Cinedigm Corp.
Q3 2017 Earnings Call Transcript

Published: 15 Feb 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the Cinedigm Fiscal 2017 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference Jill Newhouse. You may begin.

[Jill Newhouse:]

Good afternoon and thank you for joining today’s third quarter fiscal 2017 earnings conference call. Participating in today’s call are Cinedigm’s Chairman and Chief Executive Officer, Chris McGurk; Chief Financial Officer, Jeffrey Edell; and our General Counsel and Head of Digital Cinema, Gary Loffredo. Before I hand the call over to management, please note that on this call certain information presented contains forward-looking statements. These statements are based on management’s current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the Company’s business and financial results to differ materially from these forward-looking statements are described in the Company’s periodic reports filed with the SEC from time to time. All of the information discussed on this call is as of today, February 14, 2017 and Cinedigm does not intend and undertakes no duty to update future events or circumstances. In addition, certain financial information presented in this call represents non-GAAP financial measures. And now, I’d like to turn the call over to Chris McGurk.

[Chris McGurk:]

Thanks Jill. And thanks everyone for joining us on the call today. We continue to make strong progress in all aspects of our business. First, it’s important to underscore that we’ve accomplished several significant steps towards strengthening our balance sheet and reducing our cost structure. All of these recent successes will help achieve our overriding objective of sustained and growing business profitability. Let me briefly list some of these accomplishments now. We have implemented more than $10 million in annual operating cost reductions, including the recent termination of our West Coast office lease and by leasing less expensive space. That alone reduced our cost by over $750,000 per year. We reduced our Digital Cinema debt by over $43 million during the first nine months of fiscal year 2017. We fully prepaid the outstanding balance of over $9 million in our Societe Generale Phase 1 term loan facility in November 2016. We closed two significant accretive exchange transactions for our convertible notes over the past two months reducing our convertible note balance by $7.4 million and reducing our annual interest expense by over $300,000. We cancelled approximately 1.8 million common stock warrants of an institutional holder in December 2016 for a very nominal fee, further simplifying our balance sheet and reducing overhead. And we are not yet done with our efforts. We continue to aggressively pursue additional cost streamlining opportunities. In addition, working with our investment advisors, we continue to target additional opportunities to accretively exchange our convertible debt with current holders further reducing our total debt balance and interest cost. We also have made significant progress lining up promising opportunities to replace our existing revolver with an expanded asset-based loan that more adequately reflects the huge collateral base that we have in our business. As a result of all this progress, we’re now prioritizing additional convertible debt exchanges and securing an expanded asset based loan as our top two financing priorities versus raising the additional second lien debt that we discussed on prior calls. Expect more news on these efforts in the next couple of months. Most importantly, all of this successful activity has improved our ability to profitably grow our business operations, which I will now review. First

[Jeffrey Edell:]

Thanks Chris. For third quarter of 2017, we’re very pleased with the positive momentum that we’re seeing across all of our businesses and the subsequent financial results. Consolidated revenues were $24.4 million, Content and Entertainment revenues were $11.6 million. Consolidated adjusted EBITDA was $11.5 million. Our non-deployment adjusted EBITDA was $2 million, inclusive of the significant operating cost incurred in the ramp up of the over-the-top channels that Chris referred to. And our CEG combined OTT adjusted EBITDA increased 90%. Year-to-date non-deployment adjusted EBITDA was $2.8 million, an increase of over 300% or $4.1 million from last year, and CEG OTT adjusted EBITDA increased 58% over that same period. Overall, in the first nine months of fiscal year ‘17, the company paid-down over $43 million to non-recourse debt related to the Digital Cinema business. Our balance sheet continues to improve as evidenced by our current ratio being 1.1

[Chris McGurk:]

