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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                 to

Commission File Number:  001‑38125

CHICKEN SOUP FOR THE SOUL ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

81-2560811

(State or other jurisdiction of incorporation)

(I.R.S. Employer Identification No.)

 

 

132 East Putman Avenue – Floor 2W, Cos Cob, CT

06807

(Address of Principal Executive Offices)

(Zip Code)

 

855‑398‑0443

(Registrant’s Telephone Number, including Area Code)

Not Applicable

Former Name or Former Address, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes  No 

The number of shares of Common Stock outstanding as of May 14, 2020 totaled 12,007,428 as follows:

 

Title of Each Class

    

 

Class A Common Stock, $.0001 par value per share

 

4,193,490

Class B Common Stock, $.0001 par value per share*

 

7,813,938

*Each share convertible into one share of Class A Common Stock at the direction of the holder at any time.

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s) 

 

Name of each exchange on which registered

Class A Common Stock
9.75% Series A Cumulative Redeemable Perpetual Preferred Stock

 

CSSE
CSSEP

 

The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC

 

 

 

 

 

Chicken Soup for the Soul Entertainment, Inc.

Table of Contents

 

 

 

 

Page

 

 

    

Number

 

 

 

 

 

PART 1 - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1. 

Financial Statements (unaudited) 

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019

 

4

 

 

 

 

 

Condensed Consolidated Statements of Equity for the three months ended March 31, 2020 and 2019

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

ITEM 2. 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

ITEM 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

ITEM 4. 

Controls and Procedures

 

35

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1. 

Legal Proceedings

 

36

 

 

 

 

ITEM 1A. 

Risk Factors

 

36

 

 

 

 

ITEM 2.  

Unregistered Sales of Equity Securities

 

37

 

 

 

 

ITEM 3. 

Defaults Upon Senior Securities

 

37

 

 

 

 

ITEM 4. 

Mine Safety Disclosures

 

37

 

 

 

 

ITEM 5. 

Other Information

 

37

 

 

 

 

ITEM 6. 

Exhibits

 

38

 

 

 

SIGNATURES 

 

39

 

 

 

 

2

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

 

 

(unaudited)

 

 

 

ASSETS

 

 

  

 

 

  

Cash and cash equivalents

 

$

7,121,339

 

$

6,447,402

Accounts receivable, net

 

 

25,017,923

 

 

34,661,119

Prepaid expenses

 

 

862,153

 

 

861,190

Inventory, net

 

 

338,932

 

 

312,033

Goodwill

 

 

21,448,106

 

 

21,448,106

Indefinite lived intangible assets

 

 

12,163,943

 

 

12,163,943

Intangible assets, net

 

 

30,272,504

 

 

35,451,951

Film library, net

 

 

37,362,602

 

 

33,250,149

Due from affiliated companies

 

 

6,790,980

 

 

7,642,432

Programming costs, net

 

 

15,546,857

 

 

14,459,271

Program rights, net

 

 

600,551

 

 

654,303

Other assets, net

 

 

649,911

 

 

313,585

Total assets

 

$

158,175,801

 

$

167,665,484

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

  

 

 

  

Current maturities of commercial loan

 

$

3,200,000

 

$

3,200,000

Commercial loan and revolving line of credit, net of unamortized deferred finance cost of $179,373 and $189,525 respectively

 

 

11,020,627

 

 

11,810,475

Notes payable under revolving credit facility

 

 

5,000,000

 

 

5,000,000

Accounts payable and accrued expenses

 

 

27,315,709

 

 

26,646,390

Ad representation fees payable

 

 

11,552,967

 

 

12,429,838

Film library acquisition obligations

 

 

6,909,100

 

 

5,020,600

Programming obligations

 

 

7,300,861

 

 

7,300,861

Accrued participation costs

 

 

5,861,388

 

 

5,066,512

Other liabilities

 

 

229,846

 

 

170,106

Total liabilities

 

 

78,390,498

 

 

76,644,782

Commitments and contingencies

 

 

