Chicken Soup for the Soul Entertainment(CSSE) - 2021 Q3 - Quarterly Report

FORM 10-Q Filing Information This section provides key details of the Quarterly Report on Form 10-Q for Chicken Soup for the Soul Entertainment, Inc. for the period ended September 30, 2021, including its incorporation, address, and contact information General Information This section identifies the filing as a Quarterly Report on Form 10-Q for Chicken Soup for the Soul Entertainment, Inc. for the period ended September 30, 2021, detailing its incorporation state, address, and telephone number - The filing is a Quarterly Report on Form 10-Q for the period ended September 30, 2021[2] - The registrant is Chicken Soup for the Soul Entertainment, Inc., a Delaware corporation[2] Securities Registered The company has Class A Common Stock, Redeemable Perpetual Preferred Cumulative Stock, and 9.50% Notes Due 2025 registered on The Nasdaq Stock Market LLC Securities Registered Pursuant to Section 12(b) of the Act | Title of each class | Class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---- | :---------------- | :---------------------------------------- | | A Common Stock | Class | CSSE | The Nasdaq Stock Market LLC | | Redeemable Perpetual Preferred | Cumulative Stock | CSSEP | The Nasdaq Stock Market LLC | | | 9.50% Notes Due 2025 | CSSEN | The Nasdaq Stock Market LLC | Filing Status The registrant has filed all required reports, submitted Interactive Data Files, and is classified as a Non-accelerated filer, Smaller reporting company, and Emerging growth company. It is not a shell company - The registrant has filed all required reports and submitted Interactive Data Files during the preceding 12 months[2] - The company is classified as a Non-accelerated filer, Smaller reporting company, and Emerging growth company[2] - The registrant is not a shell company[2] Common Stock Outstanding As of November 8, 2021, the total number of Class A and Class B Common Stock outstanding was 16,420,671 shares, with Class B shares convertible into Class A Common Stock Outstanding as of November 8, 2021 | Title of Each Class | Shares Outstanding | | :------------------ | :----------------- | | Class A Common Stock, $.0001 par value per share | 8,766,165 | | 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. | | PART I - FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1: Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Chicken Soup for the Soul Entertainment, Inc., including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, recent acquisitions, revenue recognition, share-based compensation, debt, and other financial commitments Condensed Consolidated Balance Sheets The balance sheet shows a significant increase in total assets and liabilities from December 31, 2020, to September 30, 2021, primarily driven by increases in cash, accounts receivable, goodwill, and film library, alongside corresponding increases in debt and various obligations Condensed Consolidated Balance Sheet Highlights | Metric | September 30, 2021 (unaudited) | December 31, 2020 | | :-------------------------------- | :----------------------------- | :------------------ | | Total Assets | $282,920,360 | $156,280,786 | | Total Liabilities | $158,790,633 | $91,178,995 | | Total Equity | $124,129,727 | $65,101,791 | | Cash and cash equivalents | $66,947,955 | $14,732,726 | | Accounts receivable, net | $48,265,450 | $25,996,947 | | Goodwill | $41,286,849 | $21,448,106 | | Film library, net | $72,850,313 | $35,239,135 | - Total assets increased by approximately $126.6 million, and total liabilities increased by approximately $67.6 million from December 31, 2020, to September 30, 2021[12] Condensed Consolidated Statements of Operations The company reported increased net revenue and gross profit for both the three and nine months ended September 30, 2021, compared to the prior year, but also experienced higher operating expenses and interest expense, leading to increased net losses available to common stockholders Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net revenue | $29,096,855 | $19,361,751 | $74,428,631 | $46,126,364 | | Gross profit | $6,240,481 | $4,520,900 | $19,895,604 | $8,441,578 | | Operating loss | $(13,246,154) | $(11,293,567) | $(26,899,094) | $(34,388,166) | | Net loss available to common stockholders | $(16,741,678) | $(13,049,700) | $(37,014,237) | $(34,487,207) | | Basic and diluted net loss per common share | $(1.04) | $(1.04) | $(2.53) | $(2.83) | - Net revenue increased by 50% for the three months and 61% for the nine months ended September 30, 2021, compared to the same periods in 2020[16] - Operating loss increased for the three months but decreased for the nine months ended September 30, 2021, year-over-year[16] Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity significantly increased from December 31, 2020, to September 30, 2021, primarily due to additional paid-in capital from common stock issuances and share-based compensation, despite a growing accumulated deficit and preferred dividends Condensed Consolidated Statements of Stockholders' Equity Highlights | Metric | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | Total Stockholders' Equity | $124,020,642 | $28,546,329 | | Additional Paid-In Capital | $238,708,111 | $106,425,548 | | Deficit | $(114,056,757) | $(77,247,982) | | Series A cumulative redeemable perpetual preferred stock (shares) | 3,698,318 | 2,098,318 | | Class A common stock (shares issued) | 8,797,883 | 5,157,053 | - Total stockholders' equity increased by approximately $95.5 million from December 31, 2020, to September 30, 2021[12] - Additional paid-in capital saw a substantial increase, reflecting new equity issuances[12][21] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, the company experienced increased cash usage in operating and investing activities but significantly boosted cash from financing activities, leading to a substantial net increase in cash and cash equivalents Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30) | Cash