Thank you, Jeff. In closing I want to reiterate that we have made significant progress in strengthening our company through all of the recent accretive financing activities and cost streamlining accomplishments that Jeff and I just highlighted. We remain very, focused on quickly delivering additional accretive convertible debt exchange transactions in a new expanded revolver. Aided by those efforts, we continue to leverage our position as the largest independent studio in North America. And our studio content distribution business, we are very, focused on acquiring and releasing premium content in high financial return genres where we have a strong track record and industry-leading expertise. And that will drive revenue growth and increase profitability. In Digital and OTT, we’re extremely well-positioned to take advantage of the rapid emergence of the new S5 ecosystem in North America as well as international territories. Again, that subscription video-on-demand business is soon projected to generate over $30 billion in revenue. And it is the highest growth, highest margin part of the entertainment business. Having the track record to service and grow not only our own narrow cast OTT channels but to also acquire, manage and service an enormous volume of digital content rights and launch channels for third parties in this S5 ecosystem is a key competitive advantage for Cinedigm. We look forward to sharing successes on that front in the near future as we build out that new line of business. Finally, I want to point out that we continue to be engaged in several conversations with potential strategic partners at the corporate level. There has been significant M&A activity recently in the independent entertainment content space with companies like Legendary and DIP Plug having being acquired by the China-based entertainment conglomerate Wanda, And AMC Networks, investing heavily in ROJ Entertainment, primarily because of their OTT business. With our public currency, growing metrics in OTT, potential positioning as the leading independent content aggregator for the huge and growing S5 ecosystem and the significant potential residual value for our Digital Cinema equipment, we are attracting interest from multiple entities both in the U.S. and abroad that we are carefully evaluating. And with that, we will now take your questions. Operator?

[Operator:]

[Operator Instructions] And our first question comes from the line of Hasnaim Karim from Kilimanjaro Capital. Your line is open.

[Hasnaim Karim:]

Thank you. Just a couple of questions on the VPF if I could start with, Jeff, I think on one of the previous calls you had mentioned that the NPV of that unit is positive. And I was wondering maybe if you could put a number around it, I mean, are we looking at something over $15 million, is it a material number? My second question regarding the VPF business is with the prospect loan it looks like making up a majority of the outstanding non-recourse debt. Are you looking to refinance that debt at any point in 2017 or is it going to be sort of a gradual pay down? Thank you.

[Jeffrey Edell:]

Okay. So, the first, Gary, do you want to answer that one?

[Gary Loffredo:]

Yes, I had a hard time hearing the first one. The prospect refinance yes that is the majority of the digital sentiment non-recourse debt. And we are exploring the possibility of refinancing that prospect there with a lower interest rate financing.

[Jeffrey Edell:]

And Hasnaim, your first question about the value of the net NPV of the projectors, we don’t ever go out really from the company and give a value. But there are 4,600 projectors that we do have ownership of, 3,500 outright. And so, those systems from a use perspective with bumper-to-bumper warranties as Gary like to talk about all the time. They could be worth $15,000 a piece at the end of the day.

[Chris McGurk:]

This is Chris, as Jeff said we don’t do the calculation ourselves. Others have looked at the company and it’s both encouraging and frustrating for us that some of their calculations show that the residual value of that equipment of the projectors that Jeff mentioned is far and above the current market capital of the company. The other thing that I will say is that the interesting thing is we’re getting some interest from entities in emerging markets with significant growth rates in terms of the theatrical business, China obviously, who are looking at that equipment that potentially is going to come back to us and seeing it as an asset that they can leverage in their marketplace. So, we’re encouraged that the residual value is significant and we’re very encouraged that we’re going to be able to realize that value.

[Hasnaim Karim:]

Okay. And then maybe just to follow-up on that. With regards to the AMC acquisition of Carmike that being closed, have the discussion started yet or do you expect any discussions regarding maybe taking that in-house, that business in-house for them?

[Chris McGurk:]

Gary?

[Gary Loffredo:]

We expect to have some discussions with AMC once they fully integrate the Carmike Systems. But we’ve not made any report right now.

[Hasnaim Karim:]

Okay. Is that a 2017 timeframe or later than that?

[Gary Loffredo:]

We expect to have discussions with them this year.

[Hasnaim Karim:]

Okay, okay. I’ll get back in the queue and leave for someone else. Thank you.

[Chris McGurk:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Loren [ph] [indiscernible]. Your line is open.

