Cinedigm Corp.
Q4 2016 Earnings Call Transcript

Published: 15 Jul 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Cinedigm Corp. Fiscal 2016 Fourth 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 now like to turn the conference over to Jill Calcaterra, EVP Corporate Communications. You may begin.

[Jill Calcaterra:]

Good afternoon and thank you for joining today’s 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, 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, July 14, 2016 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 would like to turn the call over to Chris McGurk.

[Chris McGurk:]

Thanks, Jill, and thanks everyone for joining us on the call today. First, I would like to review the financings that we are currently working on to provide capital to support the business and strengthen our balance sheet. Then I will discuss some important up to the minute developments with our Board governance and then the progress we have made with our base business in OTT. Following that discussion Jeff will review our fourth quarter and full year financials and discuss the significant success we've had in achieving the streamline of our cost structure and building a profitable cash positive base business. After that we'll take your questions. So, as we detailed in our filings, we have been working on a comprehensive and interrelated series of financing transactions to provide capital, significantly strengthen our balance sheet and improve our business prospects. If implemented, these transactions will lower outstanding debt, significantly reduce annual cash interest expense and add important new working capital to support our business. Also we have already significantly improved the liquidity from our existing revolving credit facility. As a first step, we recently entered into an agreement with our existing bank group led by Société Générale to modify our existing revolving credit facility. This amendment immediately increased our working capital. Jeff will review this amendment in more detail in a few minutes. Importantly, these changes help facilitate the other two new financings now in front of the company underscoring how our current banks have been very supportive and flexible regarding our financing efforts. The second step, this agreement with the banks gave us the flexibility to do a relatively small raise of up to $11 million in second lien secured debt with a modest and shareholder friendly equity component. Ronald Chez, our largest shareholder and strategic advisor along with myself have already committed to invest in this facility. We believe Ron's investment is an important vote of confidence in both our strategy and our prospects. We expect by later today to already have $4.5 million in funding and commitments toward this effort. Expect more news on this financing shortly. Now it is very important to emphasize here that we plan to be very judicious regarding the total raise amount and probably will not target a full $11 million investment. The most important factor driving this debt tranche is that the additional working capital it will generate provides assurance that we clearly have the capital needed to continue to accelerate the company's recent success in rolling out new independent distribution deals as well as supporting growth in our narrowcast OTT channels, including several new distribution deals on the near-term horizon similar to our successful Amazon agreement. In addition to our significant cost streamlining efforts, that was a very important point for both our current lenders and the entities involved in a potential accretive exchange of the convertible and mezzanine debt currently on our balance sheet. So, as a third step and as we reported in our filing today, this second lien raise has helped enable the company to develop an opportunistic plan to offer holders of the $64 million in 2015 convertible notes and $5 million in 2013 mezzanine notes on our balance sheet to exchange their debt for a combination in total of approximately 1.5 million shares of equity and $48.3 million in third lien secured debt. We will attempt to finalize this accretive transaction after we move forward with a modest second lien financing I just described. If completed, this transaction will simplify our capital structure, reduce cash interest and significantly reduce the balance of the notes and future dilution from conversion. Finally, in another important effort to further strengthen our balance sheet, we are evaluating proposals from potential new lenders to replace our current revolving credit facility that would further improve our liquidity providing even more capital to support the business. Overall, we believe our efforts to strengthen the balance sheet, provide additional capital, streamline operations and take advantage of a much stronger competitive market position given recent industry events will prime Cinedigm to attract significant new business and enhance shareholder value. I want to thank all of our investors and other constituents for your extreme patience while we have worked on these transactions. It has taken far longer than we would have hoped to move forward with this complicated and interrelated set of deals. We appreciate your loyalty and understanding during this period of transition and hope the benefits of these transactions combined with our operational changes and momentum in both our base business and OTT will create material shareholder value. Now, I'd like to review some important developments in regard to our