost cutting and cost scrutiny on any new investments.
    • Debt restructuring to reduce ongoing interest expense. The current $68mm of Prospect Capital debt has 13.5% interest rate or approx. $9.1mm of interest expense per year. The Prospect Capital debt is currently callable and has potential to be refinanced at attractive levels which could result in material interest expense savings for the Company
    • Activist investors have advocated to explore strategic sale of the Company or spinoff the deployment business. The Company was recently rumored to have hired Evolution Media Capital to assist in the handling of potential offers. Cinedigm is said to have received interest from both domestic and international entertainment companies looking to bolster their digital strategies
Why is the stock so cheap
Cinedigm stock has dropped about 65% from a year ago. Couple of reasons why the stock has recently plummeted include:
  1. Too many financing mistakes by the Management in the last two years:
    • Gaiam Vivendi Entertainment (GVE) Acquisition: Cinedigm acquired GVE (Gaiam’s Entertainment unit) for $51.5mm in Oct 2013. At the time of the acquisition, the Company touted that the acquisition would be transformational and would generated $15mm+ in EBITDA. The actual revenues and earnings turned out to be much less. Soon after, the Company filed a lawsuit against Gaiam for $30mm in claims for materially breaching the financial details within GVE, including working capital
    • Convertible bond financing: On April 23, 2015, the Company issued a $64mm convertible bond. The stock dropped 23% with the offering as existing equity investors disliked the dilutive nature of the offering and the fact that they did not get a chance participate in the offering to protect their stake
  2. Additional negative pressure on the stock due to technical reasons:
    • Convertible hedge fund activity: Short interest in the stock has built up post the convertible offering from technical hedge funds participating in the convert. Hedge funds participating in the convert are required to hedge their equity exposure by shorting the stock to maintain a delta neutral position (convert hedge funds do not hold an equity view on the stock and but trade the convert to play the cheapness in the volatility or the credit of the company)
      • Short interest has increased from 2.2mm before the convertible offering to the current 5.2mm shares (31% of float)
    • Sub one dollar price stock tag: Current stock price is below a dollar. Most mutual funds and other investment firms probably cannot hold stocks below $1 by their investment charter. Additionally, the liquidity in the stock is low (the stock trades less than $1mm a day).
    • Potential delisting from the Nasdaq Exchange: To add insult to injury, Nasdaq has sent a notice to the Company stating that the stock would be delisted from the exchange on December 7th, if the stock does not trade above $1 for at least 10 days
      • This is not a major consideration, as the Company can do a reverse stock split to mitigate the issue
  3. Large amount of debt on the balance sheet obscuring the true liabilities of the Company: On screen, the Company looks highly levered with approx. $250mm of debt on its balance sheet compared to the $40mm in equity value. The fact is that, approx. 65% or $147mm of the debt is non-recourse debt tied to its deployment segment. Cash flows from the deployment segment can be estimated with reasonable certainty and the fair value estimated is between $50 - $100mm above the $147mm non-recourse debt.
Business Overview:
Cinedigm was formed in 2000 and was initially called Access IT Digital Media. Cinedigm has two broad business segments, i) Digital cinema deployment business, and ii) the Content and Entertainment Group (CEG). The digital cinema deployment segment is the Company’s legacy business that was formed around 2005 to help finance the transition of cinemas from analog to digital. The segment has steady predictable cash flows for the next couple of years, thereby making the segment easy to value. The CEG segment on the other hand, is a more recent segment which is currently in its growth phase with the potential for huge upside.
 
Digital Cinema Deployment: About a decade ago, Cinedigm started providing financing for theaters/exhibitors to facilitate the rollout of digital cinemas to theaters, replacing the existing analog projectors. The digital cinema projection was highly cost efficient for the studios but the theaters that had to make the switch were out-of-pocket on the investment for the equipment and the software. To bridge the gap, third party digital cinema deployment integrators (like Cinedigm) came up with the financing mechanism called Virtual Print Fee (VPF) to fund the initial purchase of the digital cinema equipment and the software required. Under the VPF model, the third party integrator pays upfront for the equipment and would then recoup the cost of the equipment and other cost over time through payments from distributors and exhibitors. Cinedigm is the 2nd largest integrator in the US and has signed agreement with top 6 studios
including 20th Century Fox, Warner Brothers, Disney, Universal, Sony Pictures and Lions Gate. VPFs are earned based on contracts with studios when movies distributed by studios are displayed in movie theatres using the installed digital systems. VPF contracts can vary and the amount payable can depend upon the initial booking of a movie or for every movie title displayed per system.
 
Cinedigm deployed the systems in two phases and the terms underlying the VPF agreement in each of the phases are a little different:
  • Phase1: Based on initial agreement in 2005 with Christie Digital Systems to install up to 4,000 systems 3,724 cinemas installed to date and have agreements with sixteen theatrical exhibitors
    • Cinedigm will retain ownership of the systems and the residual cash flows related to the systems after the repayment of all financing at the expiration of agreement (10 years from installation)
    • On average, VPF revenue has been approx. $50mm per year with more than 97% following down as free cash from operations. The revenues will decrease post 2016 since the 10 year contract will start expiring
    • Additionally, the Company collects service fee of 7.5% of the VPFs generated for providing additional services that include monitoring, billing, collection, verification and other management services
  • Phase2: Formed in 2007 for administration up to 10,000 systems 8,904 systems installed to date
    • Of the 8,904, approx. 75% of the systems are installed under Exhibitor- Buyer Structure for which the Company only receives servicing revenues
    • For remaining systems (systems not covered under the Exhibitor-Buyer Structure), the current VPF per screen is lower than the Phase1 VPF per screen collected since most of the revenues were front loaded (VPF per screen going forward will remain constant until the agreements expire)
    • Company retains no ownership of the residual cash flows and equipment after the completion of cost recoupment and at the expiration of the agreements
    • Fees are collected for the max of 10years from installment or until when such cost is recouped
    • Servicing fees is 10% of the VPFs generated, higher than the 7.5% collected under Phase1
    • The Company records no debt, PPE, financing costs or depreciation in connection with the systems covered under the Exhibitor-Buyer Structure

Content and Entertainment Group (CEG): The segment includes distribution and acquisition of independent entertainment content. The segment can be further divided into two subgroups i) Home Entertainment and Theatrical releases, and ii) Digital network. Home entertainment business is currently a $22bln market in the US and growing at 8%+ rate. Physical distribution (DVDs, CDs, etc) that makes up approx. 60% of the current market spent is in a decline while digital (video-on-demand and subscription streaming) are growing rapidly. Cinedigm currently generates most of its revenues from physical sales but has a massive content library which it intends to leverage to develop its digital network business and boost revenues and earnings.

