Part II – Offering Circular
An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These shares may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or a solicitation of an offer to buy or sell any of these shares in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a final offering circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the final offering circular or the offering statement in which such final offering circular was filed may be obtained.
Preliminary Offering Circular September __, 2016
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CHICKEN SOUP FOR THE SOUL ENTERTAINMENT, INC.
1,358,000 shares of Class A common stock
This is an offering of up to 1,358,000 shares of our Class A common stock comprised of (a) 1,100,000 newly issued shares to be sold by us (“Primary Shares”) and (b) 258,000 outstanding shares that may be sold by certain of our existing stockholders (“Secondary Shares”), with such shares being allocated ratably among the Primary Shares and Secondary Shares to the extent we sell less than all of the Primary Shares and Secondary Shares. We will have the option to sell up to ________ additional newly issued shares (“Additional Shares”) in our sole discretion. There is no minimum number of Primary Shares or Secondary Shares that we must sell in order to conduct a closing in this offering.
We will not receive any of the proceeds from the sale of Secondary Shares in the offering. Our officers, directors and existing stockholders shall be entitled to purchase shares in the offering.
Prior to this offering, there has been no public market for our common stock. We expect that our Class A common stock will be quoted for trading on the OTCQB market or another over-the-counter market on the closing of this offering under the symbol _____. See “Plan of Distribution.”
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and have elected to comply with certain reduced public company reporting requirements.
Investing in the shares offered by this offering circular involves a high degree of risk. See “Risk Factors” beginning on page 10 of this offering circular for a discussion of information that should be considered in connection with an investment in such securities.
| Per Share | Total(1) | |||||||
| Public offering price | ||||||||
| Selling agents’ commission(2) | ||||||||
| Proceeds, before expenses, to us(3) | ||||||||
| Proceeds, before expenses, to the selling shareholders | ||||||||
____________________________
| (1) | Assumes that all of the Primary Shares and Secondary Shares offered are sold and we have not taken advantage of our option to sell any Additional Shares as described herein. We will not receive any proceeds from the sale of the Secondary Shares. |
| (2) | Does not include a non-accountable expense allowance of ___% of the gross proceeds, payable to the co-bookrunning selling agents. We will not pay any selling agents’ commissions or non-accountable expense allowance with respect to the Secondary Shares. See “Plan of Distribution” beginning on page 61 of this offering circular for a description of the compensation payable to, and other arrangements with, the co-bookrunning selling agents. |
| (3) | Expenses include those relating to the Secondary Shares, other than as described in footnote (2), above. |
We plan to market this offering to potential investors through the co-bookrunning selling agents. Investors who participate in this offering will be required to deposit their funds in an escrow account managed by __________ and any funds that __________ receives shall be held in escrow until the closing of the offering or such other time as mutually agreed between us and the co-bookrunning selling agents, and then used to complete share purchases, or returned if this offering fails to close. Pursuant to Rule 15c2-4, unless there is a closing of the offering, we will not have any access to the funds held in the escrow account. The offering will close by _____________, 2016, which is ____ days after the date of this offering circular, unless all the shares are sold before that date, or we decide to extend the offering for up to _____ additional days, or we otherwise decide to close the offering early or cancel it, in our sole discretion. If we extend the offering, we will provide that information in an amendment to this offering circular. If we close the offering early or cancel it, we may do so without notice to you, although if we cancel the offering all funds that may have been provided by any investors will be promptly returned without interest or deduction. See “Plan of Distribution.”
This is a Regulation A+ Tier 1 offering, although we may determine to amend the offering to a Regulation A+ Tier 2 offering prior to its qualification by the Securities and Exchange Commission.
This Offering Circular is intended to provide the information required by Part I of Form S-1. We are a smaller reporting company within the meaning of Rule 405 and are following the Form S-1 disclosure requirements for smaller reporting companies.
No sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or your net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.
THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SHARES OFFERED HEREBY OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SHARES ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SHARES OFFERED ARE EXEMPT FROM REGISTRATION.
Co-Bookrunning Selling Agents
| [_____________] | [_____________] |
_______, 2016
TABLE OF CONTENTS
Additional Legends
NASAA UNIFORM LEGEND:
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY THE FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
FOR ALL RESIDENTS OF ALL STATES:
THE SHARES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF CERTAIN STATES AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT IN VARIOUS STATES TO RESTRICTION ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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This summary highlights certain information appearing elsewhere in this offering circular. For a more complete understanding of this offering, you should read the entire offering circular carefully, including the risk factors and the financial statements.
Unless otherwise stated in this offering circular,
| · | “we,” “us,” “our,” “our company” or “CSS Entertainment” refers to Chicken Soup for the Soul Entertainment, Inc. (including CSS Productions, our predecessor, to the extent applicable); |
| · | “CSS Holdings” refers to Chicken Soup for the Soul Holdings, LLC, our ultimate parent holding company |
| · | “CSS” refers to Chicken Soup for the Soul, LLC, a wholly owned subsidiary of CSS Holdings; |
| · | “CSS Productions” refers to Chicken Soup for the Soul Productions, LLC, a wholly owned subsidiary of CSS and our predecessor and immediate parent company; and |
| · | our “management” or “management team” refers to all of our officers and directors. |
The information in this offering circular assumes that all of the Primary Shares offered are sold and we have not taken advantage of our option to sell any Additional Shares as described herein.
You should rely only on the information contained in this offering circular. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted.
“Chicken Soup for the Soul®” and related names are trademarks owned by Chicken Soup for the Soul, LLC.
“Sips™” is a trademark owned by Chicken Soup for the Soul Entertainment, Inc.
Overview
We are a provider of distinctive and highly appealing video content capitalizing on the Chicken Soup for the Soul® brand. Chicken Soup for the Soul® is a widely recognized, global brand. Positive messaging, including real-life stories relating to happiness, inspiration, hope and other human interest topics, is intrinsic to the brand. The brand has garnered increasing consumer awareness and engagement as a welcoming sanctuary from the complexities of our daily lives. We believe the Chicken Soup for the Soul® brand is a key factor that differentiates our video content in an environment characterized by a proliferation of content creators and content distribution platforms.
We provide both long-form and short-form video content and make it available to consumers globally through a growing number of distribution platforms, including internet-delivered networks, such as social media, “over-the-top” (“OTT”) networks and direct-to-consumer networks, as well as traditional television and cable networks, for consumption on a wide range of devices on an appointment or on-demand basis.
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Our long-form video content consists of 30- or 60-minute episodic programs typically distributed initially on traditional television or cable networks. Our current long-form video content projects include:
| · | Chicken Soup for the Soul’s Hidden Heroes. Our first long-form video content project is a hidden camera show hosted by Brooke Burke-Charvet, which premiered on CBS in October 2015. During its first season, the show averaged approximately one million viewers per original episode and received multiple prestigious awards. Hidden Heroes has been renewed for its second season with new episodes premiering in October 2016. |
| · | Chicken Soup for the Soul’s Project Dad. Our second long-form video content project is a show in which the camera follows three celebrity dads as they put their careers on the sidelines and get to know their children, resulting in a humorous look at the pitfalls and joys of being a father. The show is scheduled to premiere on TLC, Discovery Life and Discovery Family in the Fall of 2016. |
Our short-form video content, including our branded short-form video content known as Sips™, is typically exhibited through online content distribution and social media platforms, such as YouTube, Facebook, Yahoo, Diply, Gateway Media, SheKnows, Rumble and Liquid Social among others, as well as on the social media of Chicken Soup for the Soul® and our sponsors. Our current short-form video content projects include:
| · | Hilton Grand Vacation Sips™. A series of seven short-form videos illustrating that a life without vacations is not complete. These Sips™ are scheduled to be delivered in October 2016 and are expected to be available for viewing in January 2017. |
| · | Emily Griffiths Technical College Sips™. A series of ten short-form videos highlighting the success in overcoming adversity of graduates of the Emily Griffiths Technical College. All ten Sips™ were funded by the Morgridge Family Foundation and delivered in June 2016. These Sips® can be viewed on the social media of Emily Griffiths Technical College and Chicken Soup for the Soul®, as well as Rumble. |
Our management team, led by our executive chairman, William J. Rouhana, Jr., our vice chairman, Scott W. Seaton, and our senior brand advisor and director, Amy L. Newmark, possesses extensive expertise in the technology, media and telecommunications (“TMT”) industries. Mr. Rouhana played a pioneering role in several innovative TMT companies, including Winstar Communications, Inc. (“Winstar”). As chief executive officer, Mr. Rouhana built Winstar from a three-person start-up company to a Nasdaq-listed public company that employed approximately 5,000 people, serviced more than one million customers and generated annual revenues of approximately $1 billion. Mr. Seaton was a senior investment banker covering companies in the TMT sectors for Credit Suisse First Boston, Bank of America and Oppenheimer & Co. and served as a director of Mediacom Communications Corporation, currently the fifth largest cable television operator in the United States. Ms. Newmark has been the publisher and editor-in-chief of the Chicken Soup for the Soul® series of books. She was previously a highly ranked equity research analyst covering the TMT sectors.
The Chicken Soup for the Soul® Brand
We own the exclusive, perpetual and worldwide license to produce and distribute video content using the Chicken Soup for the Soul® brand. The Chicken Soup for the Soul® brand has been most well-known for its series of Chicken Soup for the Soul® books, which has more than 250 published titles and has sold more than 500 million copies worldwide during the last 23 years. The Chicken Soup for the Soul® brand has garnered significant awareness within its target, highly-prized female demographic, which is driving significant growth in its social media presence and consumer engagement.
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We believe that significant brand awareness, the demographics to which the brand appeals, a growing social media presence, and the highly engaged fan base associated with the Chicken Soup for the Soul® brand will translate into meaningful recognition and demand for our video content offerings.
Brand Awareness and Demographics
| · | By 2008, 89% of people surveyed in the United States recognized the brand according to a Harris poll; |
| · | The brand had more than four billion earned media impressions in 2015, an increase from approximately 60 million earned media impressions in 2008, representing an annualized growth rate of more than 80%; |
| · | More than 80% of Chicken Soup for the Soul® book sales are made to the highly-prized female demographic; and |
| · | More than 80% of the social media followers of Chicken Soup for the Soul® on Facebook, Twitter and Instagram are women. |
Growing Social Media Presence
Between July 2015 and June 2016, the Chicken Soup for the Soul® brand on social media:
| · | Reached approximately 240 million people during such 12-month period, or an average of approximately 20 million people per month; and |
| · | Generated more than 773 million aggregate impressions on Facebook, Twitter, Pinterest, Instagram and CSS’ pet and Hidden Heroes’ social media. |
Chicken Soup for the Soul® has also seen significant growth in the number of consumers following the brand on social media. For example:
| · | The Chicken Soup for the Soul® brand had 1.8 million Facebook fans as of July 2016, which is up from 1.0 million Facebook fans in June 2014, representing growth of approximately 34% on an annualized basis over that time. |
| · | Since introduction in February 2016, our podcast has had more than 500,000 digital downloads, representing a rapid launch, and, based on the most recent monthly activity, now has an annualized rate of 1.2 million downloads. Each podcast offers listeners a daily dose of inspiration from Chicken Soup for the Soul® author and editor-in-chief Amy Newmark. |
Highly Engaged Fan Base
Based on a 2014 study conducted by SimplyMeasured.com (the “2014 Study”), Chicken Soup for the Soul® fans demonstrated high levels of engagement:
| · | More than 80% of Chicken Soup for the Soul® fans actively shared, commented on or voted to “like” posts on the Chicken Soup for the Soul® Facebook page; and |
| · | This level of fan engagement was ten times (10x) greater than that of Disney’s Facebook fan engagement rate of 8%. |
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Our Opportunity
We believe that CSS Entertainment is well positioned to capitalize on an emerging megatrend in the entertainment industry, which is characterized by increasing demand for video content resulting from the proliferation of new video content distribution outlets. This dramatic increase in video content distribution outlets has been driven by advances in video, internet and mobile technologies, changes in the ways individuals consume video content and fractionalizing audiences. Consequently, parties are seeking innovative solutions to reach their target audiences. In this evolving environment for the production, distribution and consumption of video content, we believe that established brands with strong awareness, a clear and consistent message and a reputation for high-quality, entertaining video content will be a key differentiating factor that enables individuals to successfully locate video content they desire and allow parties to reach their targeted audiences.
Our Business Model
In our innovative business model, we seek to secure committed funding for the production costs of our video content in advance of production through sponsorships, product integration and licensing fees received from corporations, foundations, video content networks (e.g., cable, broadcast and online) and other organizations. Corporate and foundation sponsors with which we work include Hilton Grand Vacations, the American Humane Association, the Boniuk Foundation and the Morgridge Family Foundation and we are currently in discussions with numerous others. We endeavor to retain meaningful back-end rights to our video content in these relationships, which provides opportunities for improved profitability and enhances our library value.
We partner with highly-regarded independent producers to develop and produce the specific long-form or short-form video content for each project. We currently have producer agreements or arrangements in place with DB Goldline Entertainment, a production company led by acclaimed producer Derek Britt and producer and television soap opera star Ricky Paull Goldin, Speedway Boogie Productions, a production company headed by celebrated producer Michael Winter, and HooplaHa, a production company focused on positive message video content, and we expect to add others in the near future.
Utilizing our outsourced, third-party independent producer model enables us to have multiple independent producer relationships, which provide us with access to a diverse pool of creative ideas for new video content projects. We can choose the top ideas from each independent producer that are consistent with the messaging of the Chicken Soup for the Soul® brand. By outsourcing our production functions we have a variable cost structure that allows us to match our revenues and production expenses. Since we seek to secure both the committed funding and production capabilities for our video content at the same time, our business model is designed to allow us to lock in profits on a particular project before committing to proceed with such project. Our ability to expand our access to creative talent and production capabilities by adding new independent producer relationships should allow us to scale our business profitably.