  

 

 

  

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Stockholders' Equity:

 

 

  

 

 

  

Series A cumulative redeemable perpetual preferred stock, $.0001 par value, liquidation preference of $25.00 per share, 10,000,000 shares authorized; 1,599,002 shares issued and outstanding, redemption value of $39,975,050

 

 

160

 

 

160

Class A common stock, $.0001 par value, 70,000,000 shares authorized; 4,267,725 and 4,259,920 shares issued, 4,193,490 and 4,185,685 shares outstanding, respectively

 

 

426

 

 

425

Class B common stock, $.0001 par value, 20,000,000 shares authorized; 7,813,938 shares issued and outstanding

 

 

782

 

 

782

Additional paid-in capital

 

 

87,854,864

 

 

87,610,030

Deficit

 

 

(44,123,009)

 

 

(32,695,629)

Class A common stock held in treasury, at cost (74,235 shares)

 

 

(632,729)

 

 

(632,729)

Total stockholders’ equity

 

 

43,100,494

 

 

54,283,039

Subsidiary convertible preferred stock

 

 

36,350,000

 

 

36,350,000

Noncontrolling interests

 

 

334,809

 

 

387,663

Total equity

 

 

79,785,303

 

 

91,020,702

Total liabilities and equity

 

$

158,175,801

 

$

167,665,484

 

See accompanying notes to unaudited condensed consolidated financial statements.

3

Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2020

    

2019

    

Revenue:

 

 

  

 

 

  

 

Online networks

 

$

9,025,710

 

$

735,264

 

Distribution and Production

 

 

5,092,789

 

 

1,790,234

 

Total revenue

 

 

14,118,499

 

 

2,525,498

 

Less: returns and allowances

 

 

(874,426)

 

 

(332,344)

 

Net revenue

 

 

13,244,073

 

 

2,193,154

 

Cost of revenue

 

 

9,910,390

 

 

1,632,101

 

Gross profit

 

 

3,333,683

 

 

561,053

 

Operating expenses:

 

 

 

 

 

  

 

Selling, general and administrative

 

 

6,839,897

 

 

2,822,057

 

Amortization and depreciation

 

 

5,204,728

 

 

205,623

 

Management and license fees

 

 

1,324,407

 

 

219,270

 

Total operating expenses

 

 

13,369,032

 

 

3,246,950

 

Operating loss

 

 

(10,035,349)

 

 

(2,685,897)

 

Interest income

 

 

(6,438)

 

 

(13,525)

 

Interest expense

 

 

329,125

 

 

141,123

 

Acquisition-related costs

 

 

98,926

 

 

397,935

 

Loss before income taxes and preferred dividends

 

 

(10,456,962)

 

 

(3,211,430)

 

Provision for (benefit from) income taxes

 

 

49,000

 

 

(438,000)

 

Net loss before noncontrolling interests and preferred dividends

 

 

(10,505,962)

 

 

(2,773,430)

 

Net loss attributable to noncontrolling interests

 

 

(52,854)

 

 

 —

 

Net loss attributable to Chicken Soup for the Soul Entertainment, Inc.

 

 

(10,453,108)

 

 

(2,773,430)

 

Less: preferred dividends

 

 

974,272

 

 

603,307

 

Net loss available to common stockholders

 

$

(11,427,380)

 

$

(3,376,737)

 

Net loss per common share:

 

 

  

 

 

  

 

Basic and diluted

 

$

(0.95)

 

$

(0.28)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4

Chicken Soup for the Soul Entertainment, Inc

Condensed Consolidated Statements of Equity

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

Class B

 

Additional

 

 

 

 

 

 

 

convertible

 

 

 

 

 

 

 

 

 

Par

 

 

 

 

Par

 

 

 

Par

 

Paid-In

 

 

 

Treasury

 

Preferred

 

Noncontrolling

 

 

 

 

    

Shares

    

Value

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Deficit

    

Stock

    

Stock

    

Interests

 

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019 (audited)

 

1,599,002

 