Home Entertainment: The company acquires distribution rights to content for distribution in physical and digital formats in the home entertainment and theatrical markets
  • Involves collaboration with producers and content owners to market, source, curate, and distribute content via different platforms including physical and digital platforms. Physical platforms include DVD, Blu-Ray Discs, etc. Currently approx. 92% of the sales are generated from physical distribution. Digital platforms include iTunes, Amazon Prime, Netflix, Xbox, PlayStation, and cable video- on- demand (VOD)
  • Cinedigm’s library contains more than 52,000 titles of films & TV episodes
  • According to the Company, Cinedigm is the 8th largest content distributor by unit; Distributors above Cinedigm include Warner Bros, 20th century fox, Universal, Disney, Sony, Lionsgate and Paramount
  • The Company direct relationships with thousands of physical retail storefronts and digital platforms, including Wal-Mart, Target, iTunes, Netflix, and Amazon, and national cable TV VOD platforms
  • Company distribute products for major brands such as the Discovery Networks, National Geographic and Scholastic
Digital Network or Over-the-Top (OTT) Channels: Simply put, digital network is what Netflix, Hulu and Amazon’s streaming business does. While Cinedigm does not intent to directly compete with Netflix, Hulu or Amazon, the Company wants to play in the long tail end of the digital streaming business with content aimed towards specific segment of the population. Cinedigm’s strategy is to launch channels mostly using its existing content but with brand partnership that can provide a dedicated fan base to the channel. Partnership allows quick launch of channels with minimal investment risk. The Company intends to spend additional resources based on the success of the channels. In a couple of years, the plan is to create a diversified portfolio of digital networks, launching several narrowcast channels each with a customized business model that maximizes the potential for success. The Company has already launched 2 channels (Docurama in May 2014 and CONtv in March 2015) and have two additional channels (Dove Tv and a channel in partnershipTV4) launching by the end of the year. CONtv has had a great launch with more than 430k app installations in about 4months. The channel is available in both AVOD and SVOD ($6.99 per month) format and appears on Roku’s Top 50 most popular channels list.
 
What is so existing about the digital network space?
Cutting-the-cord is a commonly used phrase these days that has caught wind in the last couple of years. Recently media stocks plummeted post Q2 earnings due to declining viewers and as investors feared the speed at which cord-cutting is going mainstream. Traditional television is being hit by declining TV viewership, advertising shift from TV to digital, growing OTT vailability and consumption, and shift from pay TV to Video-on-demand (VOD) and Subscription video-on-demand (SVOD). The barriers to entry into TV business are collapsing as standalone roadband allows content providers to access the consumer over-the-top (OTT) and consumers have the option to watch what they want, when they want at a much lower cost. Netflix has lead the race in switch to digital streaming but a bunch of other industry players (Hulu, Amazon, HBO, Apple, etc) are trying to catch up. According to IHS, digital network spending has been rapidly increasing and for the first time in Q4 2014, digital spending surpassed physical. Within digital, SVOD is currently approx. $7billion market and is expected to grow at 30%+ in 2016 versus 12% for digital. By 2020, revenues from digital network is expected to be twice current level.
 
How igm positioned to take advantage of the growth in digital network?
Cinedigm’s strategy is not to be the Netflix of mainstream entertainment but rather be the Netflix of independent narrowcast content. In the independent content space, Cinedigm has some key advantages that will help it launch successful channels in an economical manner. Advantages include:
  • Cinedigm is currently one of the largest distributor of independent content in all major platforms
  • Company has a large and expanding independent content library (more than 52,000 titles), which it can leverage to curate channel contents
  • Good relationships with many independent studios of high profile content providers
  • Expertise in technology and content management
  • Ability to partner with branded players like Wizard World, Dove Entertainment. Partnership not only provides loyal customers base but also helps reduce initial investment risk
  • The Company already has two channels Documrama and CONtv. In a short period, the Company has managed to generate over 1mm+ app installations. Docurama, Cinedigm’s first channel, was launched on an experimental basis without any real marketing effort or brand partnership but the channel has still managed to get good traction.
  • CONtv, on the other hand, was launched in partnership with Wizard World. Wizard World is well known for organizing Comic Cons in the US. Last year Wizard World organized about 16 conventions in different cities with 400,000+ attendees and 1.1million email database. CONtv currently has over 400k+ app installations in just over 4 months of launch. Both CONtv and Docurama appear on the top 50 most popular channels on Roku, off the more than 700 channels available on Roku.
 
So finally, what is Cinedigm really worth?
Cinedigm’s two business segments have very different revenue and cash flow profiles and hence the best way to value the business would be using sum of parts.

Deployment Business: I estimate that the deployment business segment including the services business is worth approx. $50mm net of all the non-recourse debt associated with the segment. Sabra Capital in its recent letter to the Company projected this segment to be worth approx. $96mm. The link to Sabra Capital’s letter is Here [http://www.sec.gov/Archives/edgar/data/1173204/000114420415032185/v411124_ex99-1.htm]
 
  FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
                       
DEPLOYMENT BUSINESS                      
Phase I Screens 3,724 3,724 3,724 3,724 3,724 3,514 1,449 0 0 0 0
Phase II Screens (Not under Exhibitor Buyer Structure) 1,815 2,503 2,503 2,514 2,514 2,514 2,514 2,514 2,354 1,729 699
Phase I Leased Screens           210 2,275 3,724 3,724 3,724 3,724
Total Phase II Screens (only used to estimate service rev) 6,609 7,980 8,904 8,904 8,904 8,904 8,904 8,904 8,850 8,568 5,709
                       
Phase I Revenue Estimate                      
VPF Estimate on Owned Screens $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200
VPF Estimate on Leased Screens (20% of Normal)           $396 $396 $396 $396 $396 $396
Screen Turnover 9.9 8.9 8.1 8.1 8.6 8.6 8.6 8.6 8.6 8.6 8.6
Total Revenue (,000s) $44,241 $39,772 $36,197 $36,197 $38,432 $36,980 $22,701 $12,682 $12,682 $12,682 $12,682
Y/Y Revenue Growth   -10.1% -9.0% 0.0% 6.2% -3.8% -38.6% -44.1% 0.0% 0.0% 0.0%
                       