Our Growth Strategies
The key elements of our strategy to drive growth over the next few years include:
| · | growing our existing video content production and distribution business, by covering many themes (e.g., relationships, health and wellness and positive living) consistent with the messaging of Chicken Soup for the Soul® brand in many formats (e.g., short-form, longer-form and episodic); |
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| · | enhancing our revenue potential from our long-form video content by repurposing such video content into short-form video content for syndication through our short-form video content distribution platforms; |
| · | expanding our existing and developing new relationships with sponsors, television networks and independent producers to create new video content in a variety of formats under, or which are consistent with, the Chicken Soup for the Soul® brand; |
| · | building our library and acquiring third-party libraries of video content that are consistent with the messaging of the Chicken Soup for the Soul® brand, which we believe will offer the potential for additional revenue and profitability; |
| · | soliciting, aggregating and curating crowd-sourced video content that is consistent with the messaging of the Chicken Soup for the Soul® brand and creating related Chicken Soup for the Soul® channels to display such crowd-sourced video content; |
| · | increasing distribution for our video content, including building our own OTT networks to distribute our Chicken Soup for the Soul® branded and non-branded video content consistent with the messaging of the Chicken Soup for the Soul® brand, direct-to-consumers on a global basis utilizing a fee per view or subscription-based model or a combination of both and by selling advertising on our OTT networks; |
| · | formulating and implementing an e-commerce strategy for video content-related merchandising; and |
| · | seeking to opportunistically acquire video content production, distribution and related technology companies and/or assets. |
We are seeking access to the public capital markets to avail ourselves of the capital resources provided by such capital markets and to establish our common stock as a public currency to enable us to pursue these growth strategies.
Corporate Information
We are a Delaware corporation formed on May 4, 2016. CSS Productions, our predecessor and immediate parent company, was formed in December 2014 by CSS, a publishing and consumer products company, and initiated operations in January 2015. We were formed to create a discrete, focused entity to pursue video content opportunities using the Chicken Soup for the Soul® brand and to operate in a corporate structure. Our business address is 132 E. Putnam Avenue, Floor 2W, Cos Cob, Connecticut 06807, and our telephone number is (855) 398-0443. Our web address is http://www.cssentertainment.com.
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The Offering
| Securities being offered by the company | 1,100,000 shares of Class A common stock, at $______ per share (“Primary Shares”). We will have the option to sell up to ________ additional newly issued shares in our discretion (“Additional Shares”). There is no minimum number of Primary Shares that we must sell in order to conduct a closing in this offering. | |
| Securities being offered by certain existing stockholders |
Certain of our existing stockholders may sell up to an aggregate of 258,000 shares of our Class A common stock in this offering (“Secondary Shares”).
The shares sold in the offering shall be allocated pro ratably among the Primary Shares and Secondary Shares. | |
| Securities outstanding prior to this offering |
813,167 shares of Class A common stock 8,071,955 shares of Class B common stock 273,062 Class W warrants | |
| Securities outstanding after this offering |
___________ shares of Class A common stock ____________ shares of Class B common stock _____________ Class W warrants
Currently, William J. Rouhana, Jr., our executive chairman, beneficially owns, through his affiliates, approximately 95.9% of the voting power of our outstanding capital stock. After the offering, assuming all of the Primary Shares are sold (but no Additional Shares), Mr. Rouhana would beneficially own, through his affiliates, approximately _____% of the voting power of our outstanding capital stock. | |
| Two classes of common stock | CSS Entertainment currently has _________ shares of Class A common stock outstanding and _________ shares of Class B common stock outstanding. Holders of shares of Class A common stock and Class B common stock have identical rights, except that holders of shares of Class A common stock are entitled to one vote per share and holders of shares of Class B common stock are entitled to ten (10) votes per share. Holders of shares of Class A common stock and Class B common stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law or our charter documents. See “Description of Securities” for a description of the terms of CSS Entertainment’s Class A and Class B common stock. |
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| Quotation of securities and proposed symbols | There is presently no public market for our common stock. We intend to have our Class A common stock and Class W warrants quoted on the OTCQB or another over-the-counter market under the symbols ___ and ____, respectively. See “Plan of Distribution.” | |
| Lock-up | Each holder of our shares of Class B common stock and certain holders of our Class A common stock have agreed that he or it will not sell, transfer or otherwise dispose of any of these shares (or any shares of Class A common stock issuable upon conversion of the Class B common stock) until ______________, 2017. See “Description of Securities – Lock-up Agreements” for a further description of the foregoing lock-up arrangements and other existing lock-up arrangements entered into in connection with certain of our financings. | |
| Use of proceeds |
Assuming we sell all of the Primary Shares, we estimate that the net proceeds to us from the offering, after deducting the selling agents’ fee and non-accountable expense allowance and other estimated offering expenses payable by us, will be approximately $________ (or $_______ if we sell all of the Additional Shares). We intend to utilize the net proceeds of the offering for: (a) financing production and associated development and operating costs and expenses for our video content; (b) acquiring production and distribution companies and assets and libraries; (c) servicing our obligations under the 2016 Term Notes and the Credit Facility (as such terms are defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”); and (d) working capital requirements and general corporate purposes.
We do not intend to consummate the offering unless the net proceeds of the offering to us, together with our other capital resources, are sufficient to service our debt obligations.
See “Use of Proceeds” for further information on our use of proceeds from the offering. | |
| We will pay all of the expenses of the offering (other than the selling agents’ commissions and non-accountable expense allowance payable with respect to the Secondary Shares sold in the offering), but will not receive any of the proceeds from the sale of the Secondary Shares in the offering. |
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| Risk Factors | Prospective investors should carefully consider the Risk Factors beginning on page 10 before investing in the shares offered hereby. |
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The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included elsewhere in this offering circular.
| For the Year Ended December 31, | ||||||||
| 2014 | 2015 | |||||||
| Operating Data: | ||||||||
| Revenues | $ | — | $ | 1,506,818 | ||||
| Net loss(a) | (478,666 | ) | (668,463 | ) | ||||
| Net loss per share(b) | (0.05 | ) | (0.08 | ) | ||||
| (a) | Net loss for the year ended December 31, 2015 includes non-cash stock-based compensation of $792,000 included in selling, general and administrative expense. |
| (b) | Basic and diluted net loss per common share assumes that the Class B common stock of CSS Entertainment is issued pursuant to both the Contribution Agreement and the Trema Contribution Agreement is issued and outstanding as of January 1, 2014. The weighted average shares outstanding used in the computation is 8,760,000 for both 2014 and 2015. |
| December 31, 2015 | ||||||||||||
| Actual | Pro Forma(1) | Pro Forma | ||||||||||
| Balance Sheet Data: | ||||||||||||
| Cash and cash equivalents | $ | 4,078 | $ | $ | ||||||||
| Total assets | 3,367,901 | |||||||||||
| Total liabilities(1) | 4,515,030 | |||||||||||
| Members’ (deficit)/stockholders’ (deficit) equity | (1,147,129 | ) | ||||||||||
| (1) | The “Pro Forma” information gives effect to sales in the Equity Private Placement and Debt Private Placement and advances received under the Credit Facility. The Equity Private Placement, the Debt Private Placement, and the Credit Facility are defined and described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” |
| (2) | The “Pro Forma As Adjusted” information gives effect to the sale of all of the Primary Shares by us in the offering and the application of the estimated net proceeds therein, but does not give effect to the sale of any Additional Shares. We will pay all of the expenses of the offering (other than the commissions and non-accountable expense allowance payable on the Secondary Shares sold in the offering), but will not receive any of the proceeds from the sale of the Secondary Shares in the offering. |
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An investment in the securities offered by this offering circular involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this offering circular, before making a decision to invest in the CSS Entertainment shares.
Risks associated with our business
We do not have a long operating history on which to evaluate our company.
Our predecessor, CSS Productions, was formed in December 2014 and we were formed in May 2016 to succeed to CSS Productions’ assets in order to create a discrete, focused entity to pursue video content opportunities using the Chicken Soup for the Soul® brand and to operate in a corporate structure. With only one full year of operations, we face all the risks faced by newer companies in the media industry, including significant competition from existing and emerging media producers and distributors, many of which are significantly more established, larger and better financed than our company.
It is only recently that we debuted our video content and accordingly do not have a long history on which to evaluate our ability to produce and distribute video content that will be desired by our target consumers across multiple media offerings. Similarly, we do not have a long-term operating or financial history that can be reviewed in evaluating an investment in our company.
We do not own the Chicken Soup for the Soul® brand and our license to use it may be terminated in certain circumstances.
We do not own the Chicken Soup for the Soul® brand or any other Chicken Soup for the Soul-related assets (including books), other than those assets transferred to us under the CSS Contribution and Trema Contribution Agreements as described under “Certain Transactions – Contribution Agreements.” The brand is licensed to us by CSS under the terms of the CSS License Agreement described under “Certain Transactions – CSS License Agreement.” CSS controls the brand and the continued integrity and strength of the Chicken Soup for the Soul® brand will depend in large part on the efforts and businesses of CSS and how the brand is used, promoted and protected by CSS, which will be outside of the immediate control of our company. Although the license granted to us under the CSS License Agreement is perpetual, there are certain circumstances in which it may be terminated by CSS, including our breach of the agreement.
We are required to make continuing payments to our affiliates, which will reduce our cash flow and profits.
We are required to make significant payments to our affiliates as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Affiliate Resources and Obligations – CSS Management Agreement” and “—CSS License Agreement” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” Accordingly, in the aggregate, approximately 10% of our gross revenues will be paid to our affiliates on a continuous basis and will not be otherwise available to us.
All of our assets are pledged to secure existing indebtedness.
All of our assets are pledged under first priority security interests to secure our repayment obligations under indebtedness owed to CSS under the License Notes, the noteholders under the 2016 Term Notes and the Facility Lenders under the Credit Facility. Our License Note is a demand note and could be called at any time. In the event the holders of such indebtedness take action with respect to our assets in connection with any default under the 2016 Term Notes or the Credit Facility, we may not be able to continue our operations. We do not intend to consummate the offering unless the net proceeds of the offering to us, together with our other capital resources, are sufficient to service these debt obligations.
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Our long-term results of operations are difficult to predict and depend on the commercial success of our video content and the continued strength of the Chicken Soup for the Soul® brand.
Our ability in the long-term to obtain sponsorships and licensing arrangements and to distribute our video content will depend, in part, upon the commercial success of the content that we initially distribute and, in part, on the continued strength of the Chicken Soup for the Soul® brand. We cannot predict whether our initial video content will be accepted by audiences at a level that will create strong demand for our future video content. Further, the continued strength of the brand will be affected in large part by the operations of CSS and its other business operations, none of which we control. CSS utilizes the brand through its other subsidiaries for various commercial purposes, including the sale of books (including educational curriculum products), pet foods and other consumer products. Negative publicity relating to CSS or its other subsidiaries or the brand, or any diminution in the perception of the brand could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects. We cannot assure you that we will manage the production and distribution of all of our video content successfully, that all or any portion of our video content will be met with critical acclaim or will be embraced by audiences on a one-time or repeated basis, or that the strength of the Chicken Soup for the Soul® brand will not diminish over time.
Our reliance on third parties for production and distribution could limit our control over the quality of the finished video content.
We currently have limited internal production and distribution capabilities and are reliant on relationships with third parties for much of these capabilities. Working with third parties is an integral part of our strategy to produce and distribute video content on a cost efficient basis, and our reliance on such third parties could lessen the control we have over the projects, despite our approval rights. Should the third-party producers we rely upon not produce completed projects to the standards we expect and desire, critical and audience acceptance of such projects could suffer, which could have an adverse effect on our ability to produce and distribute future projects. Further, we cannot be assured of entering into favorable agreements with such third-party producers on economically favorable terms or on terms that provide us with satisfactory intellectual property rights in the completed projects.
An integral part of our strategy is to initially minimize our production and distribution costs by utilizing funding sources provided by others, however, such sources may not be readily available.
The production and distribution of video content require a significant amount of capital. As part of our strategy, we will initially seek to fund the production and distribution of our video content through the payment of upfront fees by sponsors, licensors, broadcast, cable and satellite outlets and other producers and distributors, as well as through other initiatives, such as government tax incentives. Funding for our video content projects from the aforementioned sources or other sources may not be available on attractive terms or at all as and when we need such funding. To the extent we are not able to secure agreements by which upfront fees are paid to us, we may need to curtail the amount of video content being produced, or use our operating or other funds to pay for such video content, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
While we seek to minimize production and distribution costs by utilizing funding sources provided by others, as we grow we may seek to fund and produce more of our video content directly, subjecting us to significant additional risks.
Currently, we typically seek to fund the production and distribution of our video content through the payment of upfront fees by sponsors, licensors, broadcast, cable and satellite outlets and other producers and distributors. While this approach provides us with upfront cash receipts ahead of production and allows us to minimize and diversify production costs and risks, these arrangements may limit the backend return to us. If we should determine in the future to finance more of our video content internally in order to capture greater backend returns, we would face significant additional risks, such as the need to internally advance funds ahead of revenue generation and cost recoupment and the need to divert some of our resources and efforts away from other operations.
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We have derived our revenues to date from a limited number of video content offerings and clients and have funded our projects from a limited number of sources.
To date, we have derived all of our revenues from a limited number of video content offerings and clients. We will need to expand and broaden our video content offerings, the distribution channels into which they are placed, the clients to which we sell and the production and financing relationships utilized to create such video content to ensure that we are not reliant on a limited number of offerings or distribution partners. A failure to expand and broaden our video content offerings, client base or distribution, production and financing relationships could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
If a project we are producing incurs substantial budget overruns, we may have to seek additional financing from outside sources to complete production or fund the overrun ourselves.
If a production we are funding incurs substantial budget overruns, we may have to seek additional financing from outside sources to complete production or fund the overrun ourselves. We cannot be certain that any required financing will be available to us on commercially reasonable terms or at all, or that we will be able to recoup the costs of overruns. Increased costs incurred with respect to a particular project may result in the production not being ready for release at the intended time, which could cause a decline in the commercial performance of the project. Budget overruns could also prevent a project from being completed or released at all.
Our operating results may fluctuate.
Our results of operations will depend upon the commercial success of the video content that we produce and distribute, which cannot be predicted with certainty. Our results of operations will be impacted by the critical and general audience acceptance of our video content. We cannot assure you that we will manage the production and distribution of all of our video content successfully, that all or any portion of our video content will be met with critical acclaim or will be embraced by audiences on a one-time or repeated basis. Any inability to achieve commercial success with our video content could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Our operating results are also dependent, in part, on management’s estimates of revenues to be earned over the life of a project. We will regularly review and revise our revenue estimates. This review may result in a change in the rate of amortization and/or a write-down of the video content asset to its estimated realizable value. Results of operations in future years depend upon our amortization of our video content costs. Periodic adjustments in amortization rates may significantly affect these results.