Board of Directors. Today, we reached agreement that Ron Chez, our largest shareholder and key strategic advisor, will join our Board as lead Director effective immediately. Ron brings a wealth of expertise and knowledge of Cinedigm to this role and is clearly aligned with our shareholders. He has been instrumental over the last year as strategic advisor in helping guide the company forward. We are very pleased that Ron has joined the Board. Additionally, we are reducing the size of the Board to five directors effective immediately. This will streamline the governance process and make it even more efficient. We want to thank the two directors that will be stepping down for their service and we'll be sending out a release with more details on this shortly. Now, to review our current business, let's start with the strong progress we've made in OTT. In aggregate, as of today, we are pleased that Cinedigm's three OTT channels, Docurama, CONtv and Dove have over 2.5 million app downloads, about 500,000 registered users and over 50,000 estimated active subscribers. We continue to be pleased with our involvement in Amazon's Streaming Partners' program. As a reminder, all three of Cinedigm's OTT channels are available to Amazon Prime members for $499 monthly subscription fee each. Prime members can now view Cinedigm's channels with the Amazon video app available in hundreds of devices. We believe we secured this prime real estate due both to the high quality of all of our apps and the large volume of highly curated premium content available on each of our channels. And with an estimated 50 million households currently using Amazon Prime or nearly 40% of total American households, this distribution arrangement significantly expanded the potential subscriber base of Cinedigm's OTT channels. We're very encouraged by the performance of all three of our channels on Amazon to date and we continue to have active discussions with other major distribution platforms and technology companies about making our channels available on more services under similar arrangements. For example, we are now in advance discussions with a very large consumer hardware manufacturer to embed both CONtv and Dove Channel in their North American product offerings. The result could be several millions in additional revenue. Look for more announcements about these types of distribution arrangements soon. Now let's get into some detail on the specific channels starting with the Dove Channel. Since its launch in September 2015, the Dove Channel has rapidly generated about 1 million installations on Android, iOS, and Roku, as well as on Amazon. Additionally, we have more than 340,000 registered users. As of today we estimate approximately 35,000 active subs for Dove and growing. Dove's success has generated several discussions with potential strategic partners for the channel in which we are now actively engaged. Now let's talk about CONtv. For CONtv our repositioned content offering that we discussed on the last call continues to see particular success on Amazon. In addition, we're engaged in active discussions with potential channel strategic partners who are particularly interested in a targeted audience of millenniums. We are in the process of refreshing our content offerings for both CONtv and Dove, where we now have an enormous amount of consumer viewing data that will help us program the channels in a more targeted and efficient manner and drive additional subscriber growth. Our Docurama channel also continues to grow particularly on Amazon with a services subscription base. It is an integral part of the skinny bundling conversations we continue to have with distribution platforms for our channels. Now let's address our entertainment distribution business. We're pleased that gross sales grew 5% year-over-year despite the issues with our fiscal year 2016 sales pipeline we have emphasized on previous calls. Through strong placement management our returns were down 10% from the previous year. And additionally as Jeff will review in more detail, changing market conditions have allowed us to acquire a variety of new titles under very favorable terms and have presented us with a very strong queue of potential new deals that could dramatically expand our revenue base. On the digital front we've seen strong performance from our transactional digital accounts including iTunes, Google, Vudu, and Amazon instant video. Given the strong performance of several titles, including traded, The Good Witch TV and movie franchise, The Sharknado franchise and a variety of our catalog titles, we're very pleased to be exceeding our sales goals. Overall, when combined with our aggressive cost rationalization plan and continued focus on improving the product mix and customer base for both our physical and digital businesses, where new digital services continue to launch, we are profitably managing our base business while it also provides a key competitive advantage in quickly building our leadership position in OTT. Moreover, on a go-forward basis, we expect our base distribution business to generate sufficient cash to fund the growth capital required by our OTT channels. In the meantime, we continue our discussions with potential strategic OTT partners to accelerate our growth and also share the capital outlay required. And now Jeff will review some key financial and operational points and also discuss the progress we have made and significantly streamline our cost structure and building profitability in our base business. Jeff?