Phase I Revenue                      
VPF Estimate on Owned Screens $1,061 $624 $598 $599 $598 $598 $598 $598 $598 $598 $598
Total Revenue (,000s) $13,033 $12,464 $12,146 $12,335 $12,929 $12,929 $12,929 $12,929 $12,106 $8,892 $3,595
Y/Y Revenue Growth   -4.4% -2.6% 1.6% 4.8% 0.0% 0.0% 0.0% -6.4% -26.6% -59.6%
                       
Total Revenues (Phase I and Phase II) $57,274 $52,236 $48,343 $48,532 $51,361 $49,909 $35,630 $25,611 $24,789 $21,574 $16,277
Deployment EBITDA $55,741 $50,733 $46,472 $46,961 $47,765 $46,415 $33,136 $23,819 $23,053 $20,064 $15,138
EBITDA Margin 97.3% 97.1% 96.1% 96.8% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0%
                       
SERVICE BUSINESS                      
Service Revenue $000s $18,128 $12,932 $12,558 $12,161 $11,310 $10,518 $9,782 $9,097 $8,460 $7,868 $7,317
Service Revenue Growth Rate   -28.7% -2.9% -3.2% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0%
Services EBITDA $4,355 $8,126 $9,227 $9,242 $7,917 $7,363 $6,847 $6,368 $5,922 $5,508 $5,122
EBITDA Margin 24.0% 62.8% 73.5% 76.0% 70% 70% 70% 70% 70% 70% 70%
                       
Total EBITDA $60,096 $58,859 $55,699 $56,203 $55,682 $53,778 $39,984 $30,187 $28,976 $25,572 $20,260
PV of Cash Flows (8.5% discount rate)         $51,320 $45,682 $31,303 $21,782 $19,270 $15,674 $11,445
      Note: Fiscal Year ends on March 31st.           
Total Net Equity Value $196,477                    
Total Non-Recourse Debt $147,138                    
Net Value  $49,339                    
 
Home Entertainment: Home Entertainment includes distribution of physical and digital content. It also includes theatrical releases of newly acquired movies. The segment has generated $43.3 and $45.1mm in revenues in FY2014 and FY2015 with negative operating earnings of $8.3 and $21.3 in the FY2014 and FY2015. Earnings were negatively affected in FY2015 due to problems related to the GVE acquisition such has high returns of DVDs, termination of non-profitable customer contracts, legal proceeding expenses and impairment expenses. Earnings are hard to estimate for the segment due to the J-curve accounting Company recognizes acquisition and marketing expenses upfront while earnings are realized over 12 36months post the release of the films. In the theatrical release segment, the Company intends to launch 12-15 films a year with sub $1mm of acquisition cost and targeted IRR of over 20% (Cinedigm gets
distribution fees of about 25-35% of all revenues generated).
Given the uncertainty in earnings from home entertainment distribution and theatrical releases, I assign limited value of 1x sales to the segment.
 
Digital Network or OTT Channel: While the home entertainment segment is struggling due to declining physical sales and issues related to the GVE acquisition, the digital network segment has the potential to boost revenues and generate significant cash flows. The infrastructure required to launch the OTT channels is not high since the Company already has a good content library. Additionally, to launch the new channel, the Company is expected to partner with well-established brands with existing customer base, thereby reducing upfront investment risk. The value of a moderately successful OTT channel with SVOD model is pretty high. For example, a channel with only 0.5mm subscribers can generate $30mm in annual revenues or approx. $12mm in EBITDA (assumes $5 per month subscription rate and 40% EBITDA margin; CONtv’s current subscription rate is $6.99 per month). At 5x EBITDA multiple, the moderately successful channel would be worth $60mm or approx. $1.00 per share.
 
Based on the above, I estimate the Company to be worth approx. $1.18 - $2.31 or 70-230% upside potential to the current share price. My valuation assumes only one moderately successful OTT channel that will add 0.5-1.0x the potential value to the Company’s entire equity value. Additionally, I have not assigned any benefits to the $267mm of NOLs that could be highly valuable to potential acquirer. Also, my valuation does not include the benefit from any claims that the Company may receive from its Gaiam litigation.
 
  Base Case Bull Case Comments        
Deployment Segment - Total Equity Value $196,477 $250,395 Bull case based on Sabra's model    
Total Non-Recourse Debt $147,138 $147,138            
Net Value of Deployment Business $49,339 $103,257            
                 
Home Entertainment Business $47,000 $94,000 1 - 2x LTM revenues from CED business    
Digital Network $30,000 $60,000 0.5x - 1x value of one succesful OTT channel EBITDA at 5x
CEG Total Debt (excluding Convertible Debt) $18,984 $18,984 Excludes $64mm of convertible debt    
Cash  $29,247 $29,247            
Net Equity Value $136,602 $267,520            
                 
Shares Underlying 115,593 115,593 Inclues 52.9mm shares from convertible bond  
Implied Share Price $1.18 $2.31            
                 
Current Stock Price $0.70              
Upside Potential 69% 231%            
Note: All numbers in 000’s expect for share price.
 
 
Appendix:
 
Brief history of Digital cinema and VPF: The below links provide additional background on the history of VPFs.
http://mkpe.com/digital_cinema/faqs/#obsolete
https://en.wikipedia.org/wiki/Virtual_Print_Fee
http://info.christiedigital.com/lp/virtual-print-fee
http://www.edcf.net/edcf_docs/vpf_q-a_200710.pdf
 
 
Debt Schedule:
 
  Amount Approx. Interest Rate Issue Date Maturity Interest / Yr (000s) Comment
Cash and Cash Equivalent $29,247          
             
Non-Recourse Debt            
2013 TL, Net of debt discount $53,839 3.8% Feb-13 Feb-18 $2,019 Under restatement with SG, can borrow up to $130mm
Prospect Capital Loan $67,449 13.5% Feb-13 Mar-21 $9,106 Can be paid anytime after Feb 2015; penalties applicable - 5% in 2015
KBC Facilities $25,100 4.0% 2008 2018 - 2019 $1,004 Multiple maturity dates; Principal is to be repaid in 28 qrtly installments
P2 Vendor Note $508          
P2 Exhibitor Note $242          
Total Non-Recourse Notes Payable $147,138       $12,129  
             
Recourse Debt            
Cinedigm TL $0 6.0% Oct-13   $0 Refinanced with Convertible debt in April 2015
Cinedigm Revolving Loans $15,127 6.0% Oct-13   $908 borrow up to $30mm
2013 Notes $3,857 9.0% Oct-13 Oct-18 $347 sold warrants to purchase 1.5mm shares
Convertible Debt $64,000 5.5% Apr-15 Apr-20 $3,520  
Total Recourse Notes Payable $82,984       $4,775  
             