$

160

 

 

4,259,920

 

$

425

 

 

7,813,938

 

$

782

 

$

87,610,030

 

$

(32,695,629)

 

$

(632,729)

 

$

36,350,000

 

$

387,663

 

$

91,020,702

Share based compensation - stock options

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

213,585

 

 

  

 

 

  

 

 

  

 

 

  

 

 

213,585

Share based compensation - common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,250

Shares issued to directors

 

 

 

 

 

 

 

7,805

 

 

 1

 

 

  

 

 

  

 

 

(1)

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 —

Dividends

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(974,272)

 

 

  

 

 

  

 

 

  

 

 

(974,272)

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,854)

 

 

(52,854)

Net loss

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(10,453,108)

 

 

  

 

 

  

 

 

  

 

 

(10,453,108)

Balance, March 31, 2020

 

1,599,002

 

$

160

 

 

4,267,725

 

$

426

 

 

7,813,938

 

$

782

 

$

87,854,864

 

$

(44,123,009)

 

$

(632,729)

 

$

36,350,000

 

$

334,809

 

$

79,785,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

Class B

 

Additional

 

Retained

 

 

 

 

 

 

 

 

 

Par

 

 

 

 

Par

 

 

 

Par

 

Paid-In

 

Earnings

Treasury

 

 

 

 

    

Shares

    

Value

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

     (Deficit)

    

Stock

    

Total

Balance, December 31, 2018  (audited)

 

918,497

 

$

92

 

 

4,227,740

 

$

421

 

 

7,817,238

 

$

782

 

$

59,360,583

 

$

2,281,187

 

$

(632,729)

 

$

61,010,336

Share based compensation - stock options

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

190,847

 

 

  

 

 

  

 

 

190,847

Share based compensation - common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,000

 

 

 

 

 

 

 

 

25,000

Issuance of preferred stock

 

140,000

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,499,986

 

 

 

 

 

 

 

 

3,500,000

Preferred stock issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(288,160)

 

 

 

 

 

 

 

 

(288,160)

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

 

 

 

(603,307)

 

 

  

 

 

(603,307)

Net loss

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(2,773,430)

 

 

  

 

 

(2,773,430)

Balance, March 31, 2019

 

1,058,497

 

$

106

 

 

4,227,740

 

$

421

 

 

7,817,238

 

$

782

 

$

62,788,256

 

$

(1,095,550)

 

$

(632,729)

 

$

61,061,286

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5

Chicken Soup for the Soul Entertainment, Inc

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2020

    

2019

Cash flows from Operating Activities:

 

 

  

 

 

  

Net loss

 

$

(10,505,962)

 

$

(2,773,430)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

  

Share-based compensation

 

 

244,835

 

 

215,847

Amortization of programming costs and rights

 

 

110,629

 

 

61,798

Amortization of deferred financing costs

 

 

10,152

 

 

25,823

Amortization and depreciation of intangible and fixed assets

 

 

5,204,728

 

 

205,623

Amortization of film library

 

 

2,441,081

 

 

871,126

Bad debt and video return expense

 

 

1,721,595

 

 

300,403

Deferred income taxes

 

 

 —

 

 

(465,000)

Changes in operating assets and liabilities:

 

 

  

 

 

 

Trade accounts receivable

 

 

7,921,601

 

 

2,235,012

Prepaid expenses and other current assets

 

 

(21,984)

 

 

(135,279)

Inventory

 

 

(26,899)

 

 

(24,533)

Programming costs and rights

 

 

(1,144,463)

 

 

(147,605)

Film library

 

 

(6,553,534)

 

 

(2,819,734)

Accounts payable, accrued expenses and other payables

 

 

(207,552)

 

 

(1,218,678)

Film library acquisition obligations

 

 

1,888,500

 

 

273,250

Accrued participation costs

 

 

794,876

 

 

(32,015)

Other liabilities

 

 

59,740

 

 

(350,400)

Deferred revenue

 

 

 —

 

 