Flow Activity | 2021 | 2020 | | :-------------------------------- | :----------------- | :----------------- | | Net cash used in operating activities | $(23,666,639) | $(13,811,032) | | Net cash used in investing activities | $(1,988,221) | $(609,607) | | Net cash provided by financing activities | $77,870,089 | $17,216,552 | | Net increase in cash and cash equivalents | $52,215,229 | $2,795,913 | | Cash and cash equivalents at end of period | $66,947,955 | $9,243,315 | - Net cash used in operating activities increased by approximately $9.8 million, while net cash provided by financing activities increased by approximately $60.6 million year-over-year[27] - The significant increase in cash from financing activities was a primary driver for the substantial increase in cash and cash equivalents at the end of the period[27] Notes to Condensed Consolidated Financial Statements These notes provide essential context and detail for the condensed consolidated financial statements, covering the company's business, accounting policies, recent acquisitions, revenue recognition, share-based compensation, debt structure, put option obligations, income taxes, related party transactions, commitments, contingencies, stockholders' equity changes, segment reporting, and subsequent events Note 1 – Description of the Business Chicken Soup for the Soul Entertainment, Inc. operates video-on-demand networks and is a global independent television and film distribution company with a large library, focusing on streaming networks and deriving most revenue from the U.S. while having a presence in over 56 countries - The Company operates video-on-demand networks and is a leading global independent television and film distribution company[30] - It manages one reportable segment: production and distribution of video content, focusing on streaming networks[31] - The Company operates in the United States and internationally (over 56 countries), with primary revenue derived from the U.S.[31] Note 2 – Basis of Presentation and Summary of Significant Accounting Policies The interim financial statements are unaudited, prepared in conformity with U.S. GAAP, and consistent with the 2020 Form 10-K, with certain disclosures condensed. Management's estimates and judgments are crucial, and no material changes to significant accounting policies have occurred since December 31, 2020 - Interim condensed consolidated financial statements are unaudited and prepared in conformity with U.S. GAAP, consistent with the Annual Report on Form 10-K for December 31, 2020[32] - Preparation requires management estimates and judgments, particularly for revenue recognition, film ultimate revenues, intangible assets, and share-based compensation[33] - No material changes in significant accounting policies have occurred compared to the 2020 Annual Report[35] Note 3 – Recent Accounting Pronouncements The company adopted several ASUs in Q1 and Q2 2021, including those related to reference rate reform, film and program material costs, collaborative arrangements, and cloud computing implementation costs, none of which had a material impact on financial statements. However, the adoption of ASU 2016-02 (Leases) in fiscal year 2023 is expected to have a material impact on the balance sheet, with an estimated $14.4 million increase in right-of-use assets and lease liabilities - Adopted ASU 2020-04 (Reference Rate Reform) in Q2 2021, with no immediate material impact expected[39] - Adopted ASU 2019-02 (Costs of Films and License Agreements), ASU 2018-18 (Collaborative Arrangements), and ASU 2018-15 (Cloud Computing Arrangement Costs) in Q1 2021, with no material impact[40][41][42] - ASU 2016-02 (Leases), effective for fiscal year 2023, is expected to have a material impact on the balance sheet, with an estimated $14.4 million increase in right-of-use lease assets and corresponding lease liabilities as of September 30, 2021[47] Note 4 – Business Combination On May 21, 2021, the Company acquired Sonar Entertainment, Inc. (Sonar) for an aggregate purchase price of $53.8 million, including an initial cash payment and additional performance-based payments. The acquisition was accounted for as a purchase of a business, resulting in $19.8 million in goodwill and the acquisition of film library and distribution network assets. Sonar contributed $6.2 million in net revenue and $2.9 million in net income for the three months ended September 30, 2021 - On May 21, 2021, the Company acquired the principal assets of Sonar Entertainment, Inc. (Sonar)[49] Sonar Acquisition Purchase Price Allocation (Preliminary) | Item | May 21, 2021 | | :-------------------------------- | :------------- | | Accounts receivable, net | $17,373,257 | | Film library | $13,000,000 | | Intangible asset (distribution network) | $3,600,000 | | Total identifiable assets acquired | $33,973,257 | | Goodwill | $19,838,743 | | Net assets acquired (Total Estimated Purchase Price) | $53,812,000 | Sonar's Financial Performance Included in Consolidated Statements (Three Months Ended September 30, 2021) | Metric | Amount | | :----------- | :----------- | | Net revenue | $6,233,196 | | Net income | $2,869,905 | Note 5 – Revenue Recognition Revenue is recognized when performance obligations are satisfied, primarily from VOD and streaming, and licensing and other activities. For the three and nine months ended September 30, 2021, VOD and streaming revenue remained the largest component, but licensing and other revenue showed significant growth, increasing its share of total net revenue - Revenue is recognized from licensing content, delivering online advertisements on VOD platforms, distributing film content, and producing episodic television series[63] Revenue by Source (Three Months Ended September 30) | Revenue Source | 2021 Amount | 2021 % of Revenue | 2020 Amount | 2020 % of Revenue | | :---------------- | :------------ | :---------------- | :------------ | :---------------- | | VOD and streaming | $16,907,012 | 58 % | $16,840,003 | 87 % | | Licensing and other | $12,189,843 | 42 % | $2,521,748 | 13 % | | Net revenue | $29,096,855 | 100 % | $19,361,751 | 100 % | Revenue by Source (Nine Months Ended September 30) | Revenue Source | 2021 Amount | 2021 % of Revenue | 2020 Amount | 2020 % of Revenue | | :---------------- | :------------ | :---------------- | :------------ | :---------------- | | VOD and streaming | $45,884,136 | 62 % | $37,744,391 | 82 % | | Licensing and other | $28,544,495 | 38 % | $8,381,973 | 18 % | | Net revenue | $74,428,631 | 100 % | $46,126,364 | 100 % | Note 6 – Share-Based Compensation Share-based compensation expense significantly increased for both the three and nine months ended September 30, 2021, compared to 2020, primarily due to a broader issuance of stock options and common stock grants under the 2017 Long Term Incentive Plan. The weighted-average fair value per stock option also increased Share-Based Compensation Expense | Period | Stock Options Expense | Common Stock Grants Expense | | :-------------------------------- | :-------------------- | :-------------------------- | | Three Months Ended Sep 30, 2021 | $1,016,981 | $2,457,250 | | Three Months Ended Sep 30, 2020 | $230,123 | $116,650 | | Nine Months Ended Sep 30, 2021 | $1,418,169 | $2,519,750 | | Nine Months Ended Sep 30, 2020 | $641,731 | $179,150 | Stock Options Activity Highlights (as of September 30, 2021) | Metric | Value | | :-------------------------------- | :---------- | | Number of Stock Options Outstanding | 1,342,989 | | Weighted Average Exercise Price | $14.28 | | Weighted Average Fair Value per Stock Option (Nine Months 2021) | $7.48 | | Unrecognized Pre-Tax Compensation Expense | $6,949,698 | - Unrecognized pre-tax compensation expense related to non-vested stock options totaled $6,949,698 as of September 30, 2021, to be recognized through 2024[89] Note 7 - Earnings Per Share The company reported basic and diluted net loss per common share of $(1.04) for the three months ended September 30, 2021, and $(2.53) for the nine months ended September 30, 2021. All potentially dilutive securities were anti-dilutive due to the net loss Net Loss Per Common Share (Basic and Diluted) | Period | Net Loss Available to Common Stockholders | Basic and Diluted Loss Per Share | Weighted-Average Common Shares Outstanding | | :-------------------------------- | :---------------------------------------- | :------------------------------- | :----------------------------------------- | | Three Months Ended Sep 30, 2021 | $(16,741,678) | $(1.04) | 16,145,808 | | Three Months Ended Sep 30, 2020 | $(13,049,700) | $(1.04) | 12,508,643 | | Nine Months Ended Sep 30, 2021 | $(37,014,237) | $(2.53) | 14,622,787 | | Nine Months Ended Sep 30, 2020 | $(34,487,207) | $(2.83) | 12,174,779 | - Potentially dilutive common shares (stock options and warrants) were excluded from diluted EPS calculations as their effect would be anti-dilutive due to the net loss[95] Note 8 – Programming Costs Net programming costs and rights remained relatively stable, with programming costs released increasing significantly. Amortization expense for programming costs saw a substantial increase for both the three and nine months ended September 30, 2021, compared to 2020, primarily due to episodic television programs and licensed content Programming Costs and Rights, Net | Metric | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | Programming costs, net | $15,036,507 | $15,327,007 | | Programming rights, net | $403,739 | $454,176 | | Total Programming costs and rights, net | $15,440,246 | $15,781,183 | Programming Amortization Expense | Period | Programming Costs | Programming Rights | Total Amortization Expense | | :-------------------------------- | :---------------- | :----------------- | :------------------------- | | Three Months Ended Sep 30, 2021 | $1,756,901 | $24,346 | $1,781,247 | | Three Months Ended Sep 30, 2020 | $11,667 | $39,426 | $51,093 | | Nine Months Ended Sep 30, 2021 | $4,674,805 | $50,437 | $4,725,242 | | Nine Months Ended Sep 30, 2020 | $75,418 | $141,068 | $216,486 | - No impairment related to programming costs was recorded during the three and nine months ended September 30, 2021 and 2020[101] Note 9 – Film Library Net film library costs significantly increased from December 31, 2020, to September 30, 2021, driven by higher acquisition costs. Film library amortization expense also increased for both the three and nine months ended September 30, 2021, reflecting increased exploitation of film distribution rights Film Library Costs, Net of Amortization | Metric | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | Film library acquisition costs | $139,772,736 | $78,330,094 | | Accumulated amortization | $(66,922,423) | $(43,090,959) | | Net film library costs | $72,850,313 | $35,239,135 | Film Library Amortization Expense | Period | Amortization Expense | | :-------------------------------- | :------------------- | | Three Months Ended Sep 30, 2021 | $10,087,539 | | Three Months Ended Sep 30, 2020 | $7,981,212 | | Nine Months Ended Sep 30, 2021 | $23,831,464 | | Nine Months Ended Sep 30, 2020 | $16,781,685 | - As of September 30, 2021, accumulated amortization includes no impairment expense, compared to $1,760,846 as of December 31, 2020[104] Note 10 - Intangible Assets Indefinite-lived intangible assets remained stable, while definite-lived intangible assets, net, decreased slightly due to amortization, despite the addition of a Distribution Network asset from the Sonar acquisition. Goodwill significantly increased due to the Sonar acquisition, with no impairment recorded for either goodwill or intangible assets Indefinite Lived Intangible Assets | Asset | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | 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 (September 30, 2021) | Asset | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | :-------------------------------- | :-------------------- | :----------------------- | :------------------ | | Acquired customer base | $2,290,241 | $1,431,401 | $858,840 | | Crackle brand value | $18,807,004 | $6,380,948 | $12,426,056 | | Distribution Network | $3,600,000 | $400,000 | $3,200,000 | | Total | $31,330,664 | $12,354,438 | $18,976,226 | Goodwill | Source | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | Goodwill: Sonar | $19,838,743 | — | | Total Goodwill | $41,286,849 | $21,448,106 | - No impairment was recorded for goodwill and intangible assets for the three and nine months ended September 30, 2021 and 2020[114] Note 11 – Debt Total debt increased to $56.7 million as of September 30, 2021, primarily due to a new $20 million revolving loan facility, partially offset by repayments of the revolving credit facility and film acquisition advance. The company is in compliance with all debt covenants Long-Term Debt | Debt Type | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | Notes due 2025 | $32,895,900 | $32,895,900 | | Revolving Loan | $17,585,699 | — | | Film Acquisition Advance | $6,241,534 | $8,659,136 | | Total debt | $56,723,133 | $44,055,036 | - The Company entered into a new revolving loan facility of up to $20 million on May 21, 2021, drawing $18.3 million for the SEI acquisition[116] - The Company repaid the remaining $2.5 million outstanding principal of the Revolving Credit Facility on March 3, 2021, and repaid $2.6 million of the Film Acquisition Advance during the nine months ended September 30, 2021[124][126] - The Company is in compliance with all covenants as of September 30, 2021[118] Note 12 – Put Option Obligation As part of the Sonar acquisition, the Company has a Put Option obligation of $11.4 million as of September 30, 2021, requiring it to purchase a 5% interest in CSS AVOD, Inc. from an investor if exercised between October 2022 and October 2025 - The Company has a Put Option obligation of $11,400,000 as of September 30, 2021, related to a 5% interest in CSS AVOD, Inc. issued as part of the Sonar acquisition[129][130] - The Put Option is exercisable by the investor between October 8, 2022, and October 7, 2025[129] Note 13 – Income Taxes The Company recorded a current provision for state income taxes of $30,000 for the three months and $59,000 for the nine months ended September 30, 2021. It maintains a full valuation allowance against its deferred tax assets, which increased significantly, due to a history of recurring losses and potential limitations on net operating loss carryovers Current Provision for Income Taxes (States) | Period | Amount | | :-------------------------------- | :------- | | Three Months Ended Sep 30, 2021 | $30,000 | | Three Months Ended Sep 30, 2020 | $26,000 | | Nine Months Ended Sep 30, 2021 | $59,000 | | Nine Months Ended Sep 30, 2020 | $93,000 | Deferred Tax Assets and Liabilities (September 30, 2021) | Item | Amount | | :-------------------------------- | :----------- | | Total deferred tax assets | $2,147,000 | | Less: valuation allowance | $(27,195,000) | | Total deferred tax liabilities | $2,147,000 | | Net deferred tax asset | $0 | - The deferred tax asset valuation allowance increased by $7,192,000 for the nine months ended September 30, 2021, reflecting management's determination that the ultimate realization of net operating loss carryovers is not assured[136][137] Note 14 – Related Party Transactions The Company has an intercompany payable to affiliated companies, primarily CSS, as of September 30, 2021, and recorded significant management and license fees payable to CSS for operational expertise, brand use, and marketing support Due to/from Affiliated Companies | Item | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | Due to affiliated companies | $590,383 | $0 | | Due from affiliated companies | $0 | $5,648,652 | | Total due to/due from affiliated companies | $590,383 | $5,648,652 | Management and License Fees Payable to CSS | Period | Management and License Fees | | :-------------------------------- | :-------------------------- | | Three Months Ended Sep 30, 2021 | $2,909,686 | | Three Months Ended Sep 30, 2020 | $1,936,175 | | Nine Months Ended Sep 30, 2021 | $7,442,863 | | Nine Months Ended Sep 30, 2020 | $4,612,636 | - The Company is part of CSS's central cash management system, with advances and repayments occurring periodically without interest[139] Note 15 - Commitments and Contingencies The Company has significant content obligations totaling $49.3 million as of September 30, 2021, an increase from $25.8 million at December 31, 2020, alongside non-cancellable operating lease agreements. Total future minimum payments under these agreements are $33.1 million through 2031 Content Obligations | Obligation Type | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :------------------ | | Film library acquisition obligations | $24,752,229 | $8,616,562 | | Programming obligations | $1,641,250 | $4,697,316 | | Accrued participation costs | $22,864,494 | $12,535,651 | | Total content obligations | $49,257,973 | $25,849,529 | Future Minimum Payments (Operating Leases and Content Agreements) | Year | Amount | | :-------------------------------- | :------------- | | Remainder of 2021 | $1,367,884 | | 2022 | $16,674,647 | | 2023 | $4,387,187 | | 2024 | $1,287,430 | | 2025 | $1,313,178 | | 2026 - 2031 | $8,052,953 | | Total minimum lease and content payments | $33,083,279 | - The Company is not currently a party to any legal proceedings expected to have a material adverse effect on its business[149] Note 16 – Stockholders' Equity The Company completed a public offering of common stock in July 2021, generating $70.5 million in net proceeds, and increased its ownership in Landmark Studio Group to 78.5% by purchasing additional equity. It also issued Series A Preferred Stock to acquire 100% ownership of Crackle Plus - On July 7, 2021, the Company completed a public offering of 1,875,000 shares of common stock, generating net proceeds of $70.5 million[152] - The Company increased its ownership in Landmark Studio Group from 53.5% to 78.5% by purchasing an additional 25,000 units for $6.0 million[153] - On