Cinedigm's (CIDM) CEO Chris McGurk on Q3 2016 Results - Earnings Call Transcript

| About: Cinedigm Corp. (CIDM)

Cinedigm Corp. (NASDAQ:CIDM)

Q3 2016 Earnings Conference Call

February 9, 2016 16:30 ET

Executives

Jill Newhouse - Executive Vice President, Corporate Communications

Chris McGurk - Chairman and Chief Executive Officer

Jeffrey Edell - Chief Financial Officer

Gary Loffredo - General Counsel

Analysts

Andrew D’Silva - Merriman Capital

Gentry Klein - Cetus Capital

Alan Cortelli - Private Investor

Jeff Lopatin - Red Hook Asset Management

Terry Hackett - Hackett Management

Operator

Good day, ladies and gentlemen and welcome to the Cinedigm Corp. Fiscal 2016 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Ms. Jill Newhouse, Executive Vice President of Corporate Communications. Ma’am, please begin.

Jill Newhouse

Good afternoon and thank you for joining today’s third quarter fiscal 2016 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, 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 9, 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. To start, I would like to update all of you on the status of the strategic opportunities we referenced on our last call. Working with strategic advisors, we continue to evaluate potential significant M&A and capital raising opportunities for the company. Conversations with interested, strategic and financial investors continue. Importantly, since our last call, we have engaged in additional discussions with new potential partners at both the parent company and subsidiary levels. Additionally, given the rapid growth of OTT and Cinedigm’s OTT business, including our promising new distribution deal with Amazon that we announced in December, we are also evaluating new opportunities with strategic partners to raise capital around one or more of our OTT channels. You can be assured however that we would only consummate such a deal if it could help us dramatically accelerate growth and upside for our OTT business while supporting our overall strategic plan.

While there are no guarantees that any of these investment opportunities will come to fruition, we want to make sure our shareholders are advised about the status of our efforts in this area. That’s all we can say about this matter. And we will not take questions about it for obvious reasons.

Now, to review our current business. Let’s start with the strong progress we have made in our OTT channel business. In aggregate, as of today, we are pleased that Cinedigm’s 3 OTT channels, Docurama, CONtv and Dove, have over 1.8 million app downloads and over 316,000 registered users, growing over 43% and 155% respectively since the end of the last quarter. Not only are downloads and registered users increasing dramatically, the channels are also being used and viewed regularly with overall consumption of content more than doubling to 10 million units per month across all of our channels as compared to 4.7 million minutes last November.

Given the evolving nature of our OTT business, it’s often hard for our investors to put our progress into the context of other existing premier narrowcast OTT channels. However, I can share that Dove has a commanding lead in the iOS app store compared to direct competitors in the faith and family genre and consistently ranks on the charts very comparably to a premiere Blue Chip narrowcast channels like DramaFever and Crunchyroll. We believe the strong relative performance provides extremely positive indicators for the future of our business, particularly in light of the high valuations that both DramaFever and Crunchyroll commanded when they were sold to SoftBank and Otter Media, respectively.

In December, we announced that all three of Cinedigm’s OTT channels would be available to Amazon Prime members as part of the Amazon’s new streaming partners program for a $4.99 monthly subscription fee each. Prime members can now view Cinedigm’s channels with the Amazon video app available across hundreds of devices. We are very pleased that Cinedigm garnered 3 of the 30 channel slots in this service. 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 40 million households currently using Amazon Prime, or nearly 40% of total American households, this distribution arrangement significantly expands the potential subscriber base of Cinedigm’s OTT channels.

We are 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 even more services. Again, just as with Amazon, we believe our highly curated, high volume premium content channels will put as at the head of the bundling line for these other platforms as well.

Now, let’s get into some detail on the specific channels, starting with the Dove Channel. Overall, we are extremely happy about the initial success of the Dove Channel. Families are responding positively to our content and our app, our marketing efforts are hitting their targets and we are excited about our original programming strategy. Dove is clearly gaining strong momentum as the premiere screening channel for family and values oriented audiences. Since its launch on September 15, 2015, the Dove Channel has rapidly generated approximately 515,000 installations on androids, iOS and Roku, as well as on Amazon’s Streaming Partners Program. Additionally, we have more than 188,000 registered users, an increase of almost 50% over just the last 60 days.

