Cinedigm Corp. (CIDM) CEO Chris McGurk on Q2 2019 Results - Earnings Call Transcript

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About: Cinedigm Corp. (CIDM)
by: SA Transcripts
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Earning Call Audio

Cinedigm Corp. (NASDAQ:CIDM) Q2 2019 Earnings Conference Call November 14, 2018 4:30 PM ET

Executives

Jill Calcaterra - Executive Vice President

Chris McGurk - Chairman and Chief Executive Officer

Jeffrey Edell - Chief Financial Officer

Gary Loffredo - President of Digital Cinema, General Counsel and Secretary

Analysts

Barry Sine - Dawson James

Lisa Thompson - Zacks Investment

Austin Moldow - Canaccord

Operator

Good day, ladies and gentlemen, and welcome to the Cinedigm Corporation Fiscal 2019 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded.

I’d now like to introduce your host for today’s conference, Ms. Jill Calcaterra, Executive Vice President. Ma’am, please go ahead.

Jill Calcaterra

Good afternoon, and thank you for joining us today for our second quarter fiscal 2019 earnings conference call. Participating in today’s call are Cinedigm’s Chairman and Chief Executive Officer, Chris McGurk; Chief Financial Officer, Jeffrey Edell; and our General Counsel and Head of Cinema Equipment Business, 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, November 14, 2018, and Cinedigm does not intend and undertakes no duty to update future events or circumstances. In addition, certain financial information presented in this call represents non-GAAP financial measures.

And now, I’d like to turn the call over to Chris McGurk.

Chris McGurk

Thanks, Jill, and thanks everyone for joining us on the call today. Overall, our results for the second quarter were in-line with our expectations. We added new partnerships with both domestic and Chinese content providers and platforms to distribute content, expanded our ad-supported and subscription OTT footprint with key new partners and continued our business development efforts for the flow of content and OTT channels both into and out of China.

Over the last several quarters, we’ve been focused on expanding our OTT footprint in three key areas. OEM integrations, scaled ad-supported platforms, and scaled third party subscription platforms. Importantly, both OEM and scaled ad-supported platforms provide immediate reach engagement and revenues. And third-party subscription platforms allow us to expand our OTT subscription and viewership base with minimal to no marketing expenditures.

In the OEM area, we closed two significant deals. The first is with XUMO, a fast-growing advertising and technology company that delivers VOD and live OTT channels direct-to-consumers through smart TV integrations. Through strategic partnerships with LG electronics, VIZIO and Panasonic, XUMO has developed technology that enables Cinedigm’s channels to be consumed with advertising via simple one-click access, no app installs or registration is required.

That model has generated engagement 8 times higher than average depending on the specific device used, it enables our ad-supported businesses growth to track right alongside smart TV shipments from XUMO's huge OEM partners. The initial results of our OTT channels on XUMO have been very promising and are currently exceeding XUMO’s and our own internal forecast for both engagement and watch time.

The second major OEM deal that I am very happy to announce on this call is with Samsung. One of the largest manufacturers of smart TVs globally. We are officially launched on select Samsung smart TVs as of today, bringing Dove Channel and CONtv to Samsung's TV plus video service. We think this is an important deal for our linear and AVOD OTT strategy. We expect other channels to launch on this platform in 2019.

In the coming quarters, look for additional channel launches as we expand our OTT footprint with other smart TV OEMs telcos and other cable providers. In terms of scaled ad-supported ODP platforms, we also closed two significant new deals with the market leaders in the ad-supported space, Roku and Tubi. Last week, we announced that WHAM Network and CombatGo went live on the Roku channel. Roku's free house-channel available to the company's 24 million user base has an expansion into large sports programming.

We also recently announced the deal to distribute our entertainment channels Dove Channel, CONtv and Docurama on Tubi, one of the largest independent ad-supported OTT channels available. And we expect to go live this month. With these deals, our networks begin driving immediate revenue from two of the largest and most engaged AVOD platforms available to consumers.

