Chicken Soup for the Soul Entertainment, Inc. - FORM 10-Q

Chicken Soup for the Soul Entertainment, Inc. - FORM 10-Q - August 13, 2020

Attached files

Attached files

file	filename
EX-32.2 - EX-32.2 - Chicken Soup for the Soul Entertainment, Inc.	csse-20200630ex322aad525.htm
EX-32.1 - EX-32.1 - Chicken Soup for the Soul Entertainment, Inc.	csse-20200630ex321af4be2.htm
EX-31.2 - EX-31.2 - Chicken Soup for the Soul Entertainment, Inc.	csse-20200630ex31249af7d.htm
EX-31.1 - EX-31.1 - Chicken Soup for the Soul Entertainment, Inc.	csse-20200630ex311dcb3f9.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

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

For the transition period from to

Commission File Number: 001-38125

CHICKEN SOUP FOR THE SOUL ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware	81-2560811
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

132 East Putman Avenue – Floor 2W, Cos Cob, CT	06807
(Address of Principal Executive Offices)	(Zip Code)

855-398-0443

(Registrant’s Telephone Number, including Area Code)

Not Applicable

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock 9.75% Series A Cumulative Redeemable Perpetual Preferred Stock	CSSE CSSEP	The Nasdaq Stock Market LLC The Nasdaq Stock Market LLC
9.50% Notes Due 2025	CSSEN	The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☒

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

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

The number of shares of Common Stock outstanding as of August 13, 2020 totaled 12,648,898 as follows:

transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ -2 of the Exchange Act). Yes ☐ No ☒ 12,642,428 as follows:
Title of Each Class
Class A Common Stock, $.0001 par value per share		4,834,960
Class B Common Stock, $.0001 par value per share*		7,813,938

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

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class A Common Stock 9.75% Series A Cumulative Redeemable Perpetual Preferred Stock		CSSE CSSEP		The Nasdaq Stock Market LLC The Nasdaq Stock Market LLC

Table of Contents

Chicken Soup for the Soul Entertainment, Inc.

Table of Contents

		Page
		Number

	PART 1 - FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019	4

	Condensed Consolidated Statements of Equity for the six months ended June 30, 2020 and 2019	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	44

ITEM 4.	Controls and Procedures	44

	PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings	45

ITEM 1A.	Risk Factors	45

ITEM 2.	Unregistered Sales of Equity Securities	46

ITEM 3.	Defaults Upon Senior Securities	46

ITEM 4.	Mine Safety Disclosures	46

ITEM 5.	Other Information	46

ITEM 6.	Exhibits	47

SIGNATURES		48

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Balance Sheets


	June 30,		December 31,
	2020		2019
	(unaudited)
ASSETS
Cash and cash equivalents	$	4,655,317	$	6,447,402
Accounts receivable, net		22,573,432		34,661,119
Prepaid expenses and other current assets		1,485,557		1,173,223
Goodwill		21,448,106		21,448,106
Indefinite lived intangible assets		12,163,943		12,163,943
Intangible assets, net		25,093,057		35,451,951
Film library, net		41,105,470		33,250,149
Due from affiliated companies		4,996,754		7,642,432
Programming costs and rights, net		16,418,308		15,113,574
Other assets, net		5,303,550		313,585
Total assets	$	155,243,494	$	167,665,484

LIABILITIES AND EQUITY
Current maturities of commercial loan	$	3,200,000	$	3,200,000
Commercial loan, net of unamortized deferred finance cost of $169,219 and $189,525 respectively		10,230,781		11,810,475
Notes payable under revolving credit facility		5,000,000		5,000,000
Accounts payable and accrued expenses		30,041,385		26,646,390
Ad representation fees payable		8,511,033		12,429,838
Film library acquisition obligations		8,335,600		5,020,600
Programming obligations		6,416,012		7,300,861
Accrued participation costs		12,064,073		5,066,512
Other liabilities		1,484,050		170,106
Total liabilities		85,282,934		76,644,782
Commitments and contingencies