[Unidentified Analyst:]

Hi, it’s Loren from [indiscernible]. I had a question on the OTT installed base of users and the run-rate there. I know it seems like it’s come down quite a bit in terms of the growth rate. Can you kind of comment on what you’re seeing there?

[Jeffrey Edell:]

No, look, it’s - strictly the OTT business is strictly a measurement that the interplay, of the amount of money that we choose to spend on content refreshing the channels and the marketing dollars. So these are the levers that we can literally Loren turn up or turn down as we like. If we turn down the levers of content and marketing we can get to a breakeven very quickly but you’ll slow your growth rate. If we turn those levers up, we increase the period of time to breakeven but we create great value in a lot more subscribers. We’re actually very happy with the current subscriber base. And what’s happened to us, which is fantastic is the acquisition cost per subscriber has dropped considerably. So as we’ve been in this business now for a year and half, two years, we’ve been enabled to bring down the actual cost of acquiring a subscriber and then the long-term value of the actual customer themselves.

[Unidentified Analyst:]

Okay. So basically you just spend a little less on marketing in the last quarter?

[Chris McGurk:]

And one of the things we’ve been concentrating, I know a lot of these distribution and platform deals, we haven’t seen any impact as Jeff mentioned of the LeEco deal kicking, we never got any reporting out of them. And we’ve got three or four other distribution deals on the table right now that we’re trying to get over the line. So, with the spend that we’re doing in this first calendar quarter on both content and marketing and when the impact of these new deals kick-in, we fully expect to see the growth rate begin to climb up again.

[Unidentified Analyst:]

And did I hear you correctly, you said, it was on a $2 million run-rate, is that a net revenue absent the revenue share to the partner?

[Jeffrey Edell:]

That is the gross revenue that comes into us compared to the gross revenue that came into us last year, $300,000-ish last year and $2 million in this fiscal year. It’s just a year-over-year. It’s not a run-rate because every single.

[Unidentified Analyst:]

I see, it’s in fiscal year 2017, okay.

[Jeffrey Edell:]

Yes, yes, you got it.

[Unidentified Analyst:]

Okay. Great. And then on the Digital Cinema side, what were the Phase 1 revenues?

[Jeffrey Edell:]

For this particular, you want the quarter or the year, year-to-date?

[Unidentified Analyst:]

Just the last quarter.

[Jeffrey Edell:]

Yes, the Phase 1 revenues for this quarter were $7.855 million exactly. And the year-to-date is $28.1 million.

[Unidentified Analyst:]

Okay. It seemed like you guys had paid down a greater amount of the Phase 1 data if I’m not mistaken, I think it was $12 million at the end of September than the revenues that you just mentioned?

[Jeffrey Edell:]

Yes. Soc Gen, it was paid down $9 million-ish total I think $12 million. So they’re paid to zero, so they don’t really exist now in terms of their spot there. But yes.

[Unidentified Analyst:]

So, that was just paid out of the restricted cash I guess?

[Jeffrey Edell:]

Yes, the combination, Gary, do you want to address that?

[Gary Loffredo:]

Yes, it was paid down over the VPF cash flow from Phase 1 and the restricted cash.

[Unidentified Analyst:]

And then, when you look at the total non-recourse debt, what is that at right now?

[Jeffrey Edell:]

Total non-recourse debt is sitting at $74 million, $75 million right now. And it’s predominantly prospect with KBC really having the balance.

[Unidentified Analyst:]

Great. What was the amount of the prospect to that go down a little?

[Jeffrey Edell:]

Prospect is going down considerably, yes.

[Unidentified Analyst:]

Sorry, quarter-over-quarter?

[Jeffrey Edell:]

Quarter-over-quarter, Gary, do you have that handy? I might have to look that up.

[Gary Loffredo:]

I don’t have the reported numbers as of the end of last quarter. But we paid it down that as well.

[Jeffrey Edell:]

Yes. We’re $6 million down now and then we were down I want to say $5 million or $6 million during the quarter, somewhere in that range.

[Unidentified Analyst:]

Got it. And then, kind of just you guys had mentioned the $10,000 to $15,000 residual value on the projectors. Are you thinking that that is something that accrue to equity or?