Lastly, with regards to third-party subscription channels, we recently launched the subscription version of our channels Dove, CONtv, and Docurama on DISH Networks, as well as their OTT product, Sling TV, the market leader among virtual MVPDs. We anticipate at least two additional deals similar to this with a major MVPD and another major OEM and we think this trend illustrates how our subscription channels can thrive both on traditional, as well as next-generation programming services.

The rapid expansion of our distribution footprint through multiple deals with scaled platforms this quarter is not an anomaly. With a tremendous ongoing growth of the OTT sector, we anticipate continued expansion domestically and internationally for the foreseeable future. We currently have more than two dozen similar distribution deals in the pipeline at various stages of negotiation. With each new launch or individual platform, we are potentially adding five or six figures per deal in monthly revenues steady state. So, we expect our OTT business will scale up very, very rapidly.

As illustrated by this wave of deals I just outlined, we are aggressively taking advantage of the rapidly growing and high potential AVOD OTT market segment. There are a variety of reasons for this. So, let me elaborate. The advertising-based video on demand market or AVOD is estimated at $27 billion in the U.S. alone and is growing at more than 30% year-over-year. As the OTT streaming market evolves, research now indicates that consumers are generally willing to pay subscription fees for just two to three streaming video services.

Research also indicates that more and more millennial's and older viewers well-conditioned to viewing content for free, and also very comfortable with ad-based programming are cutting cords, joining the OTT streaming revolution, and making their new channel viewership decisions. That means there is a big and growing opportunity to provide robust free AVOD offerings for viewers who are much more content and much more diversity and breadth of content than what those two to three subscription services that they are generally willing to pay for have to offer.

So, the demand for quality AVOD offerings is clearly huge and will continue to grow rapidly as more and more consumers make their choices in the OTT space. Not only is the AVOD opportunity massive from a market and growth standpoint, but also from a business model perspective. The financial profile of AVOD revenues is extremely appealing because it is less capital intensive, requires less upfront and ongoing investment in content in the subscription VOD business and continues to utilize our existing library of content.

In addition, he AVOD market is currently being served by an array of smaller scale competitors and thus provides an opportunity to quickly leverage Cinedigm’s broad channel portfolio, our ability to secure quality partnerships with key AVOD players like the recent agreements I just mentioned with Roku, Tubi and XUMO, and also leverages our proven capability to deploy a huge volume of content assets into the business via our library and digital acquisition efforts.

As such, we are working aggressively to take advantage of all this by launching channels and securing multiple new platform partnerships in the AVOD space. This new business should drive a significant increase in OTT streaming revenues as we head into the second half of fiscal 2019. And at the same time, we’re also exploring opportunistic ventures to scale up even more quickly in this high-growth high margin space. This focus on AVOD will continue to enhance our unique ability to generate four separate revenue streams off of the huge of OTT streaming ecosystem where most of our competitors can only generate a single OTT revenue stream.

In addition to advertising revenues, Cinedigm’s three other OTT revenue streams are subscription fees, digital content licensing, and SaaS service fees. Also, during the quarter, we expanded our premium content library, including the acquisition of 10 seasons of the popular Drama Heartland, which is already resonating solidly in our Dove Channel, worldwide distribution rights to the Aurora Games and North American distribution rights to the military drama, SGT. Will Gardner to be released in select theatres on demand in digital in January 2019.

It’s also important to note that we’ve become more and more successful with the targeted green lighting of independent film co-productions, which have been key drivers of our studio business and provide very important content fuel for our OTT streaming efforts. Recent coproduction titles, which have limited investment risk in our part such as Traded, American Violence, Hickok, Gangster Land and Silencer have generated projected IRRs of between 52% on the low-end and 291% on the high-end.

Given those kind of returns, we will continue to release more of those film properties as we drive towards profitability in our overall content entertainment business. And we are pleased to announce we started production on another coproduction in the hot western genre called The Outsider, with very strong cash and multigenerational appeal that should deliver strong results in calendar 2019.