January 13, 2021, the Company issued 1,600,000 shares of Series A Preferred Stock to acquire 100% ownership of Crackle Plus[155] Warrant Activity (as of September 30, 2021) | Warrant Type | Outstanding at Dec 31, 2020 | Exercised | Outstanding at Sep 30, 2021 | Weighted Average Exercise Price | Average Remaining Contract Term (Yrs.) | | :---------------- | :-------------------------- | :-------- | :-------------------------- | :------------------------------ | :------------------------------------- | | Class W | 622,622 | (95,410) | 527,212 | $7.50 | 2.00 | | Class Z | 180,618 | (57,173) | 123,445 | $12.00 | 3.00 | | CSSE Class I | 800,000 | — | 800,000 | $8.13 | 2.87 | | CSSE Class II | 1,200,000 | — | 1,200,000 | $9.67 | 2.87 | | CSSE Class III-A | 380,000 | — | 380,000 | $11.61 | 2.87 | | CSSE Class III-B | 1,620,000 | — | 1,620,000 | $11.61 | 2.87 | | Total | 4,803,240 | (152,583) | 4,650,657 | $10.06 | 2.52 | Note 17 – Segment Reporting and Geographic Information The Company operates as one reportable segment: the distribution and production of video content. While it has a global presence, the United States remains the primary source of net revenue, accounting for 82% and 91% of total net revenue for the three and nine months ended September 30, 2021, respectively - The Company operates in one reportable segment: the distribution and production of video content for sale and use on its VOD platforms[157] - Net revenue generated in the United States accounted for approximately 82% and 91% of total net revenue for the three and nine months ended September 30, 2021, respectively[160] - Long-lived assets are 100% based in the United States[160] Note 18 – Subsequent Events Management evaluated events between September 30, 2021, and November 8, 2021, and noted no subsequent events requiring financial statement disclosure - No subsequent events requiring financial statement disclosure were identified between September 30, 2021, and November 8, 2021[161] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting revenue growth driven by acquisitions and increased licensing, alongside rising operating expenses and net losses. It also details liquidity, capital resources, and the use of non-GAAP financial measures like Adjusted EBITDA Forward-Looking Statements This section cautions readers that the report contains forward-looking statements based on current expectations, which involve risks and uncertainties that could cause actual results to differ materially. The company disclaims any obligation to update these statements - The report contains forward-looking statements based on current expectations and beliefs, subject to risks and uncertainties[164] - Important factors affecting actual results include potential losses, debt servicing ability, economic conditions (e.g., COVID-19), cybersecurity risks, market acceptance of content, ability to retain key personnel, and financing needs[165][167] - The company undertakes no obligation to update or revise any forward-looking statements[164] Overview Chicken Soup for the Soul Entertainment, Inc. is a leading streaming VOD company operating Crackle Plus, Screen Media, and Halcyon Television. It focuses on acquiring, producing, and distributing content for its ad-supported and subscription-based streaming services, boasting one of the largest independent libraries and a growing global audience - The Company is a leading streaming video-on-demand (VOD) company, operating Crackle Plus, Screen Media, and Halcyon Television[169] - Crackle Plus serves over 32 million monthly active visitors with access to approximately 6,200 films and 33,000 episodes of programming[170] - Screen Media manages one of the industry's largest independently owned television and film libraries, consisting of approximately 9,000 feature films and 34,000 episodes[171] - Halcyon Television, a new subsidiary, manages the recently acquired Sonar Entertainment library of over 1,000 titles and 4,000 hours of programming[172] JOBS Act Accounting Election As an 'emerging growth company' under the JOBS Act, the Company has irrevocably elected to delay adopting new or revised accounting standards until they apply to private companies, differing from other public companies - The Company is an 'emerging growth company' under the JOBS Act[178] - It has irrevocably elected to delay adopting new or revised accounting standards until they apply to private companies[178] Use of Non-GAAP Financial Measure The Company uses Adjusted EBITDA, a non-GAAP financial measure, to evaluate operations and provide supplemental performance indicators, believing it enhances understanding of financial results and aids in planning, forecasting, and comparing performance. However, it acknowledges Adjusted EBITDA's limitations as an analytical tool, as it excludes various cash and non-cash expenses - Adjusted EBITDA is used as a non-GAAP financial measure to evaluate results, plan, forecast, and measure executive compensation[179] - Adjusted EBITDA is defined as consolidated operating income (loss) adjusted to exclude interest, taxes, depreciation, amortization, acquisition-related costs, consulting fees, dividend payments, non-cash share-based compensation, and other unusual charges[181] - Limitations of Adjusted EBITDA include not reflecting cash expenditures for capital, working capital, preferred dividends, debt service, income taxes, or acquisition-related expenses[182] Reconciliation of Historical GAAP Net Income as reported to Adjusted EBITDA The Company's Adjusted EBITDA increased for both the three and nine months ended September 30, 2021, compared to 2020, despite higher net losses. This improvement was driven by adjustments for non-cash items like film library and program rights amortization, share-based compensation, and reduced amortization and depreciation Adjusted EBITDA Reconciliation (Three Months Ended September 30) | Metric | 2021 | 2020 | | :-------------------------------- | :------------- | :------------- | | Net loss available to common