Equity
Stockholders' Equity:
Series A cumulative redeemable perpetual preferred stock, $.0001 par value, liquidation preference of $25.00 per share, 10,000,000 shares authorized; 1,599,002 shares issued and outstanding, redemption value of $39,975,050		160		160
Class A common stock, $.0001 par value, 70,000,000 shares authorized; 4,267,725 and 4,259,920 shares issued, 4,193,490 and 4,185,685 shares outstanding, respectively		426		425
Class B common stock, $.0001 par value, 20,000,000 shares authorized; 7,813,938 shares issued and outstanding		782		782
Additional paid-in capital		88,084,137		87,610,030
Deficit		(54,133,136)		(32,695,629)
Class A common stock held in treasury, at cost (74,235 shares)		(632,729)		(632,729)
Total stockholders’ equity		33,319,640		54,283,039
Subsidiary convertible preferred stock		36,350,000		36,350,000
Noncontrolling interests		290,920		387,663
Total equity		69,960,560		91,020,702
Total liabilities and equity	$	155,243,494	$	167,665,484

See accompanying notes to unaudited condensed consolidated financial statements.

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Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Statements of Operations

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Revenue:
Online networks	$	5,360,693	$	10,009,078	$	14,386,403	$	10,744,342
Distribution and Production		8,537,956		2,202,451		13,630,745		3,992,685
Total revenue		13,898,649		12,211,529		28,017,148		14,737,027
Less: returns and allowances		(378,109)		(241,047)		(1,252,535)		(573,391)
Net revenue		13,520,540		11,970,482		26,764,613		14,163,636
Cost of revenue		12,933,545		8,321,994		22,843,935		9,954,095
Gross profit		586,995		3,648,488		3,920,678		4,209,541
Operating expenses:
Selling, general and administrative		7,052,776		4,700,424		13,892,673		7,522,481
Amortization and depreciation		5,241,415		729,991		10,446,143		935,614
Management and license fees		1,352,054		1,195,520		2,676,461		1,414,790
Total operating expenses		13,646,245		6,625,935		27,015,277		9,872,885
Operating loss		(13,059,250)		(2,977,447)		(23,094,599)		(5,663,344)
Interest expense		333,903		146,359		663,028		287,482
Acquisition-related costs		—		2,258,801		98,926		2,656,736
Other non-operating income, net		(4,331,409)		(12,024)		(4,337,847)		(25,549)
Loss before income taxes and preferred dividends		(9,061,744)		(5,370,583)		(19,518,706)		(8,582,013)
Provision for (benefit from) income taxes		18,000		(253,000)		67,000		(691,000)
Net loss before noncontrolling interests and preferred dividends		(9,079,744)		(5,117,583)		(19,585,706)		(7,891,013)
Net (loss) income attributable to noncontrolling interests		(43,889)		513		(96,743)		513
Net loss attributable to Chicken Soup for the Soul Entertainment, Inc.		(9,035,855)		(5,118,096)		(19,488,963)		(7,891,526)
Less: preferred dividends		974,272		797,981		1,948,544		1,401,288
Net loss available to common stockholders	$	(10,010,127)	$	(5,916,077)	$	(21,437,507)	$	(9,292,814)
Net loss per common share:
Basic and diluted	$	(0.83)	$	(0.49)	$	(1.79)	$	(0.78)

See accompanying notes to unaudited condensed consolidated financial statements.

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Chicken Soup for the Soul Entertainment, Inc

Condensed Consolidated Statements of Equity

(unaudited)

Preferred Stock

Common Stock

Subsidiary

Class A

Class B

Additional

convertible

Par

Paid-In

Treasury

Preferred

Noncontrolling

Shares

Value

Shares

Value

Shares

Value

Capital

Deficit

Stock

Interests

Total

Balance, December 31, 2019 (audited)

1,599,002

160

4,259,920

425

7,813,938

782

87,610,030

(32,695,629)

(632,729)

36,350,000

387,663

91,020,702

Share based compensation - stock options

213,585

213,585

Share based compensation - common stock

31,250

31,250

Shares issued to directors

7,805

(1)

—

Dividends

(974,272)

(974,272)

Net loss attributable to noncontrolling interest

(52,854)

(52,854)

Net loss

(10,453,108)

(10,453,108)

Balance, March 31, 2020

1,599,002

160

4,267,725

426

7,813,938

782

87,854,864

(44,123,009)

(632,729)

36,350,000

334,809

79,785,303

Share based compensation - stock options

198,023

Share based compensation - common stock

31,250

Dividends

(974,272)

Net loss attributable to noncontrolling interest

(43,889)

Net loss

(9,035,855)

Balance, June 30, 2020

1,599,002

160

4,267,725

426

7,813,938

782

88,084,137

(54,133,136)

(632,729)