With regard to China, during the quarter we announced a partnership to produce a China-based multi-season series about literary, adventurer, Emily "Mickey" Hahn, which will further expand our content library. This multi-season series targeted as a U.S.-China coproduction will chronicle the life of the fiercely independent American journalist who introduced exotic Shanghai and Greater China to US readers before World War II and is based on extensive, exclusive material including two autobiographies, one biography in the vast archives of the Hahn estate.

Besides this Emily Hahn Shanghai project, we also signed an agreement with Youku, China's largest web streaming video service and owned by Alibaba to distribute 30 of their original feature films to all platforms in North America. We expect to announce several similar new distribution partnerships with other leading Chinese streaming and entertainment companies shortly.

During the quarter, we also announced key details about the planned launch in calendar year 2019 of Bambu, our Chinese content OTT channel in North America aimed at the younger American audience. We are rapidly moving forward with content supply arrangements and programming strategies for this new OTT channel with several top Chinese entertainment companies and will announce the specifics soon.

We expect this programming to include over 70 original films and dozens of recently aired top-rated shows from two of the top entertainment studios in China. Based on the very positive response to our announcement from leading North American streaming services, we fully expect to obtain widespread quality distribution for Bambu across the entire OTT ecosystem.

Overall, our support from Chinese media companies and regulators stems from our business model of supporting bilateral content flow in OTT initiatives, which are clearly significant positives for Chinese and American audiences, content producers, and distributors. That support combined with the fact that we have the only majority Chinese equity investment in the US media company, approved by both China and the U.S. government in the last two years has been intently noticed in both China and in Hollywood providing a competitive advantage, while at the same time, raising our profile to relevant major players in the content and OTT businesses.

As we have stated previously, we expect all this China activity to generate significant new revenue streams for the company via content licensing, theatrical and digital revenues, from Hollywood releases in China and also OTT. Additionally, we have been continuing our outreach in a Hollywood with our strategic Chinese Partner, Starrise Media, to identify high-profile films with strong potential for release in China. We expect to make some announcements regarding that initiative soon.

And with that, I’ll now turn the call over to Jeff for a review of our financial results.

Jeffrey Edell

Thanks Chris. Before I discuss the financial results, I would like to point out that effective April 1, 2018, we revised our public financial reporting to more closely and directly reflect how we review and evaluate the company's operating performance. Beginning with the first quarter of fiscal 2019, we now report our financial results in two primary segments. Our cinema equipment business that we previously called Digital Cinema, Phase 1 and Phase 2 and services, but we’ve now changed that to avoid confusion with our digital revenues and our content and entertainment business segment or CEG, as we sometimes refer to it.

In addition to the consolidation of segments referred to above and the renaming, we also provide OTT streaming and related digital revenues. Please note that all prior periods of the results, they have been reclassified for comparison purposes to reflect these new reporting segments as well. Our legacy cinema equipment business includes the nonrecourse financing vehicles and administration for the Digital Cinema equipment that we installed in movie theaters throughout the United States, Canada, Australia and New Zealand, approximately 7 to some over 10 years ago.

This group also provides fee-based support services to over 12,000 movie screens, as well as directly to exhibitors and other third-party customers in the form of monitoring, billing, collection and verification services. Our Content & Entertainment segment includes ancillary market aggregation and distribution of entertainment content in branded and the curated OTT digital network business, providing entertainment channels and applications.

Additionally, under the new accounting ASC 606 that’s in effect for this new year, which standardized contracted revenue recognition across companies worldwide. We now provide revenue breakdowns of our OTT streaming and related digital revenues. In making these the changes, we believe investors will have a clear view of the primary focus of our strategy, which is to build our streaming OTT network business.