As of today, we estimate approximately 22,000 active subs per Dove and growing. The reason why this is an estimate is that we only have actual data from one of our largest distribution platforms through December 31. However, we are confident about the numbers and this estimate far exceeds our internal plan. Particularly, since we have only been actively marketing the service for about three months. Importantly, engagement with Dove, meaning that a user logs in, browses and/or views a program is nearly 35% of our total app installed base and nearly 65% of our registered user base. These very strong numbers show a heavy level of consumption, which builds a strong base for further scaling up the channel.

In January, we announced our first original production for the Dove Channel. Clean comedian, television host and author, Chonda Pierce, will host three one hour episodes of Chonda Pierce presents stand up for families, which will premiere exclusively on Dove in early April. We are thrilled that Chonda often billed as the Queen of clean, will bring her trademark fierce wit and southern charm to these family-friendly specials. The specials will be designed for families to enjoy together, without worrying about offensive language or other suspect subject matter, because like all of the content on the Dove Channel, they will carry the Dove seal of approval.

Now, let’s talk about CONtv. As we announced in November, the company entered into an agreement with Wizard World to increase our ownership stake to 85% of CONtv with Wizard World retaining a 10% interest. Wizard World remains a marketing partner, but we both agreed it makes sense for our companies to focus on what we do best. For Cinedigm, that’s running OTT channels and for Wizard world, it’s all about putting on events and conventions. We are also in the process of repositioning CONtv to better convert users to subscribers based on our research of Comic Con fans and of user experience, since the channel launch, last spring.

We have reduced the monthly subscription price from $6.99 to $4.99, consistent with Dove and Docurama and are reorienting our programming and value proposition to support more of Comic Con VIP experience than the previous more general Netflix for nerds approach. And to further diversify our program offering, we have expanded our coverage beyond Wizard World events, including Pac South, a large gaming conference, C2E2, the largest Comic Con convention in the Midwest, and WonderCon, the largest pop-culture event in Southern California. For the Docurama channel, we have been very encouraged by strong user engagement and viewing time across our device footprint on Roku, iOS, Android, Xbox TiVo, Amazon Fire and Samsung. We plan to expand Docurama as an SVOD service and will broadly launch it across all the key platforms in the next few months. We will be pricing Docurama at $4.99 per month, the same as all three of our channels on Amazon.

As we discussed on our last call, we have also been engaged in discussions with several additional distribution partners for our channels. These are platforms that either want to place our channels in so-called skinny distribution bundles or offer them as a-la-carte subscription services. In addition to the Amazon deal, where we demonstrated that our three channels have the quality and volume of content it takes to be at the head of the line for bundling, we hope to announce more of these partnerships soon and believe they will help accelerate subscriber growth, as well as provide even more market validation that our channels are among the best narrowcast OTT options available. And we continue our development efforts on several additional OTT channel ideas with some exciting new branded partners. Given the success of the Dove Channel, we are focusing on new channels that have a similar huge footprint of potential, avid subscribers.

Now, let’s address our entertainment distribution business. As we noted on our last two calls, our content sales pipeline for the second half of the fiscal year was significantly impacted by the negative business narrative and fallout from our convertible debt raised and resulting activism last spring and summer. Although we are pleased with our results this quarter, where our sales were up 23% versus the previous quarter, they do reflect the impact of those sales pipeline issues making comparisons to the prior year quarter, challenging. However, recent physical sales have demonstrated that while the physical business continues to gradually decline, our key retailers, notably Walmart and Amazon, continue to show strong commitment to physical goods and that should allow for several more years of strong revenue.

Holiday themed promotions were actually slightly ahead of last year, demonstrating the staying power of branded product lines like Hallmark holiday classics and Shout Factory’s my little pony. Overall, as Jeff will explain, we believe that with an aggressive cost rationalization plan in place 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 can profitably manage our base business going forward, while it provides a key competitive advantage and quickly building our leadership position in OTT.

Now Jeff will review some key financial and operational points Jeff?

Jeffrey Edell

Thanks Chris. We are pleased to once again exceed analyst consensus expectations for consolidated revenues and consolidated EBITDA for the quarter. To review our results, consolidated revenues were $30.7 million, an increase of $3 million from the previous quarter. Content & Entertainment revenues or CEG were $14.4 million, an increase of $2.7 million from the previous quarter. Consolidated adjusted EBITDA was $14.5 million, an increase of $3.1 million from the previous quarter and non-deployment adjusted EBITDA was $1.9 million versus a loss of $900,000 in the previous quarter. The overall business continues to stay steady, but this quarter being our seasonally highest revenue quarter of the fiscal year. We continue to aggressively manage returns in our Content & Entertainment business and our trailing 12-month return rate maintains a solid 13% rate, lower than what we encountered during the past 2 years since the Gaiam acquisition. We believe this is a direct result of our more disciplined and careful approach to sales placement and returns management.

