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(Mark One)
Director*
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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
(State or other jurisdiction of incorporation)
132 East Putman Avenue – Floor 2W, Cos Cob, CT
(Address of Principal Executive Offices)
81‑2560811
(I.R.S. Employer Identification No.)
06807
(Zip Code)
855‑398‑0443
(Registrant’s Telephone Number, including Area Code)
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, $.0001 par value per share
CSSE
Nasdaq Global Market
9.75% Series A Cumulative Redeemable Perpetual Preferred Stock,
$0.0001 par value per share
CSSEP
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ◻ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻ No ☒
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 ◻
Non-accelerated filer ☒
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 ☒
As of June 28, 2019, the aggregate market value of the shares of the registrant’s common stock held by non-affiliates was approximately $31.4 million.
The number of shares of Common Stock outstanding as of March 30, 2020 totaled 11,999,623 as follows:
Title of Each Class
Class A common stock, $.0001 par value per share
Class B common stock, $.0001 par value per share*
4,185,685
7,813,938
*Each share convertible into one share of Class A common stock at the direction of the holder at any time.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement for Registrant’s 2020 Annual Meeting of Stockholders to be filed at a later date are incorporated by reference into
Part III of this Annual Report on Form 10‑K.
TABLE OF CONTENTS
Page
Table of Contents
PART I
PART II
ITEM 1. Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Mine Safety Disclosures
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
ITEM 6. Selected Financial Data
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11 Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14. Principle Accounting Fees and Services
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
ITEM 16. Form 10-K Summary
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to,
statements regarding: our core strategy; operating income and margin; seasonality; liquidity, including cash flows from
operations, available funds and access to financing sources; free cash flows; revenues; net income; profitability; stock
price volatility; future regulatory changes; pricing changes; the impact of, and the company's response to new accounting
standards; action by competitors; user growth; partnerships; user viewing patterns; payment of future dividends; obtaining
additional capital, including use of the debt market; future obligations; our content and marketing investments, including
investments in original programming; amortization; significance and timing of contractual obligations; tax expense;
recognition of unrecognized tax benefits; and realization of deferred tax assets. These forward-looking statements are
subject to risks and uncertainties that could cause actual results and events to differ. A detailed discussion of these and
other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking
statements is included throughout this filing and particularly in Item 1A: "Risk Factors" section set forth in this Annual
Report. All forward-looking statements included in this document are based on information available to us on the date
hereof, and we assume no obligation to revise or publicly release any revision to any such forward-looking statement,
except as may otherwise be required by law.
In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking statements. The words “target,” “anticipate,” “believe,”
“continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,”
“project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these
words does not mean that a statement is not forward-looking.
The forward-looking statements contained in this Annual Report are based on current expectations and beliefs concerning
future developments and their potential effects on our company and its subsidiaries. There can be no assurance that future
developments will be those that have been anticipated. We may not actually achieve the plans, intentions or expectations
disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements.
You should read this Annual Report and the documents we have filed as exhibits to this Annual Report completely and with
the understanding our actual future results may be materially different from what we expect, or events could differ
materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-
looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make.
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Our company, Chicken Soup for the Soul Entertainment, Inc., is referred to in this Annual Report on Form 10-K as
“CSSE,” the Company,” or “we” or similar pronouns. References to:
PART I
·
·
·
·
·
·
·
·
“CSS Productions” means Chicken Soup for the Soul Productions, LLC, our immediate parent;
“CSS” means Chicken Soup for the Soul, LLC, our intermediate parent company;
“CSS Holdings” means Chicken Soup for the Soul Holdings, LLC the parent company of CSS and our ultimate
parent company;
“Screen Media” means Screen Media Ventures, LLC, a wholly owned subsidiary of CSSE;
“A Plus” means A Sharp Inc. (d/b/a A Plus), a wholly owned subsidiary of CSSE;
“Pivotshare” means Pivotshare, Inc., a wholly owned subsidiary of CSSE;
“Crackle Plus” means Crackle Plus, LLC, a company formed by CSSE and CPE Holdings, Inc. (an affiliate of
Sony Pictures Television Inc.); and
“Landmark Studio Group” means Landmark Studio Group a majority owned subsidiary of CSSE.
ITEM 1. Business
Overview
Chicken Soup for the Soul Entertainment, Inc. (Nasdaq:CSSE) operates streaming video-on-demand networks (“VOD”).
The company owns a majority stake in Crackle Plus, a company formed with Sony Pictures Television (“SPT”), which
owns and operates a variety of ad-supported and subscription-based VOD networks including Crackle, Popcornflix,
Popcornflix Kids, Truli, Pivotshare, Españolflix and FrightPix. Our company also acquires and distributes video content
through its Screen Media subsidiary and produces long and short-form original content through subsidiaries and outside
partnerships. The content acquired or produced by our company is sometimes used exclusively on our networks and is
generally also sold to others with the goal of providing our networks access to original and exclusive AVOD content at a
lower cost and to generate additional revenue and operating cash flow for our company.
Our majority-owned Crackle Plus subsidiary was formed in partnership with SPT in May 2019. Crackle Plus is one of the
largest, independent advertising-supported online video-on-demand (“AVOD”) network groups in the United States, with
viewers streaming an average of approximately 30 million programs per month. The popular network, Crackle®, is the
largest Crackle Plus network and a top performer on the industry-leading Roku platform. Our VOD networks deliver
popular and original new content covering a wide range of themes, including family, kids and faith, as well as proven
genres, such as horror and comedy. We are differentiated among other VOD network operators by our ability to generate
original content cost-effectively and by our access to more than 49,000 hours of programming. Our Screen Media
subsidiary has one of the largest independently owned television and film libraries in the industry and provides content to
the Crackle Plus networks and third-party networks. Our VOD networks also feature original content produced through our
subsidiaries, Landmark Studio Group and APlus.com. Our exclusive, perpetual, sublicensable and worldwide license, to
create and distribute video content under the Chicken Soup for the Soul® brand (the “Brand”) also allows us to create new
Brand-focused AVOD channels, which we expect to do in the future.
We believe CSSE is the only independent AVOD network operator with the proven capability to create and distribute
original programming and access to an extensive amount of valuable company-owned and third-party library content. We
believe this differentiation is important at a time of a major shift in consumer viewing habits, as the growth in both
availability and quality of high-speed broadband enables consumers to consume video content at any time on any device.
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According to industry projections, the global market for AVOD network revenue is expected to increase at a compound
annual growth rate of 21% between 2018 and 2024, reaching $56 billion by the end of the period. At the same time,
advertising spending on linear television networks is expected to decline as more viewers transition from pay television
subscriptions to online video viewing. We believe AVOD networks will grow rapidly as consumers seek affordable
programming alternatives to multiple SVOD offerings.
In this environment, our strategy is to build a leading VOD network featuring a range of mass-appeal and thematic
programming options. We are executing on this strategy in three ways:
·
Increase content. Our “originals and exclusives” focus, supported by our distribution and production
business, is designed to distinguish our network brands among viewers. We are able to add to our
existing broad base of content without the significant capital outlay of a traditional television or film
studio by producing new originals at low cost through creative partnerships, such as our award-winning
2019 series Going from Broke. Through Screen Media, we are also acquiring the rights to additional
exclusive content. Finally, we are expanding our production capacity through partnerships, the formation
of our majority owned subsidiary Landmark Studio Group and acquiring additional content libraries,
such as our recent acquisition of the Foresight Unlimited film library.
· Grow and retain audience while adding new networks. Our goal is to utilize our increasing, exclusive
access to quality programming to grow and retain viewers on our existing networks. As we grow our
content libraries, we are also continuously evaluating opportunities to create new thematic networks that
feature certain genres and other types of programming that can deliver more targeted advertising
opportunities to marketers such as a Chicken Soup for the Soul network for families. Finally, we are also
actively evaluating opportunities to acquire additional AVOD networks that can accelerate our path to
scale.
·
Build our advertising sales capability. As we grow our stable of networks, we are investing in
integration of advertising platform technology stacks and the growth of our sales force. As our
advertising sales capability matures, we believe we will be positioned to increase both overall advertising
sales and ad insertion rates.
Since our inception in January 2015, our business has grown rapidly. For the full year 2019, our net revenue was $55.3
million, as compared to the full year 2018 net revenue of $26.9 million. This increase was primarily due to the revenue
impact of adding the Crackle network to our business in May 2019. We had net losses of approximately $35.0 million in
2019, as compared to net losses of $2.0 million in 2018. Our 2019 Adjusted EBITDA was approximately, $6.0 million, as
compared to 2018 Adjusted EBITDA of $10.0 million.
Business
We are a media company operating Crackle Plus, our AVOD and SVOD networks group, supported by our distribution and
production capabilities. Our goal is to grow our network platform organically and through consolidation to establish a
leading AVOD business positioned to capture ad revenue as that revenue increasingly moves from linear TV to online
video.
Our three main areas of operation for 2019 were:
Online VOD Networks. In this operations area, we distribute and exhibit VOD content directly to consumers across all
digital platforms, such as connected TVs, smartphones, tablets, gaming consoles and the web through our owned and
operated AVOD Crackle Plus networks. We also distribute our own and third-party owned content to consumers across
various digital platforms through our SVOD network, Pivotshare.
Our acquisition of Screen Media in 2017 marked our entry into the direct-to-consumer online VOD market through
Popcornflix, which has an extensive footprint with apps that have been downloaded more than 27 million times.
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Popcornflix is one of the largest AVOD services. Under the Popcornflix brand, we operate a series of direct-to consumer
advertising supported channels. As a “free-to-consumer” digital streaming channel, Popcornflix is an extremely popular
online video platform that can be found on the web, iPhones and iPads, Android products, Roku, Xbox, Amazon Fire,
Apple TV, Chromecast and Samsung and Panasonic internet connected televisions, among others. Popcornflix is currently
available in 61 countries, including the United States, United Kingdom, Canada, Australia, Germany, France, and
Singapore, with additional territories to be added.
In October 2018, we completed the acquisition of the assets of Truli Media Corp., which operates a nascent global family-
friendly and faith-based online video channel (“Truli”). Truli’s content fits strategically in our thematic network plans and
includes film, television, music videos, sports, comedy, and educational material.
In May 2019, we launched a new streaming video subsidiary known as Crackle Plus, through which we operate VOD
networks including, Crackle and Popcornflix. Viewers are able to watch premium video content, such as films and TV
shows on our networks. The networks are accessible through various internet connected digital devices such as mobile,
tablet, smart TV and console. The networks primarily earn revenue from advertisements placed on the platform through
direct and reseller channels. Our entry into subscription-based VOD was initiated by our acquisition of the Pivotshare VOD
platform in August 2018. All of our VOD acquisitions are currently in our Crackle Plus subsidiary. As a result, Crackle
Plus, is one of the largest AVOD companies in the United States as well as a targeted SVOD network provider. Within
Crackle Plus we have been primarily focused on growing our AVOD networks and may turn more attention to our SVOD
opportunities in the future.
Television and Film Distribution. In this operations area, we distribute movies and television series worldwide , through
our Screen Media subsidiary, 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, representing one of the largest
independently owned libraries of filmed entertainment in the world.
We have distribution licensing agreements with numerous VOD services across all major platforms, such as cable and
satellite VOD and Internet VOD, which includes TVOD for rentals or purchases of films, AVOD for free-to-viewer
streaming of films supported by advertisements and SVOD for unlimited access to films for a monthly fee.
Our cable and satellite VOD distribution agreements include those with DirecTV, Cablevision (Altice USA), Verizon and
In Demand (owned by Comcast, Charter and Time Warner Cable). Our Internet VOD distribution agreements include those
with Amazon, iTunes, Samsung, YouTube, Hulu, Xbox, Netflix, Sony, and Vudu, among others.
We have expanded our international distribution capabilities in connection with the acquisition of the Foresight library. We
have also expanded our international digital distribution through agreements with iTunes, Sony PlayStation, Xbox, among
others.
Screen Media’s distribution capabilities across all media give us the ability to monetize various rights to our produced and
co-produced television series and films directly, including our content produced through Landmark Studio Group. The cost
savings from Screen Media’s distribution capabilities enhance our revenue and profits from our produced or co-produced
content. Furthermore, Screen Media supports the programming and content needs of our AVOD networks. The ability to
monetize film and tv rights through Screen Media gives us the ability to retain exclusive AVOD rights for some of our
acquired or produced films or television series on a cost advantaged basis.
Television and Short-Form Video Production. In this operations area, we produce content in two main ways. 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 thereby meeting commitments to sponsors and provide us with
content developed and distributed by A Plus that is complementary to the Brand.
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We utilize the Chicken Soup for the Soul brand, together with our management’s industry experience and expertise, to
generate revenue through the production and distribution of video content with sponsors. Since we seek to secure both the
committed funding and production capabilities for our video content prior to moving forward with a project, we have high
visibility into the profitability of a particular project before committing to proceed with such project. In addition, we take
limited financial risk on developing our projects.
As a result of launching Crackle Plus we decided to change 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. In October 2019, we launched Landmark
Studio Group (“Landmark”), our first production co-venture subsidiary. Landmark is a fully integrated entertainment
company focused on ownership, development, and production of quality entertainment franchises.
Landmark develops, produces, distributes and owns all the intellectual property (IP) it creates, building a valuable library.
The studio will be independent, having the ability to sell its content to any network or platform, while also developing and
producing original content for Crackle Plus. Landmark controls all worldwide rights and distributes those rights exclusively
through Screen Media.
We plan to enter into other similar co-production arrangements going forward. We will only occasionally produce
programming internally. As a result, we plan to combine the activity of this area with our distribution area beginning in
2020.
Competition
We are in a highly competitive business. The market for streaming entertainment is rapidly changing. We face competition
from companies within the entertainment business and from alternative forms of leisure entertainment, such as travel,
sporting events, outdoor recreation, video games, the internet and other cultural and computer-related activities. We
compete for viewers and programming with much larger companies which have significant resources and brand
recognition, including dominant video on demand providers such as Netflix, HBO GO, Hulu, Amazon Prime Video,
Disney Plus, Fubo TV, Sling TV, and major film and television studios. We also compete with numerous independent
motion picture and television distribution and production companies, television networks, pay television systems and
online media platforms for viewers, subscribers, and the services of performing artists, producers and other creative and
technical personnel and production financing, all of which are essential to the success of our businesses.
In addition, our video content competes for media outlet and audience acceptance with video content produced and
distributed by other companies. As a result, the success of any of our video content is dependent not only on the quality and
acceptance of a particular production, but also on the quality and acceptance of other competing video content available in
the marketplace at or near the same time.
Given such competition, and our stage of development, we emphasize a lower cost structure, risk mitigation, reliance on
financial partnerships and innovative financial strategies. We rely on our flexibility and agility as well as the
entrepreneurial spirit of our employees, partners and affiliates, in order to provide creative, desirable video content.
Intellectual Property
We are party to the CSS License Agreement (as defined) through which we have been granted the perpetual, exclusive,
worldwide license by CSS to produce and distribute video content using the brand and related content, such as stories
published in the Chicken Soup for the Soul books. Chicken Soup for the Soul and related names are trademarks owned by
CSS. We have the proprietary rights (including copyrights) in all company-produced content. As a result of the acquisitions
of Screen Media, Pivotshare, Crackle, and other smaller libraries and companies we now own copyrights or global long-
term distribution rights to approximately 49,000 hours of content.
We rely on a combination of copyright, trademark, trade secret laws, confidentiality procedures, contractual provisions and
other similar measures to protect our proprietary information and intellectual property rights. Our ability to protect
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and enforce our intellectual property rights is subject to certain risks and from time to time we encounter disputes over
rights and obligations concerning intellectual property, which are described more fully in the section titled “Risk Factors”.
Employees
As of December 31, 2019, we had 85 direct employees. The services of certain personnel, including our chairman and chief
executive officer, vice chairman and chief strategy officer, our senior brand advisor and director, and chief financial officer,
among others, are provided to us under the CSS Management Agreement. We also utilize many consultants in the ordinary
course of our business and hire additional personnel on a project-by-project basis. We believe that our employee and labor
relations are good, and we are committed to inclusion and strict policies and procedures to maintain a safe work
environment.
Corporate Information
We are a Delaware corporation formed on May 4, 2016. CSS Productions, our predecessor and immediate parent company,
was formed in December 2014 by CSS, and initiated operations in January 2015. We were formed to create a discrete entity
focused on video content opportunities using the Brand. On May 4, 2016, pursuant to the terms of the contribution
agreement among CSS, CSS Productions and the Company (the “CSS Contribution Agreement”), all video content assets
(the “Subject Assets”) owned by CSS, CSS Productions and their CSS subsidiaries were transferred to the Company in
consideration for its issuance to CSS Productions of 8,600,568 shares of the Company’s Class B common stock.
Concurrently with the consummation of the CSS Contribution Agreement, certain rights to receive payments under certain
agreements comprising part of the Subject Assets owned by Trema, LLC (“Trema”), a company principally owned and
controlled by William J. Rouhana, Jr., the Company’s chairman and chief executive officer, were assigned to the Company
under a contribution agreement (the “Trema Contribution Agreement”) in consideration for the Company’s issuance to
Trema of 159,432 shares or our Class B common stock. Thereafter, CSS Productions’ operating activities ceased, and the
Company continued the business operations of producing and distributing the video content.
Internet Address and Availability of Filings
We maintain a website at www.cssentertainment.com. The contents of our website are not incorporated in, or otherwise to
be regarded as part of, this Annual Report. The Company makes available, free of charge, on or through its website, the
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended (“Exchange Act”), as soon as reasonably practicable after the Company electronically files such material with,
or furnishes it to, the Securities and Exchange Commission.
Implications of Being an Emerging Growth Company
We are an “emerging growth company”, as defined in the Jumpstart our Business Startups Act (“JOBS Act”), and, for so
long as we are an emerging growth company, we are eligible to take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies. These
include, but are not limited to:
·
·
·
·
Not being required to comply with the auditor attestation requirements in the assessment of our internal control
over financial reporting;
Not being required to comply with any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditors’ report providing
additional information about the audit and the financial statements;
Reduced disclosure obligations regarding executive compensation; and
Exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not previously approved.
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We may remain an “emerging growth company” until as late as December 31, 2022, the fiscal year-end following the fifth
anniversary of the completion of our IPO, though we may cease to be an emerging growth company earlier under certain
circumstances, including if (a) we have more than $1.07 billion in annual revenue in any fiscal year, (b) the market value of
our common stock that is held by non-affiliates exceeds $700 million as of any June 30 or (c) we issue more than $1.0
billion of non-convertible debt over a three-year period.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for
complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies.
ITEM 1A. Risk Factors
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The
significant factors known to us that could materially adversely affect our business, financial condition, or operating results
are set forth below. You should carefully consider the risks and uncertainties described below, together with all the other
information in this Annual Report, including “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the consolidated financial statements and the related notes. If any of the following risks occurs, our
business, reputation, financial condition, results of operations, revenue, and prospects could be seriously harmed. Unless
otherwise indicated, references to our business being harmed in these risk factors will include harm to our business,
reputation, financial condition, results of operations, revenue, and prospects.
Risks Related to our Company:
We have incurred operating losses in the past, may incur operating losses in the future and may never achieve or
maintain profitability.
As of December 31, 2019, we had an accumulated deficit of approximately $32.7 million and for the year ended December
31, 2019, we had a net loss of $34.9 million. We expect our operating expenses to increase in the future as we expand our
operations. If our revenue and gross profit do not grow at a greater rate than our operating expenses, we will not be able to
achieve and maintain profitability. Additionally, we may encounter unforeseen operating or legal expenses, difficulties,
complications, delays and other factors that may result in losses in future periods. If our expenses exceed our revenue, we
may never achieve or maintain profitability and some or all aspects of our business operations may need to be modified or
curtailed.
We do not have a long operating history on which to evaluate our company.
Our predecessor, CSS Productions, was formed in December 2014 and we were formed in May 2016 to acquire CSS
Productions’ assets in order to create a discrete, focused entity to pursue video content opportunities using the Chicken
Soup for the Soul brand. We focused our company in the area of video on demand in 2017 and have a limited history in
operating commercial video on demand offerings. A significant portion of our video on demand operations assets was
acquired by us from CPE Holdings, Inc in May 2019, and we have only a limited history in controlling and operating such
assets. We face all the risks faced by newer companies in the media industry, including significant competition from
existing and emerging media producers and distributors, many of which are significantly more established, larger and better
financed than our company.
We may not realize the advantages we expect from Crackle Plus
In May 2019, we consummated a contribution agreement with CPE Holdings, Inc. (“CPEH”), pursuant to which we and
CPEH contributed certain assets relating to our respective VOD businesses to our newly formed majority owned subsidiary,
Crackle Plus.
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We may not realize the potential benefits of Crackle Plus as expected. Our inability to successfully integrate and manage
Crackle Plus could delay us from pursuing other strategic opportunities, or otherwise adversely affect our business,
financial results, and operations.
Our quarterly and annual operating results may fluctuate due to the costs and expenses of acquiring and integrating the
Crackle Plus business. We may require additional debt or equity financing, resulting in additional leverage or dilution of
ownership.
Additionally, CPEH has certain protective voting rights in Crackle Plus. Certain actions require supermajority approval of
the board of managers of Crackle Plus, including the managers appointed by CPEH. As a result, our investment in Crackle
Plus involves risks that are different from the risks involved in our independent operations. These risks include the
possibility that CPEH has economic or business interests or goals that are or become inconsistent with our economic or
business interests or goals.
The operating agreement between us and CPEH includes a put arrangement with respect to CPEH’s membership interests
in Crackle Plus. At certain times and on the terms specified in the operating agreement, CPEH has a put right to cause us to
purchase all such membership interests. We may pay the purchase price for CPEH’s membership interests in cash or in
shares of our Series A Preferred Stock, at our option. If we are required to purchase CPEH’s membership interests, we
could choose to make significant cash payment, or the price of our Series A Preferred Stock held by our other preferred
stockholders may be adversely affected.
All our tangible and intangible property is pledged to secure existing indebtedness.
All of our tangible and intangible property, including accounts receivable and intellectual property, is pledged under a first
priority security interest to secure our repayment obligations under indebtedness owed to Patriot Bank, N.A. under our
Commercial Loan, as described under “Management’s Discussion and Analysis of Operating and Financial Condition –
Liquidity and Capital Resources - “Commercial Loan.” In the event the holder of such indebtedness takes action with
respect to our assets in connection with any default under the Commercial Loan, we may not be able to continue our
operations.
If our efforts to attract and retain VOD viewers are not successful, our business may be adversely affected.
Our success depends in part on attracting viewers, retaining them on our VOD service and ultimately monetizing our VOD
services and content offerings. As such, we are seeking to expand our viewer base and increase the number of hours that are
streamed across our platforms to create additional revenue opportunities. To attract and retain viewers, we need to be able
to respond efficiently to changes in consumer tastes and preferences and to offer our viewers access to the content they
enjoy on terms that they accept. Effective monetization may require us to continue to update the features and functionality
of our VOD offerings for viewers and advertisers.
Our ability to attract viewers will depend in part on our ability to effectively market our services, as well as provide a
quality experience for selecting and viewing TV series and movies. Furthermore, the relative service levels, content
offerings, pricing and related features of competitors as compared to our service will determine our ability to attract and
retain viewers. Competitors include other streaming entertainment providers, including those that provide AVOD and
SVOD offerings, and other direct-to-consumer video distributors and more broadly other sources of entertainment that our
viewers could choose in their moments of free time. If consumers do not perceive our service offerings to be of value,
including if we introduce new or adjust existing features or service offerings, or change the mix of content in a manner that
is not favorably received by them, we may not be able to attract and retain consumers. In addition, many of our consumers
originate from word-of-mouth advertising from existing viewers. If we do not grow as expected, we may not be able to
adjust our expenditures or increase our revenues commensurate with the lowered growth rate such that our margins,
liquidity and results of operation may be adversely impacted. If we are unable to successfully compete with current and
new competitors in both retaining our existing viewers and attracting new viewers, our business may be adversely affected.
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Changes in competitive offerings for entertainment video could adversely impact our business.
The market for entertainment video is also subject to rapid change. Through new and existing distribution channels,
consumers have increasing options to access entertainment video. The various economic models underlying these channels
include subscription, transactional, and ad-supported models. All of these have the potential to capture meaningful
segments of the entertainment video market. Traditional providers of entertainment video, including broadcasters and cable
network operators, as well as internet-based e-commerce or entertainment video providers are increasing their streaming
video offerings. Several of these competitors have long operating histories, large customer bases, strong brand recognition,
exclusive rights to certain content and significant financial, marketing and other resources. They may secure better terms
from content suppliers and devote more resources to product development, technology, infrastructure, content acquisitions
and marketing. New entrants may enter the market or existing providers may adjust their services with unique offerings or
approaches to providing entertainment video. Companies also may enter into business combinations or alliances that
strengthen their competitive positions. If we are unable to successfully or profitably compete with current and new
competitors, our business may be adversely affected, and we may not be able to increase or maintain market share,
revenues or profitability.
Our long-term results of operations are difficult to predict and depend on the commercial success of our VOD platforms
as well as successful monetization of our video content in other ways and the continued strength of the Chicken Soup
for the Soul brand.
Video streaming is a rapidly evolving industry, making our business and prospects difficult to evaluate. The growth and
profitability of this industry and the level of demand and market acceptance for our VOD platforms and content offerings
are subject to a high degree of uncertainty. We believe that the continued growth of streaming as an entertainment
alternative will depend on the availability and growth of cost-effective broadband internet access, the quality of broadband
content delivery, the quality and reliability of new devices and technology, the cost for viewers relative to other sources of
content, as well as the quality and breadth of content that is delivered across streaming platforms. These technologies,
products and content offerings continue to emerge and evolve. In addition, many advertisers continue to devote a
substantial portion of their advertising budgets to traditional advertising, such as linear TV, radio and print. The future
growth of our business depends on the growth of digital advertising, and on advertisers increasing their spend on such
advertising. We cannot be certain that they will do so. If advertisers do not perceive meaningful benefits of digital
advertising, the market may develop more slowly than we expect, which could adversely impact our operating results and
our ability to grow our business.