Further, as many of our third-party relationships will be on a project-by-project basis, the profits, if any, generated from various projects will fluctuate based on the terms of the agreements between us and our third-party producers and distributors.
As a result of the foregoing and other factors, our results of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future period.
Distributors' failure to promote our video content will adversely affect our revenues and could adversely affect our business results.
We will not always control the timing and manner in which our licensed distributors distribute our video content offerings. However, their decisions regarding the timing of release and promotional support are important in determining success. Any decision by those distributors not to distribute or promote one of our television programs or films or to promote our competitors’ video content to a greater extent than they promote ours could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
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We are smaller and less diversified than many of our competitors.
Many of the producers and studios with which we compete are part of large diversified corporate groups with a variety of other operations, including television networks and cable channels, which can provide both the means of distributing their products and stable sources of earnings that may allow them to better offset fluctuations in the financial performance of their operations. In addition, the major studios have more resources with which to compete for ideas, storylines and scripts created by third parties as well as for actors, and other personnel required for production. The resources of the major producers and studios may also give them an advantage in acquiring other businesses or assets, including video content libraries, that we might also be interested in acquiring.
We must successfully respond to rapid technological changes and alternative forms of delivery or storage to remain competitive.
The entertainment industry in general continues to undergo significant developments as advances in technologies and new methods of product delivery and storage, or certain changes in consumer behavior driven by these developments, emerge. Consumers are spending an increasing amount of time online and on mobile devices, and are increasingly viewing content on a time-delayed or on-demand basis online, on their televisions and on handheld or portable devices. Our distributors and we must adapt our businesses to changing consumer behavior and preferences and exploit new distribution channels. Our strategy is to seek to take advantage of these changes and thereby to create new revenue streams and other opportunities for our video content. If we cannot successfully utilize these and other emerging technologies, it could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We face risks from doing business internationally.
We intend to distribute our video content outside the U.S. and derive revenues in foreign jurisdictions. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include:
| · | laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws; |
| · | the Foreign Corrupt Practices Act and similar laws regulating interactions and dealings with foreign government officials; |
| · | changes in local regulatory requirements, including restrictions on video content; |
| · | differing cultural tastes and attitudes; |
| · | differing degrees of protection for intellectual property; |
| · | financial instability and increased market concentration of buyers in foreign television markets; |
| · | the instability of foreign economies and governments; |
| · | fluctuating foreign exchange rates; |
| · | the spread of communicable diseases in such jurisdictions, which may impact business in such jurisdictions; and |
| · | war and acts of terrorism. |
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Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Protecting and defending against intellectual property claims may have a material adverse effect on our business.
Our ability to compete depends, in part, upon successful protection of our intellectual property relating to our video content and the protection of the Chicken Soup for the Soul® brand. We will attempt to protect proprietary and intellectual property rights to our productions through available copyright and trademark laws and licensing and distribution arrangements with reputable international companies in specific territories and media for limited durations. Under the terms of the CSS License Agreement, CSS has the primary right to take actions to protect the brand, and, if it does not, and we reasonably deem any infringement thereof is materially harmful to our business, we may elect to seek action to protect the brand ourselves. Although in the former case, we would equitably share in any recovery, and in the latter case, we would retain the entirety of any recovery, should CSS determine not to prosecute infringement of the brand, we could be materially harmed and could incur substantial cost in prosecuting an infringement of the Chicken Soup for the Soul® brand.
Others may assert intellectual property infringement claims against us.
One of the risks of the video content production and distribution business is the possibility that others may claim that our productions and production techniques misappropriate or infringe the intellectual property rights of third parties with respect to their previously developed content, stories, characters and other entertainment or intellectual property. Further, although CSS is obligated to indemnify us for claims related to our use of the Chicken Soup for the Soul® brand in accordance with the CSS License Agreement, we could face lawsuits with respect to claims relating thereto. Irrespective of the validity or the successful assertion of any such claims, we could incur significant costs and diversion of resources in defending against them, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Our business involves risks of liability claims for video content, which could adversely affect our results of operations and financial condition.
As a producer and distributor of video content, we may face potential liability for defamation, invasion of privacy, negligence and other claims based on the nature and content of the materials distributed. These types of claims have been brought, sometimes successfully, against producers and distributors of video content. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Piracy of video content may harm our business.
Video content piracy is extensive in many parts of the world, including South America, Asia, and certain Eastern European countries, and is made easier by technological advances and the conversion of video content into digital formats. This trend facilitates the creation, transmission and sharing of high quality unauthorized copies of video content on DVDs, Blu-ray discs, from pay-per-view through set-top boxes and other devices and through unlicensed broadcasts on free television and the internet. The proliferation of unauthorized copies of our video content could have an adverse effect on our business.
We rely upon a number of partners to offer streaming of content to various devices.
We currently offer viewers the ability to receive streaming content through a host of internet-connected devices, including internet-enabled televisions, digital video players, game consoles and mobile devices, using third-party platforms. We intend to continue to broaden our capability to instantly stream content to other platforms and partners over time. We do not own any of the technology utilized in the distribution of our content and rely on third-party platforms. If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing or other impediments to our streaming content, our ability to grow our business could be adversely impacted. In addition, technology changes may require that our partners update their platforms. If partners do not update or otherwise modify their platforms, our service and our viewers’ use and enjoyment could be negatively impacted.
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Any significant disruption in the computer systems of third parties that we utilize in our operations could result in a loss or degradation of service and could adversely impact our business.
Our reputation and ability to attract, retain and serve our viewers is dependent upon the reliable performance of the computer systems of third parties that we utilize in our operations. These systems may be subject to damage or interruption from earthquakes, adverse weather conditions, other natural disasters, terrorist attacks, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm these systems. Interruptions in these systems, or to the internet in general, could make our content unavailable or impair our ability to deliver such content.
Our online activities are subject to a variety of laws and regulations relating to privacy, which, if violated, could subject us to an increased risk of litigation and regulatory actions.
In addition to our websites, we use third-party applications, websites, and social media platforms to promote our video content offerings and engage consumers, as well as monitor and collect certain information about consumers. There are a variety of laws and regulations governing individual privacy and the protection and use of information collected from such individuals, particularly in relation to an individual’s personally identifiable information. Many foreign countries have adopted similar laws governing individual privacy, some of which are more restrictive than similar United States laws. If our online activities were to violate any applicable current or future laws and regulations, we could be subject to litigation and regulatory actions, including fines and other penalties.
If government regulations relating to the internet or other areas of our business change, we may need to alter the manner in which we conduct our business or incur greater operating expenses.
The adoption or modification of laws or regulations relating to the internet or other areas of our business could limit or otherwise adversely affect the manner in which we currently conduct our business. In addition, the continued growth and development of the market for online commerce may lead to more stringent consumer protection laws, which may impose additional burdens on us. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses or alter our operations.
If we experience rapid growth, we may not manage our growth effectively, execute our business plan as proposed or adequately address competitive challenges.
We anticipate growing our business and operations rapidly. Our growth strategy includes organic initiatives and acquisitions. Such growth could place a significant strain on the management, administrative, operational and financial infrastructure we utilize, most of which is made available to us by our affiliates under the CSS Management Agreement. Our long-term success will depend, in part, on our ability to manage this growth effectively, obtain the necessary support and resources under the CSS Management Agreement and grow our own internal resources as required, including internal management and staff personnel. To manage the expected growth of our operations and personnel, we also will need to increase our internal operational, financial and management controls, and our reporting systems and procedures. Failure to effectively manage growth could result in difficulty or delays in producing our video content, declines in overall project quality and increases in costs. Any of these difficulties could adversely impact our business financial condition, operating results, liquidity and prospects.
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We are subject to risks associated with possible acquisitions, business combinations, or joint ventures.
From time to time, we will engage in discussions and activities with respect to possible acquisitions, sale of assets, business combinations, or joint ventures intended to complement or expand our business, some of which may be significant transactions for us. We may not realize the anticipated benefit from any of the transactions we pursue. Regardless of whether we consummate any such transaction, the negotiation of a potential transaction could require us to incur significant costs and cause diversion of management's time and resources.
Integrating any business that we acquire may be distracting to our management and disruptive to our business and may result in significant costs to us. We could face several challenges in the consolidation and integration of information technology, accounting systems, personnel and operations. Any such transaction could also result in impairment of goodwill and other intangibles, development write-offs and other related expenses. Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Claims against us relating to any acquisition or business combination may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed the seller's indemnification obligations.
There may be liabilities assumed in any acquisition or business combination that we did not discover or that we underestimated in the course of performing our due diligence. Although a seller generally will have indemnification obligations to us under an acquisition or merger agreement, these obligations usually will be subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations. We cannot assure you that our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any undiscovered or underestimated liabilities that we may incur. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We may require and not be able to obtain additional funding to meet increased capital needs after an acquisition.
Our ability to grow through acquisitions, business combinations and joint ventures and our ability to fund our operating expenses after one or more acquisitions may depend upon our ability to obtain funds through equity financing, debt financing (including credit facilities) or the sale or syndication of some or all of our interests in certain projects or other assets or businesses. If we do not have access to such financing arrangements, and if other funds do not become available on terms acceptable to us, there could be a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Our success depends on our management and relationships with our affiliated companies.
Our success depends to a significant extent on the performance of our management personnel and key employees, including production and creative personnel, made available to us through the CSS Management Agreement. The loss of the services of such persons or the resources supplied to us by our affiliated companies could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
To be successful, we need to attract and retain qualified personnel.
Our success will depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for the caliber of talent required to produce and distribute our video content continues to increase. We cannot assure you that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future. If we were unable to hire, assimilate and retain qualified personnel in the future, such inability could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
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We are an “emerging growth company” under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.
We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Class A common stock less attractive because we may rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.
We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year.
Our status as an “emerging growth company” under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. Any inability to raise additional capital as and when we need it, could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
We will incur significant legal, accounting and other expenses associated with corporate governance and public company reporting requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC. These rules and regulations, which require significant legal and financial compliance costs, may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than was previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.
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Our executive chairman will effectively control our company.
We have two classes of common stock – Class A common stock, each share of which entitles the holder thereof to one vote on any matter submitted to our stockholders, and Class B common stock, each share of which entitles the holder thereof to ten votes on any matter submitted to our stockholders. Our executive chairman, William J. Rouhana, Jr., effectively controls CSS Holdings and CSS, which controls CSS Productions, and, in turn, our company. Mr. Rouhana will have control over the vast majority of all the outstanding voting power as represented by our outstanding Class B common stock. Assuming we sell all of the Primary Shares in the offering (but no Additional Shares), he will control approximately ____% of the outstanding voting power of our company immediately after the offering. Further, our bylaws provide that any member of our board may be removed with or without cause by the majority of our outstanding voting power, thus Mr. Rouhana will exert significant control over our board. This concentration of ownership and decision making may make it more difficult for other stockholders to effect substantial changes in our company and may also have the effect of delaying, preventing or expediting, as the case may be, a change in control of our company.
Certain conflicts of interest may arise between us and our affiliated companies and we have waived certain rights with respect thereto.
Our certificate of incorporation includes a provision stating that we renounce any interest or expectancy in any business opportunities that are presented to us or our officers, directors or stockholders or affiliates thereof, including but not limited to CSS Productions and its affiliates (collectively, the “CSS Companies”), except as may be set forth in any written agreement between us and any of the CSS Companies (such as the CSS License Agreement under which CSS has agreed that all video content operations shall be conducted only through CSS Entertainment). This provision also states that our officers, directors and employees shall not be liable to us or our stockholders for monetary damages for breach of any fiduciary duty by reason of any of our activities or any activities of any of the CSS Companies to the fullest extent permitted by Delaware law. As a result of these provisions, there may be conflicts of interest among us and our officers, directors, stockholders or their affiliates, including the CSS Companies, relating to business opportunities, and we have waived our right to monetary damages in the event of any such conflict.
We may issue shares of our capital stock or debt securities in the future, whether to complete any acquisition, a business combination or to raise additional funds, which would reduce the equity interest of our stockholders and might cause a change in control of our ownership.
Our certificate of incorporation authorizes the issuance of up to 70 million shares of Class A common stock, par value $.0001 per share, 20 million shares of Class B common stock, par value $.0001 per share, and 10 million shares of preferred stock, par value $.0001 per share. Assuming we sell all of the Primary Shares (but no Additional Shares), we will have _____ authorized but unissued shares of our Class A common stock remaining available for issuance, __________ authorized but unissued shares of our Class B common stock remaining available for issuance and 10,000,000 authorized but unissued shares of our preferred stock remaining available for issuance immediately after the offering. We also may issue a substantial number of additional shares of our common stock or preferred stock, or a combination of common and preferred stock, to raise additional funds or in connection with any acquisition or business combination in the future.
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Risks associated with this offering
Our financial statements presented in this offering circular are not audited.
This offering is a Tier 1 offering under Regulation A+. Pursuant to the rules applicable to Tier 1 offerings, we are permitted to include unaudited financial statements as opposed to audited financial statements. Accordingly, our financial statements included in this offering circular are unaudited and are subject to adjustment. To the extent that our financial statements are audited in the future, our auditors may present audit adjustments in completing their audit that may result in material changes to our financial statements.
Our outstanding warrants may have an adverse effect on the market price of our common stock.
We have outstanding Class W warrants to purchase up to an aggregate of ________ shares of Class A common stock. The sale, or even the possibility of sale, of the warrants or the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. Furthermore, we might issue warrants or other securities convertible or exchangeable for shares of common stock in the future in order to raise funds or to effect acquisitions or business combinations. If and to the extent our warrants are exercised, or we issue additional securities to raise funds or consummate any acquisition or business combination, you may experience dilution to your holdings.
We do not intend to pay any dividends on our Class A common stock at this time.
We have not paid any cash dividends on our shares of Class A common stock to date. The payment of cash dividends on our Class A common stock in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition as well as the limitations on dividends and distributions that exist under the laws and regulations of the State of Delaware and will be within the discretion of our board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board of directors does not anticipate declaring any dividends on our Class A common stock in the foreseeable future. As a result, any gain you will realize on our Class A common stock (including shares of Class A common stock obtained upon exercise of our warrants) will result solely from the appreciation of such shares.
You will experience immediate and dilution.