On the OTT channel front which is reported as part of the CEG group results this quarter includes our GAAP requirement to pick up a greater share of the CONtv investment due to our increased ownership in the channel. Our EBITDA obviously would have been significantly higher without this increased charge. In fact, our consolidated EBITDA was a bit higher than last year, on a quarter-over-quarter basis, without this adjustment. We have continually played close attention to our cost structure and in that regard, we have aggressively trimmed expenses as we have completed our transformation and are now implementing a plan going into our next fiscal year that should garner an excess of $7 million in cost savings. This plan spans both personnel in New York and Los Angeles and involves the outsourcing of some internal functions, such as IT. The IT outsourcing alone is projected to save us close to $500,000 per year. Another area of close inspection is our occupancy costs, where we believe we can also save in excess of $500,000 per year by continuing to optimize our real estate cost structure here in the West Coast. None of these reduction initiatives that we referred to should have any negative EBITDA impacts on fiscal year ‘17 or on its revenue. It should in fact be a positive impact on EBITDA.

Additionally, we continue to optimize the mix of our content acquisition on both physical and digital sides of the business. We are taking a closer look at the investments and advances we make in various pieces of content that we acquire for distribution. 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.

We continue to call less profitable content providers, which may have an impact of lowering our revenues, but should also have the benefit of increasing our EBITDA. All this reflects our key learnings over the last 2 years about the rapidly changing independent content acquisition and distribution marketplace. On the debt front, we paid down $48.7 million on our long-term debt arrangements in the last 9 months ended December 31, 2015.

Importantly, potential investors and partners are now understanding some of the strong asset value that Cinedigm brings to the market. Among their areas of focus are the residual value of our installed projection systems in our deployment business, the large approximate $300 million in NOLs 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 potentially splitting the company into deployment and media entities, and of course, our burgeoning OTT channel business, with its rapidly expanding user and subscriber base.

We continue to recover from all of the negative headwinds and noise as a result of the Gaiam issues, the convertible debt raise and resulting activism. With a revamped board working together, we are now able to focus 100% on the business itself and the results have begun to show. In addition, we are continually exploring ways to improve our balance sheet and liquidity through constantly evaluating the relationship with our current lender group and new lender options.

Now, I will turn the call back to Chris for concluding remarks. Chris?

Chris McGurk

Thank you, Jeff. To sum up, we are very pleased with our progress in the OTT business as we positioned the company as a narrowcast version of Netflix and we have strong prospects for additional channels and distribution bundling deals that will further accelerate our growth. The Amazon deal for our three OTT channels is a significant step forward and we are very pleased with our initial performance there. We now have three growing OTT channels in full operation, with several more in development. The Dove Channel, in particular, is growing rapidly, exceeding all of our internal estimates. And our base business, which we are managing to increase profitability, we continue to refill our sales pipeline while reducing our cost basis in an aggressive yet disciplined manner, revamping the mix of our content toward more profitable deals and shifting our focus to support the growth of OTT.

We still have significant challenges ahead of us in dealing with a reduced go forward sales pipeline in the fourth quarter that both Jeff and I spoke about and in making sure we continue to have the strategic partnerships and capital required to meet our needs and quickly build our position in OTT to take advantage of that enormous growth and value creation opportunity. However, as I noted, we are actively addressing those needs with the assistance of strategic advisors and are currently evaluating several alternatives. We believe we have the right plan and team in place to deal with those challenges and seize the OTT opportunity in front of us. Besides Netflix, we are the only public OTT focused media company. We need to leverage that position and our public currency. We hope to continue with more announcements about our progress on all this very soon.

And with that, we will now take questions. Operator?

Question-and-Answer Session

Operator

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

Andrew D’Silva

Good afternoon. Just a couple of quick questions bookkeeping ones at first and then we will move over to OTT. As far as Gaiam goes, has there been a conclusion to the arbitration or is that still ongoing right now?

Chris McGurk

There has been a conclusion to it. And we are kind of we have got boundaries set based on the confidentiality agreement with Gaiam if we need to disclose anything we will disclose it, however.

Andrew D’Silva

Understandable. Okay, thank you for that. And then are you seeing success in obtaining greater distribution rights as far as gaining digital distribution versus physical. That might be something that could help tie the revenue declines as that transition from physical to digital takes place. I am kind of curious on the initiatives you have been in place with that?