Total  $230,122       $16,903  
Net Debt $200,875          
 
Recent Acquisitions:
  1. New Video Group Inc: In April 2012, Cinedigm acquired New Video Group, an independent home entertainment distributor of physical and digital content for more than 500 independent rights holders
    • Holds licenses for more than 4,000 feature films and 6,000 television episodes
    • $14mm in upfront consideration, plus additional earn out potential of up to $6mm over three years tied to the future financial results ($10mm in cash from balance sheet and rest in shares)
    • The $14 million upfront purchase price represented approx. 5.6x New Video's 2011 adjusted EBITDA
  2. Gaiam Vivendi Entertainment (GVE): In Oct 2013, Cinedigm acquired GVE, a division of Gaiam America’s entertainment unit
    • Maintains exclusive rights with number of independent studios/content providers. Largest aggregator and distributor of independent content and the fourth largest distributor of non-theatrical DVD's and Blu-Ray discs in the U.S.
    • GVE provides sales, marketing and distribution services to many of the home entertainment industry's most prestigious brands, including Discovery Communications, Hallmark Channel, NFL Films, National Geographic, Marvel Animation, Shout Factory, Televisa, and World Wrestling Entertainment.
    • Acquired GVE for $51.5 million, representing approx. 3.3x GVE's 2013 estimated EBITDA
    • The accretive acquisition was expected to add more than $15 million of annual EBITDA
Gaiam Lawsuit:
  • Cinedigm is seeking more than $30 million in damages, in addition to unspecified compensatory damages, attorneys’ fees, costs and interest, resulting from the acquisition
  • Cinedigm alleges Gaiam materially breached financial details within GVE, including working capital. It claims Gaiam engaged in “fraud and tortious [litigious] acts” in connection with the sale, including the non-collection of accounts receivables, transfer of cash from collected accounts receivables, and mishandling post-closing collections, among other charges Cinedigm claims Gaiam did not disclose, or hid, information about the real financial condition of the division. It claims that Gaiam hid the fact it would not be able to hit a sales benchmark related to WWE Entertainment, forcing Cinedigm to pay millions to WWE after the deal closed 
  • In August 2014, Cinedigm initiated mediation with Gaiam. On January 2015, Gaiam and the Company participated in a two- day mediation to determine whether the parties’ disputes could be resolved informally without arbitration. The mediation was not successful, and Cinedigm decided are pursuing its claims against Gaiam through arbitration. Although Gaiam initially filed an appeal against the arbitration, the appeal has been dismissed. The parties are now proceeding with the Working Capital Arbitration and it is expected to receive an initial decision on the working capital claims shortly.
  • In addition, the parties are proceeding with their respective non- working capital claims in the AAA Arbitration.
  • Gaiam disputes Cinedigm’s allegations and filed its own arbitration claims seeking working capital reimbursement from Cinedigm of more than $8 million
OTT Channels: Couple of Cinedigm’s OTT channels launched and upcoming channels include:
  1. Docurama, the first OTT Channel, was launched in May 2014
    • Revenue model based on advertising- supported video on demand service (AVOD)
    • Available across most internet connected devices
    • 800+ documentary films available for download
    • Approx. 600k installs to date
  2. CONtv launched in March 2015
    • Brand partnership with Wizard World, Inc. (company that organizes Comic Con conventions throughout the country)
    • Freemium business model with both AVOD and SVOD (subscription video on demand offering)
    • Over 2,500hours of content available (approx. 40% original) designed to cater towards gaming based fans
    • Screening hundreds of hours of Comic Con panels, contests and behind the scenes footage direct from Comic Cons
  3. Dove Tv: To be launched in mid September
    • Partnership with Dove foundation to provide faith based content and targeted towards family and kids 
    • Dove has access to 1.5mm monthly unique web visitors and 80k households subscribing to the Dove-approved list of films
    • Cinedigm will own and operate the channel, with 20% profit sharing with Dove Foundation
  4. TV4 - At least one new OTT channel with brand partnership with Tv4:
    • First channel to be launched this summer and aimed at children, from preschoolers to tweens
    • The co-owned channel will be distributed through TV4's premium online video distribution platform, covering 100 million US households and over 300 million devices
    • The content for the new OTT network will be drawn from the Cinedigm library and then curated by TV4, which plans to add its own new networks to the partnership as well
 
 
 

 

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

- quarterly update on subscription and revenues generated from digital network segment