[Gary Loffredo:]

Did you say - I didn’t hear the first part of your question.

[Unidentified Analyst:]

Yes, I thought I heard, I thought I heard you mention people talked about maybe a range of $10,000 to $15,000 per projector in terms of residual value?

[Gary Loffredo:]

The range is actually, it’s actually wider than that. Some had the projector price higher than that.

[Unidentified Analyst:]

But is that something that you expect to be above and beyond the prospect debt and something will accrue to actual holders?

[Jeffrey Edell:]

Yes, based upon the calculations that we have, we believe the prospect that could be paid off through just the cash flow of the business. And that would lead residual value potentially available to the company.

[Unidentified Analyst:]

Great. Thank you.

[Gary Loffredo:]

Thanks Loren.

[Operator:]

Thank you. [Operator Instructions] We do have a follow-up question from Hasnaim Karim from Kilimanjaro Capital. Your line is open.

[Hasnaim Karim:]

Thank you. Just a question on the content entertainment business, the distribution revenues obviously have been impacted over the past year and half as a lot of the Amazon and Netflix have gone more in-house. Is this more of a steady state run-rate you expect going forward with regards to distribution business? Or is that something that will kind of continue to decrease over the next two years?

[Jeffrey Edell:]

Look, Hasnaim, the marketplace for the physical business as everyone is aware declines anywhere from 9% to 20%, but that’s just strictly DVD, Blu-Ray combined. We are in a unique position we’re the only Indi that sort of left out there that we can pick up business that’s coming from folks that don’t want to be part of the major studio system. So, we think we can flatten out our revenues from CEG as you look period-to-period create a steady state just from picking up that business. Additionally, digital is a focus of this company, and it’s a large focus as we go into this quarter and the next fiscal year. It’s a more profitable business and it’s a kind of thing that we’re trying to get more and more rights, digital attached to the physical product we distribute and also looking to expand foreign as well. So, if you add the fact we’re the only Switzerland-based, Swiss I’m saying in terms of Indi based, Indi left out there outside the studios, the ability to pick-up business that falls outside the studios with digital and the foreign opportunity gives us a very stable future in terms of how we see that business.

[Chris McGurk:]

And if I could just add to what Jeff said, this is Chris. The upside to us in digital is what I was talking about in my remarkets about digital aggregation for S5 platforms. That in addition, it is licensing digital content. If we can build out that business and become an aggregator for other platforms and maybe not just participate in fees but also participate in potentially the subscription revenues at that platform, you’ve got a huge growth engine for the business that ought to more than offset obviously any decline in physical and really propel our growth going forward. And that’s one of the reasons why we’re focused on trying to build-out that business because we think we have unique attributes as an independent, our ability to handle massive amounts of content and our expertise in the OTT space that people are looking at, that we can build that business out. And that’s going to be a substantial growth engine for us in digital that doesn’t rely on us launching our own channel.

[Hasnaim Karim:]

And I guess, MLB’s internal streaming services, was, part of it was sold to Disney, I think within the past six to nine months. But it takes a certain amount of scale as you can see with optimized business as well. I mean, how much or how far away are you from that type of scale? Do you need that type of scale with regards to the customers that you’re pursuing?

[Jeffrey Edell:]

You’re talking about in the OTT space?

[Hasnaim Karim:]

Yes, well, I guess with regards to providing SVOD, being a third party SVOD?

[Chris McGurk:]

We’re not providing the technology and platform. What we would be providing is we will be providing the content, curation and certain programming services. We would not be investing in technology or building out a platform for a third party.

[Hasnaim Karim:]

Okay, okay, got it.

[Chris McGurk:]

Yes. So, and it’s kind of a unique position that we’re in because besides us there are very few players that can deliver that level of content and that level of curation and programming services to a large entity that’s trying to participate in the OTT space at scale. But to add on to what Chris said, there are certain players that are looking to leverage the technology we already have. And our distribution abilities and so forth, and we hope to make some announcements about that in the ensuing quarter.