Chris McGurk

Yes. Actually on the digital side, as I mentioned in my remarks, we are encouraged by the fact that new distribution platforms keep opening up all the time in that space and also it’s highly competitive among all of the general entertainment channels that exist out there. Our goal over time is to basically open up our licensing across the spectrum and be one of the, if not the biggest independent content licensor across all the different platforms and reduce our dependence on Netflix. So, we see growth in that space and it’s primarily going to come from the growth of all these services in addition to continuing to service the Netflix deal.

Andrew D’Silva

Okay.

Jeffrey Edell

Andrew, just adding my sense, keep in mind, Andrew we don’t have digital distribution rights on all of our titles. So, it doesn’t always operate proportionately.

Andrew D’Silva

Yes, that was kind of the question. Are you starting to get digital distribution rights on a greater percent of the titles that you represent or is it still primarily physical and is it gravitating more towards digital as time goes on?

Chris McGurk

Yes, we are. And keep in mind, for all our owned and licensed titles, those we typically pickup the digital distribution rights and that’s the most profitable form of digital for us.

Andrew D’Silva

Got it. Alright, great. And then you mentioned $7 million in cost reductions that we should expect next fiscal year. Are there any severance packages that we should expect this current quarter? And if you have an estimate on what that could be, if you could share? That would be great.

Jeffrey Edell

Yes, severance will continue to hit the company’s cash flow for a period of 2 to 3 months maximum on some individuals, because some of the people have been here for years. Our policy is 2 weeks per year. So, you take someone who has been here 10 years, you are looking at 20 weeks, but the majority of it should fallout by the end of March into the first half, let’s just say of April. The way we do severance is we pay it out over time as though someone is just on payroll same way. So, we don’t pay it in lump-sum. Then we will get the benefit of the EBITDA side mostly from the April 1 through the next fiscal year, starting closer to May.

Andrew D’Silva

Got it. Thanks for the clarity on that. Then moving over to OTT, what is your posture today as it relates to OTT? Right now, is your primary focus at this point on all three channels or are you maybe kind of gravitating to focus on just Dove and improving the proof-of-concept at this time?

Chris McGurk

No, we are focused on all three channels as I described in my remarks. Obviously, Dove appears to be the channel that has got the most immediate traction in the marketplace. So, it appears from an investment standpoint on our part to be basically the best investment that we can make in the company at this point in time. So, we are obviously very focused on growing that business quickly. But I laid out the strategy for each one of the channels. We think ultimately all three are going to be very successful. We have been encouraged by how all three have done in the Amazon Streaming Partners program since December. So, across the board the goal is still to have a portfolio of 5 to 10 channels. Obviously, very quickly out of the gate, Dove has become sort of the star in our constellation of channels right off the bat.

Andrew D’Silva

Great. Last question relating to that, where are you on your expected marketing spend progression for the various OTT properties, is it still pretty early in the spending ramp or should we expect to be steady state for the next couple of quarters or increased dramatically? Any color there would be useful.

Chris McGurk

We are continuing to spend money as we garner results, like Chris talks about, remember the Dove Channel is seeing some exciting results and so we are going to build value based on acquisition of subscribers. So we are spending right now on a steady-state, but as we see greater results, we will spend more. If it builds shareholder value, it makes sense to do.

Andrew D’Silva

Got it. Alright guys. Thanks for answers and then good luck going forward.

Chris McGurk

Thank you, Andrew.

Operator

Thank you. Our next question is from Gentry Klein of Cetus Capital. Your line is open sir.

Gentry Klein

Hi, good afternoon. So a few questions following up on that last question, can you tell us roughly how much you are spending annually on OTT?

Chris McGurk

It’s not something – Gentry, we don’t release that data for a number of reasons, so we can’t really give that out, unfortunately.

Gentry Klein

Okay. But the comment of being EBITDA positive, excluding the CONtv charge...

Chris McGurk

We are still in net investment mode clearly on OTT right now. We don’t want to give out our marketing spend data right now for competitive reasons, primarily.

Jeffrey Edell

And the comment that I made I was just trying to compare last year, last quarter to this year, this quarter and saying if we didn’t pick up the additional investment in CONtv where we brought our interest higher, we wouldn’t – we picked up a greater share than of the investment in the requisite spending. And that’s why, if we would add that back year-over-year, we would be ahead of last year on a quarter-over-quarter basis.