6,469

Net cash provided by (used in) operating activities

 

 

1,937,343

 

 

(3,771,323)

Cash flows from Investing Activities:

 

 

  

 

 

  

Expenditures for property and equipment

 

 

(340,586)

 

 

 —

Decrease (increase) in due from affiliated companies

 

 

851,452

 

 

(1,985,500)

Net cash provided by (used in) investing activities

 

 

510,866

 

 

(1,985,500)

Cash flows from Financing Activities:

 

 

  

 

 

  

    Repayments of commercial loan

 

 

(800,000)

 

 

(260,358)

Payment of preferred stock issuance costs

 

 

 —

 

 

(288,160)

Proceeds from issuance of Series A preferred stock

 

 

 —

 

 

3,500,000

Dividends paid to preferred stockholders

 

 

(974,272)

 

 

(603,307)

Net cash (used in) provided by financing activities

 

 

(1,774,272)

 

 

2,348,175

Net increase (decrease)  in cash and cash equivalents

 

 

673,937

 

 

(3,408,648)

Cash and cash equivalents at beginning of period

 

 

6,447,402

 

 

7,201,758

Cash and cash equivalents at end of the period

 

$

7,121,339

 

$

3,793,110

 

 

 

 

 

 

 

Supplemental data:

 

 

  

 

 

  

Interest paid

 

$

217,222

 

$

117,453

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents and restricted cash per consolidated balance sheets to statements of cash flows

 

 

  

 

 

  

Per consolidated balance sheets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

7,121,339

 

$

3,043,110

Restricted cash

 

 

 —

 

 

750,000

Total cash, cash equivalents and restricted cash per statements of cash flows

 

$

7,121,339

 

$

3,793,110

 

 

 

6

Table of Contents

Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – Description of the Business

Chicken Soup for the Soul Entertainment, Inc. (the “Company”) is a Delaware corporation formed on May 4, 2016. The Company operates video-on-demand networks and is a leading global independent television and film distribution company with one of the largest independently owned television and film libraries.

The Company operates in one reportable segment, across two operations areas, the distribution and production of video content for sale to others and for use on our owned and operated video on demand platforms. The Company currently operates in the United States and internationally and derives its revenue primarily in the United States. The Company has a presence in over 56 countries and territories worldwide. The chief executive officer of the Company is Mr. William J. Rouhana Jr.

 

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

 

The accompanying interim condensed consolidated financial statements of Chicken Soup for the Soul Entertainment, Inc. have been prepared in conformity with accounting principles generally accepted in the United States and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020. These condensed consolidated financial statements are unaudited and have been prepared by the Company following the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted as permitted by such rules and regulations; however, the Company believes the disclosures are adequate to make the information presented not misleading

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include revenue recognition, estimated film ultimate revenues, allowance for doubtful accounts, intangible assets, share-based compensation expense, valuation allowance for income taxes and amortization of programming and film library costs. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.

The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results are not necessarily indicative of the results for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

 

 

 

Note 3 – Recent Accounting Pronouncements

Recently Issued Accounting Standards

In March 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-02, “Improvements to Accounting for Costs of Films and License Agreements for Program Materials.” The amendments in this ASU align the accounting for production costs of an episodic television series with the accounting for production costs of films. In addition, the ASU modifies certain aspects of the capitalization, impairment, presentation and disclosure requirements under the current film and broadcaster entertainment industry guidance. The new guidance is