In addition, monetization of content that we produce and acquire from sources other than our AVOD network is an essential
element of our strategy. Our ability in the long-term to obtain sponsorships, licensing arrangements, co-productions and
tax credits and to distribute our original programming and acquired video content will depend, in part, upon the commercial
success of the content that we initially produce and distribute and, in part, on the continued strength of the Chicken Soup
for the Soul brand. We cannot ensure that we will produce, acquire, and distribute successful content. The continued
strength of the brand will be affected in large part by the operations of CSS and its other business operations, none of which
we control. CSS utilizes the brand through its other subsidiaries for various commercial purposes, including the sale of
books (including educational curriculum products), pet foods and other consumer products. Negative publicity relating to
CSS or its other subsidiaries or the brand, or any diminution in the perception of the brand could have a material adverse
effect on our business, financial condition, operating results, liquidity and prospects. We cannot assure you that we will
manage the production and distribution of all of our video content successfully, that all or any portion of our video content
will be met with critical acclaim or will be embraced by audiences on a one-time or repeated basis, or that the strength of
the Chicken Soup for the Soul brand will not diminish over time.
We may not be successful in our efforts to further monetize our VOD services
Our AVOD platforms generate revenue primarily from digital advertising and audience development campaigns that run
across our streaming platform and from content distribution services. Our ability to deliver more relevant advertisements to
our viewers and to increase our platform’s value to advertisers and content publishers depends on the collection of user
engagement data, which may be restricted or prevented by a number of factors. Viewers may decide to opt out or restrict
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our ability to collect personal viewing data or to provide them with more relevant advertisements. While we have
experienced, and expect to continue to experience, growth in our revenue from advertising, our efforts to monetize our
streaming platform through the distribution of AVOD content are still developing and our advertising revenue may not
grow as we expect. This means of monetization will require us to continue to attract advertising dollars to our streaming
platform as well as deliver AVOD content that appeals to viewers. Accordingly, there can be no assurance that we will be
successful in monetizing our streaming platform through the distribution of ad-supported content.
In addition, with the recent spread of the coronavirus throughout the United States and the rest of the world, companies
advertising plans and amounts available for advertising may be significantly restricted or discontinued which could also
impact our ability to monetize our AVOD platform.
Our reliance on third parties for content, production and distribution could limit our control over the quality of the
finished video content.
We currently have limited production capabilities and are reliant on relationships with third parties for much of these
capabilities. Working with third parties is an integral part of our strategy to produce video content on a cost-efficient basis,
and our reliance on such third parties could lessen the control we have over the projects. Should the third-party producers
we rely upon not produce completed projects to the standards we expect and desire, critical and audience acceptance of
such projects could suffer, which could have an adverse effect on our ability to produce and distribute future projects.
Further, we cannot be assured of entering into favorable agreements with such third-party producers on economically
favorable terms or on terms that provide us with satisfactory intellectual property rights in the completed projects.
A limited number of content publishers account for a significant portion of the hours streamed on our Crackle Plus and
other streaming platforms. If, for any reason, our relationships with these publishers worsen, our streaming hours, active
viewers, and advertising revenue may be adversely affected, and our business may be harmed. As of year-end 2019 Sony
provides slightly over 50% of the content on our Crackle Plus network. If for any reason Sony did not provide such content
in the future the business could be adversely affected.
An integral part of our strategy is to initially minimize our production, content acquisition and distribution costs by
utilizing funding sources provided by others, however, such sources may not be readily available.
The production acquisition and distribution of video content can require a significant amount of capital. As part of our
strategy, we seek to fund the production, content acquisition, and distribution of our video content through co-productions,
tax credits, upfront fees from sponsors, licensors, broadcasters, cable and satellite outlets and other producers and
distributors, as well as through other initiatives. Such funding from the aforementioned sources or other sources may not be
available on attractive terms or at all, as and when we need such funding. To the extent we are not able to secure
agreements of this sort, we may need to curtail the amount of video content being produced or acquired by us or use our
operating or other funds to pay for such video content, which could have a material adverse effect on our business,
financial condition, operating results, liquidity and prospects.
Due to the effect of the coronavirus, the interest and ability of sponsors to enter into and invest in co-production agreements
may not be attractive or considered at this time.
As we grow, we may seek to fund and produce more of our video content directly, subjecting us to significant additional
risks.
Our current strategy of funding the production, acquisition, and distribution of our video content through the payment of
upfront fees by third parties may limit the backend return to us. If we should determine to use our own funds to produce,
acquire, and distribute more of our video content in order to capture greater backend returns, we would face significant
additional risks, such as the need to internally advance funds ahead of revenue generation and cost recoupment and the
need to divert some of our resources and efforts away from other operations. In order to reduce these risks, we may
determine to raise additional equity or incur additional indebtedness. In such event, our stockholders and our company will
be subjected to the risks associated with issuing more of our shares or increasing our debt obligations.
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If studios, content providers or other rights holders refuse to license content or other rights upon terms acceptable to us,
our business could be adversely affected.
Our ability to provide content depends on studios, content providers and other rights holders licensing rights to distribute
such content and certain related elements thereof, such as the public performance of music contained within the content we
distribute. If studios, content providers and other rights holders are not or are no longer willing or able to license us content
upon terms acceptable to us, our ability to provide content will be adversely affected and/or our costs could increase.
Certain conflicts of interest may arise between us and our affiliated companies and we have waived certain rights with
respect thereto.
Our certificate of incorporation includes a provision stating that we renounce any interest or expectancy in any business
opportunities that are presented to us or our officers, directors or stockholders or affiliates thereof, including but not limited
to CSS Productions and its affiliates (collectively, the “CSS Companies”), except as may be set forth in any written
agreement between us and any of the CSS Companies (such as the CSS License Agreement under which CSS has agreed
that all video content operations shall be conducted only through CSS Entertainment). This provision also states that, to the
fullest extent permitted by Delaware law, our officers, directors and employees shall not be liable to us or our stockholders
for monetary damages for breach of any fiduciary duty by reason of any of our activities or any activities of any of the CSS
Companies. As a result of these provisions, there may be conflicts of interest among us and our officers, directors,
stockholders or their affiliates, including the CSS Companies, relating to business opportunities, and we have waived our
right to monetary damages in the event of any such conflict.
We are required to make continuing payments to our affiliates, which may reduce our cash flow and profits.
We are required to make significant payments to our affiliates as described under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Affiliate Resources and Obligations — CSS Management Agreement”,
“CSS License Agreement” and described under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources”. Accordingly, in the aggregate, 10% of our net revenue will be
paid to our affiliates on a continuous basis and will not be otherwise available to us.
If a project we are producing incurs substantial budget overruns, we may have to seek additional financing from outside
sources to complete production or fund the overrun ourselves.
If a production we are funding incurs substantial budget overruns, we may have to seek additional financing from outside
sources to complete production or fund the overrun ourselves. We cannot be certain that any required financing will be
available to us on commercially reasonable terms or at all, or that we will be able to recoup the costs of overruns. Increased
costs incurred with respect to a project may result in the production not being ready for release at the intended time, which
could cause a decline in the commercial performance of the project. Budget overruns could also prevent a project from
being completed or released at all.
We are subject to risks associated with possible acquisitions, business combinations, or joint ventures.
We are actively pursuing discussions and activities with respect to possible acquisitions, sale of assets, business
combinations, or joint ventures intended to complement or expand our business, some of which may be significant
transactions for us. We may not realize the anticipated benefit from any of the transactions we pursue. Regardless of
whether we consummate any such transaction, the negotiation of a potential transaction could require us to incur significant
costs and cause diversion of management’s time and resources.
Integrating any business that we acquire may be distracting to our management and disruptive to our business and may
result in significant costs to us. We could face several challenges in the consolidation and integration of information
technology, accounting systems, personnel and operations. Any such transaction could also result in impairment of
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goodwill and other intangibles, development write-offs and other related expenses. Any of the foregoing could have a
material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Our operating results may fluctuate.
Our operating results are dependent, in part, on management’s estimates of revenue to be earned over the life of a project.
We will regularly review and revise our revenue estimates. This review may result in a change in the rate of amortization
and/or a write-down of the video content asset to its estimated realizable value. Results of operations in future years depend
upon our amortization of our video content costs. Periodic adjustments in amortization rates may significantly affect these
results. Further, as many of our third-party relationships will be on a project-by-project basis, the profits, if any, generated
from various projects will fluctuate based on the terms of the agreements between us and our third-party producers and
distributors.
Variations in our quarterly and year-end operating results are difficult to predict and our income and cash flows may
fluctuate significantly from period to period, which may impact our board of directors’ willingness or legal ability to
declare a monthly dividend. If our operating results fall below the expectations of investors or securities analysts, the price
of our Common Stock and our Series A preferred stock could decline substantially. Specific factors that may cause
fluctuations in our operating results include:
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demand and pricing for our products and services;
introduction of competing products;
our operating expenses which fluctuate due to growth of our business;
timing and popularity of new video content offerings and changes in viewing habits or the emergence of new
content distribution platforms; and
variable sales cycle and implementation periods for content and services.
As a result of the foregoing and other factors, our results of operations may fluctuate significantly from period to period,
and the results of any one period may not be indicative of the results for any future period.
Distributors’ failure to promote our video content could adversely affect our revenue and could adversely affect our
business results.
We will not always control the timing and way in which our licensed distributors distribute our video content offerings.
However, their decisions regarding the timing of release and promotional support are important in determining our success.
Any decision by those distributors not to distribute or promote our video content or to promote our competitors’ video
content to a greater extent than they promote our content could adversely affect our business, financial condition, operating
results, liquidity and prospects.
We are smaller and less diversified than many of our competitors.
Many of the producers and studios with which we compete are part of large diversified corporate groups with a variety of
other operations, including television networks, cable channels and other diversified companies such as Amazon, which
can provide both the means of distributing their products and stable sources of earnings that may allow them to better offset
fluctuations in the financial performance of their operations. In addition, the major studios have more resources with which
to compete for ideas, storylines and scripts created by third parties as well as for actors, and other personnel required for
production. The resources of the major producers and studios may also give them an advantage in acquiring other
businesses or assets, including video content libraries, that we might also be interested in acquiring.
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We face risks from doing business internationally.
We intend to increase the distribution of our video content outside the U.S. and thereby derive significant revenue in
foreign jurisdictions. As a result, our business is subject to certain risks inherent in international business, many of which
are beyond our control. These risks include:
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laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of
funds and withholding taxes, and changes in these laws;
the Foreign Corrupt Practices Act and similar laws regulating interactions and dealings with foreign government
officials;
changes in local regulatory requirements, including restrictions on video content;
differing cultural tastes and attitudes;
differing and more stringent user protection, data protection, privacy and other laws;
differing degrees of protection for intellectual property;
financial instability and increased market concentration of buyers in foreign television markets;
the instability of foreign economies and governments;
fluctuating foreign exchange rates;
the spread of communicable diseases in such jurisdictions, which may impact business in such jurisdictions; and
war and acts of terrorism.
Events or developments related to these and other risks associated with international trade could adversely affect our
revenue from non-U.S. sources, which could have a material adverse effect on our business, financial condition, operating
results, liquidity and prospects.
Protecting and defending against intellectual property claims may have a material adverse effect on our business.
Our ability to compete depends, in part, upon successful protection of our intellectual property relating to our video content
and the protection of the Chicken Soup for the Soul brand. We protect proprietary and intellectual property rights to our
productions through available copyright and trademark laws and licensing and distribution arrangements with reputable
international companies in specific territories and media. Under the terms of the CSS License Agreement, CSS has the
primary right to take actions to protect the brand, and, if it does not, and we reasonably deem any infringement thereof is
materially harmful to our business, we may elect to seek action to protect the brand ourselves. Although in the former case,
we would equitably share in any recovery, and in the latter case, we would retain the entirety of any recovery, should CSS
determine not to prosecute infringement of the brand, we could be materially harmed and could incur substantial cost in
prosecuting an infringement of the Chicken Soup for the Soul brand.
Others may assert intellectual property infringement claims against us.
It is possible that others may claim from time to time that our productions and production techniques misappropriate or
infringe the intellectual property rights of third parties with respect to their previously developed content, stories, characters
and other entertainment or intellectual property. Although CSS is obligated to indemnify us for claims related to our use of
the Chicken Soup for the Soul brand in accordance with the CSS License Agreement, we could face lawsuits
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with respect to claims relating thereto. Irrespective of the validity or the successful assertion of any such claims, we could
incur significant costs and diversion of resources in defending against them, which could have a material adverse effect on
our business, financial condition, operating results, liquidity and prospects.
Our business involves risks of liability claims for video content, which could adversely affect our results of operations
and financial condition.
As a producer and distributor of video content, we may face potential liability for defamation, invasion of privacy,
negligence and other claims based on the nature and content of the materials distributed. These types of claims have been
brought, sometimes successfully, against producers and distributors of video content. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, financial
condition, operating results, liquidity and prospects.
Piracy of video content may harm our business.
Video content piracy is extensive in many parts of the world, including South America, Asia, and certain Eastern European
countries, and is made easier by technological advances and the conversion of video content into digital formats. This trend
facilitates the creation, transmission and sharing of high-quality unauthorized copies of video content on DVDs, Blu-ray
discs, from pay-per-view through set-top boxes and other devices and through unlicensed broadcasts on free television and
the internet. The proliferation of unauthorized copies of our video content could have an adverse effect on our business.
Any significant disruption in the computer systems of third parties that we utilize in our operations could result in a loss
or degradation of service and could adversely impact our business.
Our reputation and ability to attract, retain and serve our viewers is dependent upon the reliable performance of the
computer systems of third parties that we utilize in our operations. These systems may be subject to damage or interruption
from earthquakes, adverse weather conditions, other natural disasters, terrorist attacks, power loss, telecommunications
failures, computer viruses, computer denial of service attacks or other attempts to harm these systems. Interruptions in
these systems or to the internet in general, could make our content unavailable or impair our ability to deliver such content.
Our online activities are subject to a variety of laws and regulations relating to privacy, which, if violated, could subject
us to an increased risk of litigation and regulatory actions.
In addition to our websites, we use third-party applications, websites, and social media platforms to promote our video
content offerings and engage consumers, as well as monitor and collect certain information about consumers. There are a
variety of laws and regulations governing individual privacy and the protection and use of information collected from such
individuals, particularly in relation to an individual’s personally identifiable information. The United States is seeing the
adoption of state-level laws governing individual privacy. This includes the California Consumer Protection Act (“CCPA”).
Many foreign countries have adopted similar laws governing individual privacy, such as the recent adoption of the EU’s
General Data Protection Regulation (“GDPR”) and some of which are more restrictive than similar United States laws. If
our online activities were to violate any applicable current or future laws and regulations that limit our ability to collect,
transfer, and use data, we could be subject to litigation from both private rights of action, class action lawsuits, and
regulatory actions, including fines and other penalties. Internationally, we may become subject to evolving, additional
and/or more stringent legal obligations concerning our treatment of customer and other personal information, such as laws
regarding data localization and/or restrictions on data export. Failure to comply with these obligations could subject us to
liability, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur
additional expenses.
If government regulations relating to the internet or other areas of our business change, we may need to alter the way
we conduct our business or incur greater operating expenses.
The adoption or modification of laws or regulations relating to the internet or other areas of our business could limit or
otherwise adversely affect the way we currently conduct our business. In addition, the continued growth and development
of the market for online commerce may lead to more stringent consumer protection laws, which may impose additional
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burdens on us such as recent adoption of the EU’s GDPR. If we are required to comply with new regulations or legislation
or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses or
alter our operations.
If we experience rapid growth, we may not manage our growth effectively, execute our business plan as proposed or
adequately address competitive challenges.
We anticipate continuing to grow our business and operations rapidly. Our growth strategy includes organic initiatives and
acquisitions. Such growth could place a significant strain on the management, administrative, operational and financial
infrastructure we utilize, a portion of which is made available to us by our affiliates under the CSS Management
Agreement. Our long-term success will depend, in part, on our ability to manage this growth effectively, obtain the
necessary support and resources under the CSS Management Agreement and grow our own internal resources as required,
including internal management and staff personnel. To manage the expected growth of our operations and personnel, we
also will need to increase our internal operational, financial and management controls, and our reporting systems and
procedures. Failure to effectively manage growth could result in difficulty or delays in producing our video content,
declines in overall project quality and increases in costs. Any of these difficulties could adversely impact our business
financial condition, operating results, liquidity and prospects.
Our exclusive license to use the Chicken Soup for the Soul brand could be terminated in certain circumstances.
We do not own the Chicken Soup for the Soul brand or any other Chicken Soup for the Soul-related assets (including
books), other than those assets transferred to us under the CSS Contribution Agreement. The Brand is licensed to us by
CSS under the terms of the CSS License Agreement. CSS controls the Brand, and the continued integrity and strength of
the Chicken Soup for the Soul brand will depend in large part on the efforts and businesses of CSS and how the brand is
used, promoted and protected by CSS, which will be outside of the immediate control of our company. Although the
license granted to us under the CSS License Agreement is perpetual, there are certain circumstances in which it may be
terminated by CSS, including our breach of the CSS License Agreement.
We may not be able to realize the entire book value of goodwill and other intangible assets from the formation of
Crackle Plus and other acquisitions.
As of December 31, 2019, we have $21.4 million of goodwill and $47.6 million of net intangible assets, primarily related to
the formation of Crackle Plus and other acquisitions. We assess goodwill and other intangible assets for impairment at least
annually and more frequently if certain events or circumstances warrant. If the book value of goodwill or other intangible
assets is impaired, any such impairment would be charged to earnings in the period of impairment. If we determine that
goodwill and other intangible assets are impaired in the future, it could have a material adverse effect on our business,
financial condition and results of operations.
Claims against us relating to any acquisition or business combination may necessitate our seeking claims against the
seller for which the seller may not indemnify us or that may exceed the seller’s indemnification obligations.
There may be liabilities assumed in any acquisition or business combination that we did not discover or that we
underestimated in the course of performing our due diligence. Although a seller generally may have indemnification
obligations to us under an acquisition or merger agreement, these obligations usually will be subject to financial limitations,
such as general deductibles and maximum recovery amounts, as well as time limitations. We cannot assure you that our
right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully
offset the amount of any undiscovered or underestimated liabilities that we may incur. Any such liabilities, individually or
in the aggregate, could have a material adverse effect on our business, financial condition, operating results, liquidity and
prospects.
We may require and not be able to obtain additional funding to meet increased capital needs after an acquisition.
Our ability to grow through acquisitions, business combinations and joint ventures and our ability to fund our operating
expenses after one or more acquisitions may depend upon our ability to obtain funds through equity financing, debt
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financing (including credit facilities) or the sale or syndication of some or all of our interests in certain projects or other
assets or businesses. If we do not have access to such financing arrangements, and if other funds do not become available
on terms acceptable to us, there could be a material adverse effect on our business, financial condition, operating results,
liquidity and prospects.
Our success depends on our management and relationships with our affiliated companies.
Our success depends to a significant extent on the performance of our management personnel and key employees,
including production and creative personnel, made available to us through the CSS Management Agreement. The loss of
the services of such persons or the resources supplied to us by our affiliated companies could have a material adverse effect
on our business, financial condition, operating results, liquidity and prospects.
To be successful, we need to attract and retain qualified personnel.
Our success will depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional,
creative, technical and managerial personnel. Competition for the caliber of talent required to produce and distribute our
video content continues to increase. We cannot assure you that we will be successful in identifying, attracting, hiring,
training and retaining such personnel in the future. If we were unable to hire, assimilate and retain qualified personnel in
the future, such inability could have a material adverse effect on our business, financial condition, operating results,
liquidity and prospects.
We are an “emerging growth company” under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure
requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.
We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and
we may take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the
auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a
non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not
previously approved. We cannot predict if investors will find our Class A common stock less attractive because we may
rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less
active trading market for our Class A common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the
extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised
accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the
extended transition period for complying with new or revised accounting standards.
We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenue
exceeds $1.07 billion, if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value
of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year.
Our status as an “emerging growth company” under the JOBS Act of 2012 may make it more difficult to raise capital as
and when we need it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and
because we will have an extended transition period for complying with new or revised financial accounting standards, we
may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors
may be unable to compare our business with other companies in our industry if they believe that our financial accounting is
not as transparent as other companies in our industry. Any inability to raise additional capital as and when we need it, could
have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
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Since our content is digitally stored and distributed online, and we accept online payments for various subscription
services, we face numerous cybersecurity risks.
We utilize information technology systems, including third-party hosted servers and cloud-based servers, to host our digital
content, as well as to keep business, financial, and corporate records, communicate internally and externally, and operate
other critical functions. If any of our internal systems or the systems of our third-party providers are compromised due to
computer virus, unauthorized access, malware, and the like, then sensitive documents could be exposed or deleted, and our
ability to conduct business could be impaired.
Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited
to, unauthorized access to our systems, computer viruses or other malicious code, denial of service attacks, malware,
ransomware, phishing, SQL injection attacks, human error, or other events that result in security breaches or give rise to the
manipulation or loss of sensitive information or assets. Cyber incidents can be caused by various persons or groups,
including disgruntled employees and vendors, activists, organized crime groups, and state-sponsored and individual
hackers. Cyber incidents can also be caused or aggravated by natural events, such as earthquakes, floods, fires, power loss,
and telecommunications failures.
To date, we have not experienced any material losses relating to cyber-attacks, computer viruses, or other systems failures.
Although we have taken steps to protect the security of data maintained in our information systems, it is possible that our
security measures will not be able to prevent the systems’ improper functioning or the improper disclosure of personally
identifiable information, such as in the event of cyber-attacks. In addition to operational and business consequences, if our
cybersecurity is breached, we could be held liable to our customers or other parties in regulatory or other actions, and we
may be exposed to reputation damages and loss of trust and business. This could result in costly investigations and
litigation, civil or criminal penalties, fines, and negative publicity.
Certain information relating to our customers, including personally identifiable information and credit card numbers, is
collected and maintained by us, or by third parties that do business with us or facilitate our business activities. This
information is maintained for a period of time for various business purposes, including maintaining records of customer
preferences to enhance our customer service and for billing, marketing, and promotional purposes. We also maintain
personally identifiable information about our employees. The integrity and protection of our customer, employee and
company data is critical to our business. Our customers and our employees expect that we will adequately protect their
personal information, and the regulations applicable to security and privacy are increasingly demanding. Privacy regulation
is an evolving area and compliance with applicable privacy regulations may increase our operating costs or adversely
impact our ability to service our customers and market our properties and services.
The occurrence of natural or man-made disasters could result in declines in business that could adversely affect our
financial condition, results of operations and cash flows.
We are exposed to various risks arising out of natural disasters, including earthquakes, hurricanes, fires, floods, landslides,
tornadoes, typhoons, tsunamis, hailstorms, explosions, climate events or weather patterns and pandemic health events (such
as the recent pandemic spread of the novel corona virus known as COVID-19 virus, duration and full effects of which ae
still uncertain), as well as man-made disasters, including acts of terrorism, military actions, cyber-terrorism, explosions and
biological, chemical or radiological events. The continued threat of terrorism and ongoing military actions may cause
significant volatility in global financial markets, and a natural or man-made disaster could trigger an economic downturn in
the areas directly or indirectly affected by the disaster. These consequences could, among other things, result in a decline in
business. Disasters also could disrupt public and private infrastructure, including communications and financial services,
which could disrupt our normal business operations. A natural or man-made disaster also could disrupt the operations of
our partners and counterparties or result in increased prices for the products and services they provide to us.
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Our business, results of operations, and financial condition may be impacted by the recent coronavirus (COVID-19)
outbreak.
The global and national impact of COVID-19 could be immense and the length of the pandemic and its ultimate economic
and human toll cannot yet be determined. There is significant uncertainty relating to the potential impact of COVID-19 on
our business. COVID-19 could cause increases in the viewership of our advertising-based VODs as consumers stay home
more and look for cost-efficient sources of entertainment. Conversely, viewership could be drawn away from our VOD
offerings as people address larger concerns in their lives or spend more of their viewing time watching news sources or if
we begin to experience any unexpected broadband outages or other issues that adversely affect viewers’ ability to gain
access to the platform from time to time. While our employees currently have the ability and are encouraged to work
remotely, such measures may have a substantial impact on employee attendance or productivity, which, along with the
possibility of employees’ illness, may adversely affect our operations. The global spread of COVID-19 also has created
significant volatility and uncertainty in financial markets. If such volatility and uncertainty persist, and we need to access
additional banking sources or other sources of financing or capital, we may be unable to do so on terms that are acceptable
to us, or at all. Additionally, in response to the pandemic, governments and the private sector have taken (and may take
additional) drastic measures to contain the spread of the coronavirus, any of which could ultimately hamper the economy
generally or business specifically.
Risks Related to our Capital Stock:
Our chairman and chief executive officer effectively controls our company.
We have two classes of common stock — Class A common stock, each share of which entitles the holder thereof to one
vote on any matter submitted to our stockholders, and Class B common stock, each share of which entitles the holder
thereof to ten votes on any matter submitted to our stockholders. Our chairman and chief executive officer, William J.
Rouhana, Jr., has control over the vast majority of all the outstanding voting power as represented by our outstanding Class
B and Class A common stock and effectively controls CSS Holdings and CSS, which controls CSS Productions, and, in
turn, our company. Further, our bylaws provide that any member of our board may be removed with or without cause by
the majority of our outstanding voting power, thus Mr. Rouhana exerts significant control over our board. This
concentration of ownership and decision making may make it more difficult for other stockholders to effect substantial
changes in our company and may also have the effect of delaying, preventing or expediting, as the case may be, a change in
control of our company.