Gentry Klein

Alright. What I am having hard time understanding is that it appears that the spend in OTT is obfuscating the core results of the CEG business, where it looks to be negative adjusted EBITDA for non-deployment for the nine months ended, I imagine a large part of that is due to the OTT investment, so I guess maybe that’s the question one. And question two or maybe the point related to that is can you walk us through your processes or your formulas for how you think about the return on investments for OTT, what I struggle with, I think what other shareholders struggle with is business that’s showing negative EBITDA and we haven’t seen any demonstrable results yet from OTT and how do you weigh that against shareholder repurchases, it’s just not clear to me that we are getting the right return on the OTT side?

Chris McGurk

Alright, so your first question about CEG, you are correct. OTT is consolidated into CEG and at this point in time, the way our segments are set up in the queue, in the case rather, it’s conglomerated and when it is, the losses from your investments in OTT are masking any results that you can visibly see in CEG. In the future, we will look at it, after this particular year end is done, the K finishes as of March and we will look at how we report Phase 1 deployment and non-deployment and the fact that OTT is becoming more and more material, we may look at breaking that apart separately. But right now it’s put together and that’s the only information we give. In terms of your second question, on how we evaluate OTT, remember, there is three channels, so we have Docurama, Dove and the CONtv channel. And what happens is, is we try to figure out the dollar spend to bring as many people into the funnel, then we evaluate the conversion opportunities of converting them to subscribers. And on a channel by channel basis, we analyze the marketing spend and other costs against the cost of acquiring a subscriber compared to the lifetime value of that potential subscriber, so that’s some of the thinking that we do.

Jeffrey Edell

And clearly, when managed successfully it’s a higher margin, high return, higher multiple business than the base studio disillusioned business, we have looked at transactions that have happened in the space. I have reference a couple of them, DramaFever and Crunchyroll and it looks like on average, these channels are being transacted when they are successful at a range of $500 to $1,000 per a subscriber. So even though when you look at the Dove Channel, for instance we said we are at around 22,000 subscribers right now and growing quite rapidly. If you just do the math using that $500 to $1,000 per subscriber, we have got a very valuable business already a business that we think is going to quickly get to multiple hundreds of thousands of subscribers. So a very high level, Gentry, that’s the way we are looking at it.

Gentry Klein

Right. I don’t think I would speak for myself when I say that shareholders have a right to know how much we are spending on these initiatives. Obviously, you see the stock price, we haven’t seen any management purchasing of shares, the stock price has been eviscerated. The only information we have is that the company spent a lot of money on OTT to the detriment, at least of a consolidated non-deployment EBITDA basis. And then we have seen – we can’t hang our head on anything as it relates to OTT value, so I understand that there is some value per subscriber and I understand the point of bringing people into your funnel, but at some point, there needs to be results and I think shareholders deserve to have more disclosure and to be able to better understand the ROI associated with OTT and also the availability to actually achieve these values, it’s one thing to talk about it is another thing to see it and we haven’t seen and results yet from this company, so I would…?

Chris McGurk

I understand your frustration Gentry, but I think our shareholders have to balance a couple of things and the need for more information, which you are laying out and also the fact that the OTT business is an arena where everybody in this industry is moving towards right now as quickly as they possibly can. We think we have got certain advantages that we have talked about in these calls before that are going to enable us to go out there and garner real estate quicker than a lot of the other media companies. We know for instance, we mentioned on the call for Lionsgate wants to launch a Comic Con channel next summer. So we have got to balance our disclosure to our shareholders and we have said, we are very happy with where we are right now. We are ahead of our internal plan in terms of OTT, with the fact that it’s a competitive environment out there right now and we shouldn’t be laying out specific parameters of our business and also potentially creating a roadmap for our competitors who are going to be launching channels over the next 6 months to 12 months. So we have got to somehow find a careful balance as we get closer to steady state and ramp up on these channels, we are going to disclose more and more information.

Gentry Klein

Okay. I would urge that time is of the essence in terms of looking to monetize these channels as the world becomes more and more OTT centric and why we have first advantage and I think that’s great, I think the reality is, is that every other content company is going to be looking to go OTT in some amount of time. Lastly, one question on deployment, you mentioned perhaps splitting up the segment, what’s your view on the value of the deployment business?

Chris McGurk

As you know, we have never sort of disclosed our internal estimates and the value of that business, the two assets that Jeff mentioned, the residual value of the equipment in that business, which various analysts have assigned a valuation to and our NOL, which is close to $300 million, I will say that Jeff in his remarks, talked about how people are looking at the company out there are beginning to understand the value of all of our assets and the NOL and the residual value and the idea of potentially splitting the company to unlock the value of both businesses. Our ideas that are getting much more attention than they were getting 1 year or 2 years ago and we are very pleased by that.