36,350,000

290,920

69,960,560


	Preferred Stock			Common Stock															Subsidiary
				Class A				Class B				Additional		Retained					convertible
		Par				Par				Par		Paid-In		Earnings		Treasury			Preferred		Noncontrolling
	Shares	Value		Shares		Value		Shares		Value		Capital		(Deficit)		Stock			Stock		Interests	Total
Balance, December 31, 2018 (audited)	918,497	$	92		4,227,740	$	421		7,817,238	$	782	$	59,360,583	$	2,281,187	$	(632,729)	$	—	$	—	$	61,010,336
Share based compensation - stock options													190,847										190,847
Share based compensation - common stock													25,000										25,000
Issuance of preferred stock	140,000		14										3,499,986										3,500,000
Preferred stock issuance costs													(288,160)										(288,160)
Dividends															(603,307)								(603,307)
Net loss															(2,773,430)								(2,773,430)
Balance, March 31, 2019	1,058,497		106		4,227,740		421		7,817,238		782		62,788,256		(1,095,550)		(632,729)		—		—		61,061,286
Share based compensation													275,097										275,097
Issuance of preferred stock	279,505		28										6,987,597										6,987,625
Preferred stock issuance costs													(538,295)										(538,295)
Stock options exercised					16,666		2						160,159										160,161
Conversion of class B shares to class A shares					3,300		—		(3,300)		—												—
Dividends															(797,981)								(797,981)
Crackle business combination													15,322,531						36,350,000		521,945		52,194,476
Net income attributable to noncontrolling interest																					513		513
Net loss													—		(5,118,096)								(5,118,096)
Balance, June 30, 2019	1,338,002	$	134		4,247,706	$	423		7,813,938	$	782	$	84,995,345	$	(7,011,627)	$	(632,729)	$	36,350,000	$	522,458	$	114,224,786

See accompanying notes to unaudited condensed consolidated financial statements.

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Chicken Soup for the Soul Entertainment, Inc

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Six months ended June 30,
	2020		2019
Cash flows from Operating Activities:
Net loss	$	(19,585,706)	$	(7,891,013)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation		474,108		490,944
Amortization of programming costs and rights		165,393		269,971
Amortization of deferred financing costs		20,306		51,647
Amortization and depreciation of intangibles, property and equipment		10,701,700		935,614
Amortization of film library		8,800,473		2,260,861
Bad debt and video return expense		2,534,336		518,515
Realized and unrealized losses on marketable securities		100,607		—
Other non-operating income		(5,404,482)		—
Deferred income taxes		—		(801,000)
Changes in operating assets and liabilities:
Trade accounts receivable		9,553,351		(7,400,171)
Prepaid expenses and other assets		(1,092,921)		(1,247,926)
Programming costs and rights		(1,470,127)		(1,494,886)
Film library		(16,655,794)		(8,101,768)
Accounts payable, accrued expenses and other payables		280,672		14,264,609
Film library acquisition and programming obligations		2,430,151		2,837,500
Accrued participation costs		6,997,561		(424,982)
Other liabilities		1,313,944		(273,868)
Net cash used in operating activities		(836,428)		(6,005,953)
Cash flows from Investing Activities:
Expenditures for property and equipment		(387,386)		—
Sales of marketable securities		334,595		—
Decrease (increase) in due from affiliated companies		2,645,678		(3,898,487)
Net cash provided by (used in) investing activities		2,592,887		(3,898,487)
Cash flows from Financing Activities:
Repayments of commercial loan		(1,600,000)		(500,000)
Payment of preferred stock issuance costs		—		(826,455)
Proceeds from issuance of common stock under equity plans		—		160,161
Payment of deferred financing costs		—		(12,348)
Proceeds from issuance of Series A preferred stock		—		10,487,625
Dividends paid to preferred stockholders		(1,948,544)		(1,401,288)
Net cash (used in) provided by financing activities		(3,548,544)		7,907,695
Net decrease in cash and cash equivalents		(1,792,085)		(1,996,745)
Cash and cash equivalents at beginning of period		6,447,402		7,201,758
Cash and cash equivalents at end of the period	$	4,655,317	$	5,205,013

Supplemental data:
Interest paid	$	443,581	$	238,192
Non-cash investing activities:
Property and equipment in accounts payable and accrued expenses	$	4,600,000	$	—
Crackle Plus business combination	$	—	$	51,672,531
Reconciliation of cash and cash equivalents to the condensed consolidated balance sheets
Cash and cash equivalents	$	4,655,317	$	4,455,013
Restricted cash		—		750,000
Total cash, cash equivalents and restricted cash per statements of cash flows	$	4,655,317	$	5,205,013

See accompanying notes to unaudited condensed consolidated financial statements.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – Description of the Business

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

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

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

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

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

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

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

Note 3 – Recent Accounting Pronouncements

Recently Issued Accounting Standards

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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

disclosure requirements under the current film and broadcaster entertainment industry guidance. The new guidance is effective for the Company’s interim and annual reporting periods starting in the fiscal year beginning after December 15, 2020, with early adoption permitted. The new guidance will be applied on a prospective basis. Based on the Company’s preliminary assessment, the impact of implementation is not expected to be material.