- Additional share repurchase annoucement

- Strategic sale or spinoff

- Setllment with Gaiam with meaningful claims

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    Description

     
    Why is Cinedigm an attractive investment opportunity?
    1. Cinedigm’s current market valuation is depressed since at the current valuation the Company’s legacy digital cinema business will provide the necessary margin of safety and investors will receive the Company’s most attractive digital network business segment for free: The legacy digital cinema (deployment segment) will continue to provide steady free cash flows for the next couple of years. The fair value of the cash flows net off the non-recourse debt tied to the cash flows is estimated to be worth between $50-$100mm (or up to 110% of current market cap). With the legacy deployment segment alone worth more than the current trading valuation, investors will receive the following for free:
      • Cinedigm’s content and distribution business, which is the Company’s growth segment that has the potential to be worth multiple times over its current market valuation
      • Approx. $267mm of NOLs; currently the market ascribes no value to the NOLs.
      • Potential $5 - $20mm in litigation proceedings from settlement with Gaiam in the near future; claims are worth 10% - 50% of current market capitalization.
    2. Digital work has substantial growth potential: Company has recently entered into the digital network business to build narrowcast Over-the-Top (OTT) Channels similar of Netflix and Hulu. The OTT channels are not directly competing with Netflix or Hulu but are aimed to deliver specific content to targeted audience. Cinedigm has the infrastructure, content distribution experience, relationships with distributors and producers, and the potential to build brand relationships to attract customers and launch successful channels.
      • Company plans to launch 3-4 channels per year. The Company has already launched two successful channels (Docurama and CONtv) and plans to launch two additional channels by end of the year.
      • A moderately successful channel has the potential to increase EBITDA by $10mm+ implying that a single moderately successful channel would double the current market valuation.
    3. Scrupulous watch from activist investors: Activist investor Ronald Chez (top investor with 8% share) and Zvi Rhine of Sabra Capital (#8 investor with approx. 2% stake) have been actively campaigning against the management to cut cost, restructure the Board, and increase the current share repurchase program. More recently (June 30th), AOF Management filed Schedule 13D disclosing the funds 5.2% ownership position (#2 holder) and joined Ron and Sabra in the activist campaign. Most of the issues are well summarized in the letter [Link] by Sabra Capital to the Company on May 12th. The activist campaign was recently settled (July 31st) with four new independent board members being added to the Board, including Zvi Rhine and Patrick O’Brien (Director of Board of Merriman Holdings, of which Ronald Chez is a co-chairman). Ron Chez will now act as strategic advisor to the Company to advice on financings and capital structure related issues. The recent development should see material changes in the near future including:
      • Additional share repurchase - I believe that the Company will announce $10mm of additional share repurchase in the near future
      • Increased cost cutting and cost scrutiny on any new investments.
      • Debt restructuring to reduce ongoing interest expense. The current $68mm of Prospect Capital debt has 13.5% interest rate or approx. $9.1mm of interest expense per year. The Prospect Capital debt is currently callable and has potential to be refinanced at attractive levels which could result in material interest expense savings for the Company
      • Activist investors have advocated to explore strategic sale of the Company or spinoff the deployment business. The Company was recently rumored to have hired Evolution Media Capital to assist in the handling of potential offers. Cinedigm is said to have received interest from both domestic and international entertainment companies looking to bolster their digital strategies
    Why is the stock so cheap
    Cinedigm stock has dropped about 65% from a year ago. Couple of reasons why the stock has recently plummeted include:
    1. Too many financing mistakes by the Management in the last two years:
      • Gaiam Vivendi Entertainment (GVE) Acquisition: Cinedigm acquired GVE (Gaiam’s Entertainment unit) for $51.5mm in Oct 2013. At the time of the acquisition, the Company touted that the acquisition would be transformational and would generated $15mm+ in EBITDA. The actual revenues and earnings turned out to be much less. Soon after, the Company filed a lawsuit against Gaiam for $30mm in claims for materially breaching the financial details within GVE, including working capital
      • Convertible bond financing: On April 23, 2015, the Company issued a $64mm convertible bond. The stock dropped 23% with the offering as existing equity investors disliked the dilutive nature of the offering and the fact that they did not get a chance participate in the offering to protect their stake
    2. Additional negative pressure on the stock due to technical reasons:
      • Convertible hedge fund activity: Short interest in the stock has built up post the convertible offering from technical hedge funds participating in the convert. Hedge funds participating in the convert are required to hedge their equity exposure by shorting the stock to maintain a delta neutral position (convert hedge funds do not hold an equity view on the stock and but trade the convert to play the cheapness in the volatility or the credit of the company)
        • Short interest has increased from 2.2mm before the convertible offering to the current 5.2mm shares (31% of float)
      • Sub one dollar price stock tag: Current stock price is below a dollar. Most mutual funds and other investment firms probably cannot hold stocks below $1 by their investment charter. Additionally, the liquidity in the stock is low (the stock trades less than $1mm a day).
      • Potential delisting from the Nasdaq Exchange: To add insult to injury, Nasdaq has sent a notice to the Company stating that the stock would be delisted from the exchange on December 7th, if the stock does not trade above $1 for at least 10 days
        • This is not a major consideration, as the Company can do a reverse stock split to mitigate the issue
    3. Large amount of debt on the balance sheet obscuring the true liabilities of the Company: On screen, the Company looks highly levered with approx. $250mm of debt on its balance sheet compared to the $40mm in equity value. The fact is that, approx. 65% or $147mm of the debt is non-recourse debt tied to its deployment segment. Cash flows from the deployment segment can be estimated with reasonable certainty and the fair value estimated is between $50 - $100mm above the $147mm non-recourse debt.
    Business Overview:
    Cinedigm was formed in 2000 and was initially called Access IT Digital Media. Cinedigm has two broad business segments, i) Digital cinema deployment business, and ii) the Content and Entertainment Group (CEG). The digital cinema deployment segment is the Company’s legacy business that was formed around 2005 to help finance the transition of cinemas from analog to digital. The segment has steady predictable cash flows for the next couple of years, thereby making the segment easy to value. The CEG segment on the other hand, is a more recent segment which is currently in its growth phase with the potential for huge upside.
     
    Digital Cinema Deployment: About a decade ago, Cinedigm started providing financing for theaters/exhibitors to facilitate the rollout of digital cinemas to theaters, replacing the existing analog projectors. The digital cinema projection was highly cost efficient for the studios but the theaters that had to make the switch were out-of-pocket on the investment for the equipment and the software. To bridge the gap, third party digital cinema deployment integrators (like Cinedigm) came up with the financing mechanism called Virtual Print Fee (VPF) to fund the initial purchase of the digital cinema equipment and the software required. Under the VPF model, the third party integrator pays upfront for the equipment and would then recoup the cost of the equipment and other cost over time through payments from distributors and exhibitors. Cinedigm is the 2nd largest integrator in the US and has signed agreement with top 6 studios
    including 20th Century Fox, Warner Brothers, Disney, Universal, Sony Pictures and Lions Gate. VPFs are earned based on contracts with studios when movies distributed by studios are displayed in movie theatres using the installed digital systems. VPF contracts can vary and the amount payable can depend upon the initial booking of a movie or for every movie title displayed per system.
     
    Cinedigm deployed the systems in two phases and the terms underlying the VPF agreement in each of the phases are a little different:
    • Phase1: Based on initial agreement in 2005 with Christie Digital Systems to install up to 4,000 systems 3,724 cinemas installed to date and have agreements with sixteen theatrical exhibitors
      • Cinedigm will retain ownership of the systems and the residual cash flows related to the systems after the repayment of all financing at the expiration of agreement (10 years from installation)
      • On average, VPF revenue has been approx. $50mm per year with more than 97% following down as free cash from operations. The revenues will decrease post 2016 since the 10 year contract will start expiring
      • Additionally, the Company collects service fee of 7.5% of the VPFs generated for providing additional services that include monitoring, billing, collection, verification and other management services
    • Phase2: Formed in 2007 for administration up to 10,000 systems 8,904 systems installed to date
      • Of the 8,904, approx. 75% of the systems are installed under Exhibitor- Buyer Structure for which the Company only receives servicing revenues
      • For remaining systems (systems not covered under the Exhibitor-Buyer Structure), the current VPF per screen is lower than the Phase1 VPF per screen collected since most of the revenues were front loaded (VPF per screen going forward will remain constant until the agreements expire)
      • Company retains no ownership of the residual cash flows and equipment after the completion of cost recoupment and at the expiration of the agreements
      • Fees are collected for the max of 10years from installment or until when such cost is recouped
      • Servicing fees is 10% of the VPFs generated, higher than the 7.5% collected under Phase1
      • The Company records no debt, PPE, financing costs or depreciation in connection with the systems covered under the Exhibitor-Buyer Structure

    Content and Entertainment Group (CEG): The segment includes distribution and acquisition of independent entertainment content. The segment can be further divided into two subgroups i) Home Entertainment and Theatrical releases, and ii) Digital network. Home entertainment business is currently a $22bln market in the US and growing at 8%+ rate. Physical distribution (DVDs, CDs, etc) that makes up approx. 60% of the current market spent is in a decline while digital (video-on-demand and subscription streaming) are growing rapidly. Cinedigm currently generates most of its revenues from physical sales but has a massive content library which it intends to leverage to develop its digital network business and boost revenues and earnings.