Gentry Klein

Yes, okay. Thanks. And again I would just suggest evaluating the return on buying back shares versus putting money into OTT especially given the lack of history with – of achieving value in OTT and generally? Thanks very much.

Chris McGurk

Understood. We thank you for your question and your point.

Operator

Thank you. [Operator Instructions] Our next question is from Mr. Alan Cortelli. Your line is open, sir.

Alan Cortelli

Yes, I have a number of questions, Chris. I worked for 14 years for direct marketing company and we deferred and amortized our marketing costs because it was the right way to show a proper EBITDA, do you guys defer your marketing costs to obtain subscribers?

Chris McGurk

No, it’s a current period expense. So, you are constantly absorbing the current period expense even though there could be some long-term value to picking up assets, like you are talking about, Alan.

Alan Cortelli

Yes. We are following GAAP in that regard when I started in this business…

Jeffrey Edell

We followed GAAP and they allowed it to us.

Chris McGurk

Yes. When I was at Disney back in the day, we used to spread our marketing expenses as well against our film and television content into the periods when we accrued revenue. Those days are gone now GAAP wise.

Alan Cortelli

Okay. Well, that’s an issue. Let’s say, is the difference between a registered user and an active subscriber active is paying a monthly fee?

Chris McGurk

Yes. I mean, a registered user is a user that has signed up and given ourselves data, I heard data and information and subscriber is someone who is actively subscribing and paying a fee.

Alan Cortelli

Okay. So, a challenge you guys have is converting registered users to active subscribers?

Chris McGurk

You are absolutely right. And the goal right now as we launch these channels as Jeff mentioned is to build a – is big a funnel at the top as we can to get as many installs of our app across as many devices as possible and then basically convert those installs into registered users and then convert those registered users into subscribers.

Alan Cortelli

Yes, yes.

Chris McGurk

Alan, one point you made since you are talking about GAAP accounting is on the marketing side, it’s as we said, but on the content side, that’s a little bit of a gray area. And so content right now we amortize over 12 to 18 months that’s how we are handling the content side. So, there is a bit of an asset that has been depreciated or amortized if you will.

Alan Cortelli

Okay. Well, I just always felt it was the better thing to do, because then don’t have all the problems where you get all these questions that you don’t – nobody is seeing a positive EBITDA, positive P&L, because you are spending and you are creating value by all these subscribers, but you don’t see it, because you need to build a certain base of subscribers before your cost level out – your marketing cost level out, but I guess you are taking a conservative approach, but it’s really hurting I think the stock price, because people just want to know earnings. And the one thing I must say I am happy to have seen is all these results look positive, look very positive and yet, the stock keeps going down, but the one thing that I view positive, very positive is I don’t see insiders selling their shares from the insider reports than our public information. So, that gives me hope that the insiders who know more about the business aren’t selling their shares and that you are in fact creating significant value that some day hopefully not too far in the future we will be seeing in the stock price.

Chris McGurk

Well, all very good commas that we appreciate. And we are going to – we are very focused on implementing the strategies that we talked about in our remarks. And as we continue to grow our OTT business, return our content business to significant profitability, figure out how to unlock the value of all of the assets across the company as Jeff kind of underscored, we are very hopeful that we will see the stock price begin to climb again as it should. So, thank you.

Alan Cortelli

Okay. One more question, where do you guys stand on avoiding a NASDAQ delisting?

Chris McGurk

Yes, well I am going to let Gary Loffredo who is on the call respond to that question, because that’s a hot topic that we are very focused on. Gary?

Gary Loffredo

Sure, Chris. As you know, we were notified in June of 2015 our deficiency in the minimum price of our common stock. So under that notification, we had 180 days to cure. During that cure period, we obtained stockholder approval to effect the reverse stock split at the Board’s discretion. Since the price has not risen over the dollar during the cure period, we got another NASDAQ notice in December of last year and we promptly requested a hearing to appeal that delisting. And that appeal stayed in delisting process. So, our hearing is scheduled for mid-February and then after the hearing, NASDAQ has 30 days to render a decision. At the hearing, we will have an opportunity to present NASDAQ with our case for getting an extension up to another 180 days to cure. We will either get an extension of 180 days or the NASDAQ will give us an extension for a period of time to effect the reverse stock split.

Alan Cortelli

Okay. So, are you – would you – I don’t know if you can answer this question, but are you confident that you won’t be de-listed?

Gary Loffredo

Yes, we are confident that we won’t be de-listed, because either the NASDAQ will give us a 180-day extension or they will give us enough time to implement the already approved reverse stock split.