We may issue shares of our capital stock or debt securities in the future, whether to complete any acquisition, a business
combination or to raise additional funds, which would reduce the equity interest of our stockholders and might cause a
change in control of our ownership.
Our certificate of incorporation authorizes the issuance of up to 70 million shares of Class A common stock, par value
$.0001 per share, 20 million shares of Class B common stock, par value $.0001 per share, and 10,000,000 shares of
preferred stock, par value $.0001 per share, of which 4,300,000 shares have been designated 9.75% Series A Cumulative
Redeemable Perpetual Preferred Stock (“Series A preferred stock”). As of the date of this Annual Report, we have
65,814,315 authorized but unissued shares of our Class A common stock remaining available for issuance, 12,186,062
authorized but unissued shares of our Class B common stock remaining available for issuance and 8,400,998 authorized but
unissued shares of our preferred stock remaining available for issuance immediately after the offering. We also may issue a
substantial number of additional shares of our common stock or preferred stock, or a combination of common and preferred
stock, to raise additional funds or in connection with any acquisition or business combination in the future.
Additionally, under the terms of the Contribution Agreement, we issued to CPEH warrants to purchase an aggregate of 4
million shares of our Class A common stock, and we may be required to issue to up to 200,000 shares of Series A preferred
stock as reimbursement for expenses in connection with the creation of the joint venture and up to an aggregate of
1,600,000 shares of Series A preferred stock in the event that Crackle elects to exchange Crackle’s membership interest in
the joint venture in 12 to 18 months.
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Our outstanding warrants may have an adverse effect on the market price of our common stock.
We have outstanding Class W warrants to purchase an aggregate of 678,822 shares of Class A common stock, Class Z
warrants to purchase an aggregate of 130,618 shares of Class A common stock, and we issued warrants to CPEH to
purchase an aggregate of 4,000,000 shares of Class A common stock. The sale, or even the possibility of sale, of warrants
or the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to
obtain future public financing. Furthermore, we might issue warrants or other securities convertible or exchangeable for
shares of common stock in the future in order to raise funds or to effect acquisitions or business combinations. If and to the
extent our warrants are exercised, or we issue additional securities to raise funds or consummate any acquisition or business
combination, you may experience dilution to your holdings.
We currently do not plan to pay any dividends on our common stock.
The payment of cash dividends on our common stock in the future will be dependent upon our revenue and earnings, if any,
capital requirements and general financial condition, our obligation to pay dividends on our Series A preferred stock, as
well as the limitations on dividends and distributions that exist under our lending agreement, the laws and regulations of the
State of Delaware and will be within the discretion of our board of directors. As a result, any gain you may realize on our
common stock (including shares of common stock obtained upon exercise of our warrants) may result solely from the
appreciation of such shares.
We may not be able to pay dividends on the Series A preferred stock if we fall out of compliance with our loan covenants
and are prohibited by our bank lender from paying dividends.
Our Commercial Loan with Patriot Bank, N.A. requires us to maintain a minimum debt service coverage ratio. Related to
this obligation, the Commercial Loan contains a negative covenant that restricts our ability to make dividend payments and
other distributions and payments to stockholders and certain other people if such payments, distributions or expenditures
would result in an event of default under the Commercial Loan or any other indebtedness, or would exceed our net earnings
in excess of its debt service obligations. In particular, the Commercial Loan requires us to maintain a minimum debt service
coverage ratio of 1.25 to 1.0. In the event we do not meet the covenant in any period we have a 90 day cure period. The
Company was in compliance with this covenant as of December 31, 2019 and 2018, respectively.
We must adhere to prescribed legal requirements and have sufficient cash in order to be able to pay dividends on our
Series A preferred stock.
In accordance with Section 170 of the Delaware General Corporation Law, we may only declare and pay cash dividends on
the Series A preferred stock if we have either net profits during the fiscal year in which the dividend is declared and/or the
preceding fiscal year, or a “surplus”, meaning the excess, if any, of our net assets (total assets less total liabilities) over our
capital. We can provide no assurance that we will satisfy such requirements in any given year. Further, even if we have the
legal ability to declare a dividend, we may not have sufficient cash to pay dividends on the Series A preferred stock. Our
ability to pay dividends may be impaired if any of the risks described herein actually occur. Also, payment of our dividends
depends upon our financial condition and other factors as our board of directors may deem relevant from time to time. We
cannot assure you that our businesses will generate sufficient cash flow from operations or that future borrowings will be
available to us in an amount sufficient to enable us to pay dividends on the Series A preferred stock. As of December 31,
2019, our outstanding obligation is $324,757. For the period ending December 31, 2019, our scheduled dividend payments
totaled $3,304,947.
If our securities become subject to the SEC’s penny stock rules, broker-dealers may have trouble in completing
customer transactions and trading activity in our securities may be adversely affected.
If at any time our securities become subject to the “penny stock” rules promulgated under the Exchange Act our securities
could be adversely affected. Typically, securities trading under a market price of $5.00 per share and that do not meet
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certain exceptions, such as national market listing or annual revenue criteria, are subject to the penny stock rules. Under
these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
· make a special written suitability determination for the purchaser;
·
·
·
receive the purchaser’s written agreement to the transaction prior to sale;
provide the purchaser with risk disclosure documents which identify certain risks associated with investing in
“penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies;
and
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has received the
required risk disclosure document before a transaction in a “penny stock” can be completed.
If our securities become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and
trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed,
and you may find it more difficult to sell our securities.
Nasdaq could delist our Class A common stock from quotation on its exchange, which could limit investors’ ability to
sell and purchase our shares and subject us to additional trading restrictions.
Our Class A common stock is currently listed on Nasdaq, a national securities exchange. If our Class A common stock is
not listed on Nasdaq or another national securities exchange at any time after the date hereof, we could face significant
material adverse consequences, including:
·
·
·
·
·
·
a limited availability of market quotations for our Class A common stock;
reduced liquidity with respect to our Class A common stock;
our Series A preferred stock would be required to meet more stringent listing requirements as a “primary equity
security”;
a determination that our Class A common stock is “penny stock” which will require brokers trading in our shares
to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading
market for our common stock;
a limited amount of news and analyst coverage for our company; and
a decreased ability to issue additional securities or obtain additional financing in the future.
If Nasdaq delists the Series A preferred stock, investors’ ability to make trades in the Series A preferred stock could be
limited.
Our Series A preferred stock is currently listed on the Nasdaq Global Market under the symbol “CSSEP.” We cannot assure
you that the Series A preferred stock will continue to be listed on the Nasdaq Global Market in the future. In order to
continue listing the Series A preferred stock on the Nasdaq Global Market, we must maintain certain financial, distribution,
and share price levels. Generally, this means having a minimum number of publicly held shares of Series A preferred stock
(generally 100,000 shares), a minimum market value (generally $1,000,000) and a minimum number of holders (generally
100 public holders). If our Class A common stock is delisted from the Nasdaq Global Market, the Series A preferred stock
would be required to meet the more stringent initial listing standards of the Nasdaq Global Market for a Primary Equity
Security, including a minimum number of publicly held shares of Series A preferred stock (generally 1,100,000 shares) and
a minimum number of holders (generally 400 public holders). If we are unable to meet these standards and the Series A
preferred stock is delisted from the Nasdaq Global Market, we may apply to list our Series A preferred stock on the Nasdaq
Capital Market. If we are also unable to meet the listing standards for the Nasdaq Capital Market, we may apply to have
our Series A preferred stock quoted by OTC Markets. If we are unable to maintain listing for the Series A preferred stock,
the ability to transfer or sell shares of the Series A preferred stock will be limited and the market value of the Series A
preferred stock will likely be materially adversely affected. Moreover, since the Series A preferred stock has no stated
maturity date, investors may be forced to hold shares of the Series A preferred stock
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indefinitely while receiving stated dividends thereon when, as and if authorized by our board of directors and paid by us
with no assurance as to ever receiving the liquidation value thereof.
The Series A preferred stock ranks junior to all our indebtedness and other liabilities.
In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay
obligations on the Series A preferred stock only after all our indebtedness and other liabilities have been paid. The rights of
holders of the Series A preferred stock to participate in the distribution of our assets will rank junior to the prior claims of
our current and future creditors and any future series or class of preferred stock we may issue that ranks senior to the Series
A preferred stock. Also, the Series A preferred stock effectively ranks junior to all existing and future indebtedness and to
the indebtedness and other liabilities of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are,
and future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to us in respect of
dividends due on the Series A preferred stock.
We have incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the
Series A preferred stock. As of the date of this Annual Report, our total liabilities (excluding contingent consideration)
equaled approximately $76.6 million, including approximately $15 million owed under our Commercial Loan and $5
million owed under our Revolving Credit Facility. If we are forced to liquidate our assets to pay our creditors, we may not
have sufficient assets to pay amounts due on any or all the Series A preferred stock then outstanding.
The market for our Series A preferred stock may not provide investors with adequate liquidity.
Liquidity of the market for the Series A preferred stock depends on a number of factors, including prevailing interest rates,
our financial condition and operating results, the number of holders of the Series A preferred stock, the market for similar
securities and the interest of securities dealers in making a market in the Series A preferred stock. We cannot predict the
extent to which investor interest in our Company will maintain a trading market in our Series A preferred stock, or how
liquid that market will be. If an active market is not maintained, investors may have difficulty selling shares of our Series A
preferred stock.
We are generally restricted from issuing shares of other series of preferred stock that rank senior the Series A preferred
stock as to dividend rights, rights upon liquidation or voting rights, but may do so with the requisite consent of the
holders of the Series A preferred stock and, further, no such consent is required for the issuance of additional series of
preferred stock ranking pari passu with the Series A preferred stock.
Under the Certificate of Designations of our Series A preferred stock, we are allowed to issue shares of other series of
preferred stock that rank above the Series A preferred stock as to dividend payments and rights upon our liquidation,
dissolution or winding up of our affairs, only with the approval of the holders of at least 66.67% of the outstanding Series
A preferred stock. Additionally, agreements that we have entered into with CPE Holdings, Inc. limit our ability to issue
shares of other series of preferred stock that rank above the Series A preferred stock as to payments, distributions, or rights
on liquidation, and we are not permitted to issue any shares of Series A preferred stock at a per share price below the stated
value of the Series A preferred stock, which is $25.00 per share. However, we are allowed to issue additional shares of
Series A preferred stock and/or additional series of preferred stock that would rank equally to the Series A preferred stock
as to dividend payments and rights upon our liquidation or winding up of our affairs without first obtaining the approval of
the holders of our Series A preferred stock or obtaining the approval of CPE Holdings, Inc. The issuance of additional
shares of Series A preferred stock and/or additional series of preferred stock could have the effect of reducing the amounts
available to the Series A preferred stock upon our liquidation or dissolution or the winding up of our affairs. It also may
reduce dividend payments on the Series A preferred stock if we do not have sufficient funds to pay dividends on all Series
A preferred stock outstanding and other classes or series of stock with equal or senior priority with respect to dividends.
Future issuances and sales of senior or pari passu preferred stock, or the perception that such issuances and sales could
occur, may cause prevailing market prices for the Series A preferred stock and our Class A common stock to decline and
may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.
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Market interest rates may materially and adversely affect the value of the Series A preferred stock.
One of the factors that will influence the price of the Series A preferred stock is the dividend yield on the Series A
preferred stock (as a percentage of the market price of the Series A preferred stock) relative to market interest rates.
Increases in market interest rates may lead prospective purchasers of the Series A preferred stock to expect a higher
dividend yield (and higher interest rates would likely increase our borrowing costs and potentially decrease funds available
for dividend payments). Thus, higher market interest rates could cause the market price of the Series A preferred stock to
materially decrease.
Holders of the Series A preferred stock may be unable to use the dividends-received deduction and may not be eligible
for the preferential tax rates applicable to “qualified dividend income.”
Distributions paid to corporate U.S. holders of the Series A preferred stock may be eligible for the dividends-received
deduction, and distributions paid to non-corporate U.S. holders of the Series A preferred stock may be subject to tax at the
preferential tax rates applicable to “qualified dividend income,” only if we have current or accumulated earnings and
profits, as determined for U.S. federal income tax purposes. Additionally, we may not have sufficient current earnings and
profits during future fiscal years for the distributions on the Series A preferred stock to qualify as dividends for U.S. federal
income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-
received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.” If any
distributions on the Series A preferred stock with respect to any fiscal year are not eligible for the dividends-received
deduction or preferential tax rates applicable to “qualified dividend income” because of insufficient current or accumulated
earnings and profits, it is possible that the market value of the Series A preferred stock might decline.
A reduction in the credit rating of our Series A preferred stock could adversely affect the pricing and liquidity of such
stock.
Any downward revision or withdrawal of the credit rating on our Series A preferred stock could materially adversely affect
market confidence in such stock and could cause material decreases in the market price of such stock and could diminish
market liquidity. Egan-Jones has initially rated our Series A preferred stock as BBB(-). Neither Egan-Jones nor any other
agency is under any obligation to maintain any rating assigned to our Series A preferred stock and such rating could be
revised downward or withdrawn at any time for reasons of general market changes or changes in our financial condition or
for no reason at all.
A reduction in the credit rating of our Series A preferred stock could adversely affect our ability to borrow from other
sources.
Our borrowing costs and our access to sources of debt financing could be significantly affected by any public credit rating
applicable to us or our securities. Ratings, such as that initially assigned by Egan-Jones to our Series A preferred stock, can
be reduced or withdrawn at any time, giving rise to negative credit implications with respect to our company. A reduction
in our credit ratings could increase our borrowing costs and limit our access to the capital markets. This, in turn, could
reduce our earnings and adversely affect our liquidity.
We may redeem the Series A preferred stock.
Commencing on June 27, 2023, we may, at our option, redeem the Series A preferred stock, in whole or in part, at any time
or from time to time. Also, upon the occurrence of a change of control prior to June 27, 2023, we may, at our option,
redeem the Series A preferred stock, in whole or in part, within 120 days after the first date on which such change of
control occurred. We may have an incentive to redeem the Series A preferred stock voluntarily if market conditions allow
us to issue other preferred stock or debt securities at a rate that is lower than the dividend rate on the Series A preferred
stock. If we redeem the Series A preferred stock, then from and after the redemption date, dividends will cease to accrue on
shares of Series A preferred stock, the shares of Series A preferred stock shall no longer be deemed outstanding and all
rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and
unpaid dividends, if any, payable upon redemption.
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A holder of Series A preferred stock has extremely limited voting rights.
The voting rights for a holder of Series A preferred stock are limited. Our shares of Class A common stock and Class B
common stock vote together as a single class and are the only class of our securities that carry full voting rights. Mr.
Rouhana, our chairman of the board and chief executive officer, beneficially owns the vast majority of the voting power of
our outstanding common stock. As a result, Mr. Rouhana exercises a significant level of control over all matters requiring
stockholder approval, including the election of directors, amendment of our certificate of incorporation, and approval of
significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our
company or changes in management and will make the approval of certain transactions difficult or impossible without his
support, which in turn could reduce the price of our Series A preferred stock.
Voting rights for holders of the Series A preferred stock exist primarily with respect to the ability to elect, voting together
with the holders of any other series of our preferred stock having similar voting rights, two additional directors to our board
of directors, subject to certain limitations in the event that eighteen monthly dividends (whether or not consecutive) payable
on the Series A preferred stock are in arrears, and with respect to voting on amendments to our certificate of incorporation,
including the certificate of designations relating to the Series A preferred stock, that materially and adversely affect the
rights of the holders of Series A preferred stock or authorize, increase or create additional classes or series of our capital
stock that are senior to the Series A preferred stock.
The Series A preferred stock is not convertible into Class A common stock, including in the event of a change of control,
and investors will not realize a corresponding upside if the price of the Class A common stock increases.
The Series A preferred stock is not convertible into shares of Class A common stock and earns dividends at a fixed rate.
Accordingly, an increase in market price of our Class A common stock will not necessarily result in an increase in the
market price of our Series A preferred stock. The market value of the Series A preferred stock may depend more on
dividend and interest rates for other preferred stock, commercial paper and other investment alternatives and our actual and
perceived ability to pay dividends on, and in the event of dissolution satisfy the liquidation preference with respect to, the
Series A preferred stock.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
We are party to the CSS Management Agreement under which the Company receives from CSS and affiliate companies’
various integral operational services, including accounting, legal, marketing, management, data access and back office
systems, and requires CSS to provide office space and equipment usage in the Company’s headquarters. See Item 7 –
“Management’s Discussions and Analysis of Financial Condition and Results of Operations – Affiliate Resources and
Obligations – CSS Management Agreement”.
CSS’ headquarters are located in an approximately 6,000 square foot leased facility in Cos Cob, Connecticut, the usage of
which is provided to the Company under the terms of the CSS Management Agreement. The CSS headquarters lease
expires in 2024. In addition, the Company leases office space of approximately 8,500 square feet in New York City, New
York, under a lease that expires in 2020.
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ITEM 3. Legal Proceedings
In the normal course of business, from time-to-time, we may become subject to claims in legal proceedings.
Legal proceedings are subject to inherent uncertainties, and an unfavorable outcome could include monetary damages, and
in such event, could result in a material adverse impact on our business, financial position, results of operations, or cash
flows.
We are not currently, and have not been since inception, subject to any material legal claims or actions. Further, we have no
knowledge of any material pending legal actions and we do not believe we are currently a party to any pending material
legal claims or actions.
ITEM 4. Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our Class A common stock is listed on the Nasdaq Global Market (“Nasdaq”) under the symbol “CSSE” and our Series A
preferred stock is listed on Nasdaq under the symbol “CSSEP.”
Holders
We had approximately 43 holders of record of Class A common stock as of March 30, 2020. This does not reflect persons
or entities that hold our Class A common stock in nominee or “street” name through various brokerage firms. We had 2
holders of record of Class B common stock as of March 30, 2020, including Chicken Soup for the Soul Productions, LLC
(“CSS Productions”), our immediate parent company.
Dividends
Series A Preferred Stock Dividends
We declared monthly cash dividends of $0.2031 per share on its Series A preferred stock to holders of record as of each
month end. The monthly dividends for each month were paid on approximately the 15th day subsequent to each respective
month end. The total amount of dividends declared and paid were $3.3 and $3.2 million, respectively, as of December 31,
2019. The total amount of dividends declared and paid were $1.1 and $0.9 million, respectively, as of December 31, 2018.
The total amount of dividends declared and paid January 1, 2020 to March 30, 2020 was approximately $1.0 million.
Common Stock Dividends
We did not pay any dividends on our common stock during the year ended December 31, 2019. Any payment of dividends
in the future is within the discretion of our board of directors (subject to the limitation on dividends contained in the
Commercial Loan and our obligation to pay dividends on our Series A preferred stock) and will depend on our earnings, if
any, our capital requirements and financial condition and other relevant factors.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
On March 27, 2018, our board of directors approved a stock repurchase program (the “Repurchase Program”) that will
enable the Company to repurchase up to $5 million of our Class A common stock prior to April 30, 2020. All open market
repurchases under the Repurchase Program shall be made in compliance with Rule 10b-18 promulgated under the
Exchange Act. Under the Repurchase Program, we may purchase shares of our Class A common stock through various
means, including open market transactions, privately negotiated transactions, tender offers or any combination thereof. The
number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited
to, stock price, trading volume and general market conditions, along with our working capital requirements, general
business conditions and other factors. The Repurchase Program may be modified, suspended or terminated at any time by
our board of directors. Repurchases under the Repurchase Program will be funded from our existing cash and cash
equivalents or future cash flow and equity or debt financings.
Any repurchase activity will depend on many factors such as our working capital needs, cash requirements for investments,
debt repayment obligations, economic and market conditions at the time, including the price of our common stock, and
other factors that we consider relevant. Our stock repurchase program may be accelerated, suspended, delayed or
discontinued at any time.
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The Company did not repurchase shares of Class A common stock during the year ended December 31, 2019 or through
the date of this report.
ITEM 6. Selected Financial Data
Not applicable.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and results of operations should be read
together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. Some of
the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including
information with respect to our plans and strategy for our business and related financing, includes forward-looking
statements involving risks and uncertainties and should be read together with the "Risk Factors" section of this Annual
Report. Such risks and uncertainties could cause actual results to differ materially from the results described in or implied
by the forward-looking statements contained in the following discussion and analysis.
Recent Developments
Landmark Studio Group Launch
On October 11, 2019, we consummated the creation of our majority owned subsidiary, Landmark Studio Group
for the development and production of original scripted content. Landmark Studio Group is governed by the terms of an
operating agreement entered into by Landmark Studio Group and the Company, David Ozer, Legend Capital Management,
LLC (“Legend”), Kevin Duncan, and Cole Investments VII, LLC (“Cole”), an affiliate of Cole Strategic Partners, each as
members of Landmark Studio Group.
In connection with the creation of Landmark Studio Group, (a) Mr. Ozer contributed certain original television
series and feature films to Landmark Studio Group in exchange for 21,000 units of common equity (“Common Units”) of
Landmark Studio Group, (b) Legend contributed an original television series to Landmark Studio Group in exchange for
2,000 Common Units, (c) our company and its affiliates agreed to provide promotion and distribution support to Landmark
Studio Group pursuant to a distribution agreement which provides for a revolving $5 million minimum guarantee facility
(“Landmark Distribution Agreement”), in exchange for 51,000 Common Units, (d) Cole made available to Landmark
Studio Group a $5 million revolving credit facility in exchange for 25,000 Common Units, and (e) Mr. Duncan received
1,000 Common Units in consideration for introducing the parties and assisting in the negotiation of the transaction.
We provide management services to Landmark Studio Group, including the services of certain of our officers,
office space, back office support, accounting, and financial services support, and technology resources and support for a
quarterly fee equal to 5% of the fees that Landmark Studio Group receives during the production of any series, film, or
special, including all executive producer fees, producer fees, overhead, and similar fees retained by Landmark Studio
Group. We will also arrange sponsorship for Landmark Studio Group’s content and will be entitled to commissions equal to
20% of certain specified revenue generated by such sponsorship.
Our company, as majority owner of the Common Units of Landmark Studio Group, manages the day to day
operations of Landmark Studio Group through its officers that are also serving as officers of Landmark Studio Group.
Landmark Studio Group maintains a board of five managers, with three managers designated by the Company, one
manager designated by Cole, and, so long as Mr. Ozer is employed by Landmark, Mr. Ozer shall be the fifth manager.
Ceased Operations of PlayStation Vue
In October 2019, Sony Interactive Entertainment (“SIE”) announced that it was ceasing operations of its PlayStation Vue
platform as of January 30, 2020. In 2019 we placed a significant portion of our advertising impressions on the PlayStation
Vue platform at a low margin pursuant to an agreement that predated our takeover of Crackle. We have
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signed a number of new agreements allowing us to monetize ad inventory at better margins from third party partners at
economically favorable rates but there can be no assurance that we will successfully replace all the advertising impressions
currently placed on PlayStation Vue.
Formation of Crackle Plus, LLC
On May 14, 2019, Crackle Plus, was formed, and we launched our new streaming video company. CPEH, and its affiliates,
and CSS Entertainment and its subsidiaries, each contributed assets to establish Crackle Plus. CPEH’s and its affiliates’
contributions included its U.S. and Canadian assets including the rights to exploit the Crackle brand in those territories, its
monthly active viewers and its ad rep business. Sony Pictures Television (“SPT”) and Crackle Plus also entered into a
license agreement for rights to popular TV series and movies from the Sony Pictures Entertainment library, including
Crackle’s original content library. In addition, New Media Services, a wholly-owned subsidiary of Sony Electronics Inc.,
contracted to provide the technology back-end services for Crackle Plus. CSS Entertainment’s contributions to Crackle Plus
included the rights to six owned and operated AVOD networks (Popcornflix, Truli, Popcornflix Kids, Popcornflix Comedy,
Frightpix, and Espanolflix) and subscription video-on-demand (SVOD) platform Pivotshare.
We own a majority interest and CPEH owns a minority interest in Crackle Plus. Additionally, we issued to CPEH five-year
warrants to purchase up to 4,000,000 shares of our Class A common stock at various prices.
We believe that Crackle Plus is one of the largest providers of free AVOD services in the United States. Crackle Plus has
approximately 30 million monthly viewer streams on its owned and operated networks with an audience of millions more
served through its advertising representation network. Crackle Plus has 26 million registered viewers. Crackle Plus is
highly competitive in the growing VOD space with over 100 VOD networks and more than 90 content partnerships.
Overview
We operate streaming video-on-demand networks (VOD). The company owns a majority stake in Crackle Plus, a company
formed with Sony Pictures Television, which owns and operates a variety of ad-supported and subscription-based VOD
networks including Crackle, Popcornflix, Popcornflix Kids, Truli, Pivotshare, Españolflix and FrightPix. The company also
acquires and distributes video content through its Screen Media subsidiary and produces long and short-form original
content through subsidiaries and outside partnerships. The content acquired or produced by the Company is sometimes
used exclusively on the Company’s networks and is generally also sold to others with the goal of providing our networks
access to original and exclusive AVOD content at a lower cost and to generate additional revenue and operating cash flow
for the Company.
Our 3 main areas of operation for 2019 were:
·
·
·
Online Networks: In this operations area, we distribute and exhibit 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.
Television and Film Distribution: In this operations area, we distribute 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.
Television and Short-Form Video Production: In this operations area, 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
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distributed by A Plus that is complementary to the Brand. As a result of launching Crackle Plus we decided to
change 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. In October 2019, we launched Landmark Studio Group
(“Landmark”), our first production co-venture subsidiary. We plan to enter into other similar co-production
arrangements going forward. We will only occasionally produce programming internally. As a result, we plan to
combine the activity of this area with our distribution area beginning in 2020.