The difference between the public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock and Class B common stock, combined, after this offering constitutes the dilution to the investors of shares in this offering. Our existing stockholders acquired their securities prior to this offering at less than investors are paying in this offering, contributing to this dilution. Upon consummation of this offering, investors will incur an immediate and dilution of approximately __% or $____ per share (the difference between the pro forma net tangible book value per share $__, and the initial offering price of $______ per share). This is because investors in this offering purchasing shares will be contributing approximately __% of the total amount paid to us for our outstanding securities after this offering but will only own __% of our outstanding securities. Accordingly, the per-share purchase price investors of the shares will be paying exceeds our per share net tangible book value. In addition, in the future, holders of our common stock will experience dilution upon any exercise of our outstanding warrants.
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If our securities becomes subject to the SEC's penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
If at any time we have net tangible assets of $5,000,000 or less and our common stock or preferred stock has a market price per share of less than $5.00, transactions in our securities may be subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
| · | make a special written suitability determination for the purchaser; |
| · | receive the purchaser's written agreement to the transaction prior to sale; |
| · | provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser's legal remedies; and |
| · | obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed. |
If our securities become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.
Our securities will not be listed on a national securities exchange upon consummation of this offering.
Our securities will not be listed on a national securities exchange upon consummation of this offering but instead will be quoted on the OTCQB or another over-the-counter market. The over-the-counter markets are inter-dealer markets that may provide significantly less liquidity than national securities exchanges. As a result, an active public market for our securities may not develop or be sustained, which could affect your ability to sell, or depress the market price of, our securities. In addition, as a result of trading in the over-the-counter market, we could face other significant material adverse consequences, including
| · | a limited availability of market quotations for our common stock; |
| · | reduced liquidity with respect to our common stock; |
| · | a determination that our common stock is “penny stock” which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; |
| · | a limited amount of news and analyst coverage for our company; and |
| · | a decreased ability to issue additional securities or obtain additional financing in the future. |
The determination for the offering price of our shares is more arbitrary compared with the pricing of securities for an established operating company.
Prior to this offering there has been no public market for any of our securities. The public offering price of our shares was negotiated between us and the co-bookrunning selling agents. Factors considered in determining the prices and terms of the Primary Shares (and the Additional Shares) offered hereby include:
| · | the history and prospects of companies similar to our company; |
| · | prior offerings of those companies; |
| · | our prospects; |
| · | our capital structure; |
| · | an assessment of our management; |
| · | general conditions of the securities markets at the time of the offering; and |
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| · | other factors as were deemed relevant. |
However, although these factors were considered, the determination of the offering prices is more arbitrary than the pricing of securities for an established operating company.
Following this offering, the price of our common stock may vary significantly due to general market or economic conditions as well as other factors. Furthermore, an active trading market for the securities may never develop or, if developed, may not be sustained. You may be unable to sell your securities unless a market can be established and sustained.
A portion of the proceeds of this offering will be used to fund payment obligations to our affiliates and to repay our 2016 Term Notes.
Under the terms of the CSS License Agreement, we were required to make an upfront, one-time payment of $5 million, which was funded through our issuance of the License Note and payment of $1.5 million of cash, which we borrowed under the Credit Facility. These obligations are owed to affiliates of our company. A portion of the proceeds of this offering will be used to repay the outstanding loans under the Credit Facility (approximately $2,800,000 as of the date of this offering circular). In addition, we will repay all principal of and interest accrued under the 2016 Term Notes (approximately $1,565,000 as of the date of this offering circular). Accordingly, the amounts used to service these obligations will not be available to us for our operations.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this offering circular that are not purely historical are forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this offering circular may include, for example, statements about our:
| · | limited operating history and ability to maintain or increase profitability; |
| · | reliance on third parties for production and distribution; |
| · | long-term results of operations; |
| · | ability to manage rapid growth; |
| · | ability to minimize our production and distribution costs by utilizing funding sources provided by others; |
| · | our capital structure; |
| · | success in retaining or recruiting, or changes required in, our officers, key employees or directors; |
| · | potential ability to obtain additional financing when and if needed; |
| · | potential liquidity and trading of our securities; |
| · | regulatory or operational risks; |
| · | financial performance following this offering. |
The forward-looking statements contained in this offering circular are based on current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
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We estimate that the net proceeds of this offering will be $____________ (or $_____________ if we sell all of the Additional Shares). We believe that such funds, together with our current resources, will allow us to operate for at least the next 12 months. We will likely use such funds for:
| · | financing production and associated development and operating costs and expenses for our video content; |
| · | acquiring video content distribution companies and assets and video content libraries; |
| · | servicing our obligations under the 2016 Term Notes and the Credit Facility; and |
| · | working capital and general corporate purposes. |
We do not intend to consummate the offering unless the net proceeds of the offering to us, together with our other capital resources, are sufficient to service our debt obligations.
We cannot estimate the amounts to be used for each purpose set forth above. Accordingly, our management will have significant flexibility in allocating the net proceeds of this offering.
We will pay all of the expenses of the offering (other than the selling agents’ commissions and non-accountable expense allowance payable with respect to the Selling Stockholders Shares sold in the offering), but will not receive any of the proceeds from the sale of the Secondary Shares in the offering.
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The difference between the public offering price per share of our Class A common stock and the pro forma net tangible book value per share after this offering constitutes the dilution to investors of our Class A common stock in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities, by the number of outstanding shares of Class A common stock and Class B common stock combined.
At ____________, our net tangible book value was $_____, or approximately $___ per share. After giving effect to the sale of all of the Primary Shares (but no Additional Shares) in the offering, and the deduction of selling agents’ fees and non-accountable expense allowance and other estimated expenses of this offering, our pro forma net tangible book value at ____________ would have been $_______ or $___ per share, representing an immediate decrease in net tangible book value of $__ per share to existing stockholders and an immediate dilution of __% per share or $__ to new investors.
The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to our outstanding Class W warrants:
| Public offering price | $ | |||||
| Net tangible book value before this offering | ||||||
| Decrease attributable to new investors | ||||||
| Pro forma net tangible book value after this offering | ||||||
| Dilution to new investors |
The following table sets forth information with respect to our existing stockholders and the new investors:
| Shares Purchased | Total Consideration | Average Price Per Share | ||||||||||||||||||
| Number | Percentage | Amount | Percentage | |||||||||||||||||
| Existing stockholders | % | $ | .0 | % | $ | |||||||||||||||
| New investors | % | $ | .0 | % | $ | |||||||||||||||
| 100.0 | % | $ | 100.0 | % | ||||||||||||||||
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The following table sets forth our capitalization as of December 31, 2015 on an actual basis, on a pro forma basis to give effect to the events described in footnote (1), below, and on a pro forma as adjusted basis to give effect to the events described in footnote (2), below.
| Actual | Pro Forma(1) | Pro Forma As | ||||||||||
| Cash and cash equivalents | $ | 4,078 | $ | $ | ||||||||
| Notes Payable – Credit Facility | $ | – | $ | $ | ||||||||
| Notes Payable – Debt Private Placement | – | |||||||||||
| Members’ deficit | (1,147,129 | ) | ||||||||||
| $ | (1,147,129 | ) | ||||||||||
| Stockholders’ (deficit) equity: | ||||||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued or outstanding | – | |||||||||||
| Class A Common stock, $0.0001 par value, 70,000,000 shares authorized; 0 shares issued and outstanding actual; ____________ shares issued and outstanding, pro forma; ____________ shares issued and outstanding, pro forma as adjusted | – | |||||||||||
| Class B Common stock, $0.0001 par value, 20,000,000 shares authorized; 0 shares issued and outstanding actual; ________ shares issued and outstanding, pro forma; ________ shares issued and outstanding pro forma as adjusted | – | |||||||||||
| Additional paid-in capital | – | |||||||||||
| Retained deficit | – | |||||||||||
| Total stockholders’ equity | – | |||||||||||
| Total capitalization | $ | (1,147,129 | ) | $ | $ | |||||||
| (1) | The “Pro Forma” information gives effect to the reorganization and succession of our company from CSS Productions, sales in the Equity Private Placement and Debt Private Placement and advances received under the Credit Facility. The Equity Private Placement, the Debt Private Placement, and the Credit Facility are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and elsewhere herein. |
| (2) | The “Pro Forma As Adjusted” information gives effect to the sale of all of the Primary Shares by us in the offering and the application of the estimated net proceeds derived therefrom, but does not give effect to the sale of any Additional Shares. We will pay all of the expenses of the offering (other than the selling agents’ commissions and non-accountable expense allowance payable with respect to the Secondary Shares sold in the offering), but will not receive any of the proceeds from the sale of the Secondary Shares in the offering. |
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Management’s
Discussion and Analysis
of Financial Condition and Results of Operations
Business Overview
CSS Entertainment is a provider of distinctive and highly appealing video content capitalizing on the Chicken Soup for the Soul® brand. Chicken Soup for the Soul® is a widely recognized, global brand. Positive messaging, including real-life stories relating to happiness, inspiration, hope and other human interest topics, is intrinsic to the brand. The brand has garnered increasing consumer awareness and engagement as a welcoming sanctuary from the complexities of our daily lives. We believe the Chicken Soup for the Soul® brand is a key factor that differentiates our video content in an environment characterized by a proliferation of content creators and content distribution platforms.
Our company owns the exclusive, perpetual and worldwide license to produce and distribute video content using the Chicken Soup for the Soul® brand. The terms of this license are described below under “‒ Affiliate Resources and Obligations – CSS License Agreement.”
We provide both long-form and short-form video content and make it available to consumers globally through a growing number of distribution platforms, including internet-delivered networks, such as social media, “over-the-top” (“OTT”) networks and direct-to-consumer networks, as well as traditional television and cable networks, for consumption on a wide range of devices on an appointment or on-demand basis.
In our innovative business model, we seek to secure committed funding for the production costs of our video content in advance of production through sponsorships, product integration and licensing fees received from corporations, foundations, video content networks (e.g., cable, broadcast and online) and other organizations. We endeavor to retain meaningful back-end rights to our video content in these relationships, which provides opportunities for improved profitability and enhances our library value.
We partner with highly-regarded independent producers to develop and produce the specific long-form or short-form video content for each project. By outsourcing our production functions we have a variable cost structure that allows us to match our revenues and production expenses. Since we seek to secure both the committed funding and production capabilities for our video content at the same time, our business model is designed to allow us to lock in profits on a particular project before committing to proceed with such project. Our ability to expand our access to creative talent and production capabilities by adding new independent producer relationships should allow us to scale our business profitably.
We have entered into agreements for the production and distribution of our video content pursuant to which the other parties are obligated to make payments to us that will generate aggregate revenues to us in 2016 and 2017, combined, of approximately $14.6 million. Our payment commitments for production costs associated with these agreements aggregate $7.7 million for 2016 and 2017, combined.
CSS Entertainment is a Delaware corporation formed on May 4, 2016. We were formed to succeed to the assets and liabilities of CSS Productions, our predecessor and parent company, in order to create a discrete, focused entity to pursue video content opportunities using the Chicken Soup for the Soul® brand and to operate in a corporate structure. In connection with such succession, and pursuant to the terms of the Contribution Agreement and Trema Contribution Agreement described in “Certain Transactions – Contribution Agreements, all video content assets owned by CSS and any of its affiliates, including all rights and obligations related thereto, were transferred to us in May 2016.
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Results of Operations
For the Year Ended December 31, 2015 compared with the Year Ended December 31, 2014
Basis of Presentation
CSS began evaluating the possibility of using the Chicken Soup for the Soul® brand for the development, distribution and sale of video content in early 2014. As described in “Business Overview,” above, CSS Productions was formed to exploit this opportunity in December 2014 and began operations in January 2015.
Our financial statements for 2014 were derived from the financial statements of our ultimate parent company, CSS Holdings. As a result, operating expenses are based on allocations of costs incurred directly attributable to the development of the video content business prior to the formation of CSS Productions. These results of operations should be read together with our financial statements and accompanying notes included elsewhere in this offering circular and together with Critical Accounting Policies and Estimates included below.
Revenues
| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Television | $ | 1,431,818 | $ | - | ||||
| Film option | 75,000 | - | ||||||
| Total Revenues | $ | 1,506,818 | $ | - | ||||
We did not generate any revenues for the year ended December 31, 2014, as we had not yet begun commercial operation of our video content business. For the year ended December 31, 2015, 95% of our total revenues were derived from Chicken Soup for the Soul’s Hidden Heroes, which began airing on CBS in October 2015. We also received a $75,000 (5% of our revenues) non-refundable deposit pursuant to an extension option agreement for a feature film in 2015. The feature film has not started production and there is no commitment or contract to produce a feature film.
Cost of revenues
| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Programming costs | $ | 646,295 | $ | - | ||||
| Film option | 7,500 | - | ||||||
| Total Cost of Revenues | $ | 653,795 | $ | - | ||||
We did not generate any video content revenues for the year ended December 31, 2014, therefore there were no related cost of revenues. For the year ended December 31, 2015, our cost of revenues represented amortization of programming costs for Chicken Soup for the Soul’s Hidden Heroes. The film option cost of revenues is a commission paid on the non-refundable deposit we received for a feature film.
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Operating expenses
| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Selling, general and administrative | $ | 1,242,749 | $ | 403,666 | ||||
| Management and license fees due to CSS | 278,750 | 75,000 | ||||||
| Total Operating Expenses | $ | 1,521,499 | $ | 478,666 | ||||
Selling, general and administrative expenses
For the year ended December 31, 2015, our selling, general and administrative expenses consisted primarily of non-cash share-based payment expense of $792,000, or 64% of total selling, general and administrative expenses. This expense was the result of an equity grant issued in satisfaction of a liability to a company principally owned and controlled by our executive chairman, and was recorded as a liability at fair value. Additionally, payroll and related benefits and travel and entertainment of $379,620 was 31% of total selling, general and administrative expenses relating to our video content business in 2015.
For the year ended December 31, 2014, our selling, general and administrative expenses consisted primarily of payroll and related benefits and travel and entertainment expenses. These expense categories made up 62% of total selling general and administrative expenses relating to our video content business in 2014.
In addition, during 2015 and 2014 we had a consulting agreement with a company that provided executive production services to us, including all activities necessary to establish and maintain relationships regarding our proposed feature length film and a possible talk show and, to oversee the production of each. The consulting agreement is with a writer and director of feature films who is the son of our executive chairman. We have made payments under the consulting agreement of $60,000 and $56,000 for the years ended December 31, 2015 and 2014, respectively. These payments represent 5% and 14% of total selling, general and administrative expenses in 2015 and 2014, respectively. Effective July 15, 2016, the Company and the provider of executive production services mutually agreed to terminate the agreement.
