EQUITY RESEARCH Telecom, Media, Tech COMPANY UPDATE

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Bernard Miller
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Member FINRA/SIPC Toll Free: 561-391-5555 www.dawsonjames.com EQUITY RESEARCH Telecom, Media, Tech COMPANY UPDATE Cinedigm Corp.

1 Member FINRA/SIPC Toll Free: EQUITY RESEARCH Telecom, Media, Tech COMPANY UPDATE Cinedigm Corp. (NASDAQ/CIDM) BUY Cinedigm is a streaming media company with channels focusing on numerous niche genres. It is majority owned by Chinese media company Bison, giving entre into this key market. December 10, 2018 Barry M. Sine Senior Research Analyst bsine@dawsonjames.com CIDM Shares Surge on Four Key Announcements And Then Give It All Back We reiterate our Buy rating on CIDM shares after four major strategic announcements that, in our view, substantially move the ball forward in the company s digital media strategy. Over the last two weeks the company has acquired a cool comic book content platform with licenses to great brands such as Star Trek, announced a new business to build content distribution/monetization platforms for other content owners with kickoff at the CES and added highly popular Chinese content from two major production houses for its upcoming Bambu OTT platform. It had already announced one other content deal for Bambu so it now has most of the content it needs to launch in early While none of these looks to us like material near-term needlemovers in terms of revenue or EBITDA, we think they increase the net present value of Cinedigm s media business. The conversation on CIDM stock has now moved almost entirely away from its declining, cash cow digital projector leasing business, to its much sexier media business. CIDM shares soared last Tuesday on heavy volume but gave back all the gains as the market sell-off accelerated last week. Thus investors can buy the stock today at roughly the same price as where the stock was before the tsunami of good news. Please find Important Disclosures beginning on Page 6. Page 1 of 7

2 CIDM Shares Surged on Four Key Announcements And Then Gave It All Back Over the last two weeks Cinedigm made four major announcements sending the shares higher on heavy volume before the broader correction knocked them back. We believe that these announcements further the company s aggressive long-term media growth strategy and increase the net present value of the company. However, none moved the needle in the near-term enough to require us to modify our revenue estimates. ComicBlitz Brings Over 10,000 Titles Including Star Trek On November 28 the company announced that it is acquiring digital comic book service ComicBlitz. ComicBlitz has the rights to over 10,000 very popular titles such as Transformers, Star Trek and Green Hornet. The transaction is expected to close shortly. Currently ComicBlitz is focusing on direct to consumer channels offering subscription access to its portfolio of titles over a range of digital platforms. This limited its revenue potential. Cinedigm expects to greatly expand this distribution to accelerate ComicBlitz revenue by leveraging other platforms. Management cited three such opportunities in a conversation with us. First, it can leverage its existing distribution platform agreements with partners such as Comcast and Amazon. Second, it can bundle this content with its existing OTT channels. Cinedigm s ConTV, which features ComicCon content is an ideal partner. Third, and most importantly, it plans to leverage existing OTT platforms with dozens of telcos around the globe ranging from Telekom Malaysia to Brasil Telecom to Telstra. Matchpoint Lets Cinedigm Sell its Own Infrastructure to Others The third announcement was the launch of new service Matchpoint on December 6th. Matchpoint is Cinedigm s internal OTT production platform producing web, IOS and Google apps for its own content as well as other popular third-party platforms such as Amazon. More importantly, Matchpoint has developed infrastructure to display content on the major OTT video platforms such as Comcast and Amazon. Matchpoint utilizes contract developers in places such as India, Eastern Europe and the Philippines. The kickoff is planned in January at CES in Las Vegas where presentations to prospective customers are planned. We think this is a clever move on the part of Cinedigm since it leverages people, code and technology it has already paid to develop. Furthermore, as the company noted in its press release it is already delivering 5,000 hours of Cinedigm s own content, including through Comcast s Xfinity platform at a 91% cost savings and two-thirds time savings versus using other third-party developers. So it can already reference its own slick platforms. Cinedigm cited five key features: aesthetically attractive OTT apps, support for all content ranging from audiobooks to music to high definition video, support for distribution to 80 distribution platforms at one fifth the cost, analytics to understand what works in order to maximize revenue and modularity/customizability so content owners can make their platform look uniquely tailored for their audience. If Matchpoint works even modestly well, it should be a material new revenue stream that is not in our model. If it doesn t Cinedigm is using technology it already developed for its own use, so the risk/reward of this new business looks very favorable to us. Cinedigm Corp. Page 2 of 7