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JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued
subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have
irrevocably elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will not
be subject to the same new or revised accounting standards as public companies that are not emerging growth companies.
Reporting Segment
We operate in one reportable segment, the production, distribution and exhibition of TV and film content for sale to others
and for use on our owned and operated video on demand platforms. We have a presence in over 56 countries and territories
worldwide and intend to continue to sell our video content internationally.
Seasonality
Our operating results are not materially affected by seasonal factors; however, we may distribute rights to certain films
which result in increased revenues and expenses during the period of distribution and revenues from our AVOD networks
vary from period to period and will generally be higher in the second half of each year.
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Financial Results of Operations:
Revenue
The following table presents net revenue line items for the years ended December 31, 2019 and 2018 and the year-over-
year dollar and percentage changes for those line items:
Revenue:
Online networks
Television and film distribution
Television and short-form video
production
Total revenue
Less: returns and allowances
Net revenue
Year Ended December 31,
% of
2019
revenue
2018
% of
revenue
Change
Period over Period
$40,027,289
15,967,507
72 % $ 4,411,427
29 % 13,188,560
16 % $35,615,862
49 % 2,778,947
807 %
21 %
610,356
56,605,152
(1,241,246)
$55,363,906
1 % 10,152,020
102 % 27,752,007
(892,488)
100 % $26,859,519
(2)%
38 % (9,541,664)
103 % 28,853,145
(348,758)
100 % $28,504,387
(3)%
(94)%
104 %
39 %
106 %
Our net revenue increased by $28.5 million for the year ended December 31, 2019 compared to 2018. This increase in net
revenue was primarily due to the $35.6 million increase in Online Networks revenue as a result of the Crackle Plus
acquisition and $2.8 million increase in Film Distribution revenues resulting from an increase in international revenues,
offset by decreased production revenues. 2019 has been a transformative year for our Company led by the launch of our
new streaming video on demand service Crackle Plus which amalgamated each of our video on demand platforms. This
strategic shift in our business has made us one of the largest providers of free AVOD service in the United States and
shifted our business focus. As a result, we decided to focus on our online networks and television and distribution areas and
we reduced the number of television and short-form productions we launched in 2019 thereby decreasing revenue in that
area.
Online network revenue
Our online network revenue is derived from content generated by online streaming of films and television programs on our
seven advertising-supported video on demand (AVOD) networks including Crackle, Popcornflix® and our subscription-
based video on demand (SVOD) network Pivotshare, all of which collectively form Crackle Plus.
Our online networks revenue increased by $35.6 million for the year ended December 31, 2019 compared to 2018. The
increase of $35.6 million was primarily due to the acquisition of the Crackle network which accounted for 94% of our
online networks revenues, driven by the delivery of advertisements during the viewing of films and programs on our
platform.
Television and film distribution revenue
Our television and film distribution revenues are derived primarily from our distribution of television series and films in all
media, including theatrical, home video, pay-per-view, free, cable television, video on demand (VOD) and new digital
media platforms worldwide as well as owned and operated networks, (i.e., Crackle, Popcornflix® and A Plus).
Television and film distribution revenue increased by $2.8 million for the year ended December 31, 2019 compared to
2018, primarily due to a $3.2 million increase in international distribution revenue and a $1.7 million increase in AVOD
distribution revenue, offset by a $1.0 million decrease in video and theatrical revenue, a $0.7 million decrease in
syndication revenues and a $0.4 million cumulative decrease in various other distribution revenue streams. We continue to
acquire new film and television series, invest in premium content libraries and grow our distribution business. In the
current year, we’ve broadened our reach increasing our revenues internationally and on AVOD platforms (including
Crackle Plus).
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Television and short-form video production revenue
Historically our television and short-form video production revenue was derived primarily from corporate and charitable
sponsors that compensate us for the production of half-hour or one-hour episodic television programs as well as short-form
video content. In 2019 we shifted our strategy to focus on our online networks business. In connection with this change
we decided to decrease in-house production and increase our work with outside production entities to facilitate the
productions of content that we could make available to an online network on an advantageous basis.
Our television and short-form video production revenue decreased by $9.5 million for the year ended December 31, 2019
compared to 2018, primarily due to the number of episodes that became available for delivery or became available for
broadcast during the respective periods and licensing revenue earned on previously produced series.
The majority of this revenue in 2019 related to the completed production of four episodes of our original episodic
series Animal Tales season one and licensing revenue related to Hidden Heroes seasons 1, 2 and 3. For the year ended
December 31, 2018, the majority of our revenue recognized related to the original productions of Going From
Broke, Vacation Rental Potential season one and two and six episodes of Animal Tales season one.
Cost of Revenue
Our cost of revenue for our online networks includes the various expenses incurred by the Company to support and
maintain our AVOD and SVOD networks. These costs are comprised of hosting and bandwidth costs, website traffic costs,
royalty fees, and music costs. Also included in cost of revenue are advertisement representation fees earned by our
advertising representation partners (“Ad Rep Partners”), license fees payable to third parties for content exhibited on our
networks and the related amortization associated with programming rights and film library costs.
Cost of revenue for our television and film distribution includes distribution costs for television series and films and
amortization of film library costs.
We record cost of revenue for our production and content acquisitions based on the individual-film-forecast method. This
method requires costs to be amortized in the proportion that the current period’s revenue bears to management’s estimate of
ultimate revenue expected to be recognized from each production or content acquisition.
The following table presents cost of revenue line items for the years ended December 31, 2019 and 2018 and the year-over-
year dollar and percentage changes for those line items:
Cost of revenue:
Programming costs amortization
Film library amortization
Revenue share and partner fees
Distribution and platform costs
Total cost of revenue
Gross profit
Gross profit margin
*Not meaningful
Year Ended December 31,
2019
% of
revenue
2018
% of
revenue
Change
Period over Period
$
710,689
10,182,166
17,202,481
12,328,214
$40,423,550
$14,940,356
1 % $ 2,752,446
18 % 6,459,431
—
31 %
22 % 3,133,713
72 % $12,345,590
$14,513,929
27 %
54 %
10 % $ (2,041,757)
24 % 3,722,735
— % 17,202,481
12 % 9,194,501
46 % $28,077,960
(74)%
58 %
*
293 %
227 %
Our cost of revenue increased by $28.1 million for the year ended December 31, 2019 compared to 2018. This
increase was primarily due to our overall increase in revenue resulting from Crackle Plus. $17.2 million of the increase
related to content revenue share and partner fees. $9.2 million of the increase related to distribution and platform costs.
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Operating Expenses
The following table presents operating expense line items for the years ended December 31, 2019 and 2018 and the year-
over-year dollar and percentage changes for those line items:
Year Ended December 31,
% of
revenue
2018
2019
% of
revenue
Change
Period over Period
Operating expenses:
Selling, general and administrative
Amortization
Management and license fees
Total operating expenses
$ 22,242,032
13,293,279
5,536,390
$ 41,071,701
40 % $ 10,745,235
326,988
24 %
10 %
2,666,907
74 % $ 13,739,130
40 % $ 11,496,797
1 % 12,966,291
10 %
2,869,483
51 % $ 27,332,571
107 %
3,965 %
108 %
199 %
Our total operating expenses were 74% of net revenue for the year ended December 31, 2019 compared to 51% in the same
period in 2018 and increased in absolute dollars by $27.3 million. Excluding amortization expense driven by acquired
intangibles resulting from the formation of the Crackle Plus Network and the 2018 acquisition of Pivotshare, total operating
expenses were 50% of net revenue for the year ended December 31, 2019 and 2018, respectively.
The following table presents selling, general and administrative expense line items for the years ended December 31, 2019
and 2018 and the year-over-year dollar and percentage changes for those line items:
Payroll, benefits and commissions
Share-based compensation
Outside professional services
Public company costs and expenses
Bad debt expense
Other costs and expenses
Year Ended
December 31,
2019
2018
Change
Period over Period
$ 12,680,626 $ 4,629,115 $ 8,051,511 174 %
108,238 11 %
953,688
(959,915) (38)%
2,529,630
(55,413) (13)%
421,791
1,098,909 333 %
329,544
3,253,467 173 %
1,881,467
$ 22,242,032 $ 10,745,235 $ 11,496,797 107 %
1,061,926
1,569,715
366,378
1,428,453
5,134,934
Our selling, general and administrative expenses include salaries and benefits, non-cash share-based compensation, public
and investor relations fees, outside director fees, professional fees and other overhead. A portion of selling, general and
administrative expenses are covered by our management agreement with CSS, as noted below. Our selling, general and
administrative expenses increased by $11.5 million for the year ended December 31, 2019 compared to 2018. This increase
is primarily due to a $8.1 million increase in payroll, benefits and commissions expense, which is primarily due to a
headcount increase of approximately 113% compared to 2018, a $3.3 million increase in other costs and expenses, which is
primarily related to marketing, travel and entertainment and other expenses incurred as a result of Crackle Plus and a $1.1
million increase in bad debt expense primarily due to reserving certain aged customer balances, offset by a $1.0 million
decrease in outside professional services.
Share-based compensation increased $0.1 million for the year ended December 31, 2019 compared to 2018 due to
additional stock option grants awarded in 2019.
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Management and License Fees
We incurred management fees to CSS equal to 5% of total net revenue reported for the year ended December 31, 2019 and
2018. We also incurred license fees to CSS for use of the brand equal to 5% of total net revenue reported for the year ended
December 31, 2019 and 2018.
Interest Expense
For the year ended December 31, 2019 and 2018, our interest expense was comprised primarily of interest paid on the
Commercial Loan and a revolving line of credit with an entity controlled by our chief executive officer, respectively.
The following table presents cash-based and non-cash-based interest expense for the years ended December 31, 2019 and
2018:
Cash Based:
Commercial Loan
Revolving credit facility
Revolving line of credit - related party
Non-Cash Based:
Amortization of deferred financing costs
Year Ended December 31,
2019
2018
$
638,617 $
90,000
—
728,617
300,607
—
30,268
330,875
82,400
82,400
811,017 $
57,161
57,161
388,036
$
Interest expense increased $0.4 million for the year ended December 31, 2019 compared to 2018. The increase is primarily
due to amending the commercial loan on August 22, 2019, pursuant to which our existing commercial loan of $5.0 million
and line of credit of $3.5 million were consolidated and combined into a term loan of $16.0 million, bearing an interest rate
of 5.75%.
Acquisition Related Costs
For the years ended December 31, 2019 and 2018 aggregate transaction-related costs, including legal, accounting and
investment advisory fees totaled $4.0 and $0.4 million, respectively. The $3.6 million increase in acquisition expenses is
primarily related to professional service costs incurred in the formation of Crackle Plus.
Provision from Income Taxes
The Company’s benefit from, or provision for income taxes, consists of federal and state taxes in amounts necessary to
align our tax provision to the effective rate that we expect for the full year.
For the years ended December 31, 2019 and 2018, we reported income tax expenses of approximately $0.6 million and
income tax expense of approximately $0.9 million, respectively, consisting of federal and state taxes currently payable and
deferred. The effective tax rate for the years ended December 31, 2019 and 2018 was 3% and 510%, respectively. The
effective rate for the year ended December 31, 2018 was significantly impacted by temporary differences as described
below.
Temporary timing differences consist primarily of net programming costs for released USA produced shows being
deductible for tax purposes in the period incurred (under Internal Revenue Code Section 168(k)) as contrasted to the
capitalization and amortization for financial reporting purposes under the guidance of ASC 926 — Entertainment — Films.
Additionally, the Company amortized, for tax purposes, intangible assets under Section 197 of the Internal Revenue Code,
the amounts of which differ substantially from charges on related assets that are either not amortized in the consolidated
financial statements or amortized at different rates.
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Affiliate Resources and Obligations
CSS License Agreement
We have a trademark and intellectual property license agreement with CSS, which we refer to as the ‘‘CSS License
Agreement.’’ Under the terms of the CSS License Agreement, we have been granted a perpetual, exclusive, worldwide
license to produce and distribute video content using the Chicken Soup for the Soul brand and related content, such as
stories published in the Chicken Soup for the Soul books.
We pay CSS an incremental recurring license fee equal to 4% of our net revenue for each calendar quarter, and a marketing
fee of 1% of our net revenue
For the years ended December 31, 2019 and 2018, we recorded $2.8 million and $1.3 million, respectively, of license fee
expense under this agreement. We believe that the terms and conditions of the CSS License Agreement, which provides us
with the rights to use the trademark and intellectual property in connection with our video content, are more favorable to us
than any similar agreement we could have negotiated with an independent third party.
CSS Management Agreement
We have a management services agreement, ‘‘CSS Management Agreement’’, in which we pay CSS a management fee
equal to 5% of our net revenue. Under the terms of the CSS Management Agreement, we are provided with the broad
operational expertise of CSS and its subsidiaries and personnel, including the services of our chairman and chief executive
officer, Mr. Rouhana, our vice chairman and chief strategy officer, Mr. Seaton, our senior brand advisor and director, Ms.
Newmark, and our chief financial officer, Mr. Mitchell. The CSS Management Agreement also provides for services, such
as accounting, legal, marketing, management, data access and back-office systems, and provides us with office space and
equipment usage. On August 1, 2019, we entered into an amendment to the CSS Management Agreement which removed
our obligation to pay sales commissions to CSS in connection with sponsorships for our video content or other revenue
generating transactions arranged by CSS or its affiliates.
For the years ended December 31, 2019 and 2018, we recorded $2.8 million and $1.3 million, respectively, of management
fee expense under this agreement. We believe that the terms and conditions of the CSS Management Agreement, as
amended, are more favorable and cost effective to us than if we hired the full staff to operate the Company.
Use of Non-GAAP Financial Measure
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the
United States (“U.S. GAAP”). We use a non-GAAP financial measure to evaluate our results of operations and as a
supplemental indicator of our operating performance. The non-GAAP financial measure that we use is Adjusted EBITDA.
Adjusted EBITDA (as defined below) is considered a non-GAAP financial measure as defined by Regulation G
promulgated by the SEC under the Securities Act of 1933, as amended. Due to the significance of non-cash, non-recurring,
and acquisition related expenses recognized for the year ended December 31, 2019 and 2018, and the likelihood of material
non-cash, non-recurring, and acquisition related expenses to occur in future periods, we believe that this non-GAAP
financial measure enhances the understanding of our historical and current financial results as well as provides investors
with measures used by management for the planning and forecasting of future periods, as well as for measuring
performance for compensation of executives and other members of management. Further, we believe that Adjusted
EBITDA enables our board of directors and management to analyze and evaluate financial and strategic planning decisions
that will directly affect operating decisions and investments. We believe this measure is an important indicator of our
operational strength and performance of our business because it provides a link between operational performance and
operating income. It is also a primary measure used by management in evaluating companies as potential acquisition
targets. We believe the presentation of this measure is relevant and useful for investors because it allows investors to view
performance in a manner similar to the method used by management. We believe it helps
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improve investors’ ability to understand our operating performance and makes it easier to compare our results with other
companies that have different capital structures or tax rates. In addition, we believe this measure is also among the primary
measures used externally by our investors, analysts and peers in our industry for purposes of valuation and comparing our
operating performance to other companies in our industry.
The presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by
unusual, infrequent or non-recurring items or by non-cash items. This non-GAAP financial measure should be considered
in addition to, rather than as a substitute for, our actual operating results included in our condensed consolidated financial
statements.
We define Adjusted EBITDA as consolidated operating income adjusted to exclude interest, taxes, depreciation,
amortization (including tangible and intangible assets), acquisition-related costs, consulting fees related to acquisitions,
dividend payments, non-cash share-based compensation expense, and adjustments for other unusual and infrequent in
nature identified charges. Adjusted EBITDA is not an earnings measure recognized by US GAAP and does not have a
standardized meaning prescribed by GAAP; accordingly, Adjusted EBITDA may not be comparable to similar measures
presented by other companies. We believe Adjusted EBITDA to be a meaningful indicator of our performance that provides
useful information to investors regarding our financial condition and results of operations. The most comparable GAAP
measure is operating income.
Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP. Some of these limitations are:
·
·
·
·
·
·
·
·
·
·
·
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or
contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for our working capital needs;
Adjusted EBITDA does not reflect the effects of preferred dividend payments, or the cash requirements
necessary to fund;
Although amortization and depreciation is a non-cash charge, the assets being depreciated will often have to be
replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
Adjusted EBITDA does not reflect the effects of the amortization of our film library, which include cash and non-
cash amortization of our initial film library investments, participation costs and theatrical release costs;
Adjusted EBITDA does not reflect the impact of stock-based compensation upon our results of operations;
Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service
interest or principal payments on our debt;
Adjusted EBITDA does not reflect our income tax (benefit) expense or the cash requirements to pay our income
taxes;
Adjusted EBITDA does not reflect the impact of acquisition related expenses; and the cash requirements
necessary;
Adjusted EBITDA does not reflect the impact of other non-recurring, infrequent in nature and unusual
expenses; and
Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness
as a comparative measure.
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In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to those eliminated
in this presentation.
Reconciliation of Historical GAAP Net Income as reported to Adjusted EBITDA
The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP
measure, for the periods presented:
(a)
Net loss available to common stockholders, as reported
Preferred dividends
Provision for income taxes
Other Taxes
Interest expense, net of interest income
Film library amortization, included in cost of revenue
Share-based compensation expense
Acquisition-related costs and other one-time consulting fees
Reserve for bad debt and video returns
Amortization
Loss on extinguishment on debt
Transitional Expenses
All other nonrecurring costs
(b)
(c)
(e)
(f)
(d)
Adjusted EBITDA
Year Ended December 31,
2018
2019
$ (34,976,816) $ (1,957,882)
1,112,910
874,000
—
348,978
6,459,431
953,688
666,793
646,289
326,988
—
—
589,679
$ 5,953,528 $ 10,020,874
3,304,947
585,000
460,205
770,826
10,683,227
1,061,926
3,968,289
2,669,699
13,293,279
350,691
3,505,855
276,400
(a). Includes non-cash amortization of deferred financing costs of $82,400 and $57,161 for the years ended December 31,
2019 and 2018, respectively.
(b). Represents amortization of our film library, which include cash and non-cash amortization of our initial film library
investments, participation costs and theatrical release costs as well as amortization for our acquired licensed program
obligations.
(c). Represents expense related to common stock equivalents issued to certain employees and officers under the Long-
Term Incentive Plan. In addition to common stock grants issued to employees and non-employee directors.
(d). Represents aggregate transaction-related costs, including legal fees, accounting fees, investment advisory fees and
various consulting fees.
(e). Represents loss on extinguishment of debt that consists primarily of write‑offs of unamortized deferred financing
costs.
(f). Represents transitional acquisition related expenses primarily associated with the Crackle Plus business combination
and our Company strategic shift related to our production business. Costs include primarily non-recurring payroll and
related expenses and redundant non-recurring technology costs incurred to transition the acquired business.
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are our existing cash and cash equivalents, cash inflows from operating activities and
financing activities. As of December 31, 2019, we had cash and cash equivalents of $6.4 million. Our total commercial
loan principal outstanding was $15.2 million as of December 31, 2019. In addition, the Company has an outstanding
revolving credit facility in the amount of $5.0 million as of December 31, 2019.
Preferred Stock Offering
During the year ended December 31, 2019, the Company completed the sale of an aggregate of 680,505 shares of its Series
A Preferred Stock at an offering price of $25.00 per share. The Company’s net proceeds from the sale of Series A Preferred
Stock, after deducting offering expenses, was approximately $15.5 million. The Company used the net proceeds from the
sale of Series A Preferred Stock for working capital and other general corporate purposes.
We have declared monthly dividends of $0.2031 per share on our Series A Preferred Stock to holders of record as of each
month end January through December 2019. Total dividends paid and declared during the year ended December 31, 2019
were $3.2 million and $3.3 million, respectively.
Commercial Loan
On August 22, 2019, the Company and Screen Media, as co-borrowers, and certain of its and their direct and indirect
subsidiaries as guarantors, entered into an amended and restated loan and security agreement (“Amended and Restated
Loan Agreement”) with Patriot Bank N.A. as lender. Under the Amended and Restated Loan Agreement, the Company’s
outstanding $5,000,000 term loan and $3,500,000 line of credit were consolidated and combined into a term loan in the
original principal amount of $16,000,000 (the “Commercial Loan”). The Commercial Loan is evidenced by a consolidated,
amended and restated term promissory note. Pursuant to the Amended and Restated Loan Agreement, at closing the
Company paid to Patriot Bank an aggregate of approximately $178,000, representing (i) a commitment fee of $85,000, (ii)
a payment of approximately $25,555 of interest due on the Loan for the 9 days of the month of August 2019, and (iii) fees
of Patriot Bank’s counsel.
Subject to the terms of the Note, the Commercial Loan bears interest, payable monthly in arrears, at a fixed rate of 5.75%
per annum. The outstanding principal amount of the Commercial Loan is repayable in consecutive monthly installments in
equal amounts of $266,667, plus interest, commencing on October 1, 2019 and continuing on the same date of each
subsequent month thereafter during the term of the Commercial Loan. The Commercial Loan matures on September 1,
2024.
Revolving Credit Facility
On October 11, 2019, the Company consummated the creation of the majority owned subsidiary Landmark Studio Group.
Through and in connection with the created subsidiary, Landmark Studio Group, the Company entered into the Revolving
Credit Facility (“Revolving Credit Facility”) with Cole Investments VII, LLC. The Revolving Credit Facility consists of a
revolving line of credit in the amount of $5,000,000 and bears interest of 8% per annum. The outstanding principal is
repayable in full on October 10, 2022, the maturity date. At the option of the lender, the loan is repayable in cash or
additional equity in the subsidiary. The loan is not collateralized by any assets of the Company except for the agreed upon
security interest in the Landmark subsidiary.
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Cash Flows
Our cash and cash equivalents balance was $6.4 million and $7.2 million as of December 31, 2019 and 2018, respectively.
Cash flow information for the years ended December 31, 2019 and 2018 is as follows:
Year Ended December 31,
Change in
2019
2018
Dollars
Percentage
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net (decrease) increase in cash and cash equivalents
Operating Activities
$(18,698,763) $ (7,760,712) $(10,938,051)
(2,279,125)
(4,149,871)
7,434,047
16,939,356
(754,356) $ 5,028,773 $ (5,783,129)
(6,428,996)
24,373,403
$
141 %
55 %
44 %
(115)%
Net cash used in operating activities was $18.7 million and $7.8 million for the years ended December 31, 2019 and 2018,
respectively. The increase of $10.9 million in cash used in operating activities for the year ended December 31, 2019
compared to 2018 was primarily due to a $14.4 million increase in net loss adjusted for the exclusion of non-cash expenses,
offset by approximately a $3.4 million increase related to the effect of changes in operating assets and liabilities.
The net loss adjusted for the exclusion of non-cash expenses was approximately $3.5 million for the year ended December
31, 2019 compared to net income adjusted for the exclusion of non-cash expenses of $10.9 million for the year ended
December 31, 2018. The decrease was primarily due to acquisition related expenses, selling, general and administrative
expenses due to the growth and transformation of the business, increase in the management and license fee and an increase
in interest expense.
The deferred tax asset decreased $0.5 million for year ended December 31, 2019 compared to a decrease of $0.4 million for
the year ended December 31, 2018, see note 13 to our consolidated financial statements for further detail.
The effect of changes in operating assets and liabilities was a decrease of $15.7 million for the year ended December 31,
2019 compared to a decrease of $19.1 million for the year ended December 31, 2018. The most significant drivers
contributing to this decrease relate to the following:
·
·
·
Changes in accounts receivable primarily driven by increased revenue and timing of collections. Accounts
receivable increased $24.5 million during the year ended December 31, 2019 as compared to an increase of $6.0
million during the year ended December 31, 2018.
Changes in film library primarily due to increased investment in our distribution line of business. Film library
increased $18.1 million for the year ended December 31, 2019 compared to a $9.1 million increase for
the year ended December 31, 2018.
Changes in accounts payable and accrued expenses primarily driven by growth of the business and timing of
accruals. Accounts payable and accrued expenses increased $24.2 million during the year ended December 31,
2019 compared to $3.4 million during year ended December 31, 2018, this increase was largely driven by non-
recurring acquisition related costs driven by our growth and M&A activity.
Investing Activities
For the year ended December 31, 2019 and 2018, our investing activities required a net use of cash totaling $6.4 million
and $4.1 million, respectively. This resulted primarily from an increase in our due-from affiliated companies’ balance
driven by our parent company’s central cash management system which from time to time funds are transferred to fulfill
joint business needs and liquidity requirements settled on an ongoing basis. Settlements fluctuate period over period due to
timing of liquidity needs.
39
Table of Contents
Financing Activities
For the year ended December 31, 2019, our financing activities provided net cash totaling $24.4 million. This resulted
primarily from proceeds from the sale of our preferred stock of $17.0 million, proceeds of $8.7 million related to the
commercial loan and proceeds of $5.0 million related to the revolving credit facility. Such proceeds were offset by the
scheduled dividends payments to preferred stockholders in the amount of $3.3 million, payment of stock issuance costs of
$1.5 million and scheduled debt principal payments of $1.5 million.
For the year ended December 31, 2018, our financing activities provided net cash totaling $16.9 million primarily
consisting of proceeds from the commercial loan and the preferred stock offering, offset by dividends paid to preferred
stockholders.
