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

Chicken Soup for the Soul Entertainment, Inc. - FORM 10-Q - May 13, 2021

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Attached files

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EX-31.2 - EX-31.2 - Chicken Soup for the Soul Entertainment, Inc.	csse-20210331ex3123e8b3a.htm
EX-32.2 - EX-32.2 - Chicken Soup for the Soul Entertainment, Inc.	csse-20210331ex3220fac04.htm
EX-32.1 - EX-32.1 - Chicken Soup for the Soul Entertainment, Inc.	csse-20210331ex3213a0d91.htm
EX-31.1 - EX-31.1 - Chicken Soup for the Soul Entertainment, Inc.	csse-20210331ex3114e6da1.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

◻	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 Putnam 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)

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
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 May 13, 2021 totaled 13,986,327 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		6,331,821
Class B Common Stock, $.0001 par value per share*		7,654,506

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

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Chicken Soup for the Soul Entertainment, Inc.

Table of Contents

		Page
		Number

	PART 1 - FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020	4

	Condensed Consolidated Statements of Equity for the three months ended March 31, 2021 and 2020	5

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	36

ITEM 4.	Controls and Procedures	36

	PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings	36

ITEM 1A.	Risk Factors	37

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

ITEM 3.	Defaults Upon Senior Securities	37

ITEM 4.	Mine Safety Disclosures	37

ITEM 5.	Other Information	37

ITEM 6.	Exhibits	38

SIGNATURES		39

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Balance Sheets


	March 31,		December 31,
	2021		2020
	(unaudited)
ASSETS
Cash and cash equivalents	$	24,569,875	$	14,732,726
Accounts receivable, net of allowance for doubtful accounts of $821,070, and $1,035,643, respectively		26,854,738		25,996,947
Prepaid expenses and other current assets		1,612,155		1,382,502
Goodwill		21,448,106		21,448,106
Indefinite lived intangible assets		12,163,943		12,163,943
Intangible assets, net		18,165,038		19,370,490
Film library, net		38,709,850		35,239,135
Due from affiliated companies		4,389,378		5,648,652
Programming costs and rights, net		13,841,702		15,781,183
Other assets, net		4,476,459		4,517,102
Total assets	$	166,231,244	$	156,280,786

LIABILITIES AND EQUITY
9.50% Notes due 2025, net of deferred issuance costs of $1,699,544 and $1,798,433, respectively	$	31,196,356	$	31,097,467
Notes payable under revolving credit facility		—		2,500,000
Film acquisition advance		6,195,174		8,659,136
Accounts payable and accrued other expenses		20,884,463		21,394,957
Film library acquisition obligations		14,854,918		8,616,562
Programming obligations		2,804,125		4,697,316
Accrued participation costs		7,529,515		12,535,651
Other liabilities		2,767,892		1,677,906
Total liabilities		86,232,443		91,178,995
Commitments and contingencies (Note 13)

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; 3,698,318 and 2,098,318 shares issued and outstanding, respectively; redemption value of $92,457,950 and $52,457,950, respectively		370		210
Class A common stock, $.0001 par value, 70,000,000 shares authorized; 6,400,766 and 5,157,053 shares issued, 6,326,531 and 5,082,818 shares outstanding, respectively		640		516
Class B common stock, $.0001 par value, 20,000,000 shares authorized; 7,654,506 shares issued and outstanding, respectively		766		766
Additional paid-in capital		166,865,655		106,425,548
Deficit		(86,235,901)		(77,247,982)
Class A common stock held in treasury, at cost (74,235 shares)		(632,729)		(632,729)
Total stockholders’ equity		79,998,801		28,546,329
Subsidiary convertible preferred stock		—		36,350,000
Noncontrolling interests		—		205,462
Total equity		79,998,801		65,101,791
Total liabilities and equity	$	166,231,244	$	156,280,786

See accompanying notes to unaudited condensed consolidated financial statements.