    Home Entertainment: The company acquires distribution rights to content for distribution in physical and digital formats in the home entertainment and theatrical markets
    • Involves collaboration with producers and content owners to market, source, curate, and distribute content via different platforms including physical and digital platforms. Physical platforms include DVD, Blu-Ray Discs, etc. Currently approx. 92% of the sales are generated from physical distribution. Digital platforms include iTunes, Amazon Prime, Netflix, Xbox, PlayStation, and cable video- on- demand (VOD)
    • Cinedigm’s library contains more than 52,000 titles of films & TV episodes
    • According to the Company, Cinedigm is the 8th largest content distributor by unit; Distributors above Cinedigm include Warner Bros, 20th century fox, Universal, Disney, Sony, Lionsgate and Paramount
    • The Company direct relationships with thousands of physical retail storefronts and digital platforms, including Wal-Mart, Target, iTunes, Netflix, and Amazon, and national cable TV VOD platforms
    • Company distribute products for major brands such as the Discovery Networks, National Geographic and Scholastic
    Digital Network or Over-the-Top (OTT) Channels: Simply put, digital network is what Netflix, Hulu and Amazon’s streaming business does. While Cinedigm does not intent to directly compete with Netflix, Hulu or Amazon, the Company wants to play in the long tail end of the digital streaming business with content aimed towards specific segment of the population. Cinedigm’s strategy is to launch channels mostly using its existing content but with brand partnership that can provide a dedicated fan base to the channel. Partnership allows quick launch of channels with minimal investment risk. The Company intends to spend additional resources based on the success of the channels. In a couple of years, the plan is to create a diversified portfolio of digital networks, launching several narrowcast channels each with a customized business model that maximizes the potential for success. The Company has already launched 2 channels (Docurama in May 2014 and CONtv in March 2015) and have two additional channels (Dove Tv and a channel in partnershipTV4) launching by the end of the year. CONtv has had a great launch with more than 430k app installations in about 4months. The channel is available in both AVOD and SVOD ($6.99 per month) format and appears on Roku’s Top 50 most popular channels list.
     
    What is so existing about the digital network space?
    Cutting-the-cord is a commonly used phrase these days that has caught wind in the last couple of years. Recently media stocks plummeted post Q2 earnings due to declining viewers and as investors feared the speed at which cord-cutting is going mainstream. Traditional television is being hit by declining TV viewership, advertising shift from TV to digital, growing OTT vailability and consumption, and shift from pay TV to Video-on-demand (VOD) and Subscription video-on-demand (SVOD). The barriers to entry into TV business are collapsing as standalone roadband allows content providers to access the consumer over-the-top (OTT) and consumers have the option to watch what they want, when they want at a much lower cost. Netflix has lead the race in switch to digital streaming but a bunch of other industry players (Hulu, Amazon, HBO, Apple, etc) are trying to catch up. According to IHS, digital network spending has been rapidly increasing and for the first time in Q4 2014, digital spending surpassed physical. Within digital, SVOD is currently approx. $7billion market and is expected to grow at 30%+ in 2016 versus 12% for digital. By 2020, revenues from digital network is expected to be twice current level.
     
    How igm positioned to take advantage of the growth in digital network?
    Cinedigm’s strategy is not to be the Netflix of mainstream entertainment but rather be the Netflix of independent narrowcast content. In the independent content space, Cinedigm has some key advantages that will help it launch successful channels in an economical manner. Advantages include:
    • Cinedigm is currently one of the largest distributor of independent content in all major platforms
    • Company has a large and expanding independent content library (more than 52,000 titles), which it can leverage to curate channel contents
    • Good relationships with many independent studios of high profile content providers
    • Expertise in technology and content management
    • Ability to partner with branded players like Wizard World, Dove Entertainment. Partnership not only provides loyal customers base but also helps reduce initial investment risk
    • The Company already has two channels Documrama and CONtv. In a short period, the Company has managed to generate over 1mm+ app installations. Docurama, Cinedigm’s first channel, was launched on an experimental basis without any real marketing effort or brand partnership but the channel has still managed to get good traction.
    • CONtv, on the other hand, was launched in partnership with Wizard World. Wizard World is well known for organizing Comic Cons in the US. Last year Wizard World organized about 16 conventions in different cities with 400,000+ attendees and 1.1million email database. CONtv currently has over 400k+ app installations in just over 4 months of launch. Both CONtv and Docurama appear on the top 50 most popular channels on Roku, off the more than 700 channels available on Roku.
     
    So finally, what is Cinedigm really worth?
    Cinedigm’s two business segments have very different revenue and cash flow profiles and hence the best way to value the business would be using sum of parts.