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

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

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for public companies’ fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. Because the Company is an emerging growth company, adoption is not required until fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021 as recently voted and deferred by FASB. The Company is currently assessing the potential impact ASU 2016-02 will have on its consolidated financial statements. Based on the Company’s preliminary assessment, the impact of implementation is expected to have a material impact on its condensed consolidated financial statements. If adopted, the Company estimates the right-of-use lease asset and corresponding lease liability will each total approximately $15,800,000, respectively, as of June 30, 2020. The Company does not expect adoption to have any material impact on its results from operations and financial condition.

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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 4 – Business Combination

The Company consummated the creation of its Crackle Plus subsidiary on May 14, 2019. In consideration for assets contributed to Crackle Plus by CPE Holdings, Inc. (“CPEH”), a Delaware corporation and affiliate of Sony Pictures Television Inc. (“Sony”), and Crackle, Inc., a Delaware corporation and wholly owned subsidiary of CPEH (“Crackle”), Crackle Plus issued to Crackle 37,000 units of preferred equity (“Preferred Units”) and 1,000 units of common equity (“Common Units”), which are now held by CPEH. In consideration for assets contributed to Crackle Plus by the Company, Crackle Plus issued to the Company 99,000 Common Units. From May 2020 to October 2020 (“Exercise Period”), CPEH will have the right to either convert its Preferred Units into Common Units of Crackle Plus or require us to purchase all, but not less than all, of its interest in Crackle Plus (“Put Option”). We may elect to pay the put option in cash or through the issuance of our 9.75% Series A Cumulative Redeemable Perpetual Preferred Stock (“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 initial purchase price allocation was preliminary and subject to change up to one year after the date of acquisition. The final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the date of the acquisition was as follows:


	May 14, 2019
Accounts receivable, net	$	5,360,667
Prepaid expenses		892,200
Programming Rights		1,155,363
Goodwill		18,911,027
Brand Value		18,807,004
Customer User Base		21,194,641
Content Rights		1,708,270
Partner Agreements		4,005,714
Assets acquired		72,034,886
Accounts payable and accrued expenses		(13,061,494)
Programming Obligations		(7,300,861)
Liabilities assumed		(20,362,355)
Total purchase consideration	$	51,672,531

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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

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

The fair values of assets acquired, and liabilities assumed were based upon valuations performed by independent third party valuation experts.

Purchase Price Consideration Allocation:


Fair Value of Preferred Units	$	36,350,000
Fair Value of Warrants in CSSE		10,899,204
Fair Value of Put Option		4,423,327
Total Estimated Purchase Price	$	51,672,531

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

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;

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%;

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

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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table illustrates Crackle’s stand-alone financial performance included in the Company’s condensed consolidated statement of operations:


	Three Months Ended June 30,

	2020		2019
Gross revenue	$	5,852,767	$	9,421,629
Gross margin	$	(45,092)	$	3,159,812
Net (loss) income	$	(4,119,889)	$	423,566


	Six Months Ended June 30,

	2020		2019
Gross revenue	$	15,142,012	$	9,421,629
Gross margin	$	2,320,711	$	3,159,812
Net (loss) income	$	(10,137,921)	$	423,566

Note 5 – Revenue Recognition

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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following tables disaggregates our revenue by operations area:


	Three Months Ended June 30,
							% of
	2020		% of revenue		2019		revenue
Revenue:
Online networks	$	5,360,693	40	%	$	10,009,078	84	%
Distribution and Production		8,537,956	63	%		2,202,451	18	%
Total revenue		13,898,649	103	%		12,211,529	102	%
Less: returns and allowances		(378,109)	(3)	%		(241,047)	(2)	%
Net revenue	$	13,520,540	100	%	$	11,970,482	100	%


	Six Months Ended June 30,
							% of
	2020		% of revenue		2019		revenue
Revenue:
Online networks	$	14,386,403	54	%	$	10,744,342	76	%
Television and film distribution		13,630,745	51	%		3,992,685	28	%
Total revenue		28,017,148	105	%		14,737,027	104	%
Less: returns and allowances		(1,252,535)	(5)	%		(573,391)	(4)	%
Net revenue	$	26,764,613	100	%	$	14,163,636	100	%

Online Networks

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

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

Television and Film Distribution and Production

In this operations area, the Company distributes movies and television series worldwide, through Screen Media, 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.

