You expect to see big price swings in thinly traded penny stocks like Cinedigm. But Wall Street seems especially confused today after the digital entertainment company announced a bigger loss than expected for the quarter that ended in March –but with a new $5 million stock repurchase plan.
Cinedigm shares opened down 14.7% to a new low of 64 cents a share but quickly recovered to about 79 cents, and at mid-day was around 72 cents, down 3.4% from yesterday’s close. The stock price is down more than 52%in 2015 as buyers wonder whether it can balance the investments needed to grow while paying off its debt. About 18 cents out of every dollar in revenues goes to interest payments.
CEO Chris McGurk can’t afford a misstep: Early this month Nasdaq warned that Cinedigm will be delisted on December 7 if the stock price doesn’t rise to at least $1 for 10 days. He’s also under fire from Ronald Chez of Sabra Capital who controls 2.7% of the stock as well as nearly 10% of the debt.
In a letter to McGurk last month, the activist investor called for a $15 million share repurchase. Complaining that execs and board members owned little of the company’s stock, Chez wrote that “for the last several years, the only ones losing money have been the shareholders.”
The losses continued in the March quarter, due in part to a $6 million impairment charge it took on the Gaiam Vivendi Entertainment assets that Cinedigm bought in 2013 for $51.1 million. In February Cinedigm sued Gaiam International for fraud, seeking $30 million in damages. It charges that the Colorado-based company misrepresented GVE’s finances. The operation said at the time of the sale that it had strong DVD and Blu-ray distribution relationships with Walmart and Target, and rights to videos from WWE, NFL, Discovery, Henson, and National Geographic.
Factoring in the writedown, Cinedigm’s net loss in the March quarter increased to $11.9 million from $465,000 on revenues of $27.6 million, down 12.7%. The top line beat the $26.3 million consensus estimate by the three analysts who Thomson/First Call says follow the company. The net loss of 14 cents a share was twice the loss the analysts expected.
McGurk told the Street that he was “pleased” with the results which “underscore the positive momentum in our base business.” He cited “strong performance at Wal-Mart” in disc sales. Cinedigm’s report said that it “terminated contracts with certain high volume customers” as disc sales suffered from “changes in consumer purchasing behavior and reduction in shelf space allotted to such products.”
McGurk also says that Cinedigm “continued to rapidly move ahead” with its streaming video initiatives including the launch of CONtv.
The new stock repurchases reflect the company’s “confidence in Cinedigm’s long-term strategy and growth prospects as well as a commitment to delivering increased value and returning capital to stockholders,” McGurk says.
In his briefing with analysts, McGurk discussed the company’s decision to hire executive search firm Korn Ferry to identify as many as new four board members, including a Non-Executive Chairman, who can “add strategic and financial insights and relationships that will help propel Cinedigm forward.” He added that he also opened discussions with “our activist shareholders.”
Early this month Chez said the Korn Ferry search was “an unacceptable waste of Company resources.” He offered to join the board without pay.