Anticipated Cash Requirements
We believe that cash flow from operations, cash on hand, and the monetization of trade accounts receivable, together with
equity and debt offerings, will be adequate to meet our known operational cash and debt service (i.e., principal and interest
payments) requirements for the foreseeable future. We monitor our cash flow liquidity, availability, capital base,
operational spending and leverage ratios with the long-term goal of maintaining our credit worthiness. If we are required
to access debt or equity financing for our operating needs, we may incur additional debt and/or issue preferred stock or
common equity, which could serve to materially increase our liabilities and/or cause dilution to existing holders. There can
be no assurance that we would be able to access debt or equity financing if required on a timely basis or at all or on terms
that are commercially reasonable to our company. If we should be required to obtain debt or equity financing and are
unable to do so on the required terms, our operations and financial performance could be materially adversely affected.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with generally accepted accounting principles in the United States of
America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported periods. In accordance with U.S. GAAP,
we base our estimates on historical experience and on various other assumptions we believe are reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in more detail in the notes to our consolidated financial statements
appearing elsewhere in this Report and should be read in conjunction with the audited consolidated financial statements and
accompanying notes included herein. There have been no significant changes in our critical accounting policies, judgments
and estimates since December 31, 2019.
Recent Accounting Pronouncements
See Item 8, Financial Statements and Supplementary Data - Note 3 “Recent Accounting Pronouncements”.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
40
Table of Contents
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements and accompanying notes are presented within Part IV of this Report.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
Page
Number
F-2
F-3
F-4
F-5
F-6
Notes to Consolidated Financial Statements
F-8 to F-35
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Chicken Soup for the Soul Entertainment, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chicken Soup for the Soul Entertainment, Inc. and
subsidiaries (the “Company”) as of , the related consolidated statements of operations, stockholders’ equity, and cash flows
for each of the two years in the period ended , and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of ,
and the results of their operations and their cash flows for each of the two years in the period ended , in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control
over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control
over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Rosenfield and Company, PLLC
We have served as Chicken Soup for the Soul Entertainment, Inc.’s auditor since 2017.
New York, New York
March 27, 2020
F-2
Table of Contents
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid expenses
Inventory, net
Goodwill
Indefinite lived intangible assets
Intangible assets, net
Film library, net
Due from affiliated companies
Programming costs, net
Program rights, net
Deferred tax asset, net
Other assets, net
Total assets
Chicken Soup for the Soul Entertainment, Inc.
Consolidated Balance Sheets
ASSETS
December 31, December 31,
2019
2018
$
6,447,402
—
34,661,119
861,190
312,033
21,448,106
12,163,943
35,451,951
33,250,149
7,642,432
14,459,271
654,303
—
313,585
$ 167,665,484
$
3,200,000
11,810,475
5,000,000
26,646,390
12,429,838
5,020,600
7,300,861
5,066,512
170,106
—
76,644,782
160
425
782
87,610,030
(32,695,629)
(632,729)
54,283,039
36,350,000
387,663
91,020,702
$ 167,665,484
$
$
$
$
6,451,758
750,000
12,841,099
218,736
262,068
2,537,079
12,163,943
2,971,637
25,338,502
1,213,436
12,790,489
—
452,000
356,221
78,346,968
1,000,000
6,582,113
—
5,078,805
—
2,715,600
—
1,539,139
414,506
6,469
17,336,632
92
421
782
59,360,583
2,281,187
(632,729)
61,010,336
—
—
61,010,336
78,346,968
LIABILITIES AND EQUITY
Current maturities of commercial loan
Commercial loan and revolving line of credit, net of unamortized deferred finance cost of $189,525 and
$334,554, respectively
Notes payable under revolving credit facility
Accounts payable and accrued expenses
Ad representation fees payable
Film library acquisition obligations
Programming obligations
Accrued participation costs
Other liabilities
Deferred revenue
Total liabilities
Commitments and contingencies (Note 15)
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 and 918,497 shares issued and outstanding, respectively,
redemption value of $39,975,050 and $22,962,425, respectively
Class A common stock, $.0001 par value, 70,000,000 shares authorized; 4,259,920 and 4,227,740 shares
issued, 4,185,685 and 4,153,505 shares outstanding, respectively
Class B common stock, $.0001 par value, 20,000,000 shares authorized; 7,813,938 and 7,817,238 shares
issued and outstanding, respectively
Additional paid-in capital
Retained (deficit) earnings
Class A common stock held in treasury, at cost (74,235 shares)
Total stockholders’ equity
Subsidiary convertible preferred stock (Note 12)
Noncontrolling interests (Note 12)
Total Equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
Chicken Soup for the Soul Entertainment, Inc.
Consolidated Statements of Operations
Revenue:
Online networks
Television and film distribution
Television and short-form video production
Total revenue
Less: Television & film distribution returns and allowances
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Amortization
Management and license fees
Total operating expenses
Operating (loss) income
Interest income
Interest expense
Loss on extinguishment of debt
Acquisition-related costs
(Loss) income before income taxes and preferred dividends
Provision for income taxes
Net loss before noncontrolling interests and preferred dividends
Net loss attributable to noncontrolling interests
Net loss attributable to Chicken Soup for the Soul Entertainment, Inc.
Less: Preferred dividends
Net loss available to common stockholders
Net loss per common share:
Basic and diluted
Year Ended December 31,
2018
2019
$ 40,027,289 $ 4,411,427
13,188,560
10,152,020
27,752,007
(892,488)
26,859,519
12,345,590
14,513,929
15,967,507
610,356
56,605,152
(1,241,246)
55,363,906
40,423,550
14,940,356
22,242,032
13,293,279
5,536,390
41,071,701
(26,131,345)
(40,191)
811,017
350,691
3,968,289
(31,221,151)
585,000
(31,806,151)
(134,282)
(31,671,869)
3,304,947
10,745,235
326,988
2,666,907
13,739,130
774,799
(39,058)
388,036
—
396,793
29,028
874,000
(844,972)
—
(844,972)
1,112,910
$ (34,976,816) $ (1,957,882)
$
(2.92) $
(0.16)
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
Chicken Soup for the Soul Entertainment, Inc
Consolidated Statements of Stockholders’ Equity
Preferred Stock
Common Stock
Subsidiary
convertible
Preferred Noncontrolling
Class A
Par
Par
Class B
Additional
Paid-In
Value Capital
Par
Retained
(Deficit)
Earnings
Treasury
Shares Value Shares
Value Shares
Stock
Stock
Interests
Total
-
- $
13
79
134,000
784,497
Balance,
December 31, 2017
Conversion of Class
B shares to Class A
shares
Shares issued to
directors
Share based
compensation -
stock options
Issuance of
preferred stock
Preferred Stock
Issuance Costs
Dividends on
preferred stock
Preferred shares
issued as part
purchase
consideration paid
for Pivotshare
acquisition
Shares issued as
part purchase
consideration Class
A shares paid for
Pivotshare
acquisition
Common Stock
Issuance Costs
Purchase of
treasury stock
Net loss
Balance,
December 31, 2018
Share based
compensation -
stock options
Share based
compensation -
common stock
Issuance of
preferred stock
Preferred stock
issuance costs
Stock options
exercised
Shares issued to
directors
Employee stock
grant
Conversion of Class
B shares to Class A
shares
Dividends on
preferred stock
Crackle business
combination
Net loss attributable
to noncontrolling
interest
Net loss
Balance,
December 31, 2019 1,599,002 $ 160
918,497 $ 92
680,505
68
4,096,353 $ 409
7,863,938 $ 786 $ 36,584,575 $ 9,421,619 $
- $
- $
- $ 46,007,389
46,700
10,452
4
1
(46,700)
(4)
74,235
7
(6,295,460)
96,614
857,073
19,612,346
(1,894,792)
3,434,407
731,949
(61,589)
(632,729)
(844,972)
-
96,615
857,073
19,612,425
(1,894,792)
(6,295,460)
3,434,420
731,956
(61,589)
(632,729)
(844,972)
4,227,740 $ 421
7,817,238 $ 782 $ 59,360,583 $ 2,281,187 $(632,729) $
— $
— $ 61,010,336
907,572
87,500
17,012,557
(1,489,706)
160,159
25,000
41,854
16,666
6,956
5,258
2
1
1
3,300
—
(3,300)
—
(3,304,947)
907,572
87,500
17,012,625
(1,489,706)
160,161
25,001
41,855
—
(3,304,947)
11,504,511
36,350,000
521,945
48,376,456
(31,671,869)
(134,282)
(134,282)
(31,671,869)
4,259,920 $ 425
7,813,938 $ 782 $ 87,610,030 $ (32,695,629) $(632,729) $ 36,350,000 $
387,663 $ 91,020,702
See accompanying notes to consolidated financial statements
F-5
Table of Contents
Chicken Soup for the Soul Entertainment, Inc
Consolidated Statements of Cash Flows
Cash flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation
Amortization of programming costs and rights
Amortization of deferred financing costs
Amortization of fixed assets and acquired intangibles
Amortization of film library
Bad debt and video return expense
Loss on debt extinguishment
Deferred income taxes
Changes in operating assets and liabilities:
Trade accounts receivable
Prepaid expenses and other current assets
Inventory
Programming costs and rights
Film library
Accounts payable, accrued expenses and other payables
Film library acquisition obligations
Accrued participation costs
Other liabilities
Deferred revenue
Net cash used in operating activities
Cash flows from Investing Activities:
Payment for business acquisition, net of cash acquired
Increase in due from affiliated companies
Net cash used in investing activities
(continued on next page)
F-6
Year ended December 31,
2018
2019
$ (31,806,151) $
(844,972)
1,061,926
710,689
82,400
13,293,279
10,182,166
2,669,699
350,691
452,000
953,688
2,752,446
57,161
326,986
6,459,431
1,222,032
—
373,000
(24,489,719)
(657,778)
(49,965)
(2,151,669)
(18,093,813)
24,165,978
2,305,000
3,527,373
(244,400)
(6,469)
(18,698,763)
(5,989,864)
133,815
106,896
(8,267,551)
(9,142,288)
3,366,143
2,052,200
(1,081,278)
269,974
(508,531)
(7,760,712)
—
(6,428,996)
(6,428,996)
190,587
(4,340,458)
(4,149,871)
Table of Contents
Chicken Soup for the Soul Entertainment, Inc
Consolidated Statements of Cash Flows
Cont’d
Cash flows from Financing Activities:
Proceeds from revolving credit facility from related party
Repayments of revolving credit facility from related party
Proceeds from commercial loan
Repayments of commercial loan
Proceeds from revolving credit facility
Payment of preferred stock issuance costs
Proceeds from issuance of common stock under equity plans
Payment of deferred financing costs
Proceeds from issuance of Series A preferred stock
Common stock repurchases held in treasury
Dividends paid to common stockholders
Dividends paid to preferred stockholders
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of the period
Supplemental data:
Interest paid
Non-cash investing activities:
Noncash investing activities (Crackle Plus business combination)
Affiliated balances settled as a part of the A Sharp acquisition consideration
Fair value of Preferred shares issued as a part of business acquisition - Pivotshare
Fair value of Common A shares issued as a part of business acquisition - Pivotshare
Year ended December 31,
2018
2019
—
—
8,665,000
(1,466,667)
5,000,000
(1,489,706)
160,161
(203,063)
17,012,625
—
—
(3,304,947)
24,373,403
(754,356)
7,201,758
200,000
(1,700,000)
8,500,000
(583,334)
—
(1,956,393)
—
(391,714)
19,612,438
(632,729)
(5,182,549)
(926,363)
16,939,356
5,028,773
2,172,985
$ 6,447,402 $ 7,201,758
$
605,561 $
267,064
$ 51,672,531 $
—
—
—
—
8,711,109
3,434,486
732,028
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
Restricted cash
Total cash, cash equivalents and restricted cash per statements of cash flows
$ 6,447,402 $ 6,451,758
—
750,000
$ 6,447,402 $ 7,201,758
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Note 1 – Description of the Business
Chicken Soup for the Soul Entertainment, Inc. (the “Company”) is a Delaware corporation formed on May 4, 2016. We
operate video-on-demand networks and are a leading global independent television and film distribution company with one
of the largest independently owned television and film libraries.
The Company operates and is managed by the Company CEO Mr. William J. Rouhana, Jr, as one reportable segment, the
production and distribution of video content. 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.
Financial Condition and Liquidity
As of December 31, 2019, we had an accumulated deficit of $32.7 million and for the year ended December 31, 2019, we
had a net loss of $35.0 million. We do not expect to continue to incur net losses at this level in the foreseeable future. We
have evaluated our current financial condition and have determined that the losses incurred in the current year are not
indicative of our ongoing operations. 2019 has been a transformative year for our Company led by the launch of our new
streaming video on demand service Crackle Plus which amalgamated each of our video on demand platforms. This
strategic shift in our business has made us one of the largest providers of free AVOD services in the United States and
shifted our business focus. With this shift and growth, we realized significant non-recurring acquisition and transitional
related expenses to integrate our Crackle Plus Network in the 2019 operating year. In addition, the Company realized a
significant portion of expenses related to non-cash items including intangible amortization expenses related to our acquired
business and stock compensation. These expenses accounted for 64% of our total loss for the fiscal year. The Company
does not expect operating expenses will remain at this level in future periods.
We believe that cash flow from operations, cash on hand, and the monetization of trade accounts receivable, together with
equity and debt offerings, if necessary, should be adequate to meet our operational cash and debt service requirements (i.e.,
principal and interest payments) for the foreseeable future. We monitor our cash flow liquidity, availability, capital base,
operational spending and leverage ratios with the long-term goal of maintaining our credit worthiness.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority
owned subsidiaries. The consolidated financial statements are prepared in conformity with accounting principles generally
accepted in the United States of America (‘‘GAAP’’). All intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s
significant estimates include those related to revenue recognition and estimated 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. Actual results could differ from those estimates.
F-8
Table of Contents
Cash and Cash Equivalents
Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Cash and cash equivalents include highly liquid investments with original maturities of three months or less and consist
primarily of money market funds. Such investments are stated at cost, which approximates fair value.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. To increase the comparability of fair value measurements,
a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for
similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are
not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions. These valuations require
significant judgment and estimates.
At December 31, 2019 and 2018, the fair value of the Company’s financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, accrued participation costs, film library
acquisition costs and accrued programming costs, approximated their carrying value due primarily to the relative short-term
nature of these instruments.
Accounts Receivable
Accounts receivable are stated at the amounts management expects to collect and are subsequently stated net of allowance
for uncollectible accounts and video returns. An allowance for doubtful accounts is recorded based on a combination of
historical experience, aging analysis and information on specific accounts. Account balances are written off against the
allowance after all means of collections have been exhausted and the potential for recovery is considered remote. Accounts
are considered past due or delinquent based on contractual terms and how recently payments have been received. Estimated
losses resulting from uncollectible accounts are reported as bad debt expense in the consolidated statements of income. At
December 31, 2019 and 2018, accounts receivable is presented net of allowance for doubtful accounts and video returns of
$1,889,147 and $601,500, respectively. Bad debt expense of $1,428,453 and $329,544 was recorded in the consolidated
statements of operations for the year ended December 31, 2019 and 2018, respectively. Provision for returns and
allowances of $1,241,246 and $892,488 was recorded in the consolidated statements of operations for the year ended
December 31, 2019 and 2018, respectively.
Inventory
Inventory consists of DVD films held for resale to wholesale and retail customers. Inventory is stated at the lower of cost or
net realizable value. Cost is determined by the first-in, first-out (FIFO) method. When the net realizable value falls below
its cost, a provision for write-downs is recorded.
Programming Costs
Programming costs include the unamortized costs of completed, in-process, or in-development long-form and short-form
video content produced by the Company. For video content, the Company’s capitalized costs include all direct production
and financing costs, capitalized interest when applicable, and production overhead.
F-9
Table of Contents
Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
The costs of producing video content are amortized using the individual-film-forecast method. These costs are amortized in
the proportion that current period’s revenue bears to management’s estimate of ultimate revenue expected to be recognized
from each production.
For an episodic television series, the period over which ultimate revenue is estimated cannot exceed ten years following the
date of delivery of the first episode, or, if still in production, five years from the date of delivery of the most recent episode,
if later.
Programming costs are stated at the lower of amortized cost or estimated fair value. The valuation of programming costs is
reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value may be less than its
unamortized cost and the valuation is based on a discounted cash flows (“DCF”) methodology with assumptions for cash
flows. Key inputs employed in the DCF methodology include estimates of a program’s ultimate revenue and costs as well
as a discount rate. The discount rate utilized in the DCF is based on the weighted average cost of capital of the Company
plus a risk premium representing the risk associated with producing a program. The Company performs an annual
impairment analysis for unamortized programming costs. An impairment charge is recorded in the amount by which the
unamortized costs exceed the estimated fair value. Estimates of future revenue involve measurement uncertainties and it is
therefore possible that reductions in the carrying value of programming costs may be required because of changes in
management’s future revenue estimates.
Included in cost of revenue in the consolidated statements of operations for the years ended December 31, 2019 and 2018,
is amortization of programming costs related to our original productions totaling $209,627 and $2,752,446, respectively.
For the years ended December 31, 2019 and 2018, there were no impairment charges recorded.
Film Library
The film library represents the cost of acquiring film distribution rights and related acquisition and accrued participation
costs. The film library is amortized using the individual-film-forecast-computation method. The film library is stated at the
lower of unamortized cost or fair value. Amortization is based upon management’s best estimate of total future, or ultimate
revenue. Amortization is adjusted when necessary to reflect increases or decreases in forecasted ultimate revenues. The
ultimate revenue time frame is determined based on the term of the acquisition agreement, which in most cases is ten years
or more. The Company generally acquires distribution rights covering periods of ten or more years.
Film library costs are stated at the lower of amortized cost or estimated fair value. The valuation of film library costs is
reviewed at the film acquisition year level (‘vintage’), when an event or change in circumstances indicates that the fair
value may be less than its unamortized cost and the valuation is based on a discounted cash flows (“DCF”) methodology
with assumptions for cash flows. Key inputs employed in the DCF methodology include estimates of a film vintage
ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF is based on the weighted
average cost of capital of the Company plus a risk premium representing the risk associated with acquiring a film. The
Company performs an annual impairment analysis for unamortized film library costs. An impairment charge is recorded in
the amount by which the unamortized costs exceed the estimated fair value. Estimates of future revenue involve
measurement uncertainties and it is therefore possible that reductions in the carrying value of film library costs may be
required because of changes in management’s future revenue estimates.
Included in cost of revenues in the consolidated statements of operations for the years ended December 31, 2019 and 2018
is amortization of film library costs totaling $10,182,166 and $6,459,431, respectively. For the years ended December 31,
2019 and 2018, there was no impairment charge recorded.
Programming rights and obligations
Programming rights acquired under license agreements are recorded as an asset and a corresponding liability upon
commencement of the license period. The programming rights are presented at the lower of unamortized cost or estimated
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
net realizable value on a program by program basis and amortized over the license period using the straight-line method
beginning with the first month of availability. Programming obligations represent the gross commitment amounts to be paid
to program suppliers over the life of the contracts.
Included in the cost of revenues in the consolidated statements of operations for the years ended December 31, 2019 and
2018 were program rights amortization totaling $501,061 and $0, respectively.
Acquisitions, Goodwill & Acquired Intangible Asset
We have made and expect to continue to make selective acquisitions. The valuation of potential acquisitions is based on
various factors, including specialized know-how resulting in future synergies, reputation, competitive position and service
offerings of the target businesses, as well as our experience and judgment.
The Company accounts for business combinations using the acquisition accounting method, in accordance with the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 805 “Business
Combinations,” which requires the determination of the fair value of the net assets acquired including tangible assets,
identified intangible assets, liabilities assumed and any noncontrolling interest in the acquired business are recorded at their
acquisition date fair values. Determining the fair value of assets acquired and liabilities assumed requires management's
judgment and involves the use of significant estimates, including projections of future cash inflows and outflows, discount
rates, asset lives and market multiples. The Company continually evaluates its estimates, including the assumptions, risks,
and uncertainties inherent in estimates; however, the Company cannot ensure that these estimates will be accurate. If the
Company subsequently determines that the estimates are not accurate, it will be required to record an impairment charge.
Considering the characteristics of AVOD and film distribution companies, the Company’s acquisitions to date did not have
significant amounts of tangible assets, as the principal assets typically acquired are brands and customer relationships. As a
result, a substantial portion of the purchase price is allocated to other intangible assets including goodwill where
appropriate.
Changes to the original estimates may be required during the life of an asset. The Company reviews goodwill and other
intangible assets with indefinite lives not subject to amortization at least annually and whenever events or significant
changes in circumstances indicate that the carrying value may not be recoverable, and if so, an impairment charge is
recorded. As of December 31, 2019 no indicators of impairment have been identified and thus no impairment charge has
been recorded.
Goodwill and Acquired Intangible Assets consist of the following,
Video Content License
The Company has been granted a perpetual, exclusive license from CSS to utilize the Brand and related content, for visual
exploitation on a worldwide basis pursuant to the CSS License Agreement. In granting the license, CSS required an initial
purchase price of $5,000,000, which approximated its costs to CSS, and was paid by the Company during 2016. The
Company has recorded the initial purchase price of the license at the estimated cost to CSS.
Popcornflix Film Rights and Other Assets
Popcornflix film rights and other assets represents the direct-to-consumer online video service and application platform
comprised of five ad-supported networks with rights to over 3,000 films and approximately 60 television series.
Popcornflix is an indefinite-lived intangible and is not subject to amortization but annual impairment analysis.
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Pivotshare
Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Acquired intangible assets of Pivotshare represent the fair value of its installed customer base, the non-compete obligation
of the former chief executive officer and goodwill.
The installed customer base and the non-compete are stated at the lower of unamortized cost or fair value. Amortization is
based upon management’s best estimate of useful lives, which is five years for the installed customer base and three years
for the non-compete, which is the period it is in effect.
A Plus
The Company recorded goodwill from the acquisition of A Plus which resulted from the portion of the purchase price in
excess of the net assets purchased as of the initial acquisition date.
Crackle
The Company recorded goodwill and intangible assets in connection with the formation of Crackle Plus. The customer user
base, content rights, brand value and partner agreements are presented net of accumulated amortization and have useful
lives between one and seven years.
We review goodwill and other intangible assets with indefinite lives not subject to amortization as of December 31st
each year and whenever events or significant changes in circumstances indicate that the carrying value may not be
recoverable. In performing our annual impairment review, we would first assess qualitative factors to determine whether it
is “more likely than not” that the goodwill or indefinite-lived intangible assets are impaired. Qualitative factors to consider
may include macroeconomic conditions, industry and market considerations, cost factors that may have a negative effect on
earnings, financial performance, and other relevant entity-specific events such as changes in management, key personnel,
strategy or clients, as well as pending litigation. If, after assessing the totality of events or circumstances such as those
described above, we determine that it is "more likely than not" that the goodwill or indefinite-lived intangible asset is
impaired, then we would be required to determine the fair value and perform the quantitative impairment test by comparing
the fair value with the carrying value. Otherwise, no additional testing is required.
For our 2019 and 2018 annual impairment tests, we performed a qualitative impairment assessment for our assets goodwill
and other intangible assets with indefinite lives. For the qualitative analysis we took into consideration all the relevant
events and circumstances, including financial performance, macroeconomic conditions and entity-specific factors such as
client wins and losses. Based on this assessment, we have concluded that for each of our assets subject to the qualitative
assessment, it is not “more likely than not” that their fair value was less than their carrying value; therefore, no additional
testing was required.
For the years ended December 31, 2019 and 2018, there was no impairment charge recorded to our goodwill and acquired
intangible assets with indefinite lives.
Income Taxes
The Company records income taxes under the asset and liability method in accordance with FASB ASC Section 740.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred taxes are also recognized for operating losses that are available to offset future taxable income. A valuation
allowance is established, when necessary, to reduce net deferred tax assets to the amount expected to be realized.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with the authoritative guidance issued by the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740: Income Taxes, which
addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return, should be recorded
in the financial statements. Pursuant to the authoritative guidance, the Company may recognize the tax benefit from an
uncertain tax position only if it meets the “more likely than not” threshold that the position will be sustained on
examination by the taxing authority, based on the technical merits of the position or expiration of statutes. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate settlement. In addition, the authoritative guidance
addresses de-recognition, classification, interest and penalties on income taxes, accounting in interim periods, and also
requires increased disclosures.
The Company includes interest and penalties related to its uncertain tax positions as part of income tax expense within its
consolidated statements of operations. At December 31, 2019 and 2018, the Company did not have any unrecognized tax
benefits or liabilities.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows, undiscounted and
without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value.
Film Library Acquisition Obligations
Film library acquisition obligations represent amounts due in connection with the Company acquiring film distribution
rights. Pursuant to the film distribution rights agreements, the Company’s right to distribute films may revert to the licensor
if the Company is unable to satisfy its financial obligations with respect to the acquisition of the related distribution rights.
Ad Representation Fees Payable
Included in cost of revenue are fees earned by the Ad Rep Partners.
Accrued Participation Costs
The Company accrues for participation costs due to production companies and producers based on the respective
agreements. Amounts due to production companies and producers are calculated based on gross revenue for each film after
exceeding certain minimum targets. In addition, the Company must recoup its original investment in each film before such
payments are due. Accrued participation costs are capitalized and amortized as part of the film library.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Related Party Transactions - Due from / to affiliated Companies
The Company follows subtopic 850-10 of the FASB ASC for the identification of related parties and disclosure of related
party transactions. Pursuant to Section 850-10-20 the related parties include subsidiaries and affiliates of the
Company. The financial statements and accompanying notes include disclosures of material related party agreements and
transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of
business.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic, 606: Revenue from contracts with customers.
Online Networks
Revenue from AVOD and online digital distribution platforms are recorded and invoiced when monthly activity is reported
by advertisers or third-party agencies. The Company earns revenues on a cost per thousand, also called on a cost-per-mille
basis (“CPM basis”) as ad impressions are run on the inventory sold to ad agencies and as ad impressions are run on the ad
inventory made available to resellers. The Company considers ad agencies and resellers as customers in these transactions
and therefore revenue is presented as gross receipts from the agencies and resellers. In addition, advertising representation
revenues are fees that the Company earns for selling ad inventory on behalf of third-party over-the-top platforms. The
Company earns revenues as placed advertisements are run on the available ad inventory of its Ad Rep Partners. Advertising
representation revenues are presented as the gross receipts from advertisers and the amount remitted to the Ad Rep Partners
are recorded as cost of sales.