[Jeffrey Edell:]

Thanks Chris. As Chris mentioned, in this fiscal year we were dealing with the effects of a reduced sales pipeline that had a definite impact on our results, particularly in quarters three and four. But even with those headwinds we are pleased that our revenues were in line with analyst expectations. To provide some more context of our overall results, there are several items I want to highlight. First, this was a ramp up year for our OTT business and we have been investing significantly in our channels. We now have three channels fully operational versus just one channel last year. We have continued to tightly manage our customer acquisitions overhead and marketing costs given the additional experience we have in running these channels. As an example, we recently launched a series of multi-month subscription plans and based on this change the number of customer months sold has significantly increased and should help mitigate our trend. Second and very importantly, we improved our base business results significantly versus the prior year. With additional cost-cutting measures enacted, coupled with more product opportunities, we are confident this business will be highly profitable going forward. To review our top line results for fiscal year 2016, first consolidated revenues for the year were $104.5 million, content and entertainment revenues for the year were $43.9 million, consolidated adjusted EBITDA for the year was $43.2 million and non-deployment adjusted EBITDA for the year was a loss of $3.4 million inclusive of our significant investment in the ramp up of OTT. To review our results for the fourth quarter, consolidated revenues were $23.2 million, content and entertainment revenues were $8.8 million, consolidated adjusted EBITDA was $9.1 million and non-deployment adjusted EBITDA was a loss of $2.1 million again inclusive of our significant investment in the ramp up of OTT. On the financing side as Chris mentioned, we entered into an agreement with our existing bank group led by Société Générale to modify our existing $22 million revolving credit facility. This previous amendment immediately increased our working capital for operations by $6.2 million through September 13, 2016. But importantly, and based on subsequent positive discussions with our banks we now have extended the $6.2 million liquidity enhancement through June 30, 2017. The new amendment also reduced the maximum principal amount available under our facility from $22 million down to $19.8 million reflecting current utilizations which has more than offset by the $6.2 million I mentioned earlier. We appreciate our close relationship with our bank group and the financing flexibility that they have provided us. Significantly, these changes help facilitate the other two new financing opportunities now in front of us that the company that Chris described. Combined with the $4.5 million in new second lien commitments that Chris mentioned earlier, this $6.2 million credit enhancement improved our liquidity by approximately $11 million and with the potential for the future exchange of our convertible and mezzanine debt we could further improve this by up to $3 million more. As we mentioned in our previous call, we have continually paid close attention to our cost structure and in that regard we have aggressively trimmed expenses throughout our business transformation. We have implemented a plan that is on track to garner approximately $10 million in annualized cost savings. This plan encompasses personnel changes in both our New York and LA offices. Another area of focus is our occupancy where we believe we can also save in excess of $500,000 per year by continuing to optimize our real estate cost structure on the West Coast. None of these reduction initiatives that we've referred to should have any negative impact on fiscal year 2017 revenues. However, they should positively impact our EBITDA. Additionally, as our position as a leading independent distributor has become more solidified based on positive industry events for Cinedigm we have recently been able to acquire high potential content under very favorable terms. We also have a significant number of new deals now in front of us that could generate in excess of $30 million in sales. Based on the more favorable deal environment that we are experiencing, we expect to spend significantly less this year on acquisitions with a focus on higher return opportunities at a lower threshold of investment and risk on our part and we continue to cull less profitable content which may have the impact of lowing our revenues, but should also have the benefit of increasing our EBITDA. All this reflects our key learnings over the last two years about the rapidly changing independent content acquisition and distribution marketplace. Finally as the larger entertainment studios launched their own distribution platforms we feel we are strategically well-positioned to be an even more major supplier of content to those channels as they seek new content to fill out their own offerings. The company has reduced its long-term debt by $62.3 million for the 12 months ended March 31, 2016 and additionally post year-end we reduced our recourse debt by $5.7 million in the first quarter of fiscal year 2017. Significantly, with our financing changes underway, potential investors and partners can now focus on the strong asset value that Cinedigm brings to the marketplace. This includes residual value of our installed projection systems from our deployment business, the large $300 million in NOL we carry, our public currency, the depth and breadth of our 50,000 title library, our broad distribution range of over 60,000 outlets, the potential to unlock more shareholder value by splitting up the company into the deployment and media entities, and of course our burgeoning OTT channel business with its rapidly expanding user and subscriber base. I would like to add that we look forward to having the finer things behind us so we can turn all of our focus and attention to running our business and improving shareholder value. Now, I'll turn the call back to Chris for concluding remarks. Chris?

[Chris McGurk:]

Thank you, Jeff. In closing, I want to reiterate that we are working hard on the financing transactions I described at the beginning of this call and again I want to thank our investors and other constituents for their patience. Having already streamlined operations and reduced annual operating costs by approximately $10 million, we believe these financings will position us to exploit the very favorable market conditions fueling our base distribution business and our leadership position in narrowcast OTT where we continued to engage in strategic discussions based on the success of our Dove; Docurama and CONtv channels. Importantly, these financings will send the right positive signal at the right time to potential customers and partners for both our base business and OTT where we need to capitalize on our momentum through strong consistent business execution. And we’re also very pleased with the positive changes that we have made to our board. And with that, we will now take questions. Operator?

[Operator:]

Thank you. [Operator Instructions] The first question is from Andrew D’Silva of Merriman Capital. Your line is open.

[Andrew D’Silva:]

Hey, good afternoon and thanks for taking my questions. I just have a couple quick ones on OTT and then I will move over to your distribution business. So, first on OTT spending decrease during the quarter and may be going into the first quarter of 2017 related to OTT marketing, has there been a significant monthly decline on your spend on a quarterly or monthly basis or any other cost cutting measures directly related to the OTT channel?