    Deployment Business: I estimate that the deployment business segment including the services business is worth approx. $50mm net of all the non-recourse debt associated with the segment. Sabra Capital in its recent letter to the Company projected this segment to be worth approx. $96mm. The link to Sabra Capital’s letter is Here [http://www.sec.gov/Archives/edgar/data/1173204/000114420415032185/v411124_ex99-1.htm]
     
      FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
                           
    DEPLOYMENT BUSINESS                      
    Phase I Screens 3,724 3,724 3,724 3,724 3,724 3,514 1,449 0 0 0 0
    Phase II Screens (Not under Exhibitor Buyer Structure) 1,815 2,503 2,503 2,514 2,514 2,514 2,514 2,514 2,354 1,729 699
    Phase I Leased Screens           210 2,275 3,724 3,724 3,724 3,724
    Total Phase II Screens (only used to estimate service rev) 6,609 7,980 8,904 8,904 8,904 8,904 8,904 8,904 8,850 8,568 5,709
                           
    Phase I Revenue Estimate                      
    VPF Estimate on Owned Screens $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200
    VPF Estimate on Leased Screens (20% of Normal)           $396 $396 $396 $396 $396 $396
    Screen Turnover 9.9 8.9 8.1 8.1 8.6 8.6 8.6 8.6 8.6 8.6 8.6
    Total Revenue (,000s) $44,241 $39,772 $36,197 $36,197 $38,432 $36,980 $22,701 $12,682 $12,682 $12,682 $12,682
    Y/Y Revenue Growth   -10.1% -9.0% 0.0% 6.2% -3.8% -38.6% -44.1% 0.0% 0.0% 0.0%
                           
    Phase I Revenue                      
    VPF Estimate on Owned Screens $1,061 $624 $598 $599 $598 $598 $598 $598 $598 $598 $598
    Total Revenue (,000s) $13,033 $12,464 $12,146 $12,335 $12,929 $12,929 $12,929 $12,929 $12,106 $8,892 $3,595
    Y/Y Revenue Growth   -4.4% -2.6% 1.6% 4.8% 0.0% 0.0% 0.0% -6.4% -26.6% -59.6%
                           
    Total Revenues (Phase I and Phase II) $57,274 $52,236 $48,343 $48,532 $51,361 $49,909 $35,630 $25,611 $24,789 $21,574 $16,277
    Deployment EBITDA $55,741 $50,733 $46,472 $46,961 $47,765 $46,415 $33,136 $23,819 $23,053 $20,064 $15,138
    EBITDA Margin 97.3% 97.1% 96.1% 96.8% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0%
                           
    SERVICE BUSINESS                      
    Service Revenue $000s $18,128 $12,932 $12,558 $12,161 $11,310 $10,518 $9,782 $9,097 $8,460 $7,868 $7,317
    Service Revenue Growth Rate   -28.7% -2.9% -3.2% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0%
    Services EBITDA $4,355 $8,126 $9,227 $9,242 $7,917 $7,363 $6,847 $6,368 $5,922 $5,508 $5,122
    EBITDA Margin 24.0% 62.8% 73.5% 76.0% 70% 70% 70% 70% 70% 70% 70%
                           
    Total EBITDA $60,096 $58,859 $55,699 $56,203 $55,682 $53,778 $39,984 $30,187 $28,976 $25,572 $20,260
    PV of Cash Flows (8.5% discount rate)         $51,320 $45,682 $31,303 $21,782 $19,270 $15,674 $11,445
          Note: Fiscal Year ends on March 31st.           
    Total Net Equity Value $196,477                    
    Total Non-Recourse Debt $147,138                    
    Net Value  $49,339                    
     
    Home Entertainment: Home Entertainment includes distribution of physical and digital content. It also includes theatrical releases of newly acquired movies. The segment has generated $43.3 and $45.1mm in revenues in FY2014 and FY2015 with negative operating earnings of $8.3 and $21.3 in the FY2014 and FY2015. Earnings were negatively affected in FY2015 due to problems related to the GVE acquisition such has high returns of DVDs, termination of non-profitable customer contracts, legal proceeding expenses and impairment expenses. Earnings are hard to estimate for the segment due to the J-curve accounting Company recognizes acquisition and marketing expenses upfront while earnings are realized over 12 36months post the release of the films. In the theatrical release segment, the Company intends to launch 12-15 films a year with sub $1mm of acquisition cost and targeted IRR of over 20% (Cinedigm gets
    distribution fees of about 25-35% of all revenues generated).
    Given the uncertainty in earnings from home entertainment distribution and theatrical releases, I assign limited value of 1x sales to the segment.
     
    Digital Network or OTT Channel: While the home entertainment segment is struggling due to declining physical sales and issues related to the GVE acquisition, the digital network segment has the potential to boost revenues and generate significant cash flows. The infrastructure required to launch the OTT channels is not high since the Company already has a good content library. Additionally, to launch the new channel, the Company is expected to partner with well-established brands with existing customer base, thereby reducing upfront investment risk. The value of a moderately successful OTT channel with SVOD model is pretty high. For example, a channel with only 0.5mm subscribers can generate $30mm in annual revenues or approx. $12mm in EBITDA (assumes $5 per month subscription rate and 40% EBITDA margin; CONtv’s current subscription rate is $6.99 per month). At 5x EBITDA multiple, the moderately successful channel would be worth $60mm or approx. $1.00 per share.
     
    Based on the above, I estimate the Company to be worth approx. $1.18 - $2.31 or 70-230% upside potential to the current share price. My valuation assumes only one moderately successful OTT channel that will add 0.5-1.0x the potential value to the Company’s entire equity value. Additionally, I have not assigned any benefits to the $267mm of NOLs that could be highly valuable to potential acquirer. Also, my valuation does not include the benefit from any claims that the Company may receive from its Gaiam litigation.
     
      Base Case Bull Case Comments        
    Deployment Segment - Total Equity Value $196,477 $250,395 Bull case based on Sabra's model    
    Total Non-Recourse Debt $147,138 $147,138            
    Net Value of Deployment Business $49,339 $103,257            
                     
    Home Entertainment Business $47,000 $94,000 1 - 2x LTM revenues from CED business    
    Digital Network $30,000 $60,000 0.5x - 1x value of one succesful OTT channel EBITDA at 5x
    CEG Total Debt (excluding Convertible Debt) $18,984 $18,984 Excludes $64mm of convertible debt    
    Cash  $29,247 $29,247            
    Net Equity Value $136,602 $267,520            
                     
    Shares Underlying 115,593 115,593 Inclues 52.9mm shares from convertible bond  
    Implied Share Price $1.18 $2.31            
                     
    Current Stock Price $0.70              
    Upside Potential 69% 231%            
    Note: All numbers in 000’s expect for share price.
     