Revenue earned on the distribution of third parties’ streaming content by Pivotshare is reported on a net basis as the
Company’s performance obligation is to facilitate a transaction between third party content producers and customers, for
which we earn a commission based on revenue share (see Note 5). Revenue from digital online media distribution is
included in online networks in the accompanying consolidated statements of operations.
The Company generally invoices customers in arrears on a monthly basis in accordance with the number of advertisements
placed or impressions delivered during the month. The Company generally invoices customers when the right to
consideration becomes unconditional and the Company has no remaining performance obligations, and as such, the only
contract balances the Company recognizes are accounts receivable.
Television and film distribution
The Company licenses and distributes individual and multi-film packages to its customers. Revenue from multi-film sales
is allocated on a per title basis and recognized upon initial availability for exploitation by customers. In addition, the
Company distributes DVDs and similar media to its customers. The Company recognizes revenue upon shipment of DVD
units or similar media units to its customers. Provision for future returns and other allowances are established based upon
historical experience. For theatrical releases, revenue is recorded after the theatrical release date and when box office
proceeds reports are received. Revenue from the distribution of multi-film packages and DVDs and similar media is
included in television and film distribution in the accompanying consolidated statements of operations.
Television and short-form video production
The Company recognizes revenue from the production and distribution of television programs and short-form video content
in accordance with FASB ASC 606: Revenue from contracts with customers and ASC 926: Entertainment – Films as
amended. For episodic television programs, revenue is recognized 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
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
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 the conditions of revenue recognition
have been met.
Share-Based Payments
The Company accounts for share-based payments in accordance with FASB ASC 718: Share-based compensation, which
establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under
the provisions of the authoritative guidance, share-based compensation expense is measured at the grant date, based on the
fair value of the award, and is recognized as an expense over the requisite service period, net of estimated forfeitures.
Shares issued for services are based upon current selling prices of the Company’s Class A common stock or independent
third-party valuations.
The Company estimates the fair value of share-based instruments using the Black-Scholes option-pricing model. All share-
based awards are fulfilled with new shares of Class A common stock. For the years ended December 31, 2019 and 2018,
share-based awards were issued to employees, non-employee directors and were recorded at fair value.
Advertising Costs
Generally, advertising costs are expensed as incurred except for the advertising costs associated with the Company’s
theatrically released titles. Total advertising costs related to theatrically released titles for the year ended December 31,
2019 and 2018 were $2,474,099 and $1,281,278, respectively. These costs are capitalized as part of the film library
acquisition costs and are amortized as such.
Acquisition-Related Costs
The Company accounts for acquisition related costs in accordance with FASB ASC 805 Business combinations and
expenses these costs as incurred. Acquisition-related costs primarily consists of legal, accounting, investment advisory and
other consulting fees related to a transaction.
Total acquisition-related costs expensed for the years ending December 31, 2019 and 2018 were $3,968,289 and $396,793,
respectively.
.Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed based on the weighted average number of shares of all classes of
common stock outstanding during the period. Diluted earnings per common share is computed based on the weighted
average number of common shares outstanding during the period increased, when applicable, by dilutive common stock
equivalents, comprised of Class W warrants, Class Z warrants, Class I warrants, Class II warrants, Class III-A warrants,
Class III-B warrants and stock options outstanding. When the Company has a net loss, dilutive common stock equivalents
are not included as they would be anti-dilutive.
In computing the effect of dilutive common stock equivalents, the Company uses the treasury stock method to calculate the
related incremental shares.
Client Concentration
For the year ended December 31, 2019, we did not have any customers, which accounted for 10% or more of our total net
revenue. For the year ended December 31, 2018, we had one customer, which accounted for 15% of our total net revenue.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2019, the Company had two customers that when combined accounted for 21% of gross accounts
receivable. As of December 31, 2018, the Company had two customers that when combined accounted for 46% of gross
accounts receivable.
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
effective for interim and annual reporting periods starting in fiscal year 2020, with early adoption permitted. The new
guidance will be applied on a prospective basis. The Company does not expect the adoption of the amendments to have a
material impact 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 interim and annual reporting periods starting in fiscal year 2020 for the
Company, 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 does not
expect the adoption of the amendments to have a material impact on its consolidated financial statements.
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.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to 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 was effective for public companies’ fiscal years beginning after December 15, 2018
(including interim periods within those periods) using a modified retrospective approach. Because the Company is an
emerging growth company, adoption is not required until fiscal years beginning after December 15, 2020. The Company is
currently assessing the potential impact ASU 2016-02 will have on its consolidated financial statements. The Company is
currently evaluating the impact of implementation on its disclosures and consolidated financial statements.
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.
Recently Adopted Accounting Standards
In June 2018, the FASB issued ("ASU") 2018-07, Compensation - Stock Compensation Topic 718: Improvements to
Nonemployee Share-Based Payment Accounting, which is intended to reduce cost and complexity and to improve financial
reporting for share-based payments issued to nonemployees. Under the new guidance, equity-classified nonemployee
awards are to be measured on the grant date, rather than on the earlier of (1) the performance commitment date or (2) the
date at which the nonemployee's performance is complete. ASU 2018-07 is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2018 for public entities and after December 15, 2019 for all other
entities. Early adoption is permitted but not before an entity adopts ASC 606. The Company has adopted ASC 606 on
January 1, 2019 and the impact of implementation was not material.
In May 2014, the FASB issued ASU 2014 09, Revenue from Contracts with Customers (Topic 606) which amended the
existing accounting standards for revenue recognition. ASU 2014 09 establishes principles for recognizing revenue upon
the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in
exchange for those goods or services. For public entities, this standard is effective for annual reporting periods beginning
after December 15, 2017 (including interim reporting periods within those periods). For all other entities, this standard is
effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods
beginning after December 15, 2019. The amendments may be applied retrospectively to each prior period (full
retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified
retrospective). The Company has adopted ASU 2014 09 in the first quarter of 2019 and has applied the modified
retrospective method. No adjustment was recorded to opening retained earnings given the lack of change to the Company’s
accounting for revenue with contracts with customers.
Refer to “Note 5 Revenue Recognition” for details of the impact and required disclosures.
Note 4 – Business Combination
Crackle
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
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
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
Prepaid expenses
Programming Rights
Goodwill
Brand Value
Customer User Base
Content Rights
Partner Agreements
Assets acquired
Accounts payable and accrued expenses
Programming Obligations
Liabilities assumed
Total purchase consideration
$
$
5,360,667
892,200
1,155,363
18,911,027
18,807,004
21,194,641
1,708,270
4,005,714
72,034,886
(13,061,494)
(7,300,861)
(20,362,355)
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.
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 Company recorded $18.9 million of goodwill in connection with
the Crackle Plus transaction.
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
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
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 Crackle Preferred Units
Fair Value of Warrants in CSSE
Fair Value of Put Option
Total Estimated Purchase Price
$
$
36,350,000
10,899,204
4,423,327
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.
The Company’s consolidated statement of operations include gross revenue of approximately $38.5 million, gross profit of
$10.9 million and net loss of $12 million, from Crackle’s operations from the date of acquisition on May 15, 2019 through
December 31, 2019.
On a combined proforma basis (unaudited), assuming the acquisition of Crackle occurred on January 1, 2018, proforma
combined consolidated gross revenue, gross profit, and net (loss)/income for the years ending 2019 and 2018 would have
resulted in approximately $79.3 million, $24.0 million and $(26.5) million and $92.6 million, 44.4 million and $0.2
million, respectively. Proforma results exclude the effects of non-recurring acquisition related expenses and any future
integration costs or savings. Unaudited proforma combined information is not necessarily indicative of results that would
have been achieved had the Company controlled Crackle’s operations during the periods presented or the results that the
Company will experience going forward.
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A Plus
Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Effective December 28, 2018, we completed the acquisition of 100% of the outstanding capital stock of A Sharp Inc. (d/b/a
“A Plus”). A Plus is a digital media company that develops and distributes high-quality, empathetic short-form videos and
articles to millions of people worldwide, with an emphasis on positive journalism and social change. A Plus was founded
by and is chaired by renowned actor and investor, Ashton Kutcher. Pursuant to the SPA, we acquired all of the outstanding
capital stock of A Plus, an affiliate of ours, for an aggregate purchase price of $15 million, which was paid as follows: (a)
an aggregate of 350,299 shares of Class A common stock, (b) an offset of $8.7 million to amounts due pursuant to the
intercompany cash management system and (c) reduction of approximately $3.3 million of advances owed by A Plus to the
Company.
Prior to the acquisition, A Plus was majority owned by an affiliate of our parent company, Chicken Soup for the Soul, LLC
(“CSS”). In September 2016, we entered into a distribution agreement with A Plus (the “A Plus Distribution Agreement”),
pursuant to which we received the exclusive worldwide rights to distribute all video content (in any and all formats) and all
editorial content (including articles, photos and still images) created, produced, edited or delivered by A Plus. Under the
terms of the Distribution Agreement, we received a net distribution fee equal to 40% of gross revenue generated by the
distribution of the A Plus video content.
As a result of the acquisition, A Plus is now a wholly owned subsidiary of our Company, and the A Plus Distribution
Agreement has been terminated, resulting in our retention of 100% of the revenues generated by A Plus and projected cost
savings. The acquisition of A Plus is expected to have a material positive impact on the Company’s consolidated financial
position, results of operations and cash flows.
The Purchase Price otherwise payable by the Company was reduced by approximately $3.3 million of advances owed by A
Plus to the Company. The balance of the cash portion of the purchase price was used to reduce all open amounts under the
intercompany cash management account. Any excess amount that may be due to CSS will be deferred and will be carried in
the intercompany cash management system until amortized in accordance with prior practice.
The Company accounted for its acquisition of A Plus in accordance with ASC Subtopic 805‑50, “Transactions between
entities under common control”. All net assets have been transferred at their carrying amounts at the date of transfer and
financial statements of the have been restated to reflect the transaction from the date of common ownership. The
consolidated financial statements have been restated as though the transfer of net assets or exchange of equity interests had
occurred at the beginning of the period. Thus, the consolidated results of operations for the period comprise those of the
previously separate entities combined from the beginning of the earliest period presented. Financial statements and
financial information presented for prior years have been retrospectively adjusted to furnish comparative information as
required. All comparative information in prior years have been adjusted for periods during which the entities were under
common control.
The effects of intra-entity transactions on current assets, current liabilities, revenue, and cost of sales for periods presented
and on retained earnings at the beginning of the periods presented have been eliminated where applicable.
Pivotshare
Effective August 22, 2018, the Company completed the acquisition of all the outstanding capital stock of Pivotshare for
approximately $258,000 in cash, the issuance of 134,000 shares of Series A preferred stock valued at $3.4 million and the
issuance of 74,235 shares of Class A common stock valued at $731,957. A portion of the Series A preferred stock and the
Class A common stock included in the Purchase Price were held in escrow for noncompete and indemnification obligations
of Pivotshare and its stockholders.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Pivotshare is the developer and owner of a global subscription-based video on-demand service (“SVOD”) offering channels
online across a variety of categories including music, sports, religion, arts and culture, lifestyle and family. Content on most
of those channels is owned and provided by third-party content publishers in accordance with terms of the Pivotshare
Publishers Agreements.
The acquisition was accounted for as a purchase of a business in accordance with ASC 805 Business Combinations, and the
aggregate purchase price consideration of $4.3 million has been allocated to the 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
Other current assets
Property and equipment, net
Deferred tax asset
Other assets
Intangibles
Goodwill
Assets acquired
Accounts payable and accrued expenses
other current liabilities
Liabilities assumed
Total purchase consideration, less cash acquired
Purchase Price Consideration Allocation:
Cash consideration
Equity consideration - Class A common stock
Equity consideration - Series A Preferred Stock
Purchase price consideration
Less: cash acquired
Total Estimated Purchase Price
$
$
$
$
5,239
11,917
7,771
407,000
29,138
2,820,410
1,300,319
4,581,794
(98,325)
(472,693)
(571,018)
4,010,776
257,758
731,957
3,350,000
4,339,715
(328,939)
4,010,776
The fair value of Pivotshare’s installed customer base as well as its former chief executive officers non-compete agreement,
were the most significant assets recorded from the acquisition of Pivotshare. In determining the fair value of the installed
customer base, the independent third-party appraiser utilized a traditional Customer Life Value (CLV) model. This model
took into account average revenue per customer, margins and customer churn rate. In determining the fair value of the
former chief executive officers noncompete agreement, the appraiser calculated the value of the securities held in escrow to
secure the non-compete.
Aggregate acquisition-related costs related to the Purchase, including legal fees, accounting fees and investment advisory
fees were approximately $267,305 and were recognized as expenses in the consolidated statements of operations for
the year ended December 31, 2018.
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
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Notes to Consolidated Financial Statements
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 major operating area (Line of Business):
Revenue:
Online networks
Television and film distribution
Television and short-form video production
Total revenue
Less: returns and allowances
Net revenue
Online Networks
Year Ended December 31,
2019
% of revenue
2018
% of
revenue
$ 40,027,289
15,967,507
610,356
56,605,152
(1,241,246)
$ 55,363,906
72 % $ 4,411,427
29 % 13,188,560
1 % 10,152,020
102 % 27,752,007
(892,488)
100 % $ 26,859,519
(2)%
16 %
49 %
38 %
103 %
(3)%
100 %
In this business area, we distribute and exhibit VOD content directly to consumers across all digital platforms, such as
connected TV’s, smartphones, tablets, smart TVs, gaming consoles and the web through our subsidiaries and operate
AVOD networks including Crackle, Popcornflix® and others. We generate advertising revenues primarily by delivering
video advertisements to our streaming viewers. We also distribute our own and third-party owned content to end viewers on
our SVOD network Pivotshare.
Revenue from online digital distribution and VOD platforms in our Online Networks business area are recorded over time
as advertisements are delivered and when monthly activity is reported by advertisers.
Television and Film Distribution
In this business area, we distribute 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.
The Company licenses and distributes individual and multi-film packages to its customers. Revenue from multi-film sales
is allocated on a per title basis and recognized upon initial availability for exploitation by customers. In addition, the
Company distributes DVDs and similar media to its customers. The Company recognizes revenue upon shipment of DVD
units or similar media units to its customers. Provision for future returns and other allowances are established based upon
historical experience. Revenue from the distribution of multi-film packages and DVDs and similar media is included in
television and film distribution in the accompanying consolidated statements of operations.
Television and Short-Form Video Production
In this business area, 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
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Notes to Consolidated Financial Statements
enhances our ability to distribute short form versions of our video productions and video library and provides us with
content developed and distributed by A Plus that is complementary to the Brand.
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, we evaluate 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, we report revenue for advertisements placed on CSSE properties, films
distributed and show productions 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). We are 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. We also generate 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 year ended December 31, 2019 and
2018, respectively.
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 and Contract Liabilities (Deferred Revenues)
The following table provides information about receivables, contract assets, and contract liabilities from contracts with
customers:
Contract Assets
Contract Liabilities
December 31,
December 31,
2019
2018
$ 34,661,119 $ 12,841,099
6,469
— $
$
Contract assets are primarily comprised of contract obligations that are generally satisfied annually under the terms of our
contracts and are transferred to accounts receivable when the right to payment becomes unconditional. Contract liabilities
relate to advance consideration received from customers under the terms of our contracts primarily related to cash
payments received in advance of satisfaction of the contractual performance obligation. We receive payments from
customers based upon contractual billing schedules. Contract receivables are recognized in the period the Company
provides services when the Company’s right to consideration is unconditional. Payment terms vary by the type and location
of our customer and the products or services offered. Payment terms for amounts invoiced are typically net 30 or 60 days.
The term between invoicing and when payment is due is not significant.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
A contract asset results when goods or services have been transferred to the customer, but payment is contingent upon a
future event, other than the passage of time (i.e. type of unbilled receivable). Given the nature of our business from time to
time we engage with customers for terms that include minimum guarantees which are contractual obligations for payment
over a period of time that may extend past one year at a variable rate of payment – based on sales or collections. These
minimum guarantees are generally collectible via royalty payments at an agreed rate which are collected on a monthly
basis. Contractual arrangements containing minimum guarantees are evaluated on a contract by contract basis for the need
for present value treatment. As of the financial statement no material arrangements requiring financing treatment have been
identified.
We record deferred revenues (also referred to as contract liabilities under Topic 606) when cash payments are received or
due in advance of our satisfying our performance obligations. Our deferred revenue balance primarily relates to advance
payments received related to our content distribution rights agreements and our production sponsorship arrangements. The
Company’s deferred revenue (i.e. contract liabilities) as of December 31, 2019 and 2018, was $0 and $6,469, respectively.
These contract liabilities are recognized as revenue as the related performance obligations are satisfied. No significant
changes in the timeframe of the satisfaction of contract liabilities have occurred during the year ended December 31, 2019.
Arrangements with multiple performance obligations
In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the
performance obligations are distinct within the context of the contract at contract inception. When multiple performance
obligations are identified, we identify how control transfers to the customer for each distinct contract obligation and
determine the period when the obligations are satisfied. If obligations are satisfied in the same period, no allocation of
revenue is deemed to be necessary. In the event performance obligations within a bundled contract do not run concurrently,
we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine
standalone selling prices based on the prices charged to customers or by using expected cost-plus margins. Performance
obligations that are not distinct at contract inception are combined.
Practical expedients
The Company has elected to use the practical expedient under the relevant accounting guidance to omit disclosure of
remaining (or partially unsatisfied) performance obligations as the related contracts have an original expected duration of
one year or less.
The Company has elected to use the practical expedient under the relevant accounting guidance to expense sales
commissions as incurred because the amortization period is generally one year or less. These commission costs are
recorded within Selling, general and administrative expenses.
Note 6 – Share-Based Compensation
Effective January 1, 2017, the Company adopted the 2017 Long Term Incentive Plan (the “Plan”) to attract and retain
certain employees. The Plan provides for the issuance of up to one million common stock equivalents subject to the terms
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Notes to Consolidated Financial Statements
and conditions of the Plan. The Plan generally provides for quarterly and bi-annual vesting over terms ranging from two to
three years. The Company accounts for the Plan as an equity plan.
The Company recognized these stock options at fair value determined by applying the Black Scholes options pricing model
to the grant date market value of the underlying common shares of the Company.
The compensation expense associated with these stock options is amortized on a straight-line basis over their respective
vesting periods. For the year ended December 31, 2019 and 2018, the Company recognized $907,572 and $857,073,
respectively, of non-cash share-based compensation expense in selling, general and administrative expense in the
condensed consolidated statement of operations.
Stock options activity as of December 31, 2019 is as follows:
Weighted
Number of
Stock Options
Average
Exercise
Price
Weighted
Average
Remaining
Contract
Term (Yrs.)
Aggregate
Intrinsic
Value
Total outstanding at December 31, 2018
Granted
Forfeited
Exercised
Expired
662,500 $
490,000
(103,334)
(16,666)
—
7.52
8.30
9.66
9.61
—
3.34 $ 332,100
—
4.15
—
3.47
—
2.99
—
—
Outstanding at December 31, 2019
1,032,500 $
7.73
3.33 $ 576,000
Vested and exercisable at December 31, 2019
687,917 $
7.37
2.59 $ 561,375
As of December 31, 2019, the Company had unrecognized pre-tax compensation expense of $1,430,101 related to non-
vested stock options under the Plan of which $788,468, $582,347 and $59,286 will be recognized in 2020, 2021 and 2022,
respectively.
We used the following weighted average assumptions to estimate the fair value of stock options granted for the periods
presented as follows:
Weighted Average Assumptions:
Expected dividend yield
Expected equity volatility
Expected term (years)
Risk-free interest rate
Exercise price per stock option
Market price per share
Weighted average fair value per stock option
Year Ended December 31,
2019
2018
0.0 %
56.1 %
5
2.22 %
$
7.73
$
7.27
$
3.51
0.0 %
57.1 %
5
2.10 %
7.52
6.80
3.26
$
$
$
The risk-free rates are based on the implied yield available on US Treasury constant maturities with remaining terms
equivalent to the respective expected terms of the options. The Company estimates expected terms for stock options
awarded to employees using the simplified method in accordance with FASB ASC 718, Stock Compensation because the
Company does not have sufficient relevant information to develop reasonable expectations about future exercise patterns.
The Company estimates the expected term for stock options using the contractual term. Expected volatility is calculated
based on the Company’s peer group because the Company does not have sufficient historical data and will continue to use
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
peer group volatility information until historical volatility of the Company is available to measure expected volatility for
future grants.
The Company also awards common stock grants to directors, employees and non-employee executive producers that
provide services to the Company. The value is based on the market price of the stock on the date granted and amortized
over the vesting period. For the year end ended December 31, 2019 and 2018, the Company recognized in selling, general
and administrative expense, non-cash share-based compensation expense relating to stock grants of $154,354 and $96,615,
respectively.
Note 7 – Earnings (Loss) Per Share
A reconciliation of shares used in calculating basic and diluted per share data is as follows:
Net loss available to common stockholders
Basic weighted-average shares outstanding
Effect of dilutive securities:
Assumed issuance of shares from exercise of stock options*
Assumed issuance of shares from exercise of warrants*
Year Ended December 31,
2018
2019
$ (34,976,816) $ (1,957,882)
11,944,528
11,987,292
—
—
—
—
Diluted weighted-average shares outstanding*
11,987,292
11,944,528
Loss per share:
Basic and diluted
$
(2.92) $
(0.16)
* For the year ended December 31, 2019 and 2018 common stock equivalents totaling 261,328 and 239,702, respectively,
were excluded from the calculation of diluted loss per share because their effect is anti-dilutive.
Note 8 – Programming Costs
Programming costs, net of amortization, consists of the following:
Released, net of accumulated amortization of $9,682,935 and $9,473,308, respectively
In production
In development
December 31, December 31,
2019
2018
$ 11,571,785 $ 11,418,244
17,099
1,355,146
$ 14,459,271 $ 12,790,489
991,277
1,896,209
Programming costs consists primarily of episodic television programs which are available for distribution through a variety
of platforms, including Crackle. Amounts capitalized include development costs, production costs and employee salaries.
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Notes to Consolidated Financial Statements
Costs to create episodic programming are amortized in the proportion that revenues bear to management’s estimates of the
ultimate revenues expected to be recognized from various forms of exploitation.
During the years ended December 31, 2019 and 2018 the Company recognized amortization related to episodic television
programs of $209,627 and $2,752,446, respectively.
During the years ended December 31, 2019 and 2018, we did not record any impairments related to our programming
costs.
Note 9 – Film Library
Film library costs, net of amortization, consists of the following:
Acquisition costs
Accumulated amortization
Net film library costs
December 31,
December 31,
2019
2018
$ 48,846,483 $ 33,176,802
(7,838,300)
$ 33,250,149 $ 25,338,502
(15,596,334)
Film library consists primarily of the cost of acquiring film distribution rights and related acquisition and accrued
participation costs. Costs related to film distribution rights are amortized in the proportion that revenues bear to
management’s estimates of the ultimate revenue expected to be recognized from various forms of exploitation.
During the years ended December 31, 2019 and 2018 the Company recognized film library amortization of $10,182,166
and $6,459,431, respectively.
During the years ended December 31, 2019 and 2018, we did not record any impairments related to our film library.
Note 10 – Intangible Assets and Goodwill
Indefinite lived Intangible assets, consists of the following:
Intangible asset - video content license
Popcornflix film rights and other assets
Amortizable intangible assets, consists of the following:
Acquired customer base, net
Non-compete agreement, net
Website development, net
Crackle Plus Customer User Base, net
F-27
December 31, December 31,
2019
2018
$ 5,000,000 $ 5,000,000
7,163,943
$ 12,163,943 $ 12,163,943
7,163,943
December 31,
December 31,
2019
2018
$ 1,660,425 $ 2,118,473
463,898
389,266
—
287,175
259,510
11,259,653
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Crackle Plus Content Rights, net
Crackle Brand Value, net
Crackle Plus Partner Agreements, net
1,352,381
17,127,807
3,505,000
—
—
—
$ 35,451,951 $ 2,971,637
Amortization expense was $13,235,315 and $326,986 for the years ended December 31, 2019 and 2018, respectively.
Goodwill consists of the following:
Goodwill: Pivotshare
Goodwill: A Plus
Goodwill: Crackle Plus
December 31,
December 31,
2019
2018
$ 1,300,319 $ 1,300,319
1,236,760
—
$ 21,448,106 $ 2,537,079
1,236,760
18,911,027
There was no impairment related to goodwill and intangible assets for the years ended December 31, 2019 and 2018.
Note 11 – Long-term Debt
Commercial Loan
On August 22, 2019, the Company, entered into an amended and restated loan with Patriot Bank, N.A. Under the Amended
and Restated Loan Agreement, the Company’s outstanding $5,000,000 term loan and $3,500,000 line of credit were
consolidated and combined into a term loan in the principal amount of $16,000,000 (the Commercial Loan”). As a result,
the Company recognized a loss on extinguishment of $350,691 for the year ended December 31, 2019.
The Commercial Loan is evidenced by a consolidated, amended and restated term promissory note. Subject to the terms of
the Note, the Commercial Loan bears interest, payable monthly in arrears, at a fixed rate of 5.75% per annum. The
outstanding principal amount of the Commercial Loan is repayable in consecutive monthly installments in equal amounts
of $266,667, commencing on October 1, 2019 and continuing on the same date of each subsequent month thereafter during
the term of the Commercial Loan. The Commercial Loan matures on September 1, 2024.