For the second quarter of fiscal 2019, consolidated revenues were 13.7 million. As expected, total consolidated revenues for this quarter declined as a result of the contracted decline in our cinema equipment business as the combination of the 10-year deployment contracts and cost recoupment contracts are at various stages of reaching the end of their terms. We had strong sales activity for the second quarter with total billings in the physical DVD and Blu-ray business increasing 9% year-over-year, while specifically the OTT channel revenues for the quarter were up 23%.

Direct operating expenses decreased in the second quarter of fiscal 2019 to $2.3 million, which is down 11%, compared to prior year period, primarily due to revenue mix, which caused lower royalty cost and lower pre-unit fulfilment cost on the majority of the physical distribution business. Year-to-date direct operating expenses are also lower, compared to last year, due to a reduction in the content advance amortization in the content and entertainment business segment.

Also, net interest expense decreased 35% to 2.6 million in the second quarter, compared to 4 million in the second quarter a year ago. The decrease is primarily as a result of the reduced debt balances compared with prior period, particularly the full payoff of our former convertible debt balance. Our total debt is now 67.1 million or 43% lower than it was 12 months ago. During this quarter, Bison Capital replaced its prior $10 million loan with a new one, and subsequent to the quarter closed, arranged a $5 million financing to replace our mezzanine notes that came due loans This shows the substantial commitment that Bison continues to make into Cinedigm.

Additionally, exclusive of our bank revolver, which expands and contracts based on seasonality, the overall company debt has been reduced by 1.65 million during the quarter. The net loss attributable to common shareholders for the fiscal quarter of 2019 was 3.6 million, a 53% improvement, compared to $7.5 million loss in the second quarter of fiscal 2018.

This significant improvement is primarily the result of decreased interest costs, due to much lower debt balance, the reduction in depreciation expense as systems continued off-line, the full impact of our significant cost streamlining efforts are kicking-in, and the improved margins from the performance in our content and entertainment group, and of course our business shift into OTT streaming.

As mentioned in our prior earnings call, we are making great progress with our investment in our new rights management and content delivery system to reflect our transition and commitment to our OTT AVOD model. Today, we have invested significant capital in this initiative and expect to be testing the results shortly. This new system will allow for better controlled databasing of our content right, as well as enabling us to speed up the delivery of massive volumes as content to digital and OTT platforms worldwide. This is required for us to continue to be a leader in the OTT space, particularly in the rapidly growing AVOD segment that Chris described.

Additionally, this will accelerate our ability to monetize content versus the more manual processes that we have been employing here and to generate SAAS revenues by licensing our technology solutions to third-parties. As Chris highlighted, our greenlighting process continues to prove effective with our results ranging up to 291% IRR for a particular project, which far exceeds our minimum IRR of 25% after tax threshold.

We attribute this to the fact that we have significant market data by genre, which allows us to determine appropriate investment amounts in content. The Western genre for instance continues to outperform with the key content producer and we continue to keep that pipeline full with another key Western release due in Q4. Given our size, smarter and constantly evolving greenlighting decisions based on up-to-the-minute market data, we are essentially able to drive enhanced IRRs and streamline our revenues.

With that, I’ll now turn the call back to Chris. Chris?

Chris McGurk

Thank you, Jeff. In summary, we’re making good progress expanding our OTT footprint by increasing our library of content and our channel portfolio and launching it at all in additional platforms like the channel launches on Samsung Smart TVs I announced earlier. We were also aggressively building our presence in the high growth high margin AVOD market through new channels, platform partnerships and licensing deals as evidenced by the Tubi, Roku and XUMO agreements I also discussed.

We are also beginning to monetize many of our other new partner agreements and that should provide growing revenues over the next few quarters. In China, where our investment from Bison and business partnerships are allowing us to operate in an advantaged business situation versus our competitors, our new bilateral content and streaming channel agreements such as our Youku film deal, and the planned launch of Bambu will begin to provide us with significant additional revenues in an opportunity to further transform our business and to the on the company operating is a true China U.S. content and OTT channel studio.

And with that, we’ll now take any questions you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Barry Sine with Dawson James. Your line now open.