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Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Statements of Operations

(unaudited)


	Three Months Ended March 31,
	2021		2020
Net revenue	$	23,196,842	$	13,244,073
Cost of revenue		16,242,934		9,910,390
Gross profit		6,953,908		3,333,683
Operating expenses:
Selling, general and administrative		9,234,819		6,839,897
Amortization and depreciation		1,238,027		5,204,728
Management and license fees		2,319,684		1,324,407
Total operating expenses		12,792,530		13,369,032
Operating loss		(5,838,622)		(10,035,349)
Interest expense		1,087,944		329,125
Acquisition-related costs		—		98,926
Other non-operating income, net		(570)		(6,438)
Loss before income taxes and preferred dividends		(6,925,996)		(10,456,962)
Provision for income taxes		14,000		49,000
Net loss before noncontrolling interests and preferred dividends		(6,939,996)		(10,505,962)
Net loss attributable to noncontrolling interests		—		(52,854)
Net loss attributable to Chicken Soup for the Soul Entertainment, Inc.		(6,939,996)		(10,453,108)
Less: preferred dividends		2,253,385		974,272
Net loss available to common stockholders	$	(9,193,381)	$	(11,427,380)
Net loss per common share:
Basic and diluted	$	(0.67)	$	(0.95)
Weighted-average common shares outstanding:
Basic and diluted		13,635,759		12,004,598

See accompanying notes to unaudited condensed consolidated financial statements.

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Chicken Soup for the Soul Entertainment, Inc

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)


	Preferred Stock			Common Stock														Subsidiary
				Class A				Class B				Additional						convertible
		Par				Par				Par		Paid-In				Treasury		Preferred		Noncontrolling
	Shares	Value		Shares		Value		Shares		Value		Capital		Deficit		Stock		Stock		Interests			Total

Balance, December 31, 2020 (audited)	2,098,318	$	210		5,157,053	$	516		7,654,506	$	766	$	106,425,548	$	(77,247,982)	$	(632,729)	$	36,350,000	$	205,462	$	65,101,791
Share based compensation - stock options													200,594										200,594
Share based compensation - common stock													31,250										31,250
Issuance of common stock					1,122,727		112						23,858,435										23,858,547
Stock options exercised					77,415		8						(8)										—
Warrant exercises - Class W and Z					43,571		4						(4)										—
Issuance of preferred stock, net	1,600,000		160										36,349,840						(36,350,000)				—
Dividends on preferred stock															(2,253,385)								(2,253,385)
Elimination of noncontrolling interests															205,462						(205,462)		—
Net loss															(6,939,996)								(6,939,996)
Balance, March 31, 2021	3,698,318	$	370		6,400,766	$	640		7,654,506	$	766	$	166,865,655	$	(86,235,901)	$	(632,729)	$	—	$	—	$	79,998,801

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

Share based compensation - common stock

31,250

Shares issued to directors

7,805

(1)

—

Dividends

(974,272)

Net loss attributable to noncontrolling interest

(52,854)

Net loss

(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

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)


	Three months ended March 31,
	2021		2020
Cash flows from Operating Activities:
Net loss	$	(6,939,996)	$	(10,505,962)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation		231,844		244,835
Programming amortization		2,230,612		110,629
Amortization of deferred financing costs		98,889		10,152
Amortization and depreciation of intangibles, property and equipment		1,621,360		5,204,728
Film library amortization		6,903,916		2,441,081
Bad debt and video return expense		694,212		1,721,595
Changes in operating assets and liabilities:
Trade accounts receivable		(1,552,003)		7,921,601
Prepaid expenses and other assets		(229,653)		(48,883)
Programming costs and rights		(291,131)		(1,144,463)
Film library		(10,374,631)		(6,553,534)
Accounts payable, accrued expenses and other payables		(1,087,368)		(207,552)
Film library acquisition and programming obligations		4,345,165		1,888,500
Accrued participation costs		(5,006,136)		794,876
Other liabilities		1,089,986		59,740
Net cash (used in) provided by operating activities		(8,264,934)		1,937,343
Cash flows from Investing Activities:
Expenditures for property and equipment		(123,351)		(340,586)
Decrease in due from affiliated companies, net		1,259,274		851,452
Net cash provided by investing activities		1,135,923		510,866
Cash flows from Financing Activities:
Repayments of commercial loan		—		(800,000)
Repayments of revolving credit facility		(2,500,000)		—
Repayment of film acquisition advance		(2,463,962)		—
Proceeds from issuance of Class A common stock		23,858,547		—
Dividends paid to preferred stockholders		(1,928,425)		(974,272)
Net cash provided by (used in) financing activities		16,966,160		(1,774,272)
Net increase in cash and cash equivalents		9,837,149		673,937
Cash and cash equivalents at beginning of period		14,732,726		6,447,402
Cash and cash equivalents at end of the period	$	24,569,875	$	7,121,339
Supplemental data:
Cash paid for interest	$	1,470,015	$	217,222
Non-cash investing activities:
Property and equipment in accounts payable and accrued expenses	$	251,914	$	—
Non-cash financing activities:
Preferred stock issued for Crackle Plus acquisition	$	40,000,000	$	—

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. 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.

