2023-04-27 03:48:52 ET
Summary
- Cinedigm: Shares of niche OTT content provider are approaching all-time lows as market participants brace for a likely reverse stock split next month.
- While the company will request a third grace period in a scheduled panel hearing next month, Nasdaq usually does not provide more than two subsequent 180-day extensions.
- Consequently, Cinedigm has taken a number of measures to ensure approval of the reverse stock split proposal including the recent issuance of supervoting preferred stock to its Chairman and CEO.
- Moreover, while masked as a reduction, Cinedigm is actually trying to double the number of authorized shares on a reverse stock split-adjusted basis which might pave the way for further, outsized dilution going forward.
- Considering the high likelihood of a near-term reverse stock split and the potential for further, substantial dilution down the road, investors should avoid the shares or even consider selling existing positions.
Note:
I have covered Cinedigm Corp. ( CIDM ) previously, so investors should view this as an update to my earlier coverage of the company.
Shares of niche OTT content provider Cinedigm Corp. or "Cinedigm" have sold off by almost 30% since I downgraded the shares from " Speculative Buy " to " Sell " on February 14 after the company's alleged strong Q3/FY2023 results failed to stand up to closer scrutiny.
Remember that virtually the entire outperformance was caused by an outsized $7.4 million recognition of Virtual Print Fees ("VPF") in the legacy cinema equipment segment while the core Content & Entertainment business which includes Cinedigm's streaming and base distribution segments continued to operate at a loss.
Surprise Stock Repurchase Program Despite Weak Liquidity
Considering the $2 million minimum liquidity covenant governing the company's fully drawn $5 million revolving credit facility with East West Bancorp ( EWBC ), available liquidity at the end of Q3/FY2023 was down to just $6.8 million.
Given the company's dire liquidity position, I was surprised by the Board of Director's decision to approve an up to $10 million stock repurchase program on March 1.
This stock repurchase program, which is effective immediately, is a testimonial to the unwavering confidence the Board and Management of Cinedigm has in the future of the Company and the considerably undervalued price of our common stock," said Chris McGurk, Chairman and CEO of Cinedigm. "We are on a strategic path that will differentiate us from all others in our industry and produce sustained profitability and growth. We see this stock repurchase program as an exceptional investment opportunity that will further enhance the value of our Company in the years ahead.
Chairman and CEO Chris McGurk subsequently provided additional color on the repurchase program in a shareholder letter :
(...) Why are we doing this? Our balance sheet is very strong, with essentially no debt, and our recent upside performance has increased our cash on hand even further from the end of last quarter. This gives us complete confidence that we can execute this significant stock repurchase program without hampering planned operating expenditures, such as key content acquisitions. Most importantly, we believe that purchasing undervalued Cinedigm shares is a superb investment strategy for the Company. (...)
Quite frankly, with the company's cash position at the end of Q3/FY2023 at new multi-year lows, the claim of cash on hand having " increased even further " looks somewhat strange.
But even when assuming positive free cash flow for the quarter, I would expect this number to be rather modest, very similar to Q4/FY2022.
In addition, the company recently acquired movie review and ratings service Dove.org and faith-based streaming platform Christian Cinema from Giving Company. Unfortunately, Cinedigm has not disclosed financial terms but details regarding the transaction should be included in the company's upcoming annual report on form 10-K.
Furthermore, Cinedigm appears to have expanded its content acquisition efforts in recent months with a particular focus on bolstering its SCREAMBOX horror film streaming service following the recent success of the low budget slasher movie Terrifier 2 .
Clearly, these additions did not come for free either.
In sum, given the company's weak liquidity position, it is hard to envision Cinedigm conducting material share buybacks anytime soon.
Reverse Stock Split Likely To Be Imminent
On a different note, the company recently received written notification from Nasdaq that its stock would be subject to delisting due to persistent failure to comply with the $1 minimum bid price requirement.