stockholders | $(16,741,678) | $(13,049,700) | | Preferred dividends | 2,253,385 | 1,017,691 | | Film library and program rights amortization | 10,111,885 | 8,020,638 | | Share-based compensation expense | 3,474,231 | 346,773 | | Amortization and depreciation | 1,921,982 | 4,960,074 | | Adjusted EBITDA | $4,858,442 | $4,215,290 | Adjusted EBITDA Reconciliation (Nine Months Ended September 30) | Metric | 2021 | 2020 | | :-------------------------------- | :------------- | :------------- | | Net loss available to common stockholders | $(37,014,237) | $(34,487,207) | | Preferred dividends | 6,760,155 | 2,966,235 | | Film library and program rights amortization | 23,881,901 | 16,922,753 | | Share-based compensation expense | 3,937,919 | 820,881 | | Amortization and depreciation | 5,264,353 | 15,661,774 | | Adjusted EBITDA | $12,571,925 | $8,944,029 | - Adjusted EBITDA increased by 15.2% for the three months and 40.6% for the nine months ended September 30, 2021, compared to the prior year[185][186] Results of Operations The Company experienced significant revenue growth for both the three and nine months ended September 30, 2021, primarily driven by the Sonar acquisition and increased licensing activities. However, this growth was accompanied by higher costs of revenue and operating expenses, including increased share-based compensation and professional fees, leading to continued net losses Revenue Net revenue increased by 50% to $29.1 million for the three months and 61% to $74.4 million for the nine months ended September 30, 2021. The Sonar acquisition contributed significantly, alongside growth in international distribution rights sales and content production/sublicensing revenue Net Revenue (Three Months Ended September 30) | Revenue Source | 2021 Amount | 2020 Amount | Change (Dollar) | Change (%) | | :---------------- | :------------ | :------------ | :-------------- | :--------- | | VOD and streaming | $16,907,012 | $16,840,003 | $67,009 | 0 % | | Licensing and other | $12,189,843 | $2,521,748 | $9,668,095 | 383 % | | Total Net Revenue | $29,096,855 | $19,361,751 | $9,735,104 | 50 % | Net Revenue (Nine Months Ended September 30) | Revenue Source | 2021 Amount | 2020 Amount | Change (Dollar) | Change (%) | | :---------------- | :------------ | :------------ | :-------------- | :--------- | | VOD and streaming | $45,884,136 | $37,744,391 | $8,139,745 | 22 % | | Licensing and other | $28,544,495 | $8,381,973 | $20,162,522 | 241 % | | Total Net Revenue | $74,428,631 | $46,126,364 | $28,302,267 | 61 % | - The Sonar acquisition contributed $6.2 million (64% of increase) to revenue for the three months and $10.2 million (36% of increase) for the nine months ended September 30, 2021[197][221] Cost of Revenue Cost of revenue increased by 54% to $22.9 million for the three months and 45% to $54.5 million for the nine months ended September 30, 2021. This was primarily due to higher film library and programming amortization, increased revenue share and partner fees, and rising distribution and platform costs Cost of Revenue (Three Months Ended September 30) | Cost Item | 2021 Amount | 2021 % of Revenue | 2020 Amount | 2020 % of Revenue | Change (Dollar) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :------------ | :---------------- | :-------------- | :--------- | | Programming amortization | $1,781,247 | 6 % | $51,094 | 0 % | $1,730,153 | 3,386 % | | Film library amortization | $10,087,539 | 35 % | $7,981,212 | 41 % | $2,106,327 | 26 % | | Revenue share and partner fees | $4,134,780 | 14 % | $2,285,131 | 12 % | $1,849,649 | 81 % | | Distribution and platform costs | $6,852,808 | 24 % | $4,523,414 | 23 % | $2,329,394 | 51 % | | Total Cost of Revenue | $22,856,374 | 79 % | $14,840,851 | 77 % | $8,015,523 | 54 % | | Gross Profit | $6,240,481 | | $4,520,900 | | $1,719,581 | 38 % | | Gross Profit Margin | 21 % | | 23 % | | | | Cost of Revenue (Nine Months Ended September 30) | Cost Item | 2021 Amount | 2021 % of Revenue | 2020 Amount | 2020 % of Revenue | Change (Dollar) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :------------ | :---------------- | :-------------- | :--------- | | Programming amortization | $4,725,242 | 6 % | $216,487 | 1 % | $4,508,755 | 2,083 % | | Film library amortization | $23,831,464 | 32 % | $16,781,685 | 36 % | $7,049,779 | 42 % | | Revenue share and partner fees | $9,465,409 | 13 % | $6,495,468 | 14 % | $2,969,941 | 46 % | | Distribution and platform costs | $16,510,912 | 22 % | $14,191,146 | 31 % | $2,319,766 | 16 % | | Total Cost of Revenue | $54,533,027 | 73 % | $37,684,786 | 82 % | $16,848,241 | 45 % | | Gross Profit | $19,895,604 | | $8,441,578 | | | | | Gross Profit Margin | 27 % | | 18 % | | | | - The Sonar acquisition accounted for $1.2 million (12%) of film library amortization and $1.5 million (22%) of distribution costs for the three months, and $2.1 million (9%) of film library amortization and $1.5 million (9%) of distribution costs for the nine months ended September 30, 2021[203][226] Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses increased by $5.7 million (62%) for the three months and $12.0 million (52%) for the nine months ended September 30, 2021. This was primarily driven by a significant increase in share-based compensation, professional fees, and marketing expenses, along with higher compensation expense due to increased headcount and the Sonar acquisition Selling, General and Administrative Expenses (Three Months Ended September 30) | Expense Item | 2021 Amount | 2020 Amount | Change (Dollar) | Change (%) | | :-------------------------------- | :------------ | :------------ | :-------------- | :--------- | | Compensation expense | $6,048,343 | $5,422,776 | $625,567 | 12 % | | Share-based compensation | $3,474,231 | $346,773 | $3,127,458 | 902 % | | Professional fees | $2,366,947 | $815,415 | $1,551,532 | 190 % | | Other operating expenses | $2,926,215 | $1,644,164 | $1,282,051 | 78 % | | Total SG&A | $15,038,299 | $9,301,550 | $5,736,749 | 62 % | Selling, General and Administrative