Management and license fees due to CSS
For the years ended December 31, 2015 and 2014, we paid CSS 4% and 1% in management services and license fees, respectively, based on cash revenues collected. These fees were paid pursuant to a management and license fee agreement between CSS Productions and CSS. This agreement is no longer in effect, and as part of the formation of CSS Entertainment, CSS Entertainment entered into a new management agreement and license agreement with CSS as described immediately below.
Affiliate Resources and Obligations
CSS License Agreement
In May 2016, we entered into a trademark and intellectual property license agreement with CSS, which we refer to as the “CSS License Agreement.” Under the terms of the CSS License Agreement, we have been granted a perpetual, exclusive, worldwide license to produce and distribute video content using the Chicken Soup for the Soul® brand and related content, such as stories published in the Chicken Soup for the Soul® books.
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We have paid CSS a one-time license fee of $5 million through the payment of $1.5 million cash and the concurrent issuance to CSS of a $3.5 million principal amount promissory note (“License Note”) bearing interest at 0.5% per annum. We are required to pay all principal of the License Note, and interest accrued thereon, on the earlier of CSS’ demand and the date of consummation of an initial public offering of our common stock. Our payment obligations under the License Note are senior obligations and secured by a first priority security interest in all of our assets. The License Note is prepayable by us in whole or part at any time without penalty and we will use a portion of the proceeds of this offering to pay all or a portion of the principal and interest of the License Note.
We also will pay CSS a recurring additional license fee equal to 4% of our gross revenues for each calendar quarter, and a marketing fee of 1% of our gross revenues for each calendar quarter, with each quarterly fee payable on or prior to the 45th day after the end of the calendar quarter to which it relates. Under the terms of the CSS License Agreement, the first quarterly fee was payable by us with respect to the quarter ended March 31, 2016, as CSS had already been rendering services to our predecessor with respect to the video content business. CSS has agreed that it will not engage, and will not cause or permit its subsidiaries (other than us) to engage, in the production or distribution of video content, including that which is unrelated to the Chicken Soup for the Soul® brand, except in connection with the marketing of their other products and services.
As of the date of this offering circular, we have repaid the License Note in full. The proceeds for these payments were derived primarily from advances we received under the Credit Facility, and the net proceeds of the Debt Private Placement and Equity Private Placement (see Liquidity and Capital Resources below).
We believe that the terms and conditions of the CSS License Agreement, which provides us with the rights to use the trademark and intellectual property in connection with our video content, is more favorable to us than a similar agreement negotiated with an independent third party.
CSS Management Agreement
In May 2016, we entered into a management services agreement, which we refer to as the “CSS Management Agreement.” Under the terms of the CSS Management Agreement, we are provided with the broad operational expertise of CSS and its subsidiaries and personnel, including the services of our executive chairman, Mr. Rouhana, our vice chairman, Mr. Seaton, and our senior brand advisor and director, Ms. Newmark. The CSS Management Agreement also provides for services, such as accounting, legal, marketing, management, data access and back-office systems, and provides us with office space and equipment usage.
We will pay CSS a management fee equal to 5% of our gross revenues for each calendar quarter, with each quarterly payable on or prior the 45th day after the end of the calendar quarter to which it relates. The first quarterly fee was payable by us with respect to the quarter ended March 31, 2016, as CSS had already been rendering services to our predecessor with respect to the video content business.
In addition, for any sponsorship which is arranged by CSS or its affiliates for (i) our video content or (ii) a multi-element transaction for which we receive a portion of such revenue and CSS receives the remaining revenue (for example, a transaction that relates to both our video content and CSS’ printed products), we shall pay a sales commission to CSS of 20% of the portion of such revenue we receive. Each sales commission shall be paid within 30 days of the end of the month in which we receive it. If CSS actually collects our portion of such fee, it will remit revenue due to us after deducting the sales commission.
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We believe that the terms and conditions of the CSS Management Agreement are more favorable, and cost effective, to us than a similar agreement negotiated with an independent third party.
Liquidity and Capital Resources
We are part of a family of companies with common ownership. CSS and its affiliates use a central cash management system to manage their cash positions, whereby cash deposits are transferred to CSS and, as payments are required by affiliated companies, cash is transferred back to them in order to make payments to suppliers and vendors. This means that the cash balance at the end of any period for any affiliated company, including us, will not be reflective of its individual cash generated from, or used in, operations.
Since our formation and after initial borrowings made under the Credit Facility, the cash generated by us is dedicated to us, and as such, is used only for its obligations, and is not subject to transfer within the central cash management system of CSS affiliates.
Credit Facility
On May 12, 2016, we entered into the Credit Facility with the Facility Lender, an affiliate of Mr. Rouhana. Under the terms of the Credit Facility, we may borrow, repay and reborrow up to an aggregate of $3 million. Our payment obligations under the Credit Facility are senior obligations and secured by a first priority security interest in all of our assets (thus having the same priority as the security interest granted by us in connection with the License Note and 2016 Term Notes). The proceeds of the loans made under the Credit Facility shall be used by us for working capital and general corporate purposes, as well as the prepayment, in our discretion, of a portion of the principal of the License Note and interest thereon.
In connection with our formation in May 2016, and our acquisition of all video content and related assets owned by CSS and its affiliates, we borrowed $1.5 million under the Credit Facility to pay a portion of the $5 million one-time payment required under the License Agreement.
Loans under the Credit Facility bear interest at 5% per annum, payable monthly in arrears in cash. Principal under the Credit Facility (and all accrued but unpaid interest thereon) shall be paid by us on the earlier of (a) June 30, 2017 and (b) the third business day following consummation of (i) an initial public offering and (ii) any future debt or equity offering (other than as a result of the exercise of our Class W warrants) resulting in gross proceeds to us of at least $7 million (“Maturity Date”). If the Credit Facility is still outstanding at the Maturity Date, or, if prior to the Maturity Date there is an event of default as prescribed by the Credit Facility, all principal and interest of the Credit Facility will be converted into shares of Class A common stock (and Class W warrants) on the same terms as our then most recently completed equity financing immediately prior to the Maturity Date or the event of default giving rise to the mandatory conversion, as the case may be; provided, that under no circumstances shall the pre-money valuation used for this mandatory conversion by less than $52,560,000. We are also obligated to pay the Facility Lender an annual fee equal to 0.75% of the unused portion of the Credit Facility.
As of September 16, 2016, we have borrowed $2,800,000 from the Credit Facility. A portion of the proceeds of this offering may be used to pay, in whole or in part, the balance due under the Credit Facility.
Debt Private Placement
Beginning in July 2016 and through the date of this offering circular, we sold in a private placement (“Debt Private Placement”) to accredited investors $_______ aggregate principal amount of 5% senior secured term notes (the “2016 Term Notes”) and Class W warrants to purchase an aggregate of _____ shares of Class A common stock, for net proceeds after offering expenses of $__________. The 2016 Term Notes bear interest at 5% per annum, payable monthly in arrears in cash. The principal of the 2016 Term Notes (including all accrued, but unpaid interest thereon) shall be paid by us on the earlier of (a) June 30, 2017 and (b) the third business day following consummation of (i) an initial public offering and (ii) any future equity offering (other than as a result of the exercise of our Class W warrants) resulting in gross proceeds to us of at least $7 million (the “Maturity Date”). The 2016 Term Notes and Class W warrants have the terms described herein under “Description of Securities – 2016 Term Notes” and “– Class W Warrants,” respectively.
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We do not intend to consummate the offering unless the net proceeds of the offering to us, together with our other capital resources, are sufficient to service our debt obligations.
Equity Private Placement
Beginning in July 2016 and through the date of this offering circular, we sold in a separate private placement (the “Equity Private Placement”) to accredited investors $_______ of units, consisting of an aggregate of _______ shares of Class A common stock and Class W warrants to purchase an aggregate of _____ shares of Class A common stock, for net proceeds after offering expenses of $__________.
Other than the Credit Facility and 2016 Term Notes, we do not have any available credit, bank financing or other external sources of liquidity. In order to meet our commitments, to expand our operations and to fund our activities, we need to obtain additional capital. The net proceeds from this offering, as well as private placements of debt and equity completed prior to the effective date of this offering, will be sufficient to meet our cash requirements for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses in the future, fail to collect significant amounts that may be owed to us, or experience unexpected cash requirements that would force us to seek additional financing. If we seek additional financing, we would likely issue additional equity or debt securities, and as a result, stockholders may experience additional dilution or the new debt or equity securities may have rights, preferences or privileges more favorable than those of existing holders of our debt or equity. In this event, if additional financing is not available or is not available on acceptable terms, we may be required to delay, reduce the scope of or eliminate our video content production plans.
Over the next twelve months, we expect to use the funds from this offering for the following purposes:
| · | financing production and associated development and operating costs and expenses for our video content; |
| · | acquiring video content distribution companies and assets and video content libraries; |
| · | servicing our obligations under the 2016 Term Notes and the Credit Facility; and |
| · | working capital and general corporate purposes. |
We have not yet determined our expected expenditures, and we cannot estimate the amounts to be used for each purpose set forth above. Accordingly, our management will have significant flexibility in allocating a significant portion of the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.
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Cash flow summary information is as follows:
| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | 2,694,301 | $ | (478,666 | ) | |||
| Investing activities | – | – | ||||||
| Financing activities | (2,690,223 | ) | 478,666 | |||||
| Net increase in cash and cash equivalents | $ | 4,078 | $ | – | ||||
Net cash provided by operating activities of $2,694,301 for the year ended December 31, 2015 was primarily due to the receipt of sponsorship payments and other advances of $3.7 million for video content to be produced. Sponsorship payments and other advances received were offset, in part, by our investment of $1,597,364 in programming costs for our video content in development and to complete episodes of Chicken Soup for the Soul’s Hidden Heroes, which began airing on CBS in October 2015. Our investment in programming costs was offset, in part, by the amortization of such costs totaling $646,295 for Chicken Soup for the Soul’s Hidden Heroes, which is included in cost of revenues in 2015.
Net cash used in operating activities of $478,666 for the year ended December 31, 2014 was due to our expenses funded by CSS to cover our net loss for the year.
There was no net cash used in or provided by investing activities for the years ended December 31, 2015 and 2014.
Net cash used in financing activities was $2,690,223 and net cash provided by financing activities was $478,666 for the years ended December 31, 2015 and 2014, respectively. For the year ended December 31, 2015, net cash used in financing activities was net cash transfers made by us to CSS as a result of being part of the central cash management system, as described above. For the year ended December 31, 2014, net cash provided by financing activities resulted from advances made by CSS to us to fund our cash requirements for the year.
Contractual Obligations and Commitments
We have significant cash obligations and commitments as follows:
| · | to make payments to CSS in accordance with the CSS License Agreement until the License Note is repaid in full, |
| · | to make quarterly payments to CSS based on reported revenues in accordance with the CSS License Agreement and the CSS Management Agreement, |
| · | to make interest payments in accordance with the terms of the Credit Facility, |
| · | to repay the Credit Facility in full no later than June 30, 2017, |
| · | to make interest payments in accordance with the terms of the 2016 Term Notes, |
| · | to repay the 2016 Term Notes at maturity, and |
| · | to make the remaining scheduled payments for the production of Chicken Soup for the Soul’s Hidden Heroes – Season 2 and for Chicken Soup for the Soul’s Project Dad. The total remaining production obligation for these productions, as of September 16, 2016, is approximately $2.8 million. |
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Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those related to our revenue recognition, the fair value of financial instruments, our programming costs and how we account for the impairment of long-lived assets.
Revenue recognition
We recognize revenue when persuasive evidence of an arrangement exists, the fee is fixed and determinable, delivery has occurred, and collection of the resulting receivable is deemed probable.
We derive our revenue from the production and distribution of long-form and short-form video content. For long-form and short-form video content, revenues are recognized when the content is available for broadcast. Revenues from television or digital licensing for fixed fees are recognized when the related program is available to the licensee for telecast.
Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met.
Fair value of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
| · | Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets. |
| · | Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. |
| · | Level 3 - Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. |
As of December 31, 2015 and 2014, the fair value of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated carrying value due to the short maturity of these instruments.
Programming Costs
Television and film programming costs includes or will include the unamortized costs of completed, in-process, or in-development television programs, online media content and film produced by our company. For television programs and films we produce, capitalized costs include all direct production and financing costs, capitalized interest when applicable, and production overhead.
Costs of producing television programs, online media content and film are amortized using the individual-film-forecast method. These costs are accrued and amortized in the proportion that current period’s revenue bears to management’s estimate of ultimate revenue expected to be recognized from each production.
For an episodic television series, the period over which ultimate revenues are estimated cannot exceed ten years following the date of delivery of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later.
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Programming costs are stated at the lower of amortized cost or estimated fair value. The valuation of programming costs is reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value may be less than its unamortized cost. We perform an annual impairment analysis for unamortized programming costs. Additional amortization is recorded in the amount by which the unamortized costs exceed the estimated fair value. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of programming costs may be required as a consequence of changes in management’s future revenue estimates.
Included in cost of revenues in the statement of operations for the year ended December 31, 2015 and 2014, is amortization of programming costs totaling $646,295 and $0, respectively.
Share-based Payments
We measure share-based payment issued in satisfaction of a liability, based on the grant date fair value of the equity investment. The fair value of the equity instrument issued in satisfaction of a liability is accounted for as a liability and measured at the settlement date. Accordingly, the fair value is adjusted at the end of each accounting period until settled.
Controls and Procedures
We are not currently required to maintain an effective system of internal controls as defined by Section 404 of the Sarbanes-Oxley Act. We will be required to comply with the internal control requirements of the Sarbanes-Oxley Act for the fiscal year ending December 31, 2017. As of the date of this offering circular, we have not completed an assessment, nor have our auditors tested our systems, of internal controls.
Once management’s report on internal controls is complete, we will retain our independent auditors to audit and render an opinion on such reports when required by Section 404. The independent auditors may identify additional issues concerning a target business’s internal controls while performing their audit of internal control over financial reporting.
Off-Balance Sheet Arrangements
As of the date of this offering circular, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Effect of Inflation and Changes in Prices
We do not believe that inflation and changes in prices will have a material effect on our operations.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We will qualify as an “emerging growth company” and under the JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As such, our financial statements may not be comparable to companies that comply with public company effective dates.