[Chris McGurk:]

Yes, as a matter of fact as we’ve determined certain programs that we're putting out there to obtain subscribers and as opposed to blanketing them we become much more targeted. So we’ve been able to trim between $100 million and $150,000 a month off of our marketing spend, yet we're still getting growth in subscriber base. So Andrew, it’s a good point and well taken.

[Andrew D’Silva:]

All right, and then as far as you know your internal market research goes with each channel, what are you seeing as the primary reason a greater portion of your either registered users or app installs and again this it primarily related to CONtv and Docurama, how come a larger portion of them are not becoming paid subs in your opinion is it related to a lack of content, platform issues, pricing, any color there would be useful in understanding future endeavours?

[Chris McGurk:]

We’re happy with the way the funnel is working right now as a matter of fact Andrew. The 50,000 subscribers that we have in total across the three services and you remember that Docurama is only a subscription service on Amazon not on the other platforms. We feel good about our conversion in the way the funnel is working right now. And I think importantly, I think you are going to see greater conversion going forward because of the point you just made. I mean, Dove has only been out there for about nine months now. We’ve got a year of experience on CONtv. We have learnt a lot based on the enormous amount of data that we have been able to generate and glean from all the viewership that we got on the channels right now. And I think as I said on my remarks right now we’re fine-tuning our content offering based on that data and we think that kind of refreshment, particularly on the Dove channel and CONtv is going to be very helpful and drive additional subscriptions. We also think that, I mention that we’ve got several upcoming and potential distribution deals, similar to the Amazon deal. On Amazon it has exceed all of our expectations across all three channels and if we can as we expect transact, two or three more of these deals on platforms similar to Amazon, we think that's going to really help jump start our subscription growth because again you get all the promotional and marketing spend from these giant platforms that exist out there right now. So, we feel pretty good of where we're at right now and we feel very good about the prospects of getting two or three of these other major deals over the line in the next couple of months and we think you’re going to see that kick start our subscription growth pretty significantly.

[Andrew D’Silva:]

Good, good to hear that. And then as far as the AVOD side of the business for the OTT channels are you obtaining adequate amount of advertising inventory right now as you initially expected and is the inventory still coming in around that $13 to $17 CPM range? And then if you can maybe disclose a little bit of data on how many hours of viewership you are seeing monthly across maybe all channels combined would be useful?

[Chris McGurk:]

So yes, the advertising dollars are still pretty stable. It is still in the range that you say Andrew, so we’re still in that same CPM range which is positive. But remember, most of what we’re going to see here is obviously not from the AVOD side, it’s going to be very much skewed to the SVOD side. And any business that in this day and age tries to sell off of or create values off of advertising it is not really appropriate, so I mean you see the majority is going to come from the subscriber side.

[Andrew D’Silva:]

Right and I was just kind of, go ahead.

[Chris McGurk:]

Go ahead, go ahead.

[Andrew D’Silva:]

Yes, I was just trying to pinpoint the type of advertisers in hours watched, kind of give me a sense of what major companies might be thinking as far as the demographic that you guys are targeting and your success within there, because you are going to obtain higher quality advertisers and willing to pay higher CPM if the viewership is there and it’s a good targeted audience?

[Chris McGurk:]

Well, again, I mean the AVOD piece of our business is a very small piece of the business right now given our level of viewership; it will become more important as we go forward. I think one of things to your point about who our viewers are, we’re finding recently awful lot of interest in CONtv because it is appealing to that millennial demographics that is so attractive to not just advertisers, but a lot of big entertainment companies that are trying to find that demo. And we talk about I mentioned that we’re in advanced discussions with a major consumer electronics manufacturing company to be embedded on their devices in North America, that conversation started around CONtv because they were very, very attracted to that millennial demographics for CONtv and that expanded into Dove, when we are able to show them that Dove appealed to a huge demographic in and of itself, Evangelicals and the Faith and Family audience.

[Andrew D’Silva:]

Okay. That makes sense and then just one quick question on the distribution side of the business. In previous calls you kind of indicated that the physical side DVD, Blu-ray could be declining annually at around 10% to 15%? The benefits that you previously mentioned, market related in your prepared remarks, are those expected to maybe offset that decline going into 2017 or do you still kind of figure that to be the case going forward at 10%, 15%?