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

effective for the Company’s interim and annual reporting periods starting in the fiscal year beginning after December 15, 2020, with early adoption permitted. The new guidance will be applied on a prospective basis. The Company is currently in the process of evaluating the impact, if any, of this new guidance on its consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808) – Clarifying the Interaction between Topic 808 and Topic 606.” The amendments in this ASU clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606, Revenue from Contracts with Customers, when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. The new guidance is effective for the Company’s interim and annual reporting periods starting in the fiscal year beginning after December 15, 2020, with early adoption permitted. The new guidance should be applied retrospectively to the date of initial application of the new revenue guidance in Topic 606 (January 1, 2018 for the Company). The Company does not expect the adoption of the amendments to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new guidance is effective for interim and annual reporting periods starting in fiscal year 2020 for the Company, with early adoption permitted. The new guidance should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  The Company impact of adoption on its consolidated financial statements is immaterial.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires an entity to assess impairment of its financial instruments based on its estimate of expected credit losses. Since the issuance of ASU 2016-13, the FASB released several amendments to improve and clarify the implementation guidance. The provisions of ASU 2016-13 and the related amendments are effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2022. Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not expect the adoption of the amendments to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for public companies’ fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. Because the Company is an emerging growth company, adoption is not required until fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021 as recently voted and deferred by FASB. The Company is currently assessing the potential impact ASU 2016-02 will have on its consolidated financial statements. The impact of implementation is not expected to be material.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial statements.

 

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 4 – Business Combination

The Company consummated the creation of its Crackle Plus subsidiary on May 14, 2019. In consideration for assets contributed to Crackle Plus by CPE Holdings, Inc. (“CPEH”), a Delaware corporation and affiliate of Sony Pictures Television Inc. (“Sony”), and Crackle, Inc., a Delaware corporation and wholly owned subsidiary of CPEH (“Crackle”), Crackle Plus issued to Crackle 37,000 units of preferred equity (“Preferred Units”) and 1,000 units of common equity (“Common Units”), which are now held by CPEH. In consideration for assets contributed to Crackle Plus by the Company, Crackle Plus issued to the Company 99,000 Common Units. From May 2020 to October 2020 (“Exercise Period”), CPEH will have the right to either convert its Preferred Units into Common Units of Crackle Plus or require us to purchase all, but not less than all, of its interest in Crackle Plus (“Put Option”). We may elect to pay the put option in cash or through the issuance of Series A Preferred Stock using a price per share of $25. Subject to certain limitations, in the event that CPEH hasn’t converted its Preferred Units into Common Units of Crackle Plus or exercised its Put Option, Crackle shall be deemed to have automatically exercised the Put Option on the last day of the Exercise Period.

As additional consideration to CPEH, the Company issued to CPEH warrants to purchase (a) Eight Hundred Thousand (800,000) shares of the Class A common stock of the Company at an exercise price of $8.13 per share (the “CSSE Class I Warrants”), (b) warrants to purchase One Million Two Hundred Thousand (1,200,000) shares of the Class A common stock of the Company at an exercise price of $9.67 per share, (the “CSSE Class II Warrants”); (c) warrants to purchase Three Hundred Eighty Thousand (380,000) shares of the Class A common stock of the Company at an exercise price of $11.61 per share, (the “CSSE Class III-A Warrants”); and (d) warrants to purchase One Million Six Hundred Twenty Thousand (1,620,000) shares of the Class A common stock of the Company at an exercise price of $11.61 per share, (the “CSSE Class III-B Warrants”). All the CSSE Warrants have a five-year term commencing on the closing and are exercisable at any time and from time to time during such term.

The Crackle Plus transaction was accounted for as a purchase of a business in accordance with FASB ASC 805, Business Combinations and the aggregate purchase price consideration of $51,672,531 has been allocated to assets acquired and liabilities assumed, based on management’s analysis and information received from an independent third-party appraisal. The results are as follows:

 

 

 

 

 

Purchase price consideration allocated to fair value of net assets acquired:

 

 

 

 

 

 

 

Accounts receivable, net

    

$

5,360,667

Prepaid expenses

 

 

892,200

Programming Rights

 

 

1,155,363

Goodwill

 

 

18,911,027

Brand Value

 

 

18,807,004

Customer User Base

 

 

21,194,641

Content Rights

 

 

1,708,270

Partner Agreements

 

 

4,005,714

Assets acquired

 

 

72,034,886

Accounts payable and accrued expenses

 

 

(13,061,494)

Programming Obligations

 

 

(7,300,861)

Liabilities assumed

 

 

(20,362,355)

Total purchase consideration

 

$

51,672,531

 

In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected growth rates and estimated discount rates.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The amount related to other intangible assets represents the estimated fair values of the brand (trademark), customer user base, content rights, and partner agreements. These long lived assets are being amortized on a straight-line basis over their estimated useful lives of 16-84 months.

Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from the intangible assets acquired that do not qualify for separate recognition.

The fair values of assets acquired, and liabilities assumed were based upon preliminary valuations performed for the preparation of the pro forma financial information and are subject to the final valuations. These estimates and assumptions are subject to change within the measurement period as additional information is obtained. A decrease in the fair value of the assets acquired or liabilities assumed in the Crackle Plus transaction from the preliminary valuations presented would result in dollar for dollar corresponding increase or decrease, as applicable, in the amount of goodwill resulting from the transaction. In addition, if the value of the other intangible assets is higher than the amount included in these unaudited condensed consolidated financial statements, it may result in higher amortization expense than is presented herein. Any such increases could be material and could result in the Company’s actual future financial condition or results of operations differing materially from that presented herein. As permitted, the final determination of these estimated fair values will be completed as soon as possible but no later than one year from the acquisition date when the Company has completed the detailed valuations and calculations.

Purchase Price Consideration Allocation:

 

 

 

 

 

Fair Value of Preferred Units

    

$

36,350,000

Fair Value of Warrants in CSSE

 

 

10,899,204

Fair Value of Put Option

 

 

4,423,327

Total Estimated Purchase Price

 

$

51,672,531

 

The purchase price paid by the Company reflects the total consideration given in return for the ownership share available to CPEH in the entity. Consideration given has been calculated at the fair market value of the Crackle Plus Preferred Units; the four CSSE tranches of warrants and the Put Option. The Company valued the securities based on the terms of the Contribution Agreement and the use of the Black Scholes model valuation technique on each of the respective components as follows,

1.

The Preferred Units have a stated value at the time of the acquisition of $36.35 million, as set forth in the Crackle Plus Operating Agreement;

2.

The four (4) tranches of CSSE warrants were individually valued based on the Black Sholes valuation model using their respective terms and strike prices (ranging from a 5% to 50% premium over the initial market price of $7.74). Each tranche used a volatility of 58% and a 5-year risk free rate of 2.2%;

3.

The Put Option was valued via the Black-Sholes valuation model assuming an initial price of $36.35 million, strike price of $40M, volatility of 17% and term of 1.5 years reflecting the latest time the Put Option could be exercised or triggered.

All consideration transferred has been determined to represent equity-classified contingent consideration and has been measured at fair value as of the acquisition date. Equity-classified contingent consideration is not remeasured following the acquisition date, and its subsequent settlement is accounted for within equity. The equity classification has been determined based on the terms of the transaction.

 

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company’s condensed consolidated statement of operations include gross revenue of $9,289,245 million, gross profit of $2,365,802 million and net loss of $6,018,032 million, from Crackle’s operations for the three months ended March 31, 2020. Net loss excluding non-cash amortization and depreciation of $5,003,936, was $1,014,096 for the three months ended March 31, 2020.

 

Note 5 – Revenue Recognition

Revenue from contracts with customers is recognized as an unsatisfied performance obligation until the terms of a customer contract are satisfied; generally, this occurs with the transfer of control as we satisfy contractual performance obligations at a point in time or over time. Our contractual performance obligations include licensing of content and delivery of online advertisements on our owned and operated VOD platforms, the distribution of film content and production of episodic television series. Revenue is measured at contract inception as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Our contracts are valued at a fixed price at inception and do not include any variable consideration or financing components in our normal course of business. Sales tax, value added tax, and other taxes that are collected concurrently with revenue producing activities are excluded from revenue.