3 A Wealth of New Content for Bambu is Coming from China On December 4th it announced a massive content deal with China s state-run television company CCTV through its subsidiary CITVC. The deal includes over 500 hours of programming which will be dubbed into English and used on Bambu, the company s upcoming Chinese content OTT platform for the US market. Bambu will target crossover US millennial audiences interested in new, eclectic content similar to how the highly successful CrunchyRoll channel brought Japanese content to the US. The deal includes current hit series, the most watched program in Chinese history, and the most popular show from Some of the content appears to us as if it will be very attractive to US audiences, others not so much. The content business is normally quite risky due to unpredictable audience demand, so as long as the company can enjoy enough hits, the platform should be successful. This announcement follows an October 22 announcement regarding a deal with Youku giving Bambu rights to distribute 30 Chinese feature films. The company followed up with an announcement earlier today to add content from its previously announced partner Starrise Media. The Starrise announcement was less detailed as it did not include the names of the titles to be added. With these three deals, the company is more than halfway towards its goal of assembling enough content to launch Bambu. Cinedigm has also said it is finalizing content deals with Shanghai Media Group, a large regional broadcaster and content producer, and China Intercontinental Communication Center (CICC) which produces nature documentaries like National Geographic s content in the US. We attach our earnings model but there are no changes since the last time we published. ComicBlitz should add incremental revenue in the March quarter, but we expect this to be modest. The CCTV content and associated revenue was already in our OTT forecast, although we now have greater clarity as we now have a better idea of what the content will be. And, as noted, Matchpoint mainly leverages existing infrastructure and looks like a new source of incremental profit with little incremental cost other than marketing such as some hospitality at CES. While none of these looks material in the near term, the long-term strategic vision is become much clearer as we can start to see the actual content and timing of Cinedigm s platforms. The chart below shows the explosive trading activity in CIDM shares last Tuesday, the day the CCTV content deal was announced. With a category 4 sell-off in the markets, the shares have given back all of these gains. Thus investors can now establish positions at roughly the same level as the stock was at before the wealth of news flow. We reiterate our Buy rating. Cinedigm Corp. Page 3 of 7