[Chris McGurk:]

It is absolutely going to offset that decline. We are going to make up for that industry decline we believe through additional volume. What is happening specifically in the industry is you’re seeing more consolidation. Specifically two of our competitors were impacted very, very recently. I won’t name them. One was bought by a major studio and the second one has gone out of business. They went out of business for two reasons. One, like we did they overreached and they made an acquisition of a physical distribution company and paid too much money. But unlike us who have managed to fight through that after the Gaiam acquisition and we think came out stronger based on all the activity that we put in place to streamline our business and pare off a lot of the unprofitable accounts, they weren’t able to do that and at the same time they remained stuck in the old independent film acquisition business that we basically got out of a couple of years ago paying for overpriced films at festivals and trying to release them theatrically. So those two companies, basically one doesn’t exist anymore and the other one was subsumed by a major studio. All of the accounts in that business are now sitting there in front of us. And we feel, as Jeff mentioned in his remarks, right now looking at it, we've got about $30 million in gross sales sitting in front of us right now. We think we’re at a unique point now where we can present ourselves as the independent studio that is financially stable and has great prospects going forward and we can pick up a lot of this incremental business with no increase in overhead. We think that is the competitive advantage that we’ve got right now and it is a buyers' market now as Jeff described. So we think we are in really, really good shape in the base business not just in digital but in physical for those reasons and we have a big opportunity in front of us that we need to execute and take advantage of.

[Jeffrey Edell:]

And Andrew, just to add to that, one is we’re finding that the terms for the new deals that we are looking at as opposed to being payable in 30 or 60 days some of them are going 60 to 90, there is no in addition to the cost that Chris mentioned, there is also no advances required on a lot of this. So cash flow is better. And then one of the earlier comments I made about strategically the way the landscape is shaping with the budgets that the Netflix of the world and the Amazons' in the world have out there anywhere from the $11 billion to $20 billion if you put them together or separately, it is so far out exceeds the studios and the major networks. And since all of those entities themselves have created their own channels or are in the process of doing that, the appetite for acquiring content by those other players fall right to us sitting as the predominant player in this space domestically. So it gives us a great look in for the future.

[Andrew D’Silva:]

That is very fascinating. All right, I will get some more color with you guys offline, but thanks and then good luck going forward this year.

[Chris McGurk:]

Thanks Andrew.

[Operator:]

Thank you. [Operator Instructions] The next question is from Gentry Klein of Cetus. Your line is open.

[Gentry Klein:]

Hi, good afternoon. Thanks for taking my questions. On this $11 million of capital raise, what is the proceeds?

[Jeffrey Edell:]

Yes, and I think I mentioned this in my remarks Gentry, we really felt that we needed and our banks felt and I think some of the entities involved in this exchange that we wanted to try to transact that I described, that we needed a little more firepower at our disposal to take advantage of the industry factors and opportunities that I just described in response to the last question. There is an awful lot of business sitting in front of us right now and we felt we needed a little bit more capital basically to go after that business. And also do the things on the OTT side that I was talking you about refreshing the content on the Dove channel and CONtv to make sure that we’re investing profitably to grow our subscriber base over the next few months at a critical time in that business and particularly when we've got all of these high potential distribution deals in the offing hopefully. We want to continue to show good growth in our user base and our subscribers. And I think I will emphasize again, we have the ability to raise up to $11 million. I think it is highly improbable that we are going to raise that amount of money, we don’t at this point we don’t think we need it, but it was an important thing for us to do, we think just to make sure we had that extra firepower on our balance sheet and it was important for our banks and it was an important fact for the potential exchange that we are looking at.

[Gentry Klein:]

And it looks like your revolver was, sorry.

[Chris McGurk:]

No, Gentry, I was just going to add two things, one is we've hit the tipping point or the influx point with OTT. In the past it was pure investment, a little revenue then in the next year we’re looking at much more significant revenue even with lesser spent, so it shrinks the amount of capital that the company needs compared to last year in that regard. And then with the $10 million of annualized expense cuts that we have made and particularly between corporate and the base business and somewhat in OTT, that also further reduced the need for, so this capital is going to be mainly going to growth and very little is going to be going for the past.

[Jeffrey Edell:]

And again Gentry, I just want to emphasize, we believe that if we can transact the exchange that I described, that will be an enormously additional positive step for the company and a positive step for our balance sheet. It will be a very accretive transaction which I think is important to everybody that will reduce our cash interest payments as Jeff said by up to $3 million a year. It will reduce our debt further and it will prevent, significant dilution from the conversion going forward. So, to add a little bit of the second lien money to get, to put some more fire power on the balance sheet, to help set up the opportunity for this exchange transaction we thought was very prudent and smart for the company. We think the fact that Ron Chez is a significant investor in this second lien along with myself is another real positive signal not just hopefully to our investors, but also to the business community out there right now. We have a lot of content suppliers and a lot of players who want to operate in the OTT space are looking for a strong and financially stable company to partner with and I think all of those factors that I just described are really behind this rather modest capital raise that we talked about.