Barry Sine

Hi. Good afternoon. Congratulations on the quarter.

Chris McGurk

Thank you, Barry.

Barry Sine

First, you talked about, you’ve got content in so many different moving pieces in so many different areas, and I know we’ve talked in the past about how you had unique ways to keep your content cost down, Liberty Media had their Analyst Day today and they talked about the skyrocketing cost of content creation. One of the examples they gave is that Amazon is going to spend $1 billion to create five seasons of Lord of the Rings, I don't think you're going to spend quite that much in some of your new series, but could you talk about what you spend on content and the ways that you have to manage your content acquisition and creation costs?

Jeffrey Edell

Sure Barry. This is Jeff. So, remember when you move aside small little productions that we could be doing in the OTT space, really what we’re doing is, we're focused on buying completed movies or catalogues of libraries. So, we just look for a content producer, let's just say, they could be spending anywhere from $1.5 million to $10 million on a particular movie, but that’s their cost, that’s their burden. We develop our own internal IRR and investment strategies based on what it takes for us to get a specific return of more than 25% after tax.

So, it doesn't matter if you created a movie that cost you 5 or 3 to 2, the deal we would offer you might be $300,000, $400,000, $500,000, $600,000 and that’s about all the risk that we're going to take on domestic and we try to make sure that in a 12 month to 18 month period of time we’ve gotten back all off our advance so our returns can kick in. So that’s why we’re not really tied in necessarily to the ballooning costs of movies per say at this point in time.

Barry Sine

And the same question on your own co-produced movies and then on the content, I assume the content you are getting from China, you're not involved in the production and paying the production cost, you are just buying those from China?

Chris McGurk

Yes. I would say on the co-production, this is the first part of your question, this is Chris. Again, as we said in these calls before it is really a buyers’ market right now. We are one of the few independents operating at scale, it’s actually acquiring and releasing these films. So, we are able to pick up all domestic distribution rights for multi-year period for a fraction of the production cost of these movies. So, we’re able to pick up North American distribution rights for 10 years or more for a couple of hundred thousand dollars sometimes for movies that cost $2 million or $3 million or more million dollars to produce. So, we are really in an advantageous position there.

For China, again and I again I have said it on these calls before, one of the reasons why China and Chinese entertainment producers are so excited about Bambu, our OTT channels for the first time will be able to put different categories of Chinese content films and TV programs out there for a Western audience to actually view and get feedback and what works and what doesn't work, and I think the point I'm trying to make here is historically Chinese content has not been monetized to any extent outside of China.

So, obviously that creates a buyers' market for us. So, most of the Chinese content we’re distributing here. We’re acquiring for a little or no upfront payment. So, I mean those are a couple of ways that we’re dealing with the fact that the Amazon’s are the world and new Netflixes of the world are spending billions and billions of dollars and very expensive original programming.

We’re able because of the way we're structured to acquire and distribute a very, very high volume of independent content across the whole spectrum and do it obviously for a fraction of the cost that they are investing and with a much, much more advantageous risk profile.

Barry Sine

So, no billion-dollar episodes on the pipeline for you?

Chris McGurk

I don't think so.

Jeffrey Edell

Only for your projects Barry.

Barry Sine

Next question, I know, in the Q, you breakout the results between the two segments, I didn’t see much break out in the audience release, I know there is some disclosure in the EBITDA table, what additional color can you give on that or do we have to wait for the Q?

Jeffrey Edell

When you save break out so, what we do…

Barry Sine

Revenue between [indiscernible] equipment.

Jeffrey Edell

Yes. So, from the equipment side, we no longer – we do provide Phase 1, Phase 2, we do break out the revenue on one of the schedules there, if that’s what you’re referring to or are you talking about the OTT revenues, what’s your specific question?

Barry Sine

All of the above. So, a full revenue, but I didn’t see that in the earnings release, unless I’m missing it.