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, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2021. 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, 2020. 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, 2020.

Note 3 – Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In March 2019, 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

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

modifies certain aspects of the capitalization, impairment, presentation and disclosure requirements under the current film and broadcaster entertainment industry guidance. As the Company is an emerging growth company, the new guidance is effective for fiscal years beginning after December 15, 2020 (fiscal year 2021 for the Company). The new guidance was applied on a prospective basis. The Company adopted ASU 2019-02 in the first quarter of 2021 and the adoption had no material impact to the Company’s condensed 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. As the Company is an emerging growth company, the new guidance is effective for fiscal years beginning after December 15, 2020 (fiscal year 2021 for the Company). The Company adopted ASU 2018-18 in the first quarter of 2021 and the adoption had no material impact to the Company’s 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. As the Company is an emerging growth company, the new guidance is effective for fiscal years beginning after December 15, 2020 (fiscal year 2021 for the Company). The Company adopted ASU 2018-15 in the first quarter of 2021 and the adoption had no material impact to the Company’s condensed consolidated financial statements.

Recently Issued Accounting Standards

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 (fiscal year 2023 for the Company). Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not expect the adoption of the amendments to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 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, 2021 as recently 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 consolidated financial statements. If adopted, the Company estimates the right-of-use lease asset and corresponding lease liability will each total approximately $15,200,000, respectively, as of March 31, 2021. The Company does not expect adoption to have any material impact on its results from operations and financial condition.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

Note 4 – Revenue Recognition

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

The following tables disaggregate our revenue by source:


	Three Months Ended March 31,
							% of
	2021		% of revenue		2020		revenue
Revenue:
VOD and streaming	$	13,890,949	60	%	$	11,211,219	85	%
Licensing and other		9,305,893	40	%		2,032,854	15	%
Net revenue	$	23,196,842	100	%	$	13,244,073	100	%

VOD and streaming

VOD and streaming revenue included in this revenue source is generated as the Company distributes and exhibits VOD content through the Crackle Plus network 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. In addition this revenue source includes, transactional video on demand (TVOD) sales, cable tv and barter syndication generated revenues. We generate VOD and streaming revenues primarily by serving video advertisements to our streaming viewers on our VOD networks and direct to consumer sales on TVOD platforms.

Revenue from VOD and streaming are recorded over time as advertisements are delivered and when monthly activity is reported by VOD partners.

Licensing and other

Licensing and other revenue included in this revenue source is generated as the Company licenses movies and television series worldwide, through Screen Media Ventures, through license agreements across channels, including theatrical and home video. 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.

Revenue from the Licensing and production of movies, television series and programs and short-form video content is recognized when or as the Company transfers control of the contracted asset to the customer. The transfer of control is represented by the Company’s delivery of the contracted asset (or the Company otherwise makes available unconditionally) to the customer and the license period during which the customer is able to benefit from its right to access

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

or its right to use the asset has begun. 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 it is 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 vendors is recorded as a cost of revenue). The Company is the principal because we control the contract asset before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the asset, being primary obligor 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 asset in the form of content or ad inventory.

No impairment losses have arisen from any Company contracts with customers during the three months ended March 31, 2021 and 2020.

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:


	March 31,		December 31,
	2021		2020
Accounts receivable, net	$	14,605,769	$	14,588,684
Contract assets (included in accounts receivable)		12,248,969		11,408,263
Total accounts receivable, net	$	26,854,738	$	25,996,947

Deferred revenue (included in other liabilities)	$	1,352,515	$	590,624

Contract assets are primarily comprised of unbilled receivables that are generally paid over time in accordance with the terms of our contracts with customers and are transferred to accounts receivable when the timing and right to payment becomes unconditional. Contract liabilities or deferred revenues relate to advance consideration received from customers under the terms of our contractual arrangements 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 goods 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.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 contractually paid over a period of time that may extend past one year at a variable rate of payment – based on sales and collections made by the customer from third parties. 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 arrangements requiring financing treatment have been identified.