[Gentry Klein:]

Right, so the revolver was $22 million at the end of the quarter and you paid it down about $60 million outstanding and it looks like. Clearly do you have capacity, how much capacity do you have to draw on the revolver and what’s the borrowing base on the revolver, because it would obviously seem like that you achieved this cost to capital, I don’t know what you’re – the receivables balance is on that, but can you give us a little color as to where you sit in the borrowing base?

[Jeffrey Edell:]

Sure, this Jeff, I’ll help you out there. So originally, our original revolver was $30 million and we lowered it to $22 million in the last amendment to the banks, and this one we've lowered it to $19.8 million. Today as you pointed out we're at $16.2 million. We will pretty much stay in the $19.8 million range, $19 million to $19.8 million over the next several months. So we'll basically keep up with the maximum that our borrowing base allows us. Remember it's different than a credit line that you draw on and use and then pay back. This - the borrowing base is supposed to reflect your asset base. It is supposed to reflect the percentage, your receivables, et cetera. So in that regard, so but we generally will average about $20 million in a month over time. We are also looking, is one other beauty to this thing, is that even though the borrowing based has been reduced to $19.8 million the banks had only kept $2.2 million in worth note of debt service reserves to fund the next six months of interest that was projected for [indiscernible], for revolver and for the underlying - for the converts. That is being cancelled. Paying down the debt and freeing up another $2.2 million of capacity. So it's no longer respected and now with the liquidity threshold of $800,000 its added significant liquidity to the company going forward. In terms of your question about, well then one last thing on the borrowing base we are entertaining some interesting options to even have more access to capital, it is what we've seen is over time that the banks when we originally made this feel haven't quite involved with us in terms of the digital business and so forth. We have significant amount of digital receivables in the $12 million to $13 million range at any point in time and we borrow very little against those digital receivables. And that is critical because that just comes in like an annuity were we've already delivered the product. So we think a new bank opportunity could create significant additional liquidity beyond the borrowing base that we have right now. Collateral wise and it's something if you want to take a look at the second lien deal that we're working on for collateralized that we are somewhere in less than 50% the way we look at collateral probably closer to the low – high 30's or low 40's in terms of the collateral, there's a bunch of collateral that we don't even borrow against. So, for future banks there's tremendous bandwidth for current banks the way it is structured this should work for our current operations.

[Gentry Klein:]

Got it, okay, it’s helpful. I really appreciate all that color. In terms of OTT what's the capital outlay, how much that we spent on OTT, how much are we spending next year? It just seems, I have brought this point there's a process point up before, we continue to show negative EBITDA, we continue to spend a lot of money on OTT, the market cap today is $7 million. I don't understand the investment rationale behind OTT. I would think given all the opportunities you’ve talked about and the funding need you talked about related to the base distribution business, which I believe were poised to actually capitalized on, I just don't believe we are the right company. We don't have the balance sheet to be funding this OTT through these three channels. I would like you to tell me and explain to everyone what the cost is of OTT?

[Jeffrey Edell:]

Yes, we really don’t.

[Chris McGurk:]

Let me answer it Jeff. I'll say, I don't want to give the specific number, because we are in a very competitive environment. But I will tell you in the last fiscal year, the total investment was below $10 million and this year it's going to below $5 million the net investment in that business. And we've got a number of deals on the table right now, that we're looking at strategic partners who might not only – who might offset that capital outlay significantly and might also take equity stakes in each one of our channels. So the rubber is going to really meet the road and the OTT business over the next six to nine months based on the strategic partnerships that we're able to get over the line and also the new distribution deals that I’ve talked about. The Amazon deal is a perfect example of the type of deal we want to do, because it really reduces our risk and opens up an opportunity to bring in many, many more subscribers on that platform. 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. And again, the type of deals that have gone on in that space, the multiples and the valuations of that space are far and above which you are going to get in the base distribution business and that’s why we’ve been pivoting the company toward OTT. So, it's too early to make the kind of call that we should not be investing in that space. We finally got metrics in that space and we’ve got a lot of interest in that space. And again as I said the rubber is going to meet the road based on the deals we do between now and the end of the year.

