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Cinedigm Faces Challenges Amid Stock Drops, Investor Demands

Digital distribution company is rocked by $11 million in losses last quarter and threatened with de-listing by Nasdaq

Digital distribution company Cinedigm is facing serious challenges after declaring an $11 million loss for the last quarter and demands from an activist investor who wants to take over current CEO-chairman Chris McGurk‘s role as chairman of the board.

Cinedigm’s shares have taken a dive below $1 since late April and the company is facing de-listing by Nasdaq on December 7, though 180-day extensions are typically granted, unless the share price rises above $1 for 10 straight days. On Monday, the stock fell another 11.8 percent, closing at $.60.

Last week, Cinedigm announced an $11 million loss for the fiscal quarter that ended in March, with revenues falling 12 percent to $27.6 million, and divulged plans to buy back $5 million in stock at the same time.

The disappointing earnings report, which nonetheless beat analysts’ expectations, follows the report last month that it had  retained Evolution Media Capital to explore potential takeover approaches. At this time, no acquisition deal appears to be imminent.

Activist shareholder Ronald Chez, who owns nearly 8 percent of the company in stock and debt through his Chicago-based investment firm and has partnered with Sabra Capital, told TheWrap that were he named chairman, he would retain McGurk as CEO. “This a real company and a great opportunity,” he said. “It just needs the right leadership.”

McGurk declined to comment for this story.

Partly in response to pressure from Chez, Cinedigm announced a plan in May to overhaul its board and hired executive search firm Korn Ferry to seek two to four new directors, including a new board chairman. It subsequently removed three of its eight current board members: Wayne Clevenger of Midmark Capital as well as affiliated board members Adam Mizel, the company’s chief operating officer, and Gary Loffredo, general counsel and president of digital services.

Despite those moves, Chez and Sabra’s Zvi Rhine filed an SC 13D written consent form last month with the Securities and Exchange Commission seeking to force further changes in the company’s leadership structure through a proxy contest that would also install both of them as directors and Chez as non-executive chairman of the board.

An executive close to Cinedigm told TheWrap that McGurk is actively seeking a new chairman but prefers to find one with more direct experience in entertainment, digital or marketing and a high profile in Hollywood. Unlike Chez, whose background is in finance, such a figure could assist in the company’s ambitions in OTT content, TV and video content delivered via the Internet rather than a service provider.

But can the company find one that Chez will think will do a better than his candidate, himself?

Chez became involved in Cinedigm about three years ago as an investment opportunity. He is a friend of Woody Allen and was an executive producer on the auteur director’s 2014 film “Magic in the Moonlight” and also on his upcoming film “Irrational Man,” in which he has a small part. He insisted that he has no Hollywood ambitions beyond that.

Chez has been a thorn in the company’s side since at least last August, when he filed another SC 13D that would have required the company’s executives and board members to own more stock. In a letter to McGurk at that time, he wrote, “For the last several years, the only ones losing money have been the shareholders.”

Cinedigm is banking heavily on OTT, an industry that Digitial TV Research recently projected will see revenues of more than $20 billion by 2020. McGurk is convinced that Cinedigm has an edge in the field by leveraging its library content and home entertainment infrastructure to launch channels more quickly than rivals and become a “narrowcaster Netflix.”

The company’s apps have been downloaded  more than 1 million times. With the recent acquisition of a stake in nostalgia content producer Shout!, it will soon have four channels online including CONtv (“Netflix for Nerds”), Docurama and the faith-based Dove Channel.

For now, though, the company is a lightly traded penny stock with serious problems. Cinedigm’s sizable first-quarter losses were driven in part by a $6 million impairment charge it took on the Gaiam Vivendi Entertainment assets that Cinedigm acquired in 2013 for $51.1 million.

Cinedigm sued Colorado-based Gaiam International for fraud in February, seeking $30 million in damages for allegedly misrepresenting its finances and falsely claiming strong DVD and Blu-ray distribution relationships with Walmart and Target, and rights to videos from WWE, NFL, Discovery, Henson, and National Geographic.