Alan Cortelli

Okay, okay. And I noticed you said, Chris you said DramaFever was sold to SoftBank and Crunchyroll was sold to who?

Chris McGurk

It was sold to the Peter Chernin Group that became Otter Media. And Otter Media is a joint venture between the Chernin Group and AT&T.

Alan Cortelli

Okay. So they saw some value in those companies and obviously it seems like your company is much more valuable than those two companies, I mean?

Chris McGurk

Well, I would agree with you. I mean, I believe at the time the transaction just on Crunchyroll they had a couple of hundred thousand subscribers at that point. They are an anime channel. And Chernin bought 60% of the company for $100 million, which valued at like $167 million at that point. And now I believe they have got 800,000 subscribers. So, he made a really smart, smart investment.

Alan Cortelli

Yes. Well, I think that’s it for me, but best of luck to you guys.

Chris McGurk

Hey, thank you, Alan. We appreciate your questions and we appreciate your support.

Alan Cortelli

Okay.

Operator

Our next question is from Jeff Lopatin of Red Hook Asset Management. Your line is open. Mr. Lopatin, your line is open.

Jeff Lopatin

Sorry gentlemen, off mute now. Just a couple of questions to start on the deployment business, if I look at your non-recourse debt, it looks like you are paying down about $10 million a quarter. How much longer does that go before there is, I guess a natural deceleration from some contracts rolling off? And maybe you can help us understand what happens with the lease projectors and how the renewal or residual value works for the remaining projectors?

Chris McGurk

Yes. If Gary is on – Gary also runs our digital cinema business in addition to being our General Counsel. Gary might if you want to take that question, Gary?

Gary Loffredo

Sure, sure. So beginning at the end of December 2015, some of the Phase 1 visual systems will reach the conclusion of their 10-year VPF payment period under certain existing agreements with content distributors. So when those systems and if you recall, that the Phase 1 deployment happened over a 2-year period, so it happened between November 2005 to November 2007. So as we signed agreements with Studios, some of those agreements will reach a 10-year mark. And as those systems reach that point, a substantial portion of the VPFs related to those systems will seems to be recognized. So over the next 2 years, calendar year ‘16 and calendar year ‘17, those 3,700 systems will slowly reach the 10-year mark under certain studio agreements, other studio agreements reach the 10-year mark later.

Jeff Lopatin

Right. And just to refresh my memory, the Phase 1 the ones where you retained the ownership or that is the ones where I guess the exhibitors you guys were effectively financing their purchase and there is no residual value?

Gary Loffredo

Yes, the Phase 1 is where we owned the systems. So, we retained the residual value.

Jeff Lopatin

Right. And then so then how do we think about the residual value that each of these systems is worth, I mean what’s the projector worth in the current market?

Gary Loffredo

Well, we don’t know right now that’s going to be subject to the negotiation between us and the exhibitor, but the exhibitor has a certain amount of time where they can continue to use the system. So, that doesn’t – we won’t get to the point where we are negotiating a sale of the equipment or an extension of the lease until 2020.

Jeff Lopatin

Right. So, there is still a substantial amount of tale left. I mean, I think it’s just – I know you guys don’t give an estimate on this, but given the stock is it about $0.20 and your market cap is $15 million, this has become a very material piece of the business again. If we go back a year ago, I believe there was a call where an analyst postulated a $0.60 to $0.80 per share value for the deployment business. I mean, you guys opined that, that was in the ballpark. Is that still the case?

Chris McGurk

I don’t recall that we exactly said that was in the ballpark. What we have always done is we have asked investors to look at the external analyses of that residual value. We are frustrated where the stock price is right now. We don’t think, obviously that that residual value is really being reflected in the stock price either as the point you are making. But I don’t think that we are going to comment on the specifics of the residual value anymore than what we already…

Jeff Lopatin

I think you specifically said if it was materially different, you would say so which is another way of saying you are blessing those numbers, but I guess…?

Chris McGurk

Well, albeit like a political count, I will stand by that remark from your prior calls, but I don’t want to elaborate on any further.

Jeff Lopatin

Right. I mean I would encourage you guys to break this out in a very detailed manner. There is no reason to not have an investment presentation that quantifies the value of the deployment business here especially if you are talking about potentially breaking it off. Again, as a shareholder, it’s very frustrating to watch positive developments not be recognized by the market and this is just one simple way for you to communicate value, rather than having actually do anything, it’s just simply doing the better job communicating the value I think is going to be a benefit for all shareholders here. I would also like to echo the comments of the prior caller that to the extent of additional disclosure, we would like to see quite a bit more of it, particularly with respect to the spending on OTT, CONtv, Docurama and Dove Channel, versus the remaining businesses in the Content & Entertainment group. Even if there is no separation that’s going to happen, just incremental disclosure is vital for any shareholders to be able to make an informed decision on this stock. And clearly, right now the market is telling you that they don’t understand it?