[Gentry Klein:]

Okay, it just, its counterintuitive to me that, it’s I have a hard time understanding that with the company is levered as we are and with the liquidity position wherein you mentioned the revolver has been reducing its borrowing base and we find ourselves meeting it through second lien capital that we would be spending any money and initiative where we’re burning cash on. If you are going to spend money I would think be spending it on the base distribution business you should be buying back stock. We shouldn’t be putting money into a venture that is burning cash and again all of our problems have been self inflected. I believe if you had a base distribution business that was showing good profitability, good cash flow, a good level of EBITDA that people could attach a multiple to and imply valuation and you look at the non - and you look at the projector business, the non-recourse projector business we'd have significant more value than we do today and we wouldn’t have the liquidity problems we do today. And it is a little mind boggling the strategy that we have been employing, we've gone from, thanks for that, it all was about strategic alternatives and in this calls are finance initiatives.

[Chris McGurk:]

Gentry, we've had this conversation before and I’ll just respond to it and then we can move on. We disagree with you. What we are working toward is an extremely strong base distribution business which is what you are talking about that’s cash flow positive that can fund more than fund our OTT business and we’ve got a very open competitive landscape in front of us now that we didn’t have a year ago and we’re going to try to take a advantage of it. And again, that was one of the reasons why we did this small capital raise. In OTT we’ve got the burn down to below $5 million. We’ve got a number of opportunities on the table to reduce that burn or eliminate it completely and a partner with bigger stronger distribution platforms in entertainment companies that can really help us accelerate and grow that business. And we’re very focused on that because again, that’s a much higher multiple, much higher return business in the base distribution business. It’s the future of the entertainment industry and we want to be part of it. So, I think we should stop the conversation about this and move on to another question.

[Gentry Klein:]

Okay, thanks.

[Chris McGurk:]

Thanks Gentry.

[Operator:]

Thank you. And the next question is from Alan Cortelli, a Private Investor. Your line is open.

[Alan Cortelli:]

Thank you. I have three questions. First of all before I ask my question, I’m so happy that Ron Chez is joining the Board. I think he is the largest shareholder of Cinedigm and the Board will definitely be shareholder friendly as the accountants like to say open track and in appearance. So, I applaud that rules. But the stock price of Cinedigm continues to bear, I’m a long-time investor and today is a great example. You guys are reporting earnings that have currently beat your estimates by $0.10, and revenue was in line with the analyst estimates and the stock goes down 16% or so. It is now trading under a dollar and right now what I always do when I look at that stock price is I divide it by – I divide it by 10 because of the reverse stock split, oh my Lord, it is selling for less than $0.10 and which leads me to my question. It’s my belief that management hasn’t been able to buy significant shares of Cinedigm because they might posses insider information. With all of the disclosures you've made today and all these good things that are forthcoming, my question is what management not now be able to buy existing shares of Cinedigm at least hopefully significantly undervalued prices since they no longer posses in my opinion insider information that is my first question.

[Chris McGurk:]

Thank you, Alan. I appreciate it very much. First, let me say we’re also thrilled that Ron is joining the Board. Again, he has been our largest shareholder, a great supporter of the company and as you know for the last year he has been a strategic advisor to the company, particularly to me and I think his insights have been invaluable. And I think if Ron was on the call right now and responding to that last question, I think he would have said very much the same that I said in response. But you can talk to Ron and he is not shy about his opinions as you know. Second, you talk about the stock price and we're baffled by it and we're frustrated by it, and we feel the pain of our investors. You’ve talked about today the stock went down 25% in the ten minutes before close. I know we don't put much stock in what goes on after hours, but after our release went out it's up 44% after hours, it's just ridiculous. We think it's undervalued. We think these financings that we have done are a good first step in announcement to our investors that we're a financially stable company that's going to move forward, we're going to execute our strategy, and we think it's a really good signal to that potential OTT partners out there and customers that we'll have for our base business that can really help us drive and grow and build the business and execute, and no one will be afraid to come to the company because we've begun to change the narrative of the company from the negative that we had before to a very, very positive one. And we hope that will have along with superior execution will have a very positive impact on the stock price and get it up to a level of value that we think is representative of the assets that we have in the company that Jeffrey described. I am investing in this second lien note that has an equity component. So I figured that was a very good way for me to step up and show my confidence and faith in the company along with Ron going forward. I turn it over to Gary to talk about our ability to buy stock going forward, but I think I can tell you that the management team here and our board view the stock as very, very undervalued right now and a very good investment opportunity. Gary?

[Jeffrey Edell:]

Yes, yes, I hope so and let's go ahead Jeff?

[Gary Loffredo:]

Yes, this is Gary. After the 10-K was filed today, which was filed around 5

[Alan Cortelli:]

Okay, then because you know a lot of investors look at insider trading and if they management buying it helps the stock price. Anyway, I hope that Gary you'll let management know they can buy a lot of shares. That's the end of that question. My second question is the Amazon deal that you talked about, is that deal a percentage of revenue deal, so that it is really a profit sharing that you [indiscernible] only when take [ph] in revenue?