The Company records deferred revenue (also referred to as contract liabilities under Topic 606) when cash payments are received 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 when the related performance obligations are satisfied. No significant changes in the timeframe of the satisfaction of contract liabilities have occurred during the three months ended March 31, 2021.

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.

Note 5 – 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.

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 these stock options is amortized on a straight-line basis over their respective vesting periods. For the three months ended March 31, 2021 and 2020, the Company recognized $200,594 and $213,585, respectively, of non-cash share-based compensation expense in selling, general and administrative expenses in the condensed consolidated statements of operations.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Stock options activity as of March 31, 2021 is as follows:


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contract	Intrinsic
	Stock Options	Price		Term (Yrs.)	Value
Outstanding at December 31, 2020	1,131,250	$	8.13	2.66	$	13,417,900
Granted	—		—
Forfeited	(6,250)		9.51
Exercised ^(a)	(100,000)		6.50
Expired	—		—
Outstanding at March 31, 2021	1,025,000	$	8.28	2.18	$	16,175,150

Vested and exercisable at March 31, 2021	819,170	$	7.89	1.85	$	13,242,811

^{(a) ) During the three months ended March 31, 2021, 100,000 stock options were exercised and converted to 77,415 shares of Class A Common Stock via the cashless exercise option.}

As of March 31, 2021 the Company had unrecognized pre-tax compensation expense of $973,932 related to non-vested stock options under the Plan of which $592,606, $285,659 and $95,667 will be recognized in 2021, 2022 and 2023, respectively.

We used the following weighted average assumptions to estimate the fair value of stock options granted for the periods presented as follows:


	Three Months Ended March 31,
Weighted Average Assumptions:	2021			2020
Expected dividend yield		0.0	%		0.0	%
Expected equity volatility		56.1	%		56.1	%
Expected term (years)		5			5
Risk-free interest rate		2.04	%		2.22	%
Exercise price per stock option	$	8.28		$	7.73
Market price per share	$	7.90		$	7.27
Weighted average fair value per stock option	$	3.82		$	3.51

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 vesting period. For the three months ended March 31, 2021 and 2020, the Company recognized in selling, general and administrative expense, non-cash share-based compensation expense relating to common stock grants of $31,250, respectively.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 6 - Earnings Per Share

Basic earnings (loss) per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include stock options and warrants outstanding during the period, using the treasury stock method. Potentially dilutive common shares are excluded from the computations of diluted earnings per share if their effect would be anti-dilutive. A net loss available to common stockholders causes all potentially dilutive securities to be anti-dilutive.

Basic and diluted loss per share are computed as follows:


	Three Months Ended March 31,
	2021		2020
Net loss available to common stockholders	$	(9,193,381)	$	(11,427,380)

Basic weighted-average common shares outstanding		13,635,759		12,004,598
Dilutive effect of options and warrants		—		—
Weighted-average diluted common shares outstanding		13,635,759		12,004,598

Basic and diluted loss per share	$	(0.67)	$	(0.95)

Anti-dilutive stock options and warrants		3,571,946		101,894

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 7 – Programming Costs

Programming costs and rights, consists of the following:


	March 31,		December 31,
	2021		2020
Programming costs released	$	22,986,486	$	22,986,486
In production		469,948		—
In development		4,460,352		4,639,169
Accumulated amortization ^(a)		(14,504,509)		(12,298,648)
Programming costs, net		13,412,277		15,327,007

Programming rights		1,209,362		1,209,362
Accumulated amortization		(779,937)		(755,186)
Programming rights, net		429,425		454,176

Programming costs and rights, net	$	13,841,702	$	15,781,183

^(a) ^{As of March 31,2021 and December 31, 2020, accumulated amortization includes impairment expense of $0 and $2,213,032, respectively.}

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 direct production overhead.

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.

Programming rights consists of licenses to various titles which the company makes available for streaming on Crackle for an agreed upon license period.