     
    Appendix:
     
    Brief history of Digital cinema and VPF: The below links provide additional background on the history of VPFs.
    http://mkpe.com/digital_cinema/faqs/#obsolete
    https://en.wikipedia.org/wiki/Virtual_Print_Fee
    http://info.christiedigital.com/lp/virtual-print-fee
    http://www.edcf.net/edcf_docs/vpf_q-a_200710.pdf
     
     
    Debt Schedule:
     
      Amount Approx. Interest Rate Issue Date Maturity Interest / Yr (000s) Comment
    Cash and Cash Equivalent $29,247          
                 
    Non-Recourse Debt            
    2013 TL, Net of debt discount $53,839 3.8% Feb-13 Feb-18 $2,019 Under restatement with SG, can borrow up to $130mm
    Prospect Capital Loan $67,449 13.5% Feb-13 Mar-21 $9,106 Can be paid anytime after Feb 2015; penalties applicable - 5% in 2015
    KBC Facilities $25,100 4.0% 2008 2018 - 2019 $1,004 Multiple maturity dates; Principal is to be repaid in 28 qrtly installments
    P2 Vendor Note $508          
    P2 Exhibitor Note $242          
    Total Non-Recourse Notes Payable $147,138       $12,129  
                 
    Recourse Debt            
    Cinedigm TL $0 6.0% Oct-13   $0 Refinanced with Convertible debt in April 2015
    Cinedigm Revolving Loans $15,127 6.0% Oct-13   $908 borrow up to $30mm
    2013 Notes $3,857 9.0% Oct-13 Oct-18 $347 sold warrants to purchase 1.5mm shares
    Convertible Debt $64,000 5.5% Apr-15 Apr-20 $3,520  
    Total Recourse Notes Payable $82,984       $4,775  
                 
    Total  $230,122       $16,903  
    Net Debt $200,875          
     
    Recent Acquisitions:
    1. New Video Group Inc: In April 2012, Cinedigm acquired New Video Group, an independent home entertainment distributor of physical and digital content for more than 500 independent rights holders
      • Holds licenses for more than 4,000 feature films and 6,000 television episodes
      • $14mm in upfront consideration, plus additional earn out potential of up to $6mm over three years tied to the future financial results ($10mm in cash from balance sheet and rest in shares)
      • The $14 million upfront purchase price represented approx. 5.6x New Video's 2011 adjusted EBITDA
    2. Gaiam Vivendi Entertainment (GVE): In Oct 2013, Cinedigm acquired GVE, a division of Gaiam America’s entertainment unit
      • Maintains exclusive rights with number of independent studios/content providers. Largest aggregator and distributor of independent content and the fourth largest distributor of non-theatrical DVD's and Blu-Ray discs in the U.S.
      • GVE provides sales, marketing and distribution services to many of the home entertainment industry's most prestigious brands, including Discovery Communications, Hallmark Channel, NFL Films, National Geographic, Marvel Animation, Shout Factory, Televisa, and World Wrestling Entertainment.
      • Acquired GVE for $51.5 million, representing approx. 3.3x GVE's 2013 estimated EBITDA
      • The accretive acquisition was expected to add more than $15 million of annual EBITDA
    Gaiam Lawsuit:
    • Cinedigm is seeking more than $30 million in damages, in addition to unspecified compensatory damages, attorneys’ fees, costs and interest, resulting from the acquisition
    • Cinedigm alleges Gaiam materially breached financial details within GVE, including working capital. It claims Gaiam engaged in “fraud and tortious [litigious] acts” in connection with the sale, including the non-collection of accounts receivables, transfer of cash from collected accounts receivables, and mishandling post-closing collections, among other charges Cinedigm claims Gaiam did not disclose, or hid, information about the real financial condition of the division. It claims that Gaiam hid the fact it would not be able to hit a sales benchmark related to WWE Entertainment, forcing Cinedigm to pay millions to WWE after the deal closed 
    • In August 2014, Cinedigm initiated mediation with Gaiam. On January 2015, Gaiam and the Company participated in a two- day mediation to determine whether the parties’ disputes could be resolved informally without arbitration. The mediation was not successful, and Cinedigm decided are pursuing its claims against Gaiam through arbitration. Although Gaiam initially filed an appeal against the arbitration, the appeal has been dismissed. The parties are now proceeding with the Working Capital Arbitration and it is expected to receive an initial decision on the working capital claims shortly.
    • In addition, the parties are proceeding with their respective non- working capital claims in the AAA Arbitration.
    • Gaiam disputes Cinedigm’s allegations and filed its own arbitration claims seeking working capital reimbursement from Cinedigm of more than $8 million
    OTT Channels: Couple of Cinedigm’s OTT channels launched and upcoming channels include:
    1. Docurama, the first OTT Channel, was launched in May 2014
      • Revenue model based on advertising- supported video on demand service (AVOD)
      • Available across most internet connected devices
      • 800+ documentary films available for download
      • Approx. 600k installs to date
    2. CONtv launched in March 2015
      • Brand partnership with Wizard World, Inc. (company that organizes Comic Con conventions throughout the country)
      • Freemium business model with both AVOD and SVOD (subscription video on demand offering)
      • Over 2,500hours of content available (approx. 40% original) designed to cater towards gaming based fans
      • Screening hundreds of hours of Comic Con panels, contests and behind the scenes footage direct from Comic Cons
    3. Dove Tv: To be launched in mid September
      • Partnership with Dove foundation to provide faith based content and targeted towards family and kids 
      • Dove has access to 1.5mm monthly unique web visitors and 80k households subscribing to the Dove-approved list of films
      • Cinedigm will own and operate the channel, with 20% profit sharing with Dove Foundation
    4. TV4 - At least one new OTT channel with brand partnership with Tv4:
      • First channel to be launched this summer and aimed at children, from preschoolers to tweens
      • The co-owned channel will be distributed through TV4's premium online video distribution platform, covering 100 million US households and over 300 million devices
      • The content for the new OTT network will be drawn from the Cinedigm library and then curated by TV4, which plans to add its own new networks to the partnership as well
     
     
     

     

    I hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    - quarterly update on subscription and revenues generated from digital network segment

    - Additional share repurchase annoucement

    - Strategic sale or spinoff

    - Setllment with Gaiam with meaningful claims

    Messages


    SubjectMizel departure, Gaiam settlement
    Entry10/19/2015 02:35 PM
    Membermaggie1002

    Thanks for posting the idea on CIDM.  I agree with the potential opportunity although the lack of owner orientation is disconcerting.  

    How do you reconcile the poor alignment (yes, McGurk owns lots of shares granted to him but is paid immensely and hasn't purchased any shares although he was influenced to take shares in lieu of cash for last year's bonus)?  What is your perspective on the Mizel departure?  Were you surprised that the Gaiam settlement was for less than $2.5M and what is your perspective on the pending arbitration with Gaiam?  For what it is worth, I hear the Dove channel launch is off to a strong start but it's obviously too early to calibrate the likelihood for success.  Thanks in advance for your responses.


    SubjectUpdate
    Entry12/29/2015 02:06 PM
    Membershoobity

    Hi VFM,

    Any update here with stock around 25 cents or so?

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