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Overview
We are a provider of distinctive and highly appealing video content capitalizing on the Chicken Soup for the Soul® brand. Chicken Soup for the Soul® is a widely recognized, global brand. Positive messaging, including real-life stories relating to happiness, inspiration, hope and other human interest topics, is intrinsic to the brand. The brand has garnered increasing consumer awareness and engagement as a welcoming sanctuary from the complexities of our daily lives. We believe the Chicken Soup for the Soul® brand is a key factor that differentiates our video content in an environment characterized by a proliferation of content creators and content distribution platforms.
We provide both long-form and short-form video content and make it available to consumers globally through a growing number of distribution platforms, including internet-delivered networks, such as social media, “over-the-top” (“OTT”) networks and direct-to-consumer networks, as well as traditional television and cable networks, for consumption on a wide range of devices on an appointment or on-demand basis.
We believe that CSS Entertainment is well positioned to capitalize on an emerging megatrend in the entertainment industry, which is characterized by increasing demand for video content resulting from the proliferation of new video content distribution outlets. This dramatic increase in video content distribution outlets has been driven by advances in video, internet and mobile technologies, changes in the ways individuals consume video content and fractionalizing audiences. Consequently, parties are seeking innovative solutions to reach their target audiences. In this evolving environment for the production, distribution and consumption of video content, we believe that established brands with strong awareness, a clear and consistent message and a reputation for high-quality, entertaining video content will be a key differentiating factor that enables individuals to successfully locate video content they desire and allows parties to reach their targeted audiences.
Our Evolving Industry
Consumers around the world are increasingly viewing their video content over online streaming video services. This megatrend has led to a proliferation of distribution outlets, including mobile, OTTs, such as Netflix, and international channels.
We believe significant market opportunities exist to sell video content to an increasing number of buyers, including:
| · | OTTs, such as Netflix, Amazon, Vimeo and Hulu, which distribute video content directly over the Internet to consumers and generate revenues from subscription fees, transactional fees, and, in cases of free-service models, advertising fees. For example, Netflix has increased its streaming subscribers to 74.8 million at December 31, 2015 from 33.3 million at December 31, 2012. |
| · | Traditional linear broadcast and cable networks; and |
| · | Domestic and international niche cable channels, which offer consumers focused and targeted programming content and generate revenues from advertising, licensing and subscription fees. |
As the overall media market has grown and the number and type of media outlets have increased, there has been a corresponding increase in demand for video content, which demand we believe currently exceeds supply. We seek to take advantage of this unmet demand.
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At the same time, however, the fragmentation of the market has made it more difficult for video content producers and media outlets through which video content is exhibited to establish a clear identity with their target audiences. As a result, marketing costs have skyrocketed as these entities spend on various initiatives to differentiate themselves. In this context, we believe that brands have become more important to attract viewers and sponsors and, accordingly, that an opportunity exists for companies that have access to sustainable brands. These companies can exploit their brands to “break through the noise” presented by the wide array of consumer viewing choices in order to provide video content that is readily identifiable to, and desired by, consumers. Companies such as Hallmark (family), Disney (family) and National Geographic (nature) have been able to use their brands to present programming targeted at specific areas of interest and attract viewers seeking such programming. We believe that the Chicken Soup for the Soul® brand will be a powerful driver in our ability to produce and distribute video content desired by media outlets and their target audiences.
The Chicken Soup for the Soul® Brand
We own the exclusive, perpetual and worldwide license to produce and distribute video content using the Chicken Soup for the Soul® brand. The Chicken Soup for the Soul® brand has been most well-known for its series of Chicken Soup for the Soul® books, which has more than 250 published titles and has sold more than 500 million copies worldwide over the last 23 years. The Chicken Soup for the Soul® brand has garnered significant awareness within its target, highly-prized female demographic, which is driving significant growth in its social media presence and consumer engagement.
We believe that significant brand awareness, the demographics to which the brand appeals, a growing social media presence, and the highly engaged fan base associated with the Chicken Soup for the Soul® brand will translate into meaningful recognition and demand for our video content offerings.
Brand Awareness and Demographics
| · | By 2008, 89% of people surveyed in the United States recognized the brand according to a Harris poll; |
| · | More than 4 billion earned media impressions in 2015, an increase from approximately 60 million earned media impressions in 2008, representing an annualized growth rate of more than 80%; |
| · | More than 80% of book sales are made to the highly-prized female demographic; and |
| · | More than 80% of the social media followers of Chicken Soup for the Soul® on Facebook, Twitter and Instagram are women. |
Growing Social Media Presence
Between July 2015 and June 2016, the Chicken Soup for the Soul® brand on social media has:
| · | Reached approximately 240 million people, or an average of approximately 20 million people per month; and |
| · | Generated over 773 million aggregate impressions on Facebook, Twitter, Pinterest, Instagram and CSS’ pet and Hidden Heroes’ social media. |
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Chicken Soup for the Soul® has also seen significant growth in the number of consumers following the brand on social media. For example:
| · | The Chicken Soup for the Soul® brand had 1.8 million Facebook fans as of July 2016, which is up from 1.0 million Facebook fans in June 2014, representing fan growth of approximately 34% on an annualized basis over that time. |
| · | Since introduction in February 2016, our podcast has had more than 500,000 digital downloads, representing a rapid launch, and, based on the most recent monthly activity, now has an annualized rate of 1.2 million downloads. Each podcast offers listeners a daily dose of inspiration from Chicken Soup for the Soul® author and editor-in-chief Amy Newmark. |
Highly Engaged Fan Base
Based on a 2014 study conducted by SimplyMeasured.com (the “2014 Study”), Chicken Soup for the Soul® fans demonstrated high levels of engagement:
| · | More than 80% of Chicken Soup for the Soul® fans actively shared, commented on or voted to “like” posts on the Chicken Soup for the Soul® Facebook page; and |
| · | This level of fan engagement was ten (10x) times greater than that of Disney’s Facebook fan engagement rate of 8%. |
Our Strategy
We have a multi-pronged strategy to capitalize on the strength of the brand and the increasing demand for high-quality video content in order to generate significant growth in our business over the next few years. We believe that our experienced management team and board of directors possess the industry, operational, financial and strategic expertise to successfully implement our strategy profitably without sacrificing growth and in a manner that creates significant value for our stockholders.
The key elements of our strategy to drive growth over the next few years include:
| · | growing our existing video content production and distribution business, by covering many themes (e.g., relationships, health and wellness and positive living) consistent with the messaging of Chicken Soup for the Soul® brand in many formats (e.g., short-form, longer-form and episodic); |
| · | enhancing our revenue potential from our long-form video content by repurposing such video content into short-form video content for syndication through our short-form video content distribution platforms; |
| · | expanding our existing and developing new relationships with sponsors, television networks and independent producers to create new video content in a variety of formats under, or which are consistent with, the Chicken Soup for the Soul® brand; |
| · | building our library and acquiring third-party libraries of video content that are consistent with the messaging of the Chicken Soup for the Soul® brand, which we believe will offer the potential for additional revenue and profitability; |
| · | soliciting, aggregating and curating crowd-sourced video content that is consistent with the messaging of the Chicken Soup for the Soul® brand and creating related Chicken Soup for the Soul® channels to display such crowd-sourced video content; |
| · | increasing distribution for our video content, including building our own OTT networks to distribute our Chicken Soup for the Soul® branded and non-branded video content consistent with the messaging of the Chicken Soup for the Soul® brand, direct-to-consumers on a global basis utilizing a fee per view or subscription-based model or a combination of both and by selling advertising on our OTT networks; |
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| · | formulating and implementing an e-commerce strategy for video content-related merchandising; and |
| · | seeking to opportunistically acquire video content production, distribution and related technology companies and/or assets. |
We are seeking access to the public capital markets to avail ourselves of the capital resources provided by such capital markets and to establish our common stock as a public currency to enable us to pursue these growth strategies.
Our Business
Business Model
We utilize the Chicken Soup for the Soul® brand, together with our management’s industry experience and expertise, to generate revenues through the production and distribution of video content. Following our innovative business model, we seek to secure committed funding for the production costs of our video content in advance of production through sponsorships, product integration and licensing fees received from corporations, foundations, video content networks (e.g., cable, broadcast and online) and other organizations. Corporate and foundation sponsors with which we work include Hilton Grand Vacations, the American Humane Association, the Boniuk Foundation and the Morgridge Family Foundation and we are currently in discussions with numerous others. We endeavor to retain meaningful back-end rights to our video content in these relationships, which provides opportunities for improved profitability and enhances our library value.
We collaborate with highly regarded independent producers to develop and produce the specific long-form or short-form video content for each project. We currently have producer agreements or arrangements in place with:
| · | DB Goldline Entertainment, a production company led by acclaimed producer Derek Britt and producer and television soap opera star Ricky Paull Goldin; |
| · | Speedway Boogie Productions, a production company headed by celebrated producer Michael Winter; and |
| · | HooplaHa, a production company focused on positive message video content, which has delivered to us approximately 100 short-form video programs to date. |
We anticipate entering into relationships with additional independent producers.
Utilizing our outsourced, third-party independent producer model enables us to have multiple independent producer relationships, which provide us with access to a diverse pool of creative ideas for new video content projects. We can choose the top ideas from each independent producer that are consistent with the messaging of the Chicken Soup for the Soul® brand. By outsourcing our production functions, we have a variable cost structure that allows us to match our revenues and production expenses. Since we seek to secure both the committed funding and production capabilities for our video content at the same time, our business model allows us to lock in profits on a particular project before committing to proceed with such project. Our ability to expand our access to creative talent and production capabilities by adding new independent producer relationships should allow us to scale our business profitably.
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Video Content
Our long-form video content consists of 30- or 60-minute episodic programs typically distributed initially on traditional television or cable networks. Our current long-form video content projects include:
| · | Chicken Soup for the Soul’s Hidden Heroes (“Hidden Heroes”). Our first long-form video content project is a hidden camera show hosted by Brooke Burke-Charvet, which premiered on CBS in October 2015. During its first season, the show averaged approximately one million viewers per original episode and received multiple prestigious awards. Hidden Heroes has been renewed for its second season with new episodes premiering in October 2016. |
| · | Chicken Soup for the Soul’s Project Dad (“Project Dad”). Our second long-form video content project is a show in which the camera follows three celebrity dads as they put their careers on the sideline and get to know their children like never before resulting in a humorous look at the pitfalls and joys of being a father. The show is scheduled to premiere on TLC, Discovery Life and Discovery Family in the Fall of 2016. |
Project Dad is based on an original, on-going series produced by KBS, the flagship public service broadcaster in Korea. It is a top-rated show in Korea, where more than 100 episodes have aired. The show is also popular in China, where more than 50 episodes of the Chinese version have aired. We have rights to the format in all markets around the world except Korea, China and Turkey.
Our short-form video content, including our branded short-form video content known as Sips™, is typically exhibited through online content distribution and social media platforms, such as YouTube, Facebook, Yahoo, Diply, Gateway Media, SheKnows, Rumble and Liquid Social among others, as well as on the social media of Chicken Soup for the Soul® and our sponsors. Our current short-form video content projects include:
| · | Hilton Grand Vacation Sips™. A series of seven short-form videos illustrating that a life without vacations is not complete. These Sips™ are scheduled to be delivered in October 2016 and are expected to be available for viewing in January 2017. |
| · | Emily Griffiths Technical College Sips™. A series of ten short-form videos highlighting the success in overcoming adversity of graduates of the Emily Griffiths Technical College. All ten Sips™ were funded by the Morgridge Family Foundation and delivered in June 2016. These Sips™ can be viewed on the social media of Emily Griffiths Technical College and Chicken Soup for the Soul®, as well as Rumble. |
OTT Networks
We believe our growing video content libraries will be of increasing value, offering the potential for additional revenue and profitability so long as new video content is high-quality and entertaining nature of our current programming. We plan to grow through continued content production and by acquiring Brand-Consistent libraries.
Over the last twelve months, we have developed and exhibited our existing video content on the brand’s web sites and social media outlets (e.g., Facebook) generating more than seven million video views. We currently partner with 20 third-party content distribution platforms, such as Diply, Gateway Media, SheKnows, Rumble and Liquid Social, which collectively receive more than nine billion annual impressions, to syndicate our video content, including shorter-form clips of our Hidden Heroes program and our Sips™, under a revenue share arrangement.
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We are building new OTT networks to distribute our video content around the world taking advantage of the brand’s awareness and strong social media presence. We anticipate that our future OTT networks will offer branded and Brand-Consistent video content from our video content libraries as an on-demand service utilizing a fee per view or subscription-based model, or a combination of both.
Brand Licensing for Films
We also license the right to use the brand in connection with films in exchange for an upfront licensing fee and a share of a film’s profits, if any. A licensee may produce and distribute a film theatrically and through other distribution channels using the brand. While we are not directly involved in any portion of a film’s development (production, marketing, distribution or financing), we maintain certain approval rights to ensure the film’s message is Brand-Consistent.
Management and Affiliate Resources and Relationships
Our management team, led by our executive chairman, William J. Rouhana, Jr., our vice chairman, Scott W. Seaton, our senior brand advisor and director, and Amy L. Newmark, possesses extensive expertise in the technology, media and telecommunications (“TMT”) industries. Mr. Rouhana played a pioneering role in several innovative TMT companies, including Winstar Communications, Inc. (“Winstar”). As chief executive officer, Mr. Rouhana built Winstar from a three-person start-up enterprise to a Nasdaq-listed public company that employed approximately 5,000 people, serviced more than 1 million customers and generated annual revenues of approximately $1 billion. Mr. Seaton was a senior investment banker covering companies in the TMT sectors for Credit Suisse First Boston, Bank of America and Oppenheimer & Co. and served as a director of Mediacom Communications Corporation, currently the fifth largest cable television operator in the United States. Ms. Newmark has been the publisher and editor-in-chief of the Chicken Soup for the Soul® series of books. She was previous a highly ranked equity research analyst covering the TMT sectors.