While Cinedigm has requested a hearing before a Nasdaq Listing Qualifications Panel which has been scheduled for May 11 to " present its plan of compliance and request a further extension of time ", the company has already been provided two six-month extensions which makes an additional grace period highly unlikely.
Clearly, the company has been aware of the issue for some time now as evidenced by the recent amendments to its bylaws which, among other things, resulted in the reduction of the quorum required for the meeting of stockholders from " the holders of a majority of the stock issued and outstanding " to " holders of at least one-third in voting power of the outstanding shares of stock ".
Subsequently, Cinedigm issued one share of newly designated Series B supervoting Preferred Stock to the company's Chairman and CEO for a purchase price of $10,000 to ensure approval of the reverse stock split (emphasis added by author):
Prior to the issuance of the Series B Preferred, stockholder approval of any Reverse Stock Split Proposal (...) required the affirmative approval of a majority of the outstanding shares of Common Stock.
Following the issuance of the Series B Preferred, stockholder approval of a Reverse Stock Split proposal requires affirmative approval from a majority of the voting power of the shares of Common Stock and the share of Series B Preferred, voting together as a single class . In the event of any Reverse Stock Split Proposal, the Purchaser will cast the votes represented by the share of Series B Preferred in a manner that mirrors the votes cast by holders of Common Stock on such proposal. Prior to the issuance of the share of Series B Preferred, abstentions and any other non-votes would have had the same effect as a vote against a Reverse Stock Split Proposal. Following the issuance of the share of Series B Preferred, abstentions and any other non-votes on a Reverse Stock Split Proposal will still technically have the same effect as a vote against such proposal, but because the share of Series B Preferred has a high number of votes and will vote in a manner that mirrors votes actually cast by the holders of Common Stock (which does not include abstentions or any other non-votes), abstentions and any other non-votes will have virtually no effect on the outcome of a Reverse Stock Split Proposal. (...)
The share of Series B Preferred will have 1,800,000,000 votes , but has the right to vote only on any Reverse Stock Split Proposal.
On April 17, Cinedigm filed a preliminary proxy statement inviting stockholders to attend a virtual special meeting in order to approve:
- A reverse stock split with a ratio between 1:2 and 1:20
- Reduce the number of shares authorized for issuance in connection with the reverse stock split
Depending on the ratio determined by the Board of Directors, outstanding shares will be reduced proportionally:
Unfortunately, the company does not intend to reduce authorized shares in the same way, effectively resulting in the number of authorized shares to double on a reverse stock split-adjusted basis thus paving the way for more dilution going forward:
While the supervoting Preferred B share won't per permitted to vote on this proposal, I do not expect stockholders to vote against a perceived reduction in authorized shares even when the opposite is actually the case (on a split-adjusted basis).
Quite frankly, I wouldn't advise voting against both proposals either. While a reverse stock split often results in additional selling pressure, a Nasdaq delisting would almost certainly cause greater damage to the stock price.
In addition, the company needs some wiggle room with regards to authorized shares to raise more capital if needed or use its stock as a currency for potential future acquisitions.
Bottom Line
Given Cinedigm's weak liquidity position and recently expanded content acquisition efforts, I do not expect the company to spend a material amount on share buybacks anytime soon.
In addition, the company will likely be required to conduct a reverse stock split next month to finally regain compliance with the Nasdaq's $1 minimum bid price requirement.
Consequently, Cinedigm has taken a number of measures to ensure approval of the reverse stock split proposal including the issuance of supervoting preferred stock to the company's Chairman and CEO.
Moreover, while masked as a reduction, Cinedigm is actually trying to double the number of authorized shares on a reverse stock split-adjusted basis which might pave the way for further, outsized dilution going forward.
Considering the high likelihood of a near-term reverse stock split and potential for further, substantial dilution down the road, investors should avoid the shares or even consider selling existing positions.
For further details see:
Cinedigm: Reverse Stock Split Appears To Be Imminent - Sell