Jeffrey Edell

Yes, no, it’s not in the earnings release, but you will see in the Q, there will be a segment on – and look over that. You will see the revenue growth broken down on the Q for OTT revenue, and you’ll also see the revenue broken down for the physical business and also the digital cinema business, which we’re now calling deployment.

Barry Sine

Okay. So, and then we’ll have to wait for the Q?

Jeffrey Edell

Yes. Which is going to come out this week, push the button. So, literally at the end of the call.

Barry Sine

My last question, you announced the relationship with Samsung, which obviously is pretty huge, and when I think of Samsung, I think of one of your channels, HallyPop, which should be a natural partner for Samsung. Is that going to be on the Samsung relationship? Is that live yet? Has it been rolled out? Could you give status on?

Chris McGurk

No. All I'm going to say on Samsung is what I said, we’re waiting for, they are going to formally announce this initiative in the near future. All I will say right now is, we expect other of our channels to go up on Samsung after the first of the year, but right now I do want to specify which ones.

Barry Sine

Has HallyPop been launched yet?

Jeffrey Edell

It’s about to.

Barry Sine

Okay. Alright. Those are my questions. Thank you.

Jeffrey Edell

Thank you.

Chris McGurk

Thanks Barry.

Operator

Our next question comes from Lisa Thompson with Zacks Investment. Your line is now open.

Lisa Thompson

Hi, good afternoon.

Chris McGurk

Hi, Lisa.

Lisa Thompson

So, hi there. So, doing a little arithmetic, it looks like the cinema business, the 6.9 million in the quarter that was higher than I expected, does it seem to be dropping off quite as rapidly as thought, is there anything going on there?

Chris McGurk

So, the cinema business actually for the quarter, Lisa is even higher than that. We’re at 7.5, if you include the services of our business on a growth phase. So…

Lisa Thompson

You said it was down 31%, so you meant without the servicing?

Chris McGurk

I meant compared to – you’re right. For Phase 1 and Phase 2 it is down 31%, including service [indiscernible] we are down 25%, but overall, we are at about $7.5 million on the cinema business and we were just been able to squeeze out a little bit longer term of revenue. Things have just performed a little bit better.

Jeffrey Edell

That business is proving to be a little more resilient than a lot of people thought.

Gary Loffredo

As you know that business depends on studio releases. So, if studios release more movies than we expect or they move them up in their calendar or move them out of their calendar it affects revenue. And it also depends on how wide they book the film. So, films may go out on a platform release in a limited number of theatres, and then as it does better they book it on more theatres. So, it’s hard to gauge how many theatres they are going to release their movies on.

Lisa Thompson

Do you think that that’s kind of a trend or something? That it is going to continue in the future and this won’t drop of as quickly?

Gary Loffredo

Well, we still think it’s going to decline. We just don't know how quickly it is going to decline. Like Chris said, it has been a little bit more resilient than we had anticipated.

Chris McGurk

We’ve been consistently Lisa beating our internal expectations every quarter and the amount of revenues that we’ve generated in the business, literally for the last eight quarters. So, I think that’s probably the best response to your question. It’s proving to be more resilient than we thought.

Lisa Thompson

You're going to need a fudge factor on your math. Could you have a feel for what this quarter looks like yet?

Chris McGurk

We don't really guide [indiscernible]. We can tell you it is going to be lower.

Lisa Thompson

Okay. Alright. So, just back to Bambu, I'm a little curious as to how that is going to be structured, are only going to be using content you get from these new Chinese suppliers? Is it only going to be Chinese? Is it going to be also Taiwanese or any other countries or is it strictly Mainland China?

Jeffrey Edell

Yes. Initially, it’s going to be – I mean the idea is, that it is going to be a premium channel with both the subscription and AVOD component to it. And we are – we haven’t 100% settled on the content presentation yet, but initially it is going to be almost all Chinese content. Our mix of films and television programming, we’re very close to completing several deals over in China with some of the most major entertainment content producers in the country to serve up the programming. We might then, you know after we have launched the channel expand into a broader presentation of Asian content, but I think, you know at the beginning, it’s almost exclusively going to be Chinese language content.