Historically, we produced content in two main ways: we worked with sponsors and used highly regarded independent producers to develop and produce our television and short-form video content, including Brand-related content. We also derived revenue from our subsidiary, A Plus, which develops and distributes high-quality, empathetic short-form videos to millions of people worldwide. 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, our first production co-venture subsidiary. Landmark Studio Group is a fully

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

integrated entertainment company focused on ownership, development, and production of quality entertainment franchises.

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

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

No impairment losses have arisen from any CSSE contracts with customers during the three and six months ended June 30, 2020 and 2019.

Performance obligations

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

Contract balances

Contract balances include the following:


	June 30,		December 31,
	2020		2019
Accounts receivable, net	$	15,717,939	$	23,266,611
Contract assets (included in accounts receivable)		6,855,493		11,394,508
Total accounts receivable, net	$	22,573,432	$	34,661,119

Deferred revenue (included in other liabilities)	$	994,580	$	—

Contract assets are primarily comprised of contract obligations that are generally satisfied over time under the terms of our contracts with customers 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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

related to cash payments received in advance of satisfaction of the contractual performance obligation. We generally receive payments from customers based upon contractual billing schedules and arrangements.

Contract receivables are recognized in the period the Company performs the agreed upon performance obligations and the Company’s right to consideration becomes unconditional. Payment terms vary by the type and location of our customer and the products or services provided. Payment terms for amounts invoiced are typically net 30 or 60 days. The term between invoicing and when payment is due is not significant.

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 or quarterly 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 date no material arrangements requiring financing treatment have been identified.

The Company records 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. 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 three and six months ended June 30, 2020.

Arrangements with multiple performance obligations

In contracts with multiple performance obligations, the Company identifies each performance obligation and evaluates 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 1,250,000 common stock equivalents subject to the terms 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.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company recognizes stock options granted under the Plan 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 stock options is amortized on a straight-line basis over their respective vesting periods. For the three months ended June 30, 2020 and 2019, the Company recognized $198,023 and $250,097, respectively, and for the six months ended June 30, 2020 and 2019, the Company recognized $411,608 and $440,944, respectively, of non-cash share-based compensation expense relating to stock options in selling, general and administrative expenses in the condensed consolidated statements of operations.

The company did not have any stock option grants, forfeitures, exercises or expirations during the six months ended June 30, 2020.

Stock options as of June 30, 2020 are as follows:


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contract	Intrinsic
	Stock Options	Price		Term (Yrs.)	Value
Outstanding at December 31, 2019	1,032,500	$	7.73	3.33	$	576,000
Outstanding at June 30, 2020	1,032,500	$	7.73	2.79	$	137,250
Vested and exercisable at June 30, 2020	785,833	$	7.49	2.24	$	137,250

As of June 30, 2020 the Company had unrecognized pre-tax compensation expense of $1,018,493 related to non-vested stock options under the Plan of which $376,860, $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:


	Six Months Ended June 30,
Weighted Average Assumptions:	2020			2019
Expected dividend yield		0.0	%		0.0	%
Expected equity volatility		56.1	%		56.0	%
Expected term (years)		5			5
Risk-free interest rate		2.22	%		2.23	%
Exercise price per stock option	$	7.73		$	7.77
Market price per share	$	7.27		$	7.34
Weighted average fair value per stock option	$	3.51		$	3.55

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 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 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 under the Plan to directors, employees and third-party consultants 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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

vesting period. For the three months ended June 30, 2020 and 2019, the Company recognized non-cash share-based compensation expense relating to stock grants of $31,250 and $25,000, respectively. For the six months ended June 30, 2020 and 2019, the Company recognized non-cash share-based compensation expense relating to stock grants of $62,500 and $50,000, respectively

Note 7 - Earnings Per Share

Basic EPS is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. The dilutive effect of outstanding common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method.

Basic and diluted earnings per share are computed as follows:

Three Months Ended June 30,

Net loss available to common stockholders