We have entered into agreements with our affiliate companies that provide us with access to important assets and resources. These agreements include:
| · | A trademark and intellectual property license agreement, which we refer to as the “CSS License Agreement,” between us and CSS through which we have been granted a perpetual, exclusive, worldwide license to produce and distribute video content using the brand and related content, such as stories published in the Chicken Soup for the Soul® books. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Affiliate Resources and Obligations – CSS License Agreement” for a discussion of the terms of the CSS License Agreement. |
| · | A management services agreement, which we refer to as the “CSS Management Agreement,” between us and CSS through which we are provided with the broad operational expertise of CSS and its subsidiaries and personnel, including the services of our executive chairman, Mr. Rouhana, and our vice chairman Mr. Seaton. The CSS Management Agreement also provides for services, such as accounting, legal, marketing, management, data access and back-office systems, and provides us with office space and equipment usage. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Affiliate Resources and Obligations – CSS Management Agreement” for a discussion of the terms of the CSS Management Agreement. |
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Intellectual Property
We are party to the CSS License Agreement with CSS through which we have been granted the perpetual, exclusive, worldwide license to produce and distribute video content using the brand and related content, such as stories published in the Chicken Soup for the Soul® books. Chicken Soup for the Soul® and related names are trademarks owned by CSS.
We intend to rely on a combination of confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information and intellectual property rights.
Competition
Video content production and distribution direct to consumers are highly competitive businesses. We face competition from companies within the entertainment business and from alternative forms of leisure entertainment, such as travel, sporting events, outdoor recreation, video games, the internet and other cultural and computer-related activities. We compete with the major studios, numerous independent motion picture and television production companies, television networks, pay television systems and online media platforms for the services of performing artists, producers and other creative and technical personnel and production financing, all of which are essential to the success of our businesses. In addition, our video content competes for media outlet and audience acceptance with video content produced and distributed by other companies. As a result, the success of any of our video content is dependent not only on the quality and acceptance of a particular production, but also on the quality and acceptance of other competing video content available in the marketplace at or near the same time.
Given such competition, and our stage of development, we intend to initially emphasize a lower cost structure, risk mitigation, reliance on financial partnerships and innovative financial strategies. Our cost structures are designed to utilize our flexibility and agility as well as the entrepreneurial spirit of our employees, partners and affiliates, in order to provide creative, desirable video content.
Facilities
We are provided with office space from CSS under the terms of the CSS Management Agreement. This office space is located at 132 E. Putnam Avenue, Floor 2W, Cos Cob, Connecticut 06831.
We consider these facilities adequate for our current operations.
Employees
We have no direct employees. The services of our personnel, including our executive chairman and vice chairman, are provided to us under the CSS Management Agreement. We also utilize many consultants in the ordinary course of our business and hire additional personnel on a project-by-project basis. We believe that our employee and labor relations are good.
Periodic Reporting
Tier 1 offerings are not subject to continuing ongoing reporting obligations under the Securities Exchange Act of 1934, as amended. However, we intend to voluntarily file annual and quarterly reports with the SEC following this offering.
Legal Proceedings
There is no material litigation, arbitration or governmental proceeding currently pending against us, or any of our officers or in their capacity acting as such under the CSS Management Agreement, and neither we, nor our officers have been subject to any such proceeding in the 12 months preceding the date of this offering circular.
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Executive Officers and Key Employees
Our current directors, executive officers and key employees are as set forth below.
| Name | Age | Position | ||||
| William J. Rouhana, Jr. | 64 | Executive Chairman of the Board | ||||
| Scott W. Seaton | 57 | Vice Chairman and Director | ||||
| Amy Newmark | 59 | Director | ||||
| Peter Dekom | 69 | Director | ||||
| Fred Cohen | 72 | Director | ||||
| Christina Weiss Lurie | 56 | Director | ||||
| Diana Wilkin | 58 | Director |
William J. Rouhana, Jr. Mr. Rouhana has been our executive chairman since the formation of our predecessor in December 2014 and has been the Chief Executive Officer of each of CSS Holding and CSS since April 2008. Mr. Rouhana has been a leader in the media, entertainment and communications industries for more than 35 years. He was the founder and Chief Executive Officer of Winstar Communications, a wireless broadband pioneer, and Winstar New Media, one of the earliest online content companies, from 1993 until 2001. During his career, Mr. Rouhana has led the acquisition of numerous media companies including Virgin Vision, a Virgin Group worldwide film distribution venture, in the 1980s. As an entertainment and finance lawyer from 1977 to 1985, he developed new film financing models for major producers such as Blake Edwards. He received his B.A. from Colby College, where he is currently trustee emeritus; and his J.D. from Georgetown Law School. He is the co-founder of The Humpty Dumpty Institute, which created the International Film Exchange, and the Chairman of the Global Creative Forum, which connects the United Nations with major film and television executives and talent. Among other qualifications, Mr. Rouhana brings to our Board extensive executive leadership in the communications, media and entertainment industries including production and distribution of content, and broad experience in business financings and acquisitions. Mr. Rouhana is the husband of Amy Newmark, a member of our board of directors.
Scott W. Seaton. Mr. Seaton has been our vice chairman and a member of our board since our formation in May 2016. He has been the Executive Vice President and Chief Operating Officer of CSS Holdings and CSS since April 2012. He has more than 25 years of media and telecommunications investment banking experience. Prior to joining the CSS companies, he was a Managing Director at Credit Suisse First Boston where he worked from 1988 to 2002, at Bank of America from 2002 to 2009 and at Oppenheimer & Co from 2010 to March 2012. He served on the board of Mediacom Communications Corporation from 2009 to 2011 when Mediacom was taken private for $3.7 billion. He received his A.B. from Stanford University and his M.B.A. from Harvard University. Among other qualifications, Mr. Seaton brings to our Board extensive public company and media-related financing, merger and acquisition transactional experience and important operating experience relating to the Chicken Soup for the Soul® brand and related operations and media company board experience.
Amy Newmark. Ms. Newmark has been a member of our board of since our formation in May 2016. She has more than 30 years of media and telecommunications industry and investment banking experience. Ms. Newmark has been the Publisher, Editor-in-Chief and an author for CSS since April 2008, and has co-authored the publication of more than 150 books during her tenure. From 1981 to 1986, she was a Managing Director at CJ Lawrence, a brokerage firm, and was a top-ranked telecom equity analyst during her tenure. Ms. Newmark founded and managed Information Age Partners, a hedge fund from 1993 to 1996. From 1995 to 1997, she was an executive at Winstar Communications. From 1998 to 2007, she served on the Boards of a variety of different technology companies. She received her A.B. and C.F.A. from Harvard University. Among other qualifications, Ms. Newmark brings to our Board important financing experience, content publications expertise and an intimate knowledge of the Chicken Soup for the Soul® brand and related operations. Ms. Newmark is the wife of Mr. Rouhana, our Executive Chairman.
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Peter Dekom. Mr. Dekom has been a member of our board of since June 2016. He has more than 40 years of media and entertainment legal, consulting and entrepreneurial experience. In 1989, he was named one of Forbes’ top 100 lawyers in the United States. In ___, he was named one of Premiere Magazine’s 50 most powerful people in Hollywood. From 2003 to 2011 he was "of counsel" with Weissmann Wolff Bergman Coleman Grodin & Evall. From 1976 to 1995, he was a partner with Bloom, Dekom, Hergott and Cook. During his career, his clients have included George Lucas, Paul Haggis, Keenen Ivory Wayans, John Travolta, Ron Howard, Rob Reiner, Andy Davis, Robert Towne and Larry David. His corporate clients have included Sears, Pacific Telesis and Japan Victor Corporation (JVC). He is a former member of the board of each of Imagine Films Entertainment, Will Vinton Studios and Cinebase Software. He is a Member of the Academy of Television Arts and Sciences and Academy Foundation. He received his B.A. from Yale University and his J.D. from the UCLA School of Law. Among other qualifications, Mr. Dekom brings to our Board extensive legal and business experience in the media and entertainment industries.
Fred Cohen. Mr. Cohen has been a member of our board of since June 2016. He has more than 35 years of media and entertainment experience. Since 2004, he has been the Chairman of the International Academy of Television Arts & Sciences (Emmys), and, since 2000, the Chairman of its Foundation. Previously, he was the Executive Vice President of CBS Broadcast International, President of King World International Productions, and President of HBO International. Since 2006, he has served as strategic advisor to Harpo Productions on the international distribution of its television properties including The Oprah Winfrey Show and Dr. Oz. He is Chair Emeritus of PCI – Media Impact, a New York based international NGO (non-governmental organization). He received his B.A. from The University of Michigan and his M.S. from Stanford University. Among other qualifications, Mr. Cohen brings to our Board extensive executive and operational experience in the media and entertainment industries, including the international segments of such industries.
Christina Weiss Lurie. Ms. Weiss Lurie has been a member of our board of since June 2016. Her multi-faceted career spans the worlds of sports, entertainment and philanthropy. She is an owner of the Philadelphia Eagles and President of Eagles Charitable Foundation (formerly Eagles Youth Partnership). She is also an Oscar award-winning film producer. As executive producer, Ms. Weiss Lurie received an Oscar for Inside Job (2011), which tackles the consequences of systematic corruption of the U.S. by the financial services industry, and Inocente (2013), which features the struggles of a homeless, undocumented teen. She is the co-founder of two independent film companies, Vox3 Films and Tango Pictures. She is also a noted philanthropist. Under her leadership, the Philadelphia Eagles earned the coveted 2011 Beyond Sports Team of the Year award for their work in the community and for trailblazing environmental programs in professional sports. She received her B.A. from Yale University. Among other qualifications, Ms. Weiss Lurie brings to our Board extensive content production experience and broad management skills.
Diana Wilkin. Ms. Wilkin has been a member of our board of since June 2016. She has over 20 years of experience in the media industry. She has been Managing Director of Twelve 24 Media, a broadcast and media consulting firm, since February, 2014. Formerly she served as President of CBS Affiliate Relations from 2008 to December 2013, where she was responsible for network agreements with all major broadcast groups’ television stations. From 2000 to 2008, she was involved in the management of both CBS and FOX affiliates as Vice President, General Manager in numerous markets. She received her B.S. from the University of Southern California. Among other qualifications, Ms. Wilkin brings to our Board, extensive management and operational experience in the media and entertainment industries, particularly in the television broadcasting industry.
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Each director will hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified.
Conflicts of Interest
Our certificate of incorporation provides that:
| · | we renounce any interest or expectancy in, or being offered an opportunity to participate in, any business opportunities that are presented to us or our officers, directors or stockholders or affiliates thereof, including but not limited to, CSS Productions and its affiliates, collectively referred to in this section as the “CSS Companies,” except as may be prescribed by any written agreement with us; |
| · | our officers and employees will not be liable to our company or our stockholders for monetary damages for breach of any fiduciary duty by reason of any activities of us or any of the CSS Companies to the fullest extent permitted by Delaware law; |
Pursuant to the CSS License Agreement, the CSS Companies have agreed not to produce and distribute video content. Accordingly, if any of our executive officers or directors becomes aware of a non-video content opportunity which is suitable for an entity to which he or she has current fiduciary or contractual obligations, he or she will be entitled to present those opportunities to the CSS Companies prior to presenting them to us.
Director Independence
Currently Peter Dekom, Fred Cohen, Christina Weiss Lurie and Diana Wilkin would each be considered an “independent director” under the listing standards of national securities exchanges such as the Nasdaq Stock Market, or “Nasdaq,” which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s Board of Directors would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our independent directors will have regularly scheduled meetings at which only independent directors are present.
Committees
Effective as of the date of this offering circular, CSS Entertainment will have standing audit, nominating and compensation committees.
Audit Committee
Effective as of the date of this offering circular, CSS Entertainment will establish an audit committee of the Board of Directors, which will consist of _______, ________ and ________, each of whom is an independent director under Nasdaq’s listing standards. The audit committee’s duties, which are specified in the Audit Committee Charter, include, but are not limited to:
| · | reviewing and discussing with management and the independent auditor the annual financial statements; |
| · | discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of CSS Entertainment’s financial statements; |
| · | discussing with management major risk assessment and risk management policies; |
| · | monitoring the independence of the independent auditor; |
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| · | verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; |
| · | reviewing and approving all related-party transactions; |
| · | inquiring and discussing with management CSS Entertainment’s compliance with applicable laws and regulations; |
| · | pre-approving all audit services and permitted non-audit services to be performed by CSS Entertainment’s independent auditor, including the fees and terms of the services to be performed; |
| · | appointing or replacing the independent auditor; |
| · | determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and |
| · | establishing procedures for the receipt, retention and treatment of complaints received by CSS Entertainment regarding accounting, internal accounting controls or reports, which raise material issues regarding its financial statements or accounting policies. |
Financial Experts on Audit Committee
The audit committee will at all times be composed exclusively of “independent directors” who are “financially literate” as defined under Nasdaq listing standards. Nasdaq listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a balance sheet, income statement and cash flow statement.
In addition, the audit committee will have at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. The Board of Directors has determined that ________ qualifies as an “audit committee financial expert,” as defined under rules and regulations of the SEC.
Nominating Committee
Effective as of the date of this offering circular, CSS Entertainment will establish a nominating committee of the Board of Directors, which will consist of _______, __________ and ________, each of whom is an independent director under Nasdaq’s listing standards. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on CSS Entertainment’s Board of Directors. The nominating committee considers persons identified by its members, management, stockholders, investment bankers and others.
The guidelines for selecting nominees, which are specified in the Nominating Committee Charter, generally provide that persons to be nominated:
| · | should have demonstrated notable or significant achievements in business, education or public service; |
| · | should possess the requisite intelligence, education and experience to make a significant contribution to the Board of Directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and |
| · | should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the stockholders. |
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The Nominating Committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person’s candidacy for membership on the Board of Directors. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time and will also consider the overall experience and makeup of its members to obtain a broad and diverse mix of board members.
Compensation Committee
Effective as of the date of this offering circular, CSS Entertainment will establish a compensation committee of the Board of Directors, which will consist of _______, __________ and ________, each of whom is an independent director under Nasdaq’s listing standards. The compensation committee’s duties, which are specified in the Compensation Committee Charter, include, but are not limited to:
| · | reviewing and approving on an annual basis the corporate goals and objectives relevant to the Chief Executive Officer’s compensation, evaluating the Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of the Chief Executive Officer’s based on such evaluation; |
| · | reviewing and approving the compensation of all of other executive officers (including through our management services agreements described below); |
| · | reviewing executive compensation policies and plans; |
| · | implementing and administering incentive compensation equity-based remuneration plans; |
| · | assisting management in complying with proxy statement and annual report disclosure requirements; |
| · | approving all special perquisites, special cash payments and other special compensation and benefit arrangements for executive officers and employees; |
| · | if required, producing a report on executive compensation to be included in the annual proxy statement; and |
| · | reviewing, evaluating and recommending changes, if appropriate, to the remuneration for . |
Executive Compensation
We have entered into the CSS Management Agreement pursuant to which we compensate CSS for providing us with certain management services, as described below. None of our executive officers are directly employed by us.