Lisa Thompson

Okay. So, it’s something like drama fever shutting down. Does that give you any opportunity to pick up some Chinese content their or just not how it is structured?

Jeffrey Edell

I think drama fever is shutting down and people have asked us about that. We think the rationale behind that was simply AT&T, Warners basically consolidating the dozens of digital and OTT related services they had until one broad channel. I don't think it really has an impact on us one way or another. Again, given the fact that we’ve got sort of this advantaged pipeline and to another China, and we're working directly with the Chinese government and we signed 8 or 9 business cooperation agreements or deals with Chinese companies. We’re really focused on trying to leverage China right now and we’re not as focused on Southeast Asia and Korea or Japan, but that could be sort of the next wave for us. We think that the most important thing we can do is successfully launch Bambu into the marketplace and then address other opportunities over in Asia.

Lisa Thompson

Okay. And how far do you think it is for you to send a movie over there from the US?

Chris McGurk

We’re looking pretty aggressively. We’re trying to be selective. We’ve made a couple of offers for Chinese rights on bigger Hollywood films. I would hope to be able to announce something in the next 60 days or so, but again it’s more important to us that we pick the right movie, that we know is going to generate a very nice return to get the ball started for us in our Chinese partners than it is just to pick something and release it.

We are being very careful and sort of the discipline that Jeff described in our greenlighting process with our content here in the United States. We are applying that same discipline to this process with our Chinese Partner, Starrise and trying to find that bigger budget American film that we can release into China.

Lisa Thompson

Okay. Great. Thanks. That's all my questions for now.

Chris McGurk

Thank you, Lisa.

Operator

[Operator Instructions] Our next question comes from Austin Moldow with Canaccord. Your line is now open.

Austin Moldow

Hi. Thanks for taking my question. Congrats on growing the OTT channel revenue 23%, can you give last quarter's growth rate as well? And then as it pertains to this quarter, can you update us on how monetization of the ad-supported view is going? I know there have been tons of distribution announcements with Tubi, and Roku and XUMO and all that, so maybe you can just share which platforms are maybe starting to monetize well and what you’re learning there?

Chris McGurk

Yes. Couple of things I will say and then I’ll turn it over to Jeff. We got to be very careful in this arena because we’ve talked before about not disclosing sort of the absolute amounts of the four components of our OTT revenues for competitive reasons, but in terms of the deals that the have caught and a lot of them I describe in my remarks. Again, we’ve got to be careful there because for competitive reasons we cannot – and for competitive and confidentiality reasons we can't disclose the specific profitability estimates or revenues we are getting from any specific deal, but each one of those deals that I have described we’re anticipating a monthly run rate of five figures or six figures per month from each deal.

The deals that we’ve already closed and then the dozen or so deals that we have in the deal pipeline. So, as we launch more channels, as we service more deals, as we close more deals, we are going to see a very rapid scaling up of our revenues from advertising and subscriptions. And also, from the digital content licensing to service the deals as well. I really don't want to give any more specific than that. I don't know whether Jeff wants to add anything?

Jeffrey Edell

Just a couple of things Austin. One is, we're sort of stepping into our – doing our reporting now. Like we said, April 1, 2018 was the first period, so this is really Q2. So, we are trying to get our legs around the types of metrics that we can start to be consistent with reporting every month. So, I don't have the information right on my hands for the channel growth in Q1, compared to Q2. I can also tell you that what we’re trying to do, we’ll talk about that when we do our analyst call, but I can tell you the other thing that we're trying to do is, it’s not just our channel business, but if we look at our business together, all of our OTT streaming businesses together and that’s something that there is more of a focus on as we move forward.

Austin Moldow

Okay thanks. I wanted to try asking one more advertising question. Because across all the channels you must have a pretty sizable audience that is probably viewing ads or commercials at some point. So, the growth from here, I mean like what is the bottleneck to showing more advertising revenue, is it that the ad load is too low or maybe pricing is just getting, pricing is slow because these deals are so new or is it really a matter of growing audience?