[Hasnaim Karim:]

Okay. And then, final question from me. Initially when you’re trying to do the convert exchange several quarters ago, I think the target that you laid out was something if I can remember right, something close to reducing convertible debt by $18 million. Is that kind of how you’re looking at the exchanges now with regards to second lien and equity exchanges? Or is there a dollar figure that you’re going for? I guess how are you thinking about those exchanges now?

[Jeffrey Edell:]

Look, the exchanges could run anywhere from $0.20 on a $1 to $0.40 on $1 to $0.50, depending upon whether they’re consummated through cash, equity or adding to the second lien debt. We have $15 million is our cap in our second lien debt position. So, to the extent that we can utilize the second lien debt and garner a large discount, convert, it makes sense because it’s adding equity value to the company. And you see, the two transactions that we’ve just done right now, one of them is probably $0.20 on the dollar when you figure out just the straight equity that we converted it for without putting anything in the second lien position and got rid of significant debt. And the other one was a combination of equity and a second lien position that was around just I think under 50%. So, you can give an idea of the range. So, if you took the $64 million of overall debt and you take the $5 million in mix, because that’s available to work this way as well, its $69 million. I don’t think it’s too far of a stretch to get $18 million off of that debt.

[Chris McGurk:]

Yes, we don’t have any hard and fast rule to any particular deal other than we’re trying to reduce our interest cost, we’re trying to improve our balance sheet, we want to make sure that it’s an accretive transaction. Obviously we’re extraordinarily focused on making sure we’re not doing anything to mute our current shareholders. And we’re very happy with the deals that we’ve done so far. And you should expect more announcements in the near future.

[Hasnaim Karim:]

Great. Thanks so much. And good luck.

[Chris McGurk:]

Thank you.

[Jeffrey Edell:]

Thank you.

[Operator:]

Thank you. And we do have a follow-up from the line of Loren [indiscernible]. Your line is open.

[Unidentified Analyst:]

Thanks. Yes, you made a good comment about the cash flows of the Digital Cinema business covering the debt and then the residuals to the equity on the projectors. I wanted to make sure I understood where the revenue streams were coming from in terms of kind of the assumptions. I know that I think you’re projecting the Phase 1 screens for the MPA to roll-off this year. And then after that I guess you’d have the non-MPA revenue streams. Is that still around $1 million roughly per quarter?

[Jeffrey Edell:]

Gary, do you want to?

[Chris McGurk:]

Gary, you want to tackle that one?

[Gary Loffredo:]

We’re not prepared to give guidance on what we expect on the Phase 1 screens. But as far as the revenue, this Phase 1 VPF revenues and then there is the Phase 2 VPF revenue and the service fees that we get for collecting those revenue. All of those revenue streams will go to pay down the prospect debt. And we are forecasting that revenue is sufficient to pay off the prospect debt without using any sale or projectors.

[Unidentified Analyst:]

Right. So 2017 we’re still thinking that the 10-year anniversary on the Phase 1 goes away. Is that right on the MPA projectors?

[Gary Loffredo:]

Under the major studio you’re talking about?

[Unidentified Analyst:]

Yes.

[Gary Loffredo:]

Yes.

[Unidentified Analyst:]

Okay, and then, Phase - sorry, go ahead.

[Gary Loffredo:]

No, go ahead.

[Unidentified Analyst:]

Phase 2, it sounded like disclosures where that would carry on through 2022, albeit decreasing starting next year is that right with projectors rolling?

[Gary Loffredo:]

Yes.

[Unidentified Analyst:]

And then, your media services, how should we think about that from a modeling perspective and I think it was 10% of the Phase 2 VPF and 7.5 of the MPA Phase 1. Is that just kind of calculation based on those two drivers?

[Gary Loffredo:]

Yes, it’s based on the VPF revenue that we collect.

[Unidentified Analyst:]

Got it. Okay, great. Thank you.

[Chris McGurk:]

Thank you, Loren.

[Operator:]

Thank you. At this time I’m showing no further questions. I would like to turn the call over to Chris McGurk for closing remarks.

[Chris McGurk:]

Again, thank you all. We’ve got a lot going on. And we feel very good about the progress we made in the business. So, thanks for your support. And stay tuned and expect to hear more from us over the coming weeks. Thank you all.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a great day.