CSS Management Agreement
We entered into the CSS Management Agreement with our parent operating company, CSS, on May 12, 2016. Under the terms of the CSS Management Services Agreement, are provided with the broad operational expertise of the CSS companies’ personnel, including our executive chairman. The CSS Management Agreement also provides for us to receive numerous other services, including accounting, legal, marketing, social media support, management, data access and back office systems, and requires CSS to provide us with office space and equipment usage. The terms of the CSS Management Agreement are described in this offering circular under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Affiliate Resources and Obligations – CSS Management Agreement.”
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Director Compensation
We intend to pay each of our independent directors $25,000 per year in two equal semi-annual installments. We also will make semi-annual grants to each independent director of that number of shares of our Class A common stock having a fair market value of $12,500 on the date of each grant.
Code of Ethics
Effective upon consummation of this offering, we will adopt a code of ethics that applies to all of our respective executive officers, directors and employees. The codes of ethics codify the business and ethical principles that govern all aspects of our business.
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The following table sets forth information regarding the beneficial ownership of our shares of Class A common stock and Class B common stock as of the date of this offering circular and as adjusted to reflect the sale of shares offered by this offering circular (assuming none of the individuals listed purchase shares in this offering), by:
| · | each person known by us to be the beneficial owner of more than 5% of our outstanding shares; |
| · | each of our officers and directors; and |
| · | all of our officers and directors as a group. |
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them. Additionally, except as otherwise indicated, beneficial ownership reflected in the table has been determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended.
| Shares Beneficially Owned Prior to Offering | Shares Beneficially Owned After Offering | |||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||||||||||||||||||||||||||
| Name and Address of Beneficial Owner(1) | Shares | % | Shares | % | % of Total Voting Power Prior to Offering(2) | Shares | % | Shares | % | % of Total Voting Power After Offering(2) | ||||||||||||||||||||||||||||||
| William J. Rouhana, Jr. | 105,000 | — | 7,813,938 | (3) | 105,000 | * | 7,813,938 | (3) | ||||||||||||||||||||||||||||||||
| Amy Newmark(4) | — | — | 0 | 0 | % | * | 0 | 0 | % | 0 | (5) | * | * | |||||||||||||||||||||||||||
| Scott W. Seaton | — | — | 0 | 0 | % | * | 0 | 0 | % | 0 | * | * | ||||||||||||||||||||||||||||
| Peter Dekom | 2,083 | * | 0 | * | * | 2,083 | * | 0 | * | * | ||||||||||||||||||||||||||||||
| Fred Cohen | 2,083 | * | 0 | * | * | 2,083 | * | 0 | * | * | ||||||||||||||||||||||||||||||
| Christina Weiss Lurie | 2,083 | * | 0 | * | * | 2,083 | * | 0 | * | * | ||||||||||||||||||||||||||||||
| Diana Wilkin | 2,083 | * | 0 | * | * | 2,083 | * | 0 | * | * | ||||||||||||||||||||||||||||||
| Chicken Soup for the Soul Productions, LLC | — | 7,654,506 | 0 | % | 7,654,506 | |||||||||||||||||||||||||||||||||||
| Trema, LLC | 105,000 | (5) | 11.75 | % | 159,432 | 105,000 | (5) | 159,432 | ||||||||||||||||||||||||||||||||
| All and executive officers as a group (eight individuals) | — | — | (8) | 0 | 0 | % | (8) | |||||||||||||||||||||||||||||||||
| * | Less than 1% |
| (1) | Unless otherwise indicated, the business address of each of the individuals is 132 E. Putnam Avenue, Floor 2W, Cos Cob, Connecticut 06807. |
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| (2) | Percentage of total voting power represents voting power with respect to all shares of our Class A and Class B common stock, as a single class. The holders of our Class B common stock are entitled to ten votes per share, and holders of our Class A common stock are entitled to one vote per share. For more information about the voting rights of our Class A and Class B common stock, see “Description of Securities – Common Stock.” |
| (3) | Represents (i) 159,432 shares of Class B common stock owned by an affiliate of Mr. Rouhana, (ii) all of the shares of Class B common stock owned by CSS Productions, as described below in footnote (5) and (iii) 105,000 shares of Class A common stock that may be issued upon exercise of Class W warrants owned by an affiliate of Mr. Rouhana. The ultimate parent of CSS Productions is CSS Holdings, which in turn is ultimately controlled by Mr. Rouhana. |
| (4) | Ms. Newmark is the spouse of Mr. Rouhana, but disclaims all beneficial ownership over the shares beneficially owned by him. |
| (5) | Includes 105,000 shares of Class B common stock underlying the Class W warrants owned by an affiliate of Mr. Rouhana. |
William J. Rouhana, Jr., and CSS Productions are our “promoters,” as that term is defined under the Federal securities laws.
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Other than compensation arrangements, we describe below transactions and series of similar transactions, since our inception, to which we were a party or will be a party, in which:
| · | the amounts involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years; and |
| · | any of our directors, executive officers, or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest. |
CSS License Agreement
We entered into the CSS License Agreement in May 2016 pursuant to which we have been granted a perpetual, exclusive, worldwide license to produce and distribute video content using the brand and related content, such as stories published in the Chicken Soup for the Soul® books. We paid CSS a one-time license fee of $5 million comprised of an upfront cash payment of $1.5 million and the concurrent issuance of a $3.5 million principal amount License Note bearing interest at 0.5% per annum. For a further description of the CSS License Agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Affiliates Resources and Obligations – CSS License Agreement.”
CSS Management Agreement
We entered into the CSS Management Agreement in May 2016 with CSS pursuant to which we are provided with the broad operational expertise of CSS and its subsidiaries and personnel, including the services of our executive chairman, Mr. Rouhana, our vice chairman, Mr. Seaton and our senior brand advisor and director, Amy Newmark. The CSS Management Agreement also provides for services, such as accounting, legal, marketing, management, data access and back-office systems, as well as office space and equipment usage. For a further description of the CSS Management Agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Affiliate Resources and Obligations – CSS Management Agreement.”
Contribution Agreements
On May 12, 2016, pursuant to the terms of the Contribution Agreement among CSS, CSS Productions and CSS Entertainment, all video content assets (the “Subject Assets”) owned by CSS, CSS Productions and their subsidiaries were transferred to us in consideration for our issuance to CSS Productions of 8,600,568 shares of our Class B common stock. Since the date of the Contribution Agreement, CSS Production has transferred certain of these shares of Class B common stock to other persons in certain transactions. Concurrently with the consummation of the Contribution Agreement, certain rights to receive payments under certain agreements comprising part of the Subject Assets owned by Trema, a company principally owned and controlled by William J. Rouhana, Jr., our executive chairman, were assigned to us in consideration for our issuance to Trema of 159,432 shares or our Class B common stock. Trema has certain demand and piggyback registration rights with respect to these shares that would be effective only after consummation of an initial public offering by us.
Equity Exchange
As of July 1, 2016, we entered into an exchange agreement with a former executive of CSS Productions, in which he exchanged all membership interest in CSS Productions which had been issued or were issuable to him in the future for 430,028 shares of our Class B common stock then owned by CSS Productions, which he simultaneously elected to convert into a like number of shares of our Class A common stock.
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Credit Facility
On May 12, 2016, we entered into the Credit Facility with the Facility Lender, an affiliate of Mr. Rouhana. Under the terms of the Credit Facility, we may borrow, repay and reborrow up to an aggregate of $3 million through June 30, 2017. Our payment obligations under the Credit Facility are senior obligations and secured by a first priority security interest in all of our assets (thus having the same priority as the security interest granted by us in connection with the License Note and the 2016 Term Notes). The proceeds of the loans made under the Credit Facility shall be used by us for working capital and general corporate purposes, as well as the prepayment, in our discretion, of a portion of the principal of the License Note and interest thereon. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
In connection with the Credit Facility, we issued Class W warrants to the Facility Lender to purchase an aggregate of 105,000 shares of our Class A common stock. The Facility Lender has been given registration rights with respect to such shares and the securities issuable upon conversion of the principal amount outstanding under the Credit Facility as described herein under “Description of Securities – Registration Rights.”
Consulting Agreement
In 2014, we entered into a consulting agreement with a company that provided executive production services to us, which included all activities necessary to establish and maintain relationships regarding a proposed feature length film and a possible talk show and, to oversee the production of each. The consulting agreement was with a writer and director of feature films who is the son of our executive chairman. We terminated this consulting agreement in 2016.
Indemnification Agreements
We have entered into indemnification and reimbursement agreements with each of our executive officers and directors. Pursuant to these agreements, we will indemnify, and advance amounts to, each of our executive officers and to the fullest extent permitted by applicable law, as in effect on the date of the agreement or to such greater extent as applicable law may later permit, in connection with any proceedings brought against such individuals by reason of his or her status as a director, officer, employee, agent or fiduciary of our company, any subsidiary of our company, or any other enterprise which such person is or was serving at our request.
All ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be on terms believed by us to be no less favorable to us than are available from unaffiliated third parties. Such transactions will require prior approval by a majority of our uninterested “independent” directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested “independent” directors (or, if there are no “independent” directors, our disinterested directors) determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties.
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Related Party Policy
Our Code of Ethics requires each company to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interests, except under guidelines approved by the board of directors. Related party transactions are defined under SEC rules as transactions in which (1) the aggregate amount involved will or may be expected to exceed the lesser of $120,000 or one percent of the average of our total assets in any calendar year, (2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of our shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.
No director may participate in the approval of any transaction in which he is a related party, but that director is required to provide the other members of the board with all material information concerning the transaction. Additionally, we require each of our directors and executive officers to complete a directors’ and officers’ questionnaire that elicits information about related party transactions.
These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.
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General
We are authorized to issue 70 million shares of Class A common stock, par value $.0001, 20 million shares of Class B common stock, par value $.0001, and 10 million shares of preferred stock, par value $.0001. As of the date of this offering circular, 813,167 shares of our Class A common stock are outstanding, 8,071,955 shares of our Class B common stock are outstanding and no shares of our preferred stock are outstanding.
Common Stock
Voting Rights
Holders of shares of Class A common stock and Class B common stock have identical rights, except that holders of shares of Class A common stock are entitled to one vote per share and holders of shares of Class B common stock are entitled to ten votes per share. Holders of shares of Class A common stock and Class B common stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law or our charter documents.
There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors.
Dividend Rights
Shares of Class A common stock and Class B common stock shall be treated equally, identically and ratably, on a per share basis, with respect to any dividends or distributions as may be declared and paid from time to time by the board of directors out of any assets legally available therefor.
No Preemptive or Similar Rights
Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions.
Right to Receive Liquidation Distributions
Subject to the preferential or other rights of any holders of preferred stock then outstanding, upon our dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Class A common stock and Class B common stock will be entitled to receive ratably all assets of CSS Entertainment available for distribution to its stockholders unless disparate or different treatment of the shares of each such class with respect to distributions upon any such liquidation, dissolution or winding up is approved in advance by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under our Certificate of Incorporation) of the holders of a majority of the outstanding shares of Class A common stock and Class B common stock, each voting separately as a class.
Merger or Consolidation
In the case of any distribution or payment in respect of the shares of Class A common stock or Class B common stock upon our consolidation or merger with or into any other entity, or in the case of any other transaction having an effect on stockholders substantially similar to that resulting from a consolidation or merger, such distribution or payment shall be made ratably on a per share basis among the holders of the Class A common stock and Class B common stock as a single class; provided, however, that shares of one such class may receive different or disproportionate distributions or payments in connection with such merger, consolidation or other transaction if (i) the only difference in the per share distribution to the holders of the Class A common stock and Class B common stock is that any securities distributed to the holder of a share Class B common stock have ten times the voting power of any securities distributed to the holder of a share of Class A common stock, or (ii) such merger, consolidation or other transaction is approved by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under our Certificate of Incorporation) of the holders of a majority of the outstanding shares of Class A common stock and Class B common stock, each voting separately as a class.
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Conversion
The outstanding shares of Class B common stock are convertible at any time as follows: (1) at the option of the holder, a share of Class B common stock may be converted at any time into one share of Class A common stock or (2) upon the election of the holders of a majority of the then outstanding shares of Class B common stock, all outstanding shares of Class B common stock may be converted into shares of Class A common stock. Once converted into Class A common stock, the Class B common stock will not be reissued.
Preferred Stock
Our certificate of incorporation currently authorizes the issuance of 10 million shares of blank check preferred stock. No shares of our preferred stock are being issued in this offering. The blank check preferred stock may be issued in the future by our board of directors, without stockholder approval, with such designation, rights and preferences as it may be determined from time to time. Accordingly, such preferred stock could adversely affect the voting power or other rights of the holders of common stock.
Class W Warrants
We currently have 273,062 Class W warrants outstanding.
Each Class W warrant entitles the registered holder to purchase one share of our Class A common stock at a price of $7.50 per share, subject to adjustment as discussed below. Each warrant is exercisable at anytime through June 30, 2021 at 5:00 p.m., New York City time.
If our Class A common stock is traded, listed or quoted on any U.S. market or electronic exchange, and the closing per-share sales price of the Class A common stock for any twenty (20) trading days during a consecutive thirty (30) trading days period (the “Measurement Period”) exceeds $15.00 (subject to adjustment for forward and reverse stock splits, recapitalizations, stock dividends and the like), then we may call for cancellation of all or any portion of the Class W Warrants for which a notice of exercise has not yet been delivered to us for consideration equal to $.01 per Class W warrant, in accordance with the provisions of the Class W warrants. Notwithstanding anything to the contrary, we shall not make a call of the Class W warrants prior to January 31, 2018.
If the resale of the Class A common stock issuable upon exercise of the Class W warrants is not covered by an effective registration statement or an exemption from registration (a) at the time of a call by us of the Class W warrants as described above, (b) at any time the Class A common stock is traded, listed or quoted on a U.S. trading market or electronic exchange or (c) after January 31, 2018, the holders of the Class W warrants shall be afforded cashless exercise rights as further described in the Class W warrants. In such event, each holder would pay the exercise price by surrendering the Class W warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A common stock underlying the Class