Chris McGurk

Again, as I have said to the previous questioner, we agree. And as these channels grow and as we begin to get closer to steady state, we are going to be reporting more and more to our investors. We are just at the point right now where we are quickly scaling up these channels in a very competitive environment and we have got to balance the need for disclosure. We have the competitive realities of the business that we are in right now. The last thing we – I mean we could potentially in the case of CONtv be dealing with a multi-billion dollar company that’s launching a competitive channel and we certainly do not want to give them a roadmap when we are have an advantage right now.

Jeff Lopatin

I am sure these guys, these multi-billion dollar content players have a very, very good idea of what content costs and what it would cost to build these things and your first mover advantage I think...

Chris McGurk

You would be surprised actually and there are already a lot of examples of missteps that some of these bigger players have made in the space, because it’s a totally new ballgame in the industry. And there isn’t an innate expertise in launching these channels anywhere, whether you are a multi-billion dollar media conglomerate or a smaller startup in somebody’s garage. We have been at it, we have been the biggest aggregator of digital content since 2006 and we have done more streaming transactions than anybody. Hopefully, that gives us a leg up in launching these channels successfully. And we just got to be very, very careful about the level of disclosure at a really critical time in the ramp-up of this business.

Jeff Lopatin

Right. I mean perhaps, one avenue, I am sure one that you guys have explored, but would be great for shareholders to see would be striking an agreement with the strategic that allows you to offload the costs to somebody else on OTT, basically put the OTT content on somebody else’s dime and participate in the economics that way?

Chris McGurk

I think, as I have said in my remarks before, we are exploring opportunities for smart partnerships in the OTT arena that we would do if we thought we could significantly accelerate our growth and value creation in the business. So that’s directly the point you are making.

Jeff Lopatin

Great. Well, thank you gentlemen. I look forward to hopefully seeing some actual conclusions of these potential strategic alternatives and look forward seeing growth in all of these divisions and hopefully some incremental disclosure across the board.

Chris McGurk

Thank you, Jeff. Good questions. Thank you.

Operator

Thank you. Our next question is from Terry Hackett of Hackett Management. Your line is open.

Terry Hackett

Good afternoon everyone. Let me reiterate again the deployment value issue is something I think needs to be addressed. The OTT spending issue, I also think needs to be addressed, I do understand your competitive reality comment, but the reality is this company has lost over 90% of its value and management credibility is waning every day, with that in mind I wonder why, when your buy window opens up, management and Board members are not buying their stock and is there an actual Board resolution authorizing a buyback of any sort as we speak?

Chris McGurk

Yes, there is a Board resolution that has been out there for a while in terms of a buyback, so we are authorized and approved to do that. Keep in mind that we have been in strategic conversations now for months. And so any windows that would exist outside the reporting windows get closed up by other issues as terms of us know significant information. So we are not in the position, timing wise to do that. Second thing is we are now going into our traditionally slowest quarter, which is coming up next. We have options, as Chris mentioned, where – when we are investing in say, the OTT business and the Dove Channel we are getting significant subscriber, building significant value. And so we are looking at things like that and opportunities where to deploy capital. And so the combination of the lack of a window to do something, combined with the other higher and best uses for capital are reasons why we have not deployed the money to purchase shares.

Terry Hackett

And yesterday, the stock hit $0.15, I rest my case.

Chris McGurk

As we said we are as frustrated by that as you are, but we’re hopeful...

Terry Hackett

I don’t know that you are with your options and your salaries I don’t know that you are?

Chris McGurk

Well, all of our options are completely underwater at this point, which is very frustrating. But we understand your point, we understand your frustration. We believe that with the successful implementation of the strategies that we talked about and our goal is to help the market understand what our strategic plan is, how we are building the OTT business that we will see the stock rebound.

Terry Hackett

Well, they must see the deployment valuation to give us some credibility.

Chris McGurk

Alright, thank you.

Operator

Thank you. At this time, I see no other questions in queue. I would like to turn it back to management for any closing remarks.

Chris McGurk

Yes. Again, I want to thank you all for your interest and your support. And we look forward to talking with you again after our fourth quarter results. Thank you, all.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.

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