Pursuant to the Amended and Restated Loan Agreement, at closing the Company paid to Patriot Bank, N.A. an aggregate
of approximately $179,000, representing a commitment fee of $85,000, a payment of $25,556 of interest due on the
Commercial Loan for the 9 days of the month of August 2019 and $68,090 in fees paid to Patriot Bank’s counsel.
Revolving Credit Facility
On October 11, 2019, the Company consummated the creation of the majority owned subsidiary Landmark Studio Group.
Through and in connection with the created subsidiary, Landmark Studio Group, the Company entered into a Revolving
Credit Facility (“Revolving Credit Facility”) with Cole Investments VII, LLC. The Revolving Credit Facility consists of a
revolving line of credit in the amount of $5,000,000 and bears interest of 8% per annum. The outstanding principal is
repayable in full on October 10, 2022, the maturity date. At the option of the lender, the loan is repayable in cash or
additional equity in the subsidiary. The loan is not collateralized by any assets of the Company.
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Notes to Consolidated Financial Statements
Long-term debt for the periods presented was as follows:
Commercial Loan
Revolving Credit Facility
Revolving Line of Credit
Total Debt
Less: debt issuance costs
Less: current portion
Total long-term debt
December 31,
December 31,
2019
2018
$ 15,200,000 $ 4,416,667
—
3,500,000
7,916,667
334,554
1,000,000
$ 16,810,475 $ 6,582,113
5,000,000
—
20,200,000
189,525
3,200,000
The Amended and Restated Loan Agreement includes customary financial covenants, restrictions and interest rate
governors including delivery of financial statements, maintaining an account at Patriot Bank, N.A. with an average balance
of $2,500,000 in any trailing 90-day period or the interest rate will increase by 0.50% and maintain a minimum debt service
coverage ratio of 1.25 to 1.0. The Company did not maintain the average balance of $2,500,000 with Patriot Bank N.A.
during the 90-day period ending December 31, 2019. The Company has a 30-day cure period to comply with the covenant
or the interest rate will increase 0.50%. There is no event of default related to the aforementioned covenant. The Company
was in compliance with all other covenants as of December 31, 2019.
As of December 31, 2019, the expected aggregate maturities of long-term debt for each of the next five years are as
follows:
Year Ended December 31,
2020
2021
2022
2023
2024
Amount
3,200,000
3,200,000
8,200,000
3,200,000
2,400,000
20,200,000
$
Note 12 – Stockholders’ Equity
Class A and B Common Stock
The Company is authorized to issue 70,000,000 shares of Class A common stock, par value $0.0001 (“Class A Stock”),
20,000,000 shares of Class B common stock, par value $.0001 (“Class B Stock”). and 10,000,000 shares of preferred stock,
par value $.0001, of which 4,300,000 shares are designated Series A preferred stock.
As of December 31, 2019, and 2018, the Company had 4,185,685 and 4,153,505 shares of Class A Stock outstanding,
respectively and 7,813,938 and 7,817,238 shares of Class B Stock outstanding, respectively. Each holder of Class A Stock
is entitled to one vote per share while holders of Class B Stock are entitled to ten votes per share.
The Company declared a special one-time dividend of $0.45 per share on shares of Class A and Class B common stock to
holders of record of such stock as of August 6, 2018. The special one-time dividend totaling approximately $5.2 million
was paid on August 10, 2018. As a result of the special one-time dividend, a payment of approximately $3.4 million was
made to CSS as a holder of Class B common stock. No dividends on our common stock were declared during the year
ended December 31, 2019.
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Notes to Consolidated Financial Statements
On March 27, 2018, the board of directors of the Company approved a stock repurchase program (the “Repurchase
Program”) that enables the Company to repurchase up to $5.0 million of its Class A common stock prior to April 30, 2020.
During the year ended December 31, 2019 and 2018 the Company has repurchased 0 and 74,235 shares of its Class A
common stock pursuant to the Repurchase Program at a cost of approximately $0 and $633,000, respectively.
Series A Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, of which 4,300,000 is designated 9.75% Series A
Cumulative Redeemable Perpetual Preferred Stock, par value $.0001 (“Series A Preferred Stock”). At December 31, 2019
and 2018, the Company had 1,599,002 and 918,497 shares of Series A Preferred Stock outstanding, respectively.
Holders of the Series A Preferred Stock will receive cumulative cash dividends at a rate of 9.75% per annum, as and when
declared by the board of directors. Holders of Series A Preferred Stock generally have no voting rights except for the right
to add two members to the board of directors if dividends payable on the outstanding Series A Preferred Stock are in
arrears for eighteen or more consecutive or non-consecutive monthly dividend periods. The Series A Preferred Stock is not
convertible into common stock of the Company.
If the Company liquidates, dissolves or winds up, holders of the Series A Preferred stock will have the right to receive
$25.00 per share, plus any accumulated and unpaid dividends before any payment is made to the holders of the Company’s
Class A and Class B common stock.
The Series A Preferred Stock is not redeemable by the Company prior to June 27, 2023 except upon the occurrence of a
change in control which the Company, at its option, may redeem the Series A Preferred Stock, in whole or in part, within
120 days after the change in control, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid
dividends to, but not including, the redemption date.
After June 27, 2023, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time
or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends
to, but not including, the redemption date.
The Company has made all dividend payments and there are no unpaid cumulative dividends.
Subsidiary convertible preferred stock
The subsidiary convertible preferred stock represents the equity attributable to the noncontrolling interest holder as a part of
the Crackle Plus business combination. Given the terms of the transaction, the noncontrolling interest holder has the right
to convert their Preferred Units in Crackle Plus into Common Units representing common ownership of 49% in Crackle
Plus or into Series A Preferred Stock of the Company. Based on the terms of the transaction agreement, the noncontrolling
interest in Crackle Plus is convertible into equity.
Noncontrolling interest
Noncontrolling interests represents a 1% equity interest in the consolidated subsidiary Crackle Plus. The noncontrolling
interests are presented as a component of equity and the proportionate share of net income (loss) attributed to the
noncontrolling interests is recorded in results of operations. Changes in noncontrolling interests that do not result in a loss
of control are accounted for in equity. Gains and losses from the changes in noncontrolling interests that result in a loss of
control are recorded in results of operations.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Note 13 – Income Taxes
The Company’s current and deferred income tax provision are as follows:
Current provision (benefit):
Federal
States
Total current provision
Deferred provision:
Federal
States
Total deferred provision
Total provision for income taxes
Year Ended December 31,
2019
2018
$
— $
133,000
133,000
4,000
90,000
94,000
333,000
119,000
452,000
585,000 $
575,000
205,000
780,000
874,000
$
The provision for income taxes is different from amounts computed by applying the U.S. statutory rates to consolidated
earnings (loss) before taxes. The significant reason for these differences is as follows:
Expected tax provision -- Income taxes computed at Federal statutory rate
Increase (decrease) in tax expense resulting from:
Year Ended December 31,
2019
$ (6,654,000) $
2018
6,000
Gain on asset contribution
Crackle amortization
State and local taxes
Programming costs
Acquisition-related costs
Share-based compensation - incentive plan
Film library
Allowance for doubtful accounts
Other
Increase in valuation allowance
Actual tax provision
$
F-31
782,000
2,769,000
276,000
(41,000)
887,000
286,000
341,000
348,000
28,000
1,563,000
—
—
276,000
(1,384,000)
116,000
237,000
1,620,000
—
3,000
—
874,000
585,000 $
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate.
The components of the deferred tax assets and liabilities are as follows:
Deferred Tax Assets:
Net operating loss carry-forwards
Acquisition-related costs
Film library and other intangibles
Deferred state taxes
Less: valuation allowance
Total Deferred Tax Assets
Deferred Tax Liabilities:
Programming costs
Other assets
Total Deferred Tax Liabilities
Net deferred tax asset
$
$
$
$
December 31,
2019
December 31,
2018
723,000
3,769,000
34,000
(11,243,000)
9,680,000 $ 3,022,000
663,000
427,000
157,000
(719,000)
2,963,000 $ 3,550,000
2,820,000
143,000
2,779,000
319,000
2,963,000 $ 3,098,000
452,000
— $
The Company and its subsidiaries have combined net operating losses of approximately $35,951,000, $10,845,000 of
which were incurred before 2018 and expire between 2031 and 2037 with the balance of $25,106,000 having no expiration
under changes made by the Tax Cuts and Jobs Act but may only be utilized generally to offset 80 percent of taxable
income. The ultimate realization of the tax benefit from net operating losses is dependent upon future taxable income, if
any, of the Company.
Internal Revenue Code Section 382 imposes limitations on the use of net operating loss carryovers when the stock
ownership of one or more 5% stockholders (stockholders owning 5% or more of the Company’s outstanding capital stock)
has increased by more than 50 percentage points. Additionally, the separate-return-limitation-year (SRLY) rules that apply
to consolidated returns may limit the utilization of losses in a given year when consolidated tax returns are filed.
Management has determined that because of a recent history of recurring losses, the ultimate realization of the net
operating loss carryovers is not assured and has recorded a full valuation allowance. Public trading of the Company’s stock
poses a risk of an ownership change beyond the control of the Company that could trigger a limitation of the use of the loss
carryover.
The deferred tax asset valuation allowance increased by $10,524,000 and $609,000 for the years ended December 31, 2019
and 2018, respectively.
Note 14 – Related Party Transactions
Affiliate Resources and Obligations
The Company has agreements with CSS and affiliated companies that provide the Company with access to important assets
and resources including key personnel. The assets and resources provided are included as a part of a management services
and a license agreement. A summary of the relevant ongoing agreements is as follows:
Management Services Agreement
The Company is a party to a Management Services Agreement with CSS (the “Management Agreement”). Under the
terms of the Management Agreement, the Company is provided with the operational expertise of the CSS companies’
personnel, including its chief executive officer, chief financial officer, chief accounting officer, chief strategy officer,
and senior brand advisor, and with other services, including accounting, legal, marketing, management, data access
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
and back office systems. The Management Agreement also requires CSS to provide headquarter office space and
equipment usage.
Under the terms of the Management Agreement, the Company pays a quarterly fee to CSS equal to 5% of the net
revenue as reported under GAAP for each fiscal quarter. For the years ended December 31, 2019 and 2018, the
Company recorded management fee expense of $2,768,195 and $532,820, respectively, payable to CSS.
The term of the Management Agreement is five years, with automatic one-year renewals thereafter unless either party
elects to terminate by delivering written notice at least 90 days prior to the end of the then current term. The
Management Agreement is terminable earlier by either party by reason of certain prescribed and uncured defaults by
the other party. The Management Agreement will automatically terminate in the event of the Company’s bankruptcy or
a bankruptcy of CSS or if the Company no longer has licensed rights from CSS under the License Agreement
described below.
License Agreement and Marketing Support Fee
The Company is a party to a trademark and intellectual property license agreement with CSS (the “License
Agreement”). Under the terms of the License Agreement, the Company has been granted a perpetual, exclusive license
to utilize the Brand and related content, such as stories published in the Chicken Soup for the Soul books, for visual
exploitation worldwide. Under the License Agreement, the Company pays a license fee to CSS equal to 4% of net
revenue for each fiscal quarter.
In addition, CSS provides marketing support for the Company’s productions through its email distribution, blogs and
other marketing and public relations resources. The Company pays a quarterly fee to CSS for those services equal to
1% of net revenue as reported under GAAP for each fiscal quarter for such support.
For the years ended December 31, 2019 and 2018, the Company recorded a combined license and marketing support
fee expense of $2,768,195 and $532,820, respectively, payable to CSS.
Due from Affiliated Companies
The Company is part of CSS’s central cash management system whereby payroll and benefits are administered by CSS
and the related expenses are charged to its subsidiaries and funds are transferred between affiliates to fulfill joint
liquidity needs and business initiatives. Settlements fluctuate period over period due to timing of liquidity needs. As
of December 31, 2019, the Company is owed $7,642,432 and $1,213,436, respectively, from affiliated companies
primarily CSS.
Promotions License Agreement
The Company entered into a Promotions License Agreement with One Last Thing (“OLT”) in 2018 under which the
Company paid $100,000 for the right to integrate certain products into a feature film produced by OLT, such amount
being recoupable from the gross revenue of such film. OLT is controlled by the son of the Company’s chairman and
chief executive officer. The payment of $100,000 is included in programming costs in the accompanying consolidated
balance sheet as of December 31, 2019.
The Company also has agreements to provide management services to consolidated subsidiaries which have non-
controlling interest holders. As these subsidiaries are controlled by the Company and consolidated for financial reporting
purposes any revenues generated and fees incurred are eliminated in consolidation. A summary of the relevant ongoing
agreements is as follows:
Crackle Plus Management Services Agreement
We provide management services to Crackle Plus, including property management, back-office support, accounting,
tax, legal and financial services (including strategic financial planning) and technology resources and support for a
quarterly fee equal to five percent (5%) of Crackle Plus’s gross revenues, subject to adjustment after the first year.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Landmark Studios Group Management Services Agreement
We provide management services to Landmark Studio Group, including property management, back-office support,
accounting, tax, legal and financial services (including strategic financial planning) and technology resources and
support for a quarterly fee equal to five percent (5%) of Landmark Studio Group’s gross revenues.
Note 15 – Commitments and Contingencies
Operating Leases
We are obligated under non-cancellable lease agreements for certain facilities and services, which frequently include
renewal options and escalation clauses. For leases that contain predetermined fixed escalations, we recognize the related
rent expense on a straight-line basis and record the difference between the recognized rent expense and amounts payable
under the lease as lease obligations. Lease obligations due within one year are included in accounts payable and accrued
expenses on our Consolidated Balance Sheets. These leases expire at various points through 2031.
Rent expense related to these leases was $452,000 and $425,688 for the years ended December 31, 2019 and 2018,
respectively. The Company does not record rent expense for its Connecticut office as it is included under the Management
Agreement with CSS
The Company is contingently liable for a standby letter of credit in connection with its office lease agreement in the
amount of $129,986 as of December 31, 2019.
Future minimum payments under non-cancelable operating lease agreements as of December 31, 2019 were as follows:
Year Ended December 31,
2020
2021
2022
2023
2024
2025 - 2031
Total minimum lease payments
Legal and Other Matters
Amount
5,964,411
7,136,682
4,011,272
1,269,773
1,295,168
8,862,909
$ 28,540,215
We may be involved in various legal proceedings and litigation arising in the ordinary course of business. While any legal
proceeding or litigation has an element of uncertainty, management believes the ultimate disposition of these matters will
not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
Note 16 – Segment and Geographic Information
The Company’s reportable segments have been determined based on the distinct nature of its operations, the Company’s
internal management structure, and the financial information that is evaluated regularly by the Company’s chief operating
decision maker. The Company operates in one reportable segment, the production and distribution of video content, and
currently operates in the United States and internationally.
Net revenue generated in the United States accounted for approximately 99% and 99% of total net revenue for the years
ended December 31, 2019 and 2018, respectively. Remaining net revenue was generated in the rest of the world. 100% of
total consolidated long-lived assets are based in the United States.
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Chicken Soup for the Soul Entertainment, Inc.
Notes to Consolidated Financial Statements
Note 17 – Client Concentration
The list of our customers changes periodically. Our largest customers accounted for the following percentages of total net
revenue:
Customer A
Year Ended December 31,
2018
2019
— %
15 %
Our largest customers accounted for the following percentages of total gross accounts receivable:
Accounts Receivable
Customer A
Customer B
Note 18 – Subsequent Events
Series A Preferred Stock Dividends
Year Ended December 31,
2018
2019
11 %
10 %
32 %
14 %
We have declared monthly cash dividends of $0.2031 per share on our Series A preferred stock to holders of record as of
January 31, 2020, February 29, 2020, and March 31, 2020. The monthly dividend for January was paid on February 15,
2020, the monthly dividend for February was paid on March 15, 2020, and the monthly dividend for March is expected to
be paid on April 15, 2020. The total dividends declared and paid through March 2020 was approximately $974,272.
COVID-19
The impact that the recent COVID-19 outbreak will have on our consolidated results of operations is uncertain. The
Company will continue to evaluate the nature and extent of the impact to our business and consolidated results of
operations.
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that such information is accumulated and communicated to a company’s management, including its
chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial
statements will not be prevented or detected on a timely basis.
In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2019, the end of the period covered by our
Annual Report on Form 10-K. Based upon such evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that our disclosure controls and procedures were effective as of such date.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our Company. Internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately
and fairly reflect our transactions; providing reasonable assurance that transactions and disposition of assets are recorded as
necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are
made in accordance with the authorization of our management and directors; and providing reasonable assurance that
unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would
be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is
not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the control and misstatements due to error or fraud may occur and not be detected on
a timely basis. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a
specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies and procedures may decline.
Under the supervision and with the participation of management, including our Chief Executive and Chief Financial
Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December
31, 2019 based on those portions of the framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework (2013 Framework) that we believed to be applicable to us as a
smaller reporting company and emerging growth company. Based on this evaluation, management concluded that the
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Company’s internal controls over financial reporting were effective at the reasonable assurance level as of December 31,
2019 and did not identify any material weaknesses.
Because we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm
was not required to attest to the effectiveness of our internal control over financial reporting for so long as we are an
emerging growth company.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) during our fourth fiscal quarter ended December 31, 2019, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item 10 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended
December 31, 2019.
We have adopted a code of ethics which applies to all our directors, officers, and employees, including our chief executive
officer, chief financial officer, and principal accounting officer. The code of ethics is designed to deter wrongdoing and
promote honest and ethical conduct, full, fair, accurate, timely, and understandable disclosure in reports that we file or
furnish to the SEC and in our other public communications, compliance with applicable government laws, rules, and
regulations, and prompt internal reporting of violations of the code. A copy of the code of ethics may be found on our
website at ir.cssentertainment.com
ITEM 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended
December 31, 2019.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended
December 31, 2019.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended
December 31, 2019.
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ITEM 14. Principle Accounting Fees and Services
The information required by this Item 14 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended
December 31, 2019
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ITEM 15. Exhibits, Financial Statement Schedules
PART IV
The information required by subsections (a)(1) and (a)(2) of this item are included in the response to Item 8 of Part II of
this annual report on Form 10-K.
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Exhibit
No.
3.1
3.2
4.1
4.2.1
Certificate of Incorporation of CSS Entertainment (1)
By-laws of CSS Entertainment (1)
Specimen CSS Entertainment Class A common stock Certificate (1)
Certificate of Designations, Rights and Preferences of 9.75% Series A Cumulative Redeemable Perpetual
Description
Preferred Stock (2)
4.2.2
Certificate of Amendment to the Certificate of Designations, Rights and Preferences of 9.75% Series A
Cumulative Redeemable Perpetual Preferred Stock (3)
4.2.3
Certificate of Amendment to the Certificate of Designations, Rights and Preferences of 9.75% Series A
Cumulative Redeemable Perpetual Preferred Stock dated November 14, 2018. (5)
4.2.4
Certificate of Amendment to the Certificate of Designations, Rights and Preferences of 9.75% Series A
Cumulative Redeemable Perpetual Preferred Stock dated July 31, 2019. (6)
4.3
4.4
4.5.1
4.5.2
4.6
10.1
Class I Warrant (7)
Class II Warrant (7)
Class III-A Warrant (7)
Class III-B Warrant (7)
Description of Securities.*
Trademark and Intellectual Property License Agreement between CSS Entertainment and CSS Entertainment
for the Soul, LLC (1)
10.2.1 Management Services Agreement between CSS Entertainment and Chicken Soup for the Soul, LLC (1)
10.2.2 Amendment to Management Services Agreement (9)
10.3
Contribution Agreement between CSS Entertainment and Chicken Soup for the Soul, LLC and Chicken Soup
for the Soul Productions, LLC (1)
10.4
10.5
10.6
Form of Indemnification Agreement (1)
2017 Equity Plan (1)
Amended and Restated Loan and Security Agreement between CSS Entertainment, Screen Media Ventures,
the subsidiaries listed as the Guarantors therein, and Patriot Bank, N.A., as Lender (4)
10.7
Consolidated Amended and Restated Term Promissory Note by each of CSS Entertainment and Screen Media
Ventures, as Maker, in favor of Patriot Bank, N.A., as Lender (4)
10.8
Amended and Restated Limited Liability Company Operating Agreement by and among Crackle Plus, LLC,
Chicken Soup for the Soul Entertainment, Inc. and Crackle, Inc. (7)
10.9
21
23.1
31.1
31.2
32.1
Limited Liability Company Operating Agreement by and among Landmark Studio Group, Chicken Soup for
the Soul Entertainment, Inc., Cole Investments VII LLC, David Ozer, Legend Capital Management, LLC, and
Kevin Duncan (8)
Subsidiaries of the Registrant*
Consent of Rosenfield & Company, PLLC *
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
*Included herewith.
(1) Incorporated by reference to the Registrant’s Form 1-A (SEC No. 024-10704).
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed June 29, 2018.
(3) Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (SEC File No. 333-227596).
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(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 22, 2019.
(5) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 18, 2018.
(6) Incorporated by reference to the Registrant’s Registration Statement on Form S-1/A (SEC File No. 333-232523).
(7) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 15, 2019.
(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 18, 2019.
(9) Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2019, filed with the SEC on August 14, 2019.
ITEM 16. Form 10-K Summary
Not applicable.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2020.
SIGNATURES
CHICKEN SOUP FOR THE SOUL
ENTERTAINMENT, INC.
(Registrant)
/s/ William J. Rouhana, Jr.
William J. Rouhana, Jr.
Chairman and Chief Executive Officer
/s/ Christopher Mitchell
Christopher Mitchell
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
By:
/s/ William J. Rouhana, Jr.
William J. Rouhana, Jr., Chairman and Chief Executive Officer
March 30, 2020
/s/ Scott W. Seaton
Scott W. Seaton, Vice Chairman and Director
/s/ Christopher Mitchell
Christopher Mitchell, Chief Financial Officer
/s/ Daniel Sanchez
Daniel Sanchez, Chief Accounting Officer
/s/ Amy L. Newmark
Amy L. Newmark, Director
/s/ Cosmo DeNicola
Cosmo DeNicola, Director
/s/ Fred M. Cohen
Fred M. Cohen, Director
/s/ Christina Weiss Lurie
Christina Weiss Lurie, Director
/s/ Diana Wilkin
Diana Wilkin, Director
/s/ Martin Pompadur
Martin Pompadur, Director
49
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
DESCRIPTION OF REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.6
The following description of the Company’s securities is based upon the Company’s amended and restated certificate of incorporation
(“Charter”), the Company’s Bylaws (“Bylaws”) and applicable provisions of law. We have summarized certain portions of the Charter
and Bylaws below. The summary is not complete and is subject to, and is qualified in its entirety by express reference to, the provisions
of our Charter and Bylaws, each of which is filed as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.6 is a part.
Authorized Capital Stock
We are authorized to issue 70,000,000 shares of Class A common stock, par value $.0001, 20,000,000 shares of Class B common stock,
par value $.0001, and 10,000,000 shares of preferred stock, par value $.0001, of which 4,300,000 has been designated as 9.75% Series A
Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”).
Common Stock
Voting Rights - Holders of shares of Class A common stock and Class B common stock have substantially identical rights, except that
holders of shares of Class A common stock are entitled to one vote per share and holders of shares of Class B common stock are entitled
to ten votes per share. Holders of shares of Class A common stock and Class B common stock vote together as a single class on all
matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law or our charter. There is
no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the voting power
voting for the election of directors can elect all of the directors.
Dividend Rights - Shares of Class A common stock and Class B common stock shall be treated equally, identically and ratably, on a per
share basis, with respect to any dividends or distributions as may be declared and paid from time to time by the board of directors out of
any assets legally available therefor.
No Preemptive or Similar Rights - Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or
sinking fund provisions.
Right to Receive Liquidation Distributions - Subject to the preferential or other rights of any holders of preferred stock then outstanding,
including the Series A Preferred Stock, upon our dissolution, liquidation or winding up, whether voluntary or involuntary, holders of
Class A common stock and Class B common stock will be entitled to receive ratably all of our assets available for distribution to our
stockholders unless disparate or different treatment of the shares of each such class with respect to distributions upon any such
liquidation, dissolution or winding up is approved in advance by the affirmative vote (or written consent if action by written consent of
stockholders is permitted at such time under our certificate of incorporation) of the holders of a majority of the outstanding shares of
Class A common stock and Class B common stock, each voting separately as a class.
Merger or Consolidation - In the case of any distribution or payment in respect of the shares of Class A common stock or Class B
common stock upon our consolidation or merger with or into any other entity, or in the case of any other transaction having an effect on
stockholders substantially similar to that resulting from a consolidation or merger, such distribution or payment shall be made ratably on
a per share basis among the holders of the Class A common stock and Class B common stock as a single class, provided, however, that
shares of one such class may receive different or disproportionate distributions or payments in connection with such merger,
consolidation or other transaction if (i) the only difference in the per share distribution to the holders of the Class A common stock and
Class B common stock is that any securities distributed to the holder of a share Class B common stock have ten times the voting power
of any securities distributed to the holder of a share of Class A common stock, or (ii) such merger, consolidation or other transaction is
approved by the affirmative vote (or written consent if action by written
consent of stockholders is permitted at such time under our Certificate of Incorporation) of the holders of a majority of the outstanding
shares of Class A common stock and Class B common stock, each voting separately as a class.
Conversion - The outstanding shares of Class B common stock are convertible at any time as follows: (a) at the option of the holder, a
share of Class B common stock may be converted at any time into one share of Class A common stock or (b) upon the election of the
holders of a majority of the then outstanding shares of Class B common stock, all outstanding shares of Class B common stock may be
converted into shares of Class A common stock. Once converted into Class A common stock, the Class B common stock will not be
reissued.