Amortization of programming costs related to episodic television programs and programming rights related to licensed content is as follows:



	Three Months Ended
	March 31,
	2021		2020
Programming costs	$	2,205,861	$	56,878
Programming rights		24,751		53,751
Total programming amortization expense	$	2,230,612	$	110,629

During the three months ended March 31, 2021 and 2020, the Company did not record any impairments related to programming costs.

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 8 – Film Library

Film library costs, net of amortization, consists of the following:


	March 31,		December 31,
	2021		2020
Film library acquisition costs	$	88,704,725	$	78,330,094
Accumulated amortization ^(a)		(49,994,875)		(43,090,959)
Net film library costs	$	38,709,850	$	35,239,135

^{(a) As of March 31, 2021 and December 31, 2020, accumulated amortization includes impairment expense of $0 and $1,760,846, respectively.}

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.

Amortization of film library costs is as follows:

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 9 - Intangible Assets

Indefinite lived intangible assets, consists of the following:


	March 31,		December 31,
	2021		2020
Intangible asset - video content license	$	5,000,000	$	5,000,000
Popcornflix film rights and other assets		7,163,943		7,163,943
Total	$	12,163,943	$	12,163,943

Intangible assets, net, consists of the following:


		Gross				Net
		Carrying		Accumulated		Carrying
		Amount		Amortization		Amount
March 31, 2021:
Acquired customer base	$	2,290,241	$	1,202,377	$	1,087,864
Non-compete agreement		530,169		496,337		33,832
Website development		389,266		259,510		129,756
Crackle Plus content rights		1,708,270		1,067,669		640,601
Crackle brand value		18,807,004		5,037,591		13,769,413
Crackle Plus partner agreements		4,005,714		1,502,142		2,503,572
Total	$	27,730,664	$	9,565,626	$	18,165,038

December 31, 2020:
Acquired customer base	$	2,290,241	$	1,087,865	$	1,202,376
Non-compete agreement		530,169		419,717		110,452
Website development		389,266		259,510		129,756
Crackle Plus content rights		1,708,270		925,313		782,957
Crackle brand value		18,807,004		4,365,912		14,441,092
Crackle Plus partner agreements		4,005,714		1,301,857		2,703,857
Total	$	27,730,664	$	8,360,174	$	19,370,490

Amortization expense was $1,205,452 and $5,179,447 for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021 amortization expense for the next 5 years is expected be:


Remainder of 2021	$	3,550,084
2022		4,159,440
2023		3,774,138
2024		2,987,143
2025		2,686,715
Thereafter		1,007,518
Total	$	18,165,038

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Goodwill consists of the following:


	March 31,		December 31,
	2021		2020
Goodwill: Pivotshare	$	1,300,319	$	1,300,319
Goodwill: A Plus		1,236,760		1,236,760
Goodwill: Crackle Plus		18,911,027		18,911,027
Total	$	21,448,106	$	21,448,106

There was no impairment recorded related to goodwill and intangible assets in the three months ended March 31, 2021 and 2020, respectively.

Note 10 – Debt

9.50% Notes Due 2025

On July 17, 2020, the Company completed a public offering of 9.50% Notes due 2025 (the “Notes”) in the aggregate principal amount of $21,000,000. On August 5, 2020, the Company sold an additional $1,100,000 of Notes pursuant to the partial exercise of the overallotment option. The Notes bear interest at 9.50% per annum, payable every March 31, June 30, September 30, and December 31, and at maturity. The Notes mature on July 31, 2025.

The sale of the Notes resulted in net proceeds of approximately $20,995,000 after deducting underwriting discounts and commissions of approximately $1,105,000. The Company used $13,333,333 of the net proceeds to repay the outstanding principal under the Commercial Loan.

On December 22, 2020, the Company completed a public offering of 9.50% Notes due 2025 (the “December Notes”) in the aggregate principal amount of $9,387,750. On December 29, 2020, the Company sold an additional $1,408,150 of December Notes pursuant to the partial exercise of the overallotment option. The stated principal of $25.00 per note was discounted 2% to the public offering price of $24.50 per note.