4 CIDM Shares Soared Last Tuesday, But Then Gave It All Back Source: FactSet Data Systems Cinedigm Corp. Page 4 of 7

5 Cinedigm Corp. Income Forecast Dollars in thousands, except per share data FY2019E FY2020E FY2021E Fiscal years ended March 31 1QA 2QA 3Q 4Q YEAR 1Q 2Q 3Q 4Q YEAR 1Q 2Q 3Q 4Q YEAR June September December March June September December March June September December March Cinema Equipment Business 7,115 7,491 6,228 5,628 26,462 2,971 1, , YoY grow th -27.3% -25.3% -26.4% -39.5% -29.6% -58.2% -76.4% -97.9% % -81.6% Content and entertainment 5,963 6,253 6,482 6,782 25,480 6,704 7,027 7,298 7,646 28,676 7,557 7,918 8,240 8,644 32,359 YoY grow th 9.4% 0.0% -35.4% -19.0% -15.4% 12.4% 12.4% 12.6% 12.7% 12.5% 12.7% 12.7% 12.9% 13.1% 12.8% Revenue 13,078 13,744 12,710 12,410 51,942 9,675 8,798 7,428 7,646 33,548 7,557 7,918 8,240 8,644 32,359 YoY grow th -14.2% -15.6% -31.3% -29.8% -23.3% -26.0% -36.0% -41.6% -38.4% -35.4% -21.9% -10.0% 10.9% 13.1% -3.5% Seq grow th -26.0% 5.1% -7.5% -2.4% 418.5% -22.0% -9.1% -15.6% 2.9% 438.7% -1.2% 4.8% 4.1% 4.9% 374.3% Direct operating costs 3,425 3,616 3,360 3,345 13,746 3,069 3,022 2,925 2,906 11,921 2,721 2,692 2,637 2,593 10,643 As a percent of revenue 26.2% 26.3% 26.4% 27.0% 26.5% 31.7% 34.4% 39.4% 38.0% 35.5% 36.0% 34.0% 32.0% 30.0% 32.9% Selling general and admin costs 6,543 6,487 6,535 6,535 26,100 6,656 6,535 6,535 6,535 26,261 6,123 6,000 6,000 6,000 24,123 As a percent of revenue 50.0% 47.2% 51.4% 52.7% 50.2% 68.8% 74.3% 88.0% 85.5% 78.3% 81.0% 75.8% 72.8% 69.4% 74.5% Provision for doubtful accounts 65 1, , Depreciation 2,089 2,076 2,129 2,129 8,423 2,089 2,129 2,129 2,129 8, Amortization 1,395 1,395 1,413 1,413 5,616 1,413 1,413 1,413 1,413 5,652 1,401 1,401 1,401 1,401 5,604 Operating income (439) (897) (907) (1,192) (3,546) (3,728) (4,481) (5,753) (5,516) (19,478) (2,816) (2,304) (1,927) (1,479) (8,526) Operating margin -3.4% -6.5% -7.1% -9.6% -6.8% -38.5% -50.9% -77.4% -72.1% -58.1% -37.3% -29.1% -23.4% -17.1% -26.3% Interest income Interest expense (2,695) (2,572) (2,399) (2,211) (9,877) (2,024) (1,836) (1,836) (1,836) (7,533) (1,836) (1,836) (1,836) (1,836) (7,346) Debt conversion expense Loss on extinguishment of debt Other income - (18) - - (18) Gain on termination of capital lease Change in fair value of derivatives (10) (10) Pretax Income (3,144) (3,487) (3,306) (3,403) (13,452) (5,751) (6,318) (7,590) (7,353) (27,011) (4,653) (4,141) (3,763) (3,315) (15,872) Taxes (139) (139) Non-controlling interest Preferred dividends (89) (89) (90) (90) (358) (90) (90) (90) (90) (360) (90) (90) (90) (90) (360) Net income to common (3,356) (3,568) (3,386) (3,483) (13,905) (5,831) (6,398) (7,670) (7,433) (27,331) (4,733) (4,221) (3,843) (3,395) (16,192) Net income margin -25.7% -26.0% -26.6% -28.1% -26.8% -60.3% -72.7% % -97.2% -81.5% -62.6% -53.3% -46.6% -39.3% -50.0% Diluted shares outstanding 37,639 37,696 37,696 37,696 37,682 69,853 69,853 69,853 69,853 69,853 69,853 69,853 69,853 69,853 69,853 Seq change , EPS diluted - continuing ($0.09) ($0.09) ($0.09) ($0.09) ($0.37) ($0.08) ($0.09) ($0.11) ($0.11) ($0.39) ($0.07) ($0.06) ($0.06) ($0.05) ($0.23) EBITDA Net loss (3,283) (3,487) (3,306) (3,403) (13,591) (5,751) (6,318) (7,590) (7,353) (27,011) (4,653) (4,141) (3,763) (3,315) (15,872) Add back: Income tax expense Depreciation and amortization of PPE 2,089 2,076 2,129 2,129 8,423 2,089 2,129 2,129 2,129 8, Amortization of intangibles 1,395 1,395 1,413 1,413 5,616 1,413 1,413 1,413 1,413 5,652 1,401 1,401 1,401 1,401 5,604 Gain on termination of capital lease Interest expense 2,695 2,572 2,399 2,211 9,877 2,024 1,836 1,836 1,836 7,533 1,836 1,836 1,836 1,836 7,346 Debt conversion expense Other expense Change in fair value of derivatives Provision for doubtful accounts Stock-based comp Restructuring Non-controlling EBITDA 3,147 2,899 2,746 2,462 11,143 (116) (829) (2,100) (1,862) (4,907) (1,176) (664) (286) 163 (1,963) YoY grow th -41.5% -50.7% -49.9% -61.0% -51.6% % % % % % 918.3% -19.9% -86.4% % -60.0% Source: Company reports and Dawson James estimates Cinedigm Corp. Page 5 of 7