Jeffrey Edell

It is everything you said. It is a combination of all of that. Remember we’ve taken a pivot now. We have a base subscription business and we’ve moved over to this AVOD concept. So, you are looking at money that takes more to grow it and you are starting from a low base. We will in the future, again we are public, we don't like to give out a lot of this information. So, in the future we will start to provide more of it, impressions, CPMs and so forth, as we start to move forward calling the next quarter, we will be a little bit more transparent too.

Austin Moldow

Okay. That would be helpful. Pivoting to another leg of the OTT revenue segment, the digital distribution, can you talk to because I think in the past the physical distribution side of the businesses has done pretty well, and I think you said 9% billings growth, can you talk about the digital distribution business and I think it’s considerably smaller, but maybe what you're seeing there in terms of growth or what the opportunities that because I guess the consumption model is shifting towards access?

Jeffrey Edell

Sure. So, you will see when we release the Q later today, but we are pretty consistent between the three months ended this quarter and the three months ended – the six months ended. So, we are doing around $2.3 million in total OTT streaming and digital together. That’s what we're looking at for the quarter. That’s the GAAP side not the billing side. The billing side is much higher, and so that’s what we’re reporting right now. So, it’s around $2.3 million, including the channels. That’s the GAAP revenue fees, not a billing fees.

Austin Moldow

Okay. I wanted to ask a question about the debt activities in the quarter, I think you said, you took on additional, in addition to replacing the 10 million loan with Bison, you took on 5 million more to pay down, I guess the 2013 notes, did you also have to draw down on the credit facility? And then the second question is, what is the – what level do you plan on paying down the non-recourse prospect loan through this year?

Gary Loffredo

I’ll let Jeff answer, but we replaced 5 million in mezz debt with $5 million of lower interest debt from Bison during the quarter. So, it didn't increase our debt balance, but go ahead.

Jeffrey Edell

So, prospect today, today, literally today and this information to everybody on this call is 27.4 million. So, it is even down from the $30 million that is sitting in the Q rather that you are going to see. So, we were able to pay that down a little bit further. So, we are, like I said right now a 27.4. In terms of overall debt, yes, we are now moving into a cyclically seasonally higher period of time where we are shipping our physical DVDs and Blu-rays into Walmart, and our highest period 40%-ish of our revenue comes during this quarter. The one we’re talking in right now, December 31.

So, the facility will start to move up. It has moved up around $4 million over the last quarter. We believe it will end up going to its cap of 19, and then drop back down as we get out of Q4 and into Q1 of the next fiscal year, which is pretty normal for us. And interestingly enough, our borrowing base goes up. We have about $41 million of collateral on our borrowing base as we look at it really on the filing that we're going to do with the banks at the end of this month, compared to even if we drew the entire your 19 million on the facility.

So, banks are very well-collateralized and there is a lot of solid assets in the company. And when you are dealing with a receivable from universal and receivable from Netflix or Amazon or Walmart that is all great credit to have. So, on a net basis, we are down dropping 1.6 million, I would say 1.65 million in overall debt, which is attributable to the cinema business. From our CEG side of the business, we pretty much – the Bison note is the same as Chris said, the mezz replaced the prior mezz note, reduced the interest rate by 1%. The second lean went up a couple hundred thousand dollars because of the pick, and so really you just have the seasonal increase in the ABL.

Austin Moldow

Okay. That’s it from me. Thanks, very much.

Chris McGurk

Thank you, Austin.

Operator

And I'm showing no further questions in queue at this time. I’d like to turn the call back to Mr. McGurk for closing remarks.

Chris McGurk

Well thank you all for listening on the call and for your continued support. Be on the lookout for more announcements from us as we continue our business transformation and build-out our streaming business, and our bilateral business with China. And we look forward to talking to you again in a couple of months on our next call. Thank you all.

Operator

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