Film Acquisition Advance

On August 27, 2020, the Company entered into a Film Acquisition Advance Agreement with Great Point Media Limited (“GPM”). GPM advanced to the Company $10,210,000 of acquisition advances on August 28, 2020 (the “Acquisition Advance”) and may, directly, or through affiliated entities, fund additional acquisition advances in the future. Pursuant to the agreement, GPM has formed a US-based special purpose vehicle (the “SPV”), which has been assigned the territorial licenses and distribution rights in certain films and productions owned or to be acquired by Screen Media Ventures Inc., CSSE’s wholly owned subsidiary. The Company will pay the SPV on a quarterly basis adjusted gross receipts generated on each of the assigned productions during the two-year term of the agreement, until the SPV has recouped the full Acquisition Advance for each of the productions together with interest and additional participation amounts on gross receipts generated by the productions. The Acquisition Advance bears interest at 10% per annum compounded monthly on the amount outstanding. In the event the SPV has not recouped the full Acquisition Advance from gross receipts generated within the two-year contractual term, the Company shall pay the remaining balance outstanding, if any, by no later than November 30, 2022. For the three months ended March 31, 2021, the Company repaid $2,463,962 of the principal outstanding under the Film Acquisition Advance.

Revolving Credit Facility

On October 11, 2019, the Company created a majority owned subsidiary Landmark Studio Group. Through Landmark Studio Group, the Company entered into a Revolving Credit Facility (“Revolving Credit Facility”) with Cole Investments

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

VII, LLC. The Revolving Credit Facility consists of a line of credit in the amount of $5,000,000 and bears interest of 8% per annum.

On July 23, 2020, the Company repaid $2,500,000 of the principal outstanding under the Revolving Credit Facility. The outstanding principal was repayable in full on October 11, 2021.

On March 3, 2021, the Company repaid the remaining outstanding principal of $2,500,000 and terminated the Revolving Credit Facility.

Long-term debt for the periods presented was as follows:


	March 31,		December 31,
	2021		2020
Notes due 2025	$	32,895,900	$	32,895,900
Revolving Credit Facility		—		2,500,000
Film Acquisition Advance		6,195,174		8,659,136
Total debt		39,091,074		44,055,036
Less: debt issuance costs		1,699,544		1,798,433
Less: current portion		—		2,500,000
Total long-term debt	$	37,391,530	$	39,756,603

As of March 31, 2021, the expected aggregate maturities of debt for each of the next five years are as follows:



Remainder of 2021	$	—
2022		6,195,174
2023		—
2024		—
2025		32,895,900
	$	39,091,074

Note 11 – Income Taxes

The Company’s current and deferred income tax provision are as follows:


	Three Months Ended March 31,
	2021		2020
Current provision:
States	$	14,000	$	49,000
Total current provision		14,000		49,000
Deferred provision:
Federal		—
States		—
Total deferred provision		—		—
Total provision for income taxes	$	14,000	$	49,000

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Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 deferred tax assets and liabilities are as follows:


	March 31,		December 31,
	2021		2020
Deferred tax assets:
Net operating loss carry-forwards	$	11,720,000	$	10,428,000
Acquisition-related costs		723,000		723,000
Film library and other intangibles		11,515,000		11,968,000
Deferred state taxes		39,000		39,000
Less: valuation allowance		(21,299,000)		(20,003,000)
Total deferred tax assets		2,698,000		3,155,000
Deferred tax liabilities:
Programming costs		2,165,000		2,715,000
Other assets		533,000		440,000
Total deferred tax liabilities		2,698,000		3,155,000
Net deferred tax asset	$	—	$	—

The Company and its subsidiaries have combined net operating losses of approximately $43,530,000, $10,843,000 of which were incurred before 2018 and expire between 2031 and 2037 with the balance of $32,687,000 having no expiration under changes made by the Tax Cuts and Jobs Act but may only be utilized generally to offset only 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 company 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 $1,296,000 and $2,305,000 during the three months ended March 31, 2021 and 2020, respectively.

Note 12 – Related Party Transactions

At March 31, 2021 and December 31, 2020, the Company is owed $4,389,378 and $5,648,652, respectively, from affiliated companies - primarily CSS. 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. Advances and repayments occur periodically. The Company and CSS do not charge interest on the net advances.

For the three months ended March 31, 2021 and 2020, the Company recorded management and license fees of $2,319,684 and $1,324,407, respectively.

Three Months Ended

March 31,

Film library amortization expense