Preferred Stock
General
Our board of directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences and rights
of the shares of each series and any of its qualifications, limitations or restrictions, in each case without further vote or action by our
stockholders. Our board of directors can also increase (but not above the total number of authorized shares of the class) or decrease (but
not below the number of shares then outstanding) the number of shares of any series of preferred stock, without any further vote or action
by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of our common stock or other series of preferred stock. The issuance of
preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a change in our control of our company and might adversely
affect the market price of our common stock and the voting and other rights of the holders of our common stock.
Series A Preferred Stock
Listing - Our Series A Preferred Stock is listed on the Nasdaq Global Market under the symbol “CSSEP”.
Credit Rating - Our Series A Preferred Stock has been rated BBB(-) by Egan-Jones Rating Co., a Nationally Recognized Statistical
Rating Organization (“NRSRO”). The Series A Preferred Stock has not been rated by any other NRSRO or other agency. A securities
rating reflects only the view of a rating agency and is not a recommendation to buy, sell, or hold the Series A Preferred Stock. Any rating
may be subject to revision upward or downward or withdrawal at any time by a rating agency if such rating agency decides that
circumstances warrant that change. Each rating should be evaluated independently of any other rating. No report of any rating agency is
being incorporated herein by reference.
The credit ratings assigned by Egan-Jones are based, in varying degrees, on the following considerations:
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Likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
Nature of and provisions of the obligation; and
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors’ rights.
Credit ratings assigned by Egan-Jones are expressed in terms of default risk. The rating scale utilized by Egan-Jones is as follows:
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AAA — An obligation rated “AAA” has the highest rating assigned by Egan-Jones. The obligor’s capacity to meet its financial
commitment on the obligation is extremely strong.
AA — An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to
meet its financial commitment on the obligation is very strong.
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A — An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the
obligation is still strong.
BBB — An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC, and C — Obligations rated “BB”, “B”, “CCC”, “CC”, and “C” are regarded as having significant
speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to
adverse conditions.
D — An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not expired, unless Egan-Jones believes that such payments will be
made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus (+) or minus (-) — The ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to
show relative standing within the major rating categories.
No Maturity, Sinking Fund or Mandatory Redemption - The Series A Preferred Stock has no stated maturity and will not be subject to
any sinking fund or mandatory redemption. Shares of the Series A Preferred Stock will remain outstanding indefinitely unless we decide
to redeem or otherwise repurchase them. We are not required to set aside funds to redeem the Series A Preferred Stock.
Ranking - The Series A Preferred Stock ranks, with respect to rights to the payment of dividends and the distribution of assets upon our
liquidation, dissolution or winding up:
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senior to all classes or series of our common stock and to all other equity securities issued by us other than equity securities
referred to in the next two bullet points below;
on a parity with all equity securities issued by us with terms specifically providing that those equity securities rank on a parity
with the Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon our
liquidation, dissolution or winding up;
junior to all equity securities issued by us with terms specifically providing for ranking senior to the Series A Preferred Stock
with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up
(please see the section entitled “Voting Rights” below); and
effectively junior to all our existing and future indebtedness (including indebtedness convertible to our common stock or
preferred stock) and to any indebtedness and other liabilities of (as well as any preferred equity interests held by others in) our
existing subsidiaries.
Dividends - Holders of shares of the Series A Preferred Stock are entitled to receive, when, as and if declared by our board of directors,
out of funds of the Company legally available for the payment of dividends, cumulative cash dividends at the rate of 9.75% of the $25.00
per share liquidation preference per annum (equivalent to $2.4375 per annum per share). Dividends on the Series A Preferred Stock shall
be payable monthly on the 15th day of each month; provided that if any dividend payment date is not a business day, as defined in the
certificate of designations, then the dividend that would otherwise have been payable on that dividend payment date may be paid on the
next succeeding business day and no interest, additional dividends or other sums will accrue on the amount so payable for the period
from and after that dividend payment date to that next succeeding business day. Any dividend payable on the Series A Preferred Stock,
including dividends payable for any partial dividend period, will be computed on the basis of a 360-day year consisting of twelve 30-day
months; however, the shares of Series A Preferred Stock offered hereby will be credited as having accrued dividends since the first day
of the calendar month in which they are issued. Dividends will be payable to holders of record as they appear in our stock records for the
Series A Preferred Stock at the close of business on the applicable record date, which shall be the last day of the calendar month, whether
or not a business day, immediately preceding the month in which the applicable dividend payment date falls. As a result, holders of
shares of Series A Preferred Stock will not be entitled to receive dividends on a dividend payment date if such shares were not issued and
outstanding on the applicable dividend record date.
No dividends on shares of Series A Preferred Stock shall be authorized by our board of directors or paid or set apart for payment by us at
any time when the terms and provisions of any agreement of ours, including any agreement relating to our indebtedness, prohibit the
authorization, payment or setting apart for payment thereof or provide that the authorization, payment or setting apart for payment
thereof would constitute a breach of the agreement or a default under the agreement, or if the authorization, payment or setting apart for
payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred Stock will accrue whether or not we have earnings, whether or not
there are funds legally available for the payment of those dividends and whether or not those dividends are declared by our board of
directors. No interest, or sum in lieu of interest, will be payable in respect of any dividend payment or payments on the Series A
Preferred Stock that may be in arrears, and holders of the Series A Preferred Stock will not be entitled to any dividends in excess of full
cumulative dividends described above. Any dividend payment made on the Series A Preferred Stock shall first be credited against the
earliest accumulated but unpaid dividend due with respect to those shares.
Future distributions on our common stock and preferred stock, including the Series A Preferred Stock, will be at the discretion of our
board of directors and will depend on, among other things, our results of operations, cash flow from operations, financial condition and
capital requirements, any debt service requirements and any other factors our board of directors deems relevant. Accordingly, we cannot
guarantee that we will be able to make cash distributions on our preferred stock or what the actual distributions will be for any future
period.
Unless full cumulative dividends on all shares of Series A Preferred Stock have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for payment for all past dividend
periods, no dividends (other than in shares of common stock or in shares of any series of preferred stock that we may issue ranking junior
to the Series A Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up)
shall be declared or paid or set aside for payment upon shares of our common stock or preferred stock that we may issue ranking junior
to, or on a parity with, the Series A Preferred Stock as to the payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up. Nor shall any other distribution be declared or made upon shares of our common stock or preferred stock that
we may issue ranking junior to, or on a parity with, the Series A Preferred Stock as to the payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up. Also, any shares of our common stock or preferred stock that we may issue ranking
junior to or on a parity with the Series A Preferred Stock as to the payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up shall not be redeemed, purchased or otherwise acquired for any consideration (or any moneys paid to or made
available for a sinking fund for the redemption of any such shares) by us (except by conversion into or exchange for our other capital
stock that we may issue ranking junior to the Series A Preferred Stock as to the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up).
When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series A Preferred Stock and
the shares of any other series of preferred stock that we may issue ranking on a parity as to the payment of dividends with the Series A
Preferred Stock, all dividends declared upon the Series A Preferred Stock and any other series of preferred stock that we may issue
ranking on a parity as to the payment of dividends with the Series A Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share of Series A Preferred Stock and such other series of preferred stock that we may issue shall in all cases bear
to each other the same ratio that accrued dividends per share on the Series A Preferred Stock and such other series of preferred stock that
we may issue (which shall not include any accrual in respect of unpaid dividends for prior dividend periods if such preferred stock does
not have a cumulative dividend) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any
dividend payment or payments on the Series A Preferred Stock that may be in arrears.
Liquidation Preference - In the event of our voluntary or involuntary liquidation, dissolution or winding up, the holders of shares of
Series A Preferred Stock will be entitled to be paid out of the assets we have legally available for distribution to our shareholders, subject
to the preferential rights of the holders of any class or series of our capital stock we may issue ranking senior to the Series A Preferred
Stock with respect to the distribution of assets upon liquidation, dissolution or winding up, a liquidation preference of $25.00 per share,
plus an amount equal to any accumulated and unpaid dividends to, but not including, the date of payment, before any distribution of
assets is
made to holders of our common stock or any other class or series of our capital stock we may issue that ranks junior to the Series A
Preferred Stock as to liquidation rights.
In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, our available assets are insufficient to
pay the amount of the liquidating distributions on all outstanding shares of Series A Preferred Stock and the corresponding amounts
payable on all shares of other classes or series of our capital stock that we may issue ranking on a parity with the Series A Preferred
Stock in the distribution of assets, then the holders of the Series A Preferred Stock and all other such classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be
respectively entitled.
We will use commercially reasonable efforts to provide written notice of any such liquidation, dissolution or winding up no fewer than
10 days prior to the payment date. After payment of the full amount of the liquidating distributions to which they are entitled, the holders
of Series A Preferred Stock will have no right or claim to any of our remaining assets. The consolidation or merger of us with or into any
other corporation, trust or entity or of any other entity with or into us, or the sale, lease, transfer or conveyance of all or substantially all
of our property or business, shall not be deemed a liquidation, dissolution or winding up of us (although such events may give rise to the
special optional redemption to the extent described below).
Optional Redemption - On and after June 27, 2023, we may, at our option, upon not less than 30 nor more than 60 days’ written notice,
redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00
per share, plus any accumulated and unpaid dividends thereon to, but not including, the date fixed for redemption.
Special Optional Redemption - Upon the occurrence of a Change of Control, we may, at our option, upon not less than 30 nor more than
60 days’ written notice, redeem the Series A Preferred Stock, in whole or in part, within 120 days after the first date on which such
Change of Control occurred, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon to,
but not including, the redemption date.
A “Change of Control” is deemed to occur when the following have occurred and are continuing:
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the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the
Exchange Act (other than Mr. Rouhana, the chairman of our board of directors, our chief executive officer and our principal
stockholder, any member of his immediate family, and any “person” or “group” under Section 13(d)(3) of the Exchange Act,
that is controlled by Mr. Rouhana or any member of his immediate family, any beneficiary of the estate of Mr. Rouhana, or any
trust, partnership, corporate or other entity controlled by any of the foregoing), of beneficial ownership, directly or indirectly,
through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of
our stock entitling that person to exercise more than 50% of the total voting power of all our stock entitled to vote generally in
the election of our directors (except that such person will be deemed to have beneficial ownership of all securities that such
person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition); and
following the closing of any transaction referred to above, neither we nor the acquiring or surviving entity has a class of
common securities (or American Depositary Receipts representing such securities) listed on the NYSE, the NYSE American, or
Nasdaq, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American, or
Nasdaq.
Redemption Procedures. In the event we elect to redeem Series A Preferred Stock, the notice of redemption will be mailed to each holder
of record of Series A Preferred Stock called for redemption at such holder’s address as it appears on our stock transfer records, not less
than 30 nor more than 60 days prior to the redemption date, and will state the following:
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the redemption date;
the number of shares of Series A Preferred Stock to be redeemed;
the redemption price;
the place or places where certificates (if any) for the Series A Preferred Stock are to be surrendered for payment of the
redemption price;
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that dividends on the shares to be redeemed will cease to accumulate on the redemption date;
whether such redemption is being made pursuant to the provisions described above under “—Optional Redemption” or “—
Special Optional Redemption”; and
if applicable, that such redemption is being made in connection with a Change of Control and, in that case, a brief description of
the transaction or transactions constituting such Change of Control.
If less than all of the Series A Preferred Stock held by any holder are to be redeemed, the notice mailed to such holder shall also specify
the number of shares of Series A Preferred Stock held by such holder to be redeemed. No failure to give such notice or any defect thereto
or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except
as to the holder to whom notice was defective or not given.
Holders of Series A Preferred Stock to be redeemed shall surrender the Series A Preferred Stock at the place designated in the notice of
redemption and shall be entitled to the redemption price and any accumulated and unpaid dividends payable upon the redemption
following the surrender. If notice of redemption of any shares of Series A Preferred Stock has been given and if we have irrevocably set
aside the funds necessary for redemption in trust for the benefit of the holders of the shares of Series A Preferred Stock so called for
redemption, then from and after the redemption date (unless default shall be made by us in providing for the payment of the redemption
price plus accumulated and unpaid dividends, if any), dividends will cease to accrue on those shares of Series A Preferred Stock, those
shares of Series A Preferred Stock shall no longer be deemed outstanding and all rights of the holders of those shares will terminate,
except the right to receive the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption. If any
redemption date is not a business day, then the redemption price and accumulated and unpaid dividends, if any, payable upon redemption
may be paid on the next business day and no interest, additional dividends or other sums will accrue on the amount payable for the period
from and after that redemption date to that next business day. If less than all of the outstanding Series A Preferred Stock is to be
redeemed, the Series A Preferred Stock to be redeemed shall be selected pro rata (as nearly as may be practicable without creating
fractional shares) or by any other equitable method we determine.
In connection with any redemption of Series A Preferred Stock, we shall pay, in cash, any accumulated and unpaid dividends to, but not
including, the redemption date, unless a redemption date falls after a dividend record date and prior to the corresponding dividend
payment date, in which case each holder of Series A Preferred Stock at the close of business on such dividend record date shall be
entitled to the dividend payable on such shares on the corresponding dividend payment date notwithstanding the redemption of such
shares before such dividend payment date. Except as provided above, we will make no payment or allowance for unpaid dividends,
whether or not in arrears, on shares of the Series A Preferred Stock to be redeemed.
No shares of Series A Preferred Stock shall be redeemed unless full cumulative dividends on all shares of Series A Preferred Stock have
been or contemporaneously are declared and paid and all outstanding shares of Series A Preferred Stock are simultaneously redeemed.
We shall not otherwise purchase or acquire directly or indirectly any shares of Series A Preferred Stock (except by exchanging it for our
capital stock ranking junior to the Series A Preferred Stock as to the payment of dividends and distribution of assets upon liquidation,
dissolution or winding up); provided, however, that the foregoing shall not prevent the purchase or acquisition by us of shares of Series A
Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A
Preferred Stock.
Subject to applicable law, we may purchase shares of Series A Preferred Stock in the open market, by tender or by private agreement.
Any shares of Series A Preferred Stock that we acquire may be retired and reclassified as authorized but unissued shares of preferred
stock, without designation as to class or series, and may thereafter be reissued as any class or series of preferred stock.
Voting Rights - Holders of the Series A Preferred Stock do not have any voting rights, except as set forth below or as otherwise required
by law.
On each matter on which holders of Series A Preferred Stock are entitled to vote, each share of Series A Preferred Stock will be entitled
to one vote. In instances described below where holders of Series A Preferred Stock vote with
holders of any other class or series of our preferred stock as a single class on any matter, the Series A Preferred Stock and the shares of
each such other class or series will have one vote for each $25.00 of liquidation preference (excluding accumulated dividends)
represented by their respective shares.
Whenever dividends on any shares of Series A Preferred Stock are in arrears for eighteen or more monthly dividend periods, whether or
not consecutive, the number of directors constituting our board of directors will be automatically increased by two (if not already
increased by two by reason of the election of directors by the holders of any other class or series of our preferred stock we may issue
upon which like voting rights have been conferred and are exercisable and with which the Series A Preferred Stock is entitled to vote as a
class with respect to the election of those two directors) and the holders of Series A Preferred Stock (voting separately as a class with all
other classes or series of preferred stock we may issue upon which like voting rights have been conferred and are exercisable and which
are entitled to vote as a class with the Series A Preferred Stock in the election of those two directors) will be entitled to vote for the
election of those two additional directors (the “preferred stock directors”) at a special meeting called by us at the request of the holders of
record of at least 25% of the outstanding shares of Series A Preferred Stock or by the holders of any other class or series of preferred
stock upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the Series A
Preferred Stock in the election of those two preferred stock directors (unless the request is received less than 90 days before the date
fixed for the next annual or special meeting of shareholders, in which case, such vote will be held at the earlier of the next annual or
special meeting of shareholders), and at each subsequent annual meeting until all dividends accumulated on the Series A Preferred Stock
for all past dividend periods and the then current dividend period have been fully paid or declared and a sum sufficient for the payment
thereof set aside for payment. In that case, the right of holders of the Series A Preferred Stock to elect any directors will cease and, unless
there are other classes or series of our preferred stock upon which like voting rights have been conferred and are exercisable, any
preferred stock directors elected by holders of the Series A Preferred Stock shall immediately resign and the number of directors
constituting the board of directors shall be reduced accordingly. In no event shall the holders of Series A Preferred Stock be entitled
under these voting rights to elect a preferred stock director that would cause us to fail to satisfy a requirement relating to director
independence of any national securities exchange or quotation system on which any class or series of our capital stock is listed or quoted.
For the avoidance of doubt, in no event shall the total number of preferred stock directors elected by holders of the Series A Preferred
Stock (voting separately as a class with all other classes or series of preferred stock we may issue upon which like voting rights have
been conferred and are exercisable and which are entitled to vote as a class with the Series A Preferred Stock in the election of such
directors) under these voting rights exceed two. Any person nominated to serve as a director of our company under the foregoing terms
shall be reasonably acceptable to our company.
If a special meeting is not called by us within 30 days after request from the holders of Series A Preferred Stock as described above, then
the holders of record of at least 25% of the outstanding Series A Preferred Stock may designate a holder to call the meeting at our
expense.
If, at any time when the voting rights conferred upon the Series A Preferred Stock are exercisable, any vacancy in the office of a
preferred stock director shall occur, then such vacancy may be filled only by a written consent of the remaining preferred stock director,
or if none remains in office, by vote of the holders of record of the outstanding Series A Preferred Stock and any other classes or series of
preferred stock upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the
Series A Preferred Stock in the election of the preferred stock directors. Any preferred stock director elected or appointed may be
removed only by the affirmative vote of holders of the outstanding Series A Preferred Stock and any other classes or series of preferred
stock upon which like voting rights have been conferred and are exercisable and which classes or series of preferred stock are entitled to
vote as a class with the Series A Preferred Stock in the election of the preferred stock directors, such removal to be effected by the
affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding Series A Preferred Stock and any such
other classes or series of preferred stock, and may not be removed by the holders of the common stock.
So long as any shares of Series A Preferred Stock remain outstanding, we will not, without the affirmative vote or consent of the holders
of at least 66.67% of the votes entitled to be cast by the holders of the Series A Preferred Stock outstanding at the time, given in person
or by proxy, either in writing or at a meeting (voting together as a class with all other series of parity preferred stock that we may issue
upon which like voting rights have been conferred and are exercisable), (a) authorize or create, or increase the authorized or issued
amount of, any class or series of capital stock ranking senior to the Series A Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassify any of our authorized capital stock into such shares, or
create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (b) unless
redeeming all Series A Preferred Stock in connection with such action, amend, alter, repeal or replace our certificate of incorporation,
including by way of a merger, consolidation or otherwise in which we may or may not be the surviving entity, so as to materially and
adversely affect and deprive holders of Series A Preferred Stock of any right, preference, privilege or voting power of the Series A
Preferred Stock (each, an “Event”). An increase in the amount of the authorized preferred stock, including the Series A Preferred Stock,
or the creation or issuance of any additional Series A Preferred Stock or other series of preferred stock that we may issue, or any increase
in the amount of authorized shares of such series, in each case ranking on a parity with or junior to the Series A Preferred Stock with
respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed an Event
and will not require us to obtain 66.67% of the votes entitled to be cast by the holders of the Series A Preferred Stock and all such other
similarly affected series, outstanding at the time (voting together as a class).
The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be
required shall be affected, all outstanding shares of Series A Preferred Stock shall have been redeemed or called for redemption upon
proper notice and sufficient funds shall have been deposited in trust to affect such redemption.
Except as expressly stated in the certificate of designations or as may be required by applicable law, the Series A Preferred Stock do not
have any relative, participating, optional or other special voting rights or powers and the consent of the holders thereof shall not be
required for the taking of any corporate action.
No Conversion Rights - The Series A Preferred Stock is not convertible into our common stock or any other security.
No Preemptive Rights - No holders of the Series A Preferred Stock will, as holders of Series A Preferred Stock, have any preemptive
rights to purchase or subscribe for our common stock or any other security.
Warrants
Class W Warrants - Each outstanding Class W warrant entitles the registered holder to purchase one share of our Class A common stock
at a price of $7.50 per share, subject to adjustment as discussed below. Each warrant is exercisable at any time through June 30, 2021 at
5:00 p.m., New York City time.
Class Z Warrants - Each outstanding Class Z warrant entitles the registered holder to purchase one share of our Class A common stock at
a price of $12.00 per share, subject to adjustment as discussed below. Each warrant is exercisable at any time through June 30, 2022 at
5:00 p.m., New York City time.
Cancellation - We may call for cancellation of all or any portion of the Class W warrants or Class Z warrants for which a notice of
exercise has not yet been delivered to us for consideration equal to $.01 per Class W warrant or Class Z warrant, as the case may be, in
accordance with the provisions of such warrants, if (i) our Class A common stock is traded, listed or quoted on any U.S. market or
electronic exchange, and (ii) the closing per-share sales price of the Class A common stock for any twenty (20) trading days during a
consecutive thirty (30) trading days period exceeds $15.00, for Class W warrants, or $18.00, for Class Z warrants, in each case subject to
adjustment for forward and reverse stock splits, recapitalizations, stock dividends and the like.
The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the call notice. On and after the call
date, a record holder of a warrant will have no further rights except to receive the call price for such holder’s warrant upon surrender of
such warrant.
The criteria for calling our warrants have been established at a price which is intended to provide warrant holders a reasonable premium
to the initial exercise price and provide a sufficient differential between the then-prevailing
share price and the warrant exercise price so that if the share price declines as a result of our call, the call will not cause the share price to
drop below the exercise price of the warrants.
Exercise Rights - Holders of the Class W warrants and Class Z warrants have cashless exercise rights that allow each holder to pay the
exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the
product of the number of shares of Class A common stock underlying the warrants, multiplied by the difference between the exercise
price of the warrants and the “fair market value” by (y) the fair market value. The “fair market value” for this purpose will mean the
average reported last sale price of the shares of common stock for the ten trading days ending on the trading day prior to the date of
exercise.
The exercise price and number of shares of Class A common stock issuable on exercise of the warrants may be adjusted in certain
circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or
consolidation. However, neither the Class W warrants nor the Class Z warrants will be adjusted for issuances of shares of any equity or
equity-based securities at a price below their respective exercise prices.
The Class W warrants and Class Z warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date
at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price, by certified or official bank check or wire transfer payable to us, for the
number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of shares of common stock and
any voting rights until they exercise their warrants and receive shares of Class A common stock. After the issuance of shares of common
stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by
stockholders.
No fractional shares will be issued upon exercise of the Class W warrants or Class Z warrants. If, upon exercise, a holder would be
entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of
Class A common stock to be issued to the warrant holder.
Certain Provisions in our Certificate of Incorporation
Article Twelve of our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the
sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any derivative action or proceeding brought on
behalf of our company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of
our company to our company or its stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware
General Corporation Law or our charter documents, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be
the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another state court located within
the State of Delaware, or if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of
Delaware) in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. While this
provision is intended to include all actions, excluding any arising under the Securities Act of 1933, the Exchange Act of 1934 and any
other claim for which the federal courts have exclusive jurisdiction, there is uncertainty as to whether a court would enforce this
provision.
SUBSIDIARIES OF REGISTRANT
Exhibit 21
Name of Subsidiary
Pivotshare, Inc.
Powerslam, LLC
Screen Media Ventures, LLC
757 Film Acquisition LLC
Digital Media Enterprises LLC
Screen Media Films, LLC
A Sharp, Inc.
BD Productions, LLC
PH2017, LLC
VRP2018, LLC
RSHOOD2017, LLC
The Fixer 2018, LLC
Crackle Plus, LLC
Landmark Studio Group
Proportion of Ownership Interest
100% by the Registrant
100% by Pivotshare, Inc.
100% by the Registrant
100% by Screen Media Ventures, LLC
100% by Screen Media Ventures, LLC
100% by Screen Media Ventures, LLC
100% by the Registrant
100% by the Registrant
100% by the Registrant
100% by the Registrant
100% by the Registrant
100% by the Registrant
51% by the Registrant*
51% by the Registrant
*Chicken Soup for the Soul Entertainment, Inc. currently owns 99% of the common equity of Crackle Plus, LLC, and CPE
Holdings, Inc. owns 1% of the common equity and $37 million of preferred units which must be converted between May-
August 2020 into (i) common units that would represent an additional 48% of the common equity of Crackle Plus, LLC
upon conversion, or (ii) $40 million of Series A Preferred Shares of Chicken Soup for the Soul Entertainment, Inc.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-223780) and on Form S-
3 (Registration No. 333-227596) of Chicken Soup for the Soul Entertainment, Inc. of our report dated March 30, 2020, relating to the
consolidated financial statements of Chicken Soup for the Soul Entertainment, Inc. and subsidiaries as of December 31, 2019 and 2018
and for each of the years in the two-year period ended December 31, 2019, and appearing in the Registration Statements and to the
reference to us under the heading “Experts” in the Registration Statements.
EXHIBIT 23.1
/s/ Rosenfield and Company, PLLC
Orlando, Florida
March 27, 2020
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William J. Rouhana, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Chicken Soup for the Soul Entertainment, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; and
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30, 2020
/s/ William J. Rouhana, Jr.
William J. Rouhana, Jr.
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Chris Mitchell, certify that:
1. I have reviewed this annual report on Form 10-K of Chicken Soup for the Soul Entertainment, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; and
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30, 2020
/s/ Chris Mitchell
Chris Mitchell
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Chicken Soup for the Soul Entertainment, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned, in the
capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation
of the Company.
Date: March 30, 2020
/s/ William J. Rouhana, Jr.
William J. Rouhana, Jr.
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Chicken Soup for the Soul Entertainment, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned, in the
capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation
of the Company.
Date: March 30, 2020
/s/ Chris Mitchell
Chris Mitchell
Chief Financial Officer
(Principal Financial Officer)