The following tables disaggregates our revenue by operations area:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 

 

 

 

 

 

 

 

 

 

 

 

% of  

 

 

    

2020

    

% of revenue

    

2019

    

revenue

 

Revenue:

 

 

  

 

  

 

 

  

 

  

 

Online networks

 

$

9,025,710

 

68

%  

$

735,264

 

33

%

Distribution and Production

 

 

5,092,789

 

38

%  

 

1,790,234

 

82

%

Total revenue

 

 

14,118,499

 

106

%  

 

2,525,498

 

115

%

Less: returns and allowances

 

 

(874,426)

 

(6)

%  

 

(332,344)

 

(15)

%

Net revenue

 

$

13,244,073

 

100

%  

$

2,193,154

 

100

%

 

Online Networks

In this operations area, the Company distributes and exhibits VOD content through Crackle Plus directly to consumers across all digital platforms, such as connected TV’s, smartphones, tablets, gaming consoles and the web through our owned and operated AVOD networks. We also distribute our own and third-party owned content to end viewers across various digital platforms through our SVOD network. We generate advertising revenues primarily by serving video advertisements to our streaming viewers and subscription revenue from consumers.

Revenue from online digital distribution and VOD platforms in our Online Networks operations area are recorded over time as advertisements are delivered and when monthly activity is reported by advertisers.

Distribution and Production

In this operations area, the Company distributes movies and television series worldwide to consumers through license agreements across all media, including theatrical, home video, pay-per-view, free, cable, pay television, VOD, mobile and new digital media platforms worldwide. We own the copyright or long-term distribution rights to over 1,000 television series and feature films.

In addition we work with sponsors and use highly regarded independent producers to develop and produce our television and short-form video content, including Brand-related content. We also derive revenue from our subsidiary A Plus, which develops and distributes high-quality, empathetic short-form videos to millions of people worldwide. A Plus enhances our ability to distribute short form versions of our video productions and video library and provide us with content developed and distributed by A Plus that is complementary to the Brand. As a result of launching Crackle Plus we decided to change

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

our approach to content production, focusing primarily on co-production partnerships in order to build our AVOD networks, through Crackle Plus, and our worldwide distribution capabilities through Screen Media. By focusing this way, we believe that we will be able to grow our business more rapidly by entering into production agreements with a variety of production partners.

The Company recognizes revenue from the production and distribution of television programs and short-form video content as each episode becomes available for delivery or becomes available for broadcast, and for short-form online videos, revenue is recognized when the videos are posted to a website for viewing. Revenue from the distribution of short-form online media content is included in television and short-form video production revenue in the accompanying consolidated statements of operations. Cash advances received by the Company are recorded as deferred revenue until all performance obligations have been satisfied.

For all customer contracts, the Company evaluates whether we are the principal (i.e., report revenue on a gross basis) or the agent (i.e., report revenue on a net basis). Generally, the Company reports revenue for show productions, films distributed, and advertising placed on CSSE properties on a gross basis (the amount billed to our customers is recorded as revenue, and the amount paid to our publishers is recorded as a cost of revenue). The Company is the principal because we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory, being primarily responsible to our customers, having discretion in establishing pricing, or a combination of these factors. The Company also generates revenue through agency relationships in which revenue is reported net of agency commissions and publisher payments in arrangements where we do not own the content or the ad inventory.

No impairment losses have arisen from any CSSE contracts with customers during the three months ended March 31, 2020 and 2019.

Performance obligations

The unit of measure under ASC 606 is a performance obligation, which is a promise in a contract to transfer a distinct or series of distinct goods or services to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our contracts have either a single performance obligation as the promise to transfer services is not separately identifiable from other promises in the contracts and is, therefore, not distinct, or have multiple performance obligations, most commonly due to the contract covering multiple service offerings. For contracts with multiple performance obligations, the contract’s transaction price can generally be readily allocated to each performance obligation based upon the selling price of each distinct service in the contract. In cases where estimates are needed to allocate the transaction price, we use historical experience and projections based on currently available information.

Contract Assets

The following table provides information about receivables, contract assets, from contracts with customers:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31,

 

 

2020

 

2019

Contract Assets

 

$

25,017,923

 

$