[Chris McGurk:]

Yes, I think and I don't want to get too specific, because we have a non-disclosure agreement with them, but it is – it's a revenue sharing deal.

[Alan Cortelli:]

Good.

[Chris McGurk:]

And they provide all the technology costs and the marketing services and we just provide the content. And I think the great thing about that deal is when you net it all down because they're picking up a big piece of the cost basis the margin is almost the same as if you were subscribing on our website, while we're taking advantage of their reach into 50 million homes. And that’s why we’re so excited about the deals that we – the similar deals that we have on the table right now, we have our opportunities again to do very similar deals. And some of these companies are tracking the fact that Amazon picked all three of our channels in their first tranche of 30 channels that they put up, and they picked them because the channels, our technology works, they look great, our user reviews are very positive, and we put up each channel with enormous amount of content relative to other channels that exist out there in the narrow cast OTT space. And we think all of those factors are going to be very, very important as we pursue sort of the whole next round of distribution deals that we hope we're going to be able to announce in the next few months.

[Alan Cortelli:]

Well that's, I'm glad to hear that and that's a response was the guidance for me is Jeffrey or Gentry I couldn’t remember, couldn’t hear his name, Jeffrey?

[Chris McGurk:]

Gentry.

[Alan Cortelli:]

Gentry, remember you said that your capital outlay and OTT was $10 million last year and you expect it to be $5 million this year, but if you do more revenue staring deals that contributes to less capital spending while still growing the OTT channel.

[Chris McGurk:]

You're absolutely right. And again I said less than $10 million last year and less than $5 million this year. And the other part of some of these deals, they're not just distribution deals that are revenue sharing. We're also having conversations with larger entertainment companies that may have related assets who might want to invest in these channels and also as part of the deal pick up a big piece or provide content, marketing and technology services, so that in and of itself would defray a piece of our less than $5 million capital outlay.

[Alan Cortelli:]

Yes, that's good. My next question and probably you might not be able to answer, but do you foresee a quarter in the next two or three years or year that you'll be able to report a GAAP pretax profit?

[Chris McGurk:]

I'll let Jeff Edell answer that question.

[Jeffrey Edell:]

Yes, Alan as much as I love you and I can talk to you offline, that’s the kind of response for us. We don’t really do look forward, we don’t provide guidance, but you could if you have any of your analytics or the math and some of the things you are doing, if you just project out the OTT ramp up and the cost reductions in the company, you could probably project when you could see that happening, but we don’t give any forward-looking guidance. But you can see everything – it is all aligned for those type of things to happen.

[Alan Cortelli:]

Okay and my last point is not a question, but a potential suggestion, if you haven’t looked into it. I used to be a Catholic for 50 years and we went to an Evangelical free Church and were very happy when I know those kinds of people are important to like the Dove channel. Have you guys ever heard of an organization called Awana?

[Chris McGurk:]

Well, how do you spell it, pronounce that?

[Alan Cortelli:]

Awana, AWANA.

[Chris McGurk:]

I have not.

[Alan Cortelli:]

Okay, I guess that's good because I can tell you, you should have your people look into it. It is a huge organization, evangelical. They have programs that are church every hour through the fall and winter geared the children and parents who care about their kids. It is a wonderful organization and I have a feeling that if you learn more about them, parents who care about their kids, you might be able to work something out.

[Chris McGurk:]

Yes, I appreciate that very much and again just because I have not heard of Awana, it doesn’t mean we're not working with them because we've got huge outreach program for the Dove channel and affiliate program where we've done outreach to religious family evangelical organizations across the whole spectrum. What I'll do is I'm going to followup with them specifically.

[Alan Cortelli:]

Please do, there might be something there.

[Chris McGurk:]

Yes, and Jill Calcaterra, who is here with me right now will followup directly with you to see whether we're working with them currently or there is a opportunity going forward.

[Alan Cortelli:]

Okay, that's it for now.

[Chris McGurk:]

Alan, thank you, very much for all of your questions and your support.

[Alan Cortelli:]

Okay, good luck.

[Operator:]

There are no further questions in the queue at this time. I'll turn the call back over to Chris for closing remarks.

[Chris McGurk:]

Well again, I want to thank you all for your support, for your patience and we look forward to talking to you again actually in about a month and hopefully we'll have more progress to report at that point, both on our business, our financing activities that we've described here and also the strategic conversations that we've been having. So, thank you all.

[Operator:]

Thank you. Ladies and gentlemen this concludes today's conference, you may now disconnect. Good day.