Expenses (Nine Months Ended September 30) | Expense Item | 2021 Amount | 2020 Amount | Change (Dollar) | Change (%) | | :-------------------------------- | :------------ | :------------ | :-------------- | :--------- | | Compensation expense | $16,853,398 | $12,695,703 | $4,157,695 | 33 % | | Share-based compensation | $3,937,919 | $820,881 | $3,117,038 | 380 % | | Professional fees | $5,035,223 | $2,513,449 | $2,521,774 | 100 % | | Other operating expenses | $7,923,261 | $4,520,631 | $3,402,630 | 75 % | | Total SG&A | $35,237,480 | $23,194,223 | $12,043,257 | 52 % | - Bad debt expense decreased by $0.9 million for the three months and $1.6 million for the nine months ended September 30, 2021, due to increased collection efforts[211][236] Management and License Fees Management and license fees, paid to CSS, increased by 50% to $2.9 million for the three months and 61% to $7.4 million for the nine months ended September 30, 2021, directly in line with the increase in net revenue, as these fees are calculated as 5% of net revenue each - Management fees (5% of net revenue) and license fees (5% of net revenue) are paid to CSS[191][192] Management and License Fees | Period | Amount | | :-------------------------------- | :----------- | | Three Months Ended Sep 30, 2021 | $2,909,686 | | Three Months Ended Sep 30, 2020 | $1,936,175 | | Nine Months Ended Sep 30, 2021 | $7,442,863 | | Nine Months Ended Sep 30, 2020 | $4,612,636 | - The increase in fees is directly proportional to the 50% and 61% increase in net revenue for the three and nine months ended September 30, 2021, respectively[207][232] Interest Expense Interest expense increased by $0.6 million for the three months and $2.2 million for the nine months ended September 30, 2021, primarily due to a higher average outstanding debt balance compared to the prior year Interest Expense | Debt Type | Three Months 2021 | Three Months 2020 | Nine Months 2021 | Nine Months 2020 | | :-------------------------------- | :---------------- | :---------------- | :--------------- | :--------------- | | 9.50% Notes due 2025 | $781,278 | $431,564 | $2,312,113 | $431,564 | | Revolving Loan | $213,320 | — | $312,172 | — | | Film acquisition advance | $168,429 | $82,918 | $505,052 | $82,918 | | Total Interest Expense | $1,304,952 | $659,803 | $3,533,940 | $1,322,831 | - The increase in interest expense is primarily related to a higher average outstanding debt balance during 2021[214][241] Provision for Income Taxes The Company's provision for income taxes is based on federal and state taxes, with its effective rate impacted by permanent differences (e.g., non-tax-deductible stock options) and temporary differences (e.g., film production costs, interest limitation rules) - The provision for income taxes consists of federal and state taxes, aligning with the expected full-year effective rate[215][242] - The effective tax rate is impacted by permanent differences, such as non-tax-deductible incentive stock options and amortization of pre-acquisition film library costs[216][243] - Temporary differences arise from film production costs (deductible under IRC Section 181 or 168(k) vs. capitalized for GAAP), interest limitation rules (Section 163(j)), and amortization of acquired intangible assets (Section 197)[217][244] Liquidity and Capital Resources The Company's liquidity is primarily supported by cash on hand, operating cash flows, and financing activities. It significantly increased cash and cash equivalents through equity offerings and debt financing, which also improved its liquidity position and reduced future interest payments Overview As of September 30, 2021, the Company had $66.9 million in cash and cash equivalents and $56.7 million in total debt. It raised significant capital through public and private common stock offerings, generating $70.5 million and $21.4 million in net proceeds, respectively, and $3.4 million from at-the-market offerings - Cash and cash equivalents totaled $66.9 million as of September 30, 2021, up from $14.7 million at December 31, 2020[245][252] - Total debt principal outstanding was $56.7 million as of September 30, 2021[245] - The Company completed a public offering of common stock in July 2021, generating $70.5 million in net proceeds, and a private placement in January 2021, generating $21.4 million in net proceeds[249][250] - Total preferred dividends declared for the nine months ended September 30, 2021, were $6.8 million, compared to $3.0 million in 2020[251] Cash Flows For the nine months ended September 30, 2021, net cash used in operating activities increased to $23.7 million, and investing activities used $2.0 million. However, financing activities provided a substantial $77.9 million, primarily from equity offerings, leading to a net increase of $52.2 million in cash and cash equivalents Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2021 | 2020 | | :-------------------------------- | :----------------- | :----------------- | | Operating activities | $(23,666,639) | $(13,811,032) | | Investing activities | $(1,988,221) | $(609,607) | | Financing activities | $77,870,089 | $17,216,552 | | Net increase in cash and cash equivalents | $52,215,229 | $2,795,913 | - The increase in cash used in operating activities was primarily due to a $9.3 million decrease in net loss adjusted for non-cash items and a $19.1 million decrease from changes in operating assets and liabilities, including a $48.4 million increase in film library assets[253][254][258] - Investing activities used cash for the Landmark Studio Group equity purchase ($6.0 million), Sonar acquisition ($1.1 million), and capital expenditures ($1.1 million), partially offset by a decrease in due-from affiliated companies ($6.2 million)[263] - Financing activities were boosted by $70.5 million from a public common stock offering, $21.4 million from a private placement, and $3.4 million from at-the-market offerings, offset by contingent consideration payments ($8.1 million) and preferred stockholder dividends ($6.4 million)[264] Anticipated Cash Requirements The Company anticipates meeting future operational and debt service needs through existing cash, operating cash flow, monetization of receivables, and potential equity/debt offerings. It monitors liquidity to maintain creditworthiness but acknowledges risks if unable to secure financing on reasonable terms - Primary sources of liquidity include existing cash, cash flow from operations, monetization of trade accounts receivable, and potential equity and debt offerings[266] - The Company monitors cash flow, capital base, and leverage ratios to maintain creditworthiness[266] - There is no assurance that debt or equity financing would be available on a timely basis or commercially reasonable terms if required, which could materially adversely affect operations[266] Critical Accounting Policies and Significant Judgments and Estimates The financial statements are prepared using U.S. GAAP, requiring management to make estimates and assumptions that affect reported amounts. No significant changes in critical accounting policies, judgments, and estimates have occurred since December 31, 2020 - Financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions[268] - No significant changes in critical accounting policies, judgments, and estimates have occurred since December 31, 2020[269] JOBS Act As an emerging growth company, the Company has irrevocably elected to use the extended transition period for new or revised accounting standards, allowing it to comply with standards applicable to private companies - The Company is an emerging growth company under the JOBS Act[270] - It has irrevocably elected the extended transition period for new or revised accounting standards, aligning with private company compliance[270] Off-Balance Sheet Arrangements As of September 30, 2021, and December 31, 2020, the Company had no off-balance sheet arrangements - The Company had no off-balance sheet arrangements as of September 30, 2021, and December 31, 2020[271] Effect of Inflation and Changes in Prices This section states that the effect of inflation and changes in prices is not applicable to the Company's discussion - The effect of inflation and changes in prices is not applicable[272] Item 3: Quantitative and Qualitative Disclosures About Market Risk This section indicates that there are no quantitative and qualitative disclosures about market risk applicable to the Company - No quantitative and qualitative disclosures about market risk are applicable[273] Item 4: Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021. No material changes in internal control over financial reporting occurred during the period, despite remote work due to COVID-19 Evaluation of disclosure controls and procedures Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2021, concluding they were designed and functioning effectively to provide reasonable assurance for timely and accurate reporting - Management, with CEO and CFO, evaluated disclosure controls and procedures as of September 30, 2021[276] - They concluded that disclosure controls and procedures were designed and functioning effectively to provide reasonable assurance for timely and accurate reporting[277] - As an 'emerging growth company,' the Company is exempt from auditor attestation requirements for internal control over financial reporting[278] Changes in internal control over financial reporting No material changes in internal control over financial reporting occurred during the period, and the Company continues to monitor the impact of remote work due to the COVID-19 pandemic - No material changes in internal control over financial reporting occurred during the period[279] - The Company is monitoring the impact of remote work due to COVID-19 on internal controls[279] PART II - OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1 – Legal Proceedings The Company is not currently a party to any legal proceedings expected to have a material adverse effect on its business, though it acknowledges inherent uncertainties and potential risks from future litigation - The Company is not presently a party to any legal proceedings believed to have a material adverse effect on its business[280] - Legal proceedings are subject to inherent uncertainties, and unfavorable outcomes could materially impact the business[280] Item 1A – Risk Factors This section refers readers to the 'Risk Factors' section of the Company's Form 10-K for the year ended December 31, 2020, for a comprehensive discussion of factors that could materially adversely affect its business - Significant risk factors are detailed in the 'Risk Factors' section of the Company's Form 10-K for the year ended December 31, 2020[281] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities during the reporting period - There were no unregistered sales of equity securities[282] Item 3 – Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[283] Item 4 – Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[285] Item 5 – Other Information This section indicates that there is no other information to report - No other information is reported[286] Item 6 – Exhibits This section lists the exhibits filed as part of this Quarterly Report on Form 10-Q, including certifications and XBRL documents - Exhibits filed include certifications from principal executive and financial officers (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF, 104)[287][288] SIGNATURES This section contains the signatures of the Chief Financial Officer and Chief Executive Officer of Chicken Soup for the Soul Entertainment, Inc., certifying the report on November 8, 2021 Signatures The report is signed on behalf of Chicken Soup for the Soul Entertainment, Inc. by Christopher Mitchell, Chief Financial Officer, and William J. Rouhana, Jr., Chief Executive Officer, on November 8, 2021 - The report is signed by Christopher Mitchell, Chief Financial Officer, and William J. Rouhana, Jr., Chief Executive Officer[291] - The signing date is November 8, 2021[291]