6 Important Disclosures: Source: FactSet Data Systems Price target and ratings changes over the past 3 years: Initiation October 22, Buy - Price Target $2.67 Dawson James Securities, Inc. (the Firm ) is a member of the Financial Industry Regulatory Authority ( FINRA ) and the Securities Investor Protection Corporation ( SIPC ). The Firm does not make a market in the securities of the subject company (s). The Firm has NOT engaged in investment banking relationships with the subject company in the prior twelve months, as a manager or co-manager of a public offering and has NOT received compensation resulting from those relationships. The Firm may seek compensation for investment banking services in the future from the subject company(s). The Firm has NOT received other compensation from the subject company(s) in the last 12 months for services unrelated to the managing or co-managing of a public offering. Neither the research analyst(s) whose name appears on this report nor any member of his (their) household is an officer, director or advisory board member of these companies. The Firm and/or its directors and employees may own securities of the company(s) in this report and may increase or decrease holdings in the future. As of November 30, 2018, the Firm as a whole did not beneficially own 1% or more of any class of common equity securities of the subject company (s) of this report. The Firm, its officers, directors, analysts or employees may effect transactions in and have long or short positions in the securities (or options or warrants related to those securities) of the company(s) subject to this report. The Firm may effect transactions as principal or agent in those securities. Analysts receive no direct compensation in connection with the Firm's investment banking business. All Firm employees, including the analyst(s) responsible for preparing this report, may be eligible to receive non-product or service specific monetary bonus compensation that is based upon various factors, including total revenues of the Firm and its affiliates as well as a portion of the proceeds from a broad pool of investment vehicles consisting of components of the compensation generated by investment banking activities, including but not limited to shares of stock and/or warrants, which may or may not include the securities referenced in this report. Although the statements in this report have been obtained from and are based upon recognized statistical services, issuer reports or communications, or other sources that the Firm believes to be reliable, we cannot guarantee their accuracy. All opinions and estimates included in this report constitute the analyst s judgment as of the date of this report and are subject to change without notice. Cinedigm Corp. Page 6 of 7

7 VALUATION Our $2.67 price target is based on a multiple of 3.0x our FY2021 EBITDA estimate, plus $37 mm for the estimated disposal of the cinema equipment business s projectors at the end of their lease term. RISK FACTORS 1. Cinedigm is a relatively small player selling to much larger corporate entities, so sales can be unpredictable and volatile. 2. Consumer tastes in media are highly fickle and unpredictable. While Cinedigm hedges its bets with content appealing to a wide range of demographics, if most fail to gain traction with audiences, the company will miss our projections. 3. Cinedigm is 60% owned by a Chinese company and expects to generate significant growth from its eight announced Chinese partners. Should the growing SINO-U.S. frictions negatively impact its ability to do so, the company will miss our projections, although little current revenue is at risk. Ratings Definitions: 1) Buy: the analyst believes the price of the stock will appreciate and produce a total return of at least 20% over the next months; 2) Neutral: the analyst believes the price of the stock is fairly valued for the next months; 3) Sell: the analyst believes the price of the stock will decline by at least 20% over the next months and should be sold. The following chart reflects the range of current research report ratings for all companies followed by the analysts of the Firm. The chart also reflects the research report ratings relating to those companies for which the Firm has performed investment banking services in the last twelve months. Analyst Certification: The analyst(s) whose name appears on this research report certifies that 1) all of the views expressed in this report accurately reflect his (their) personal views about any and all of the subject securities or issuers discussed; and 2) no part of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report; and 3) all Dawson James employees, including the analyst(s) responsible for preparing this research report, may be eligible to receive non-product or service specific monetary bonus compensation that is based upon various factors, including total revenues of Dawson James and its affiliates as well as a portion of the proceeds from a broad pool of investment vehicles consisting of components of the compensation generated by investment banking activities, including but not limited to shares of stock and/or warrants, which may or may not include the securities referenced in this report. Cinedigm Corp. Page 7 of 7

EQUITY RESEARCH Telecom, Media, Tech COMPANY UPDATE

EQUITY RESEARCH Telecom, Media, Tech COMPANY UPDATE 9 27 31 A S D 10 2016 4 S N D 14 18 2017 26 2 2018 8 16 22 29 F 5 12 20 26 LIVEXLIVE ED IA O RD (5.81000, 5.974,5.67000,5.77000,+0.01000) Relative Strength Index (45.7825) 5 12 19 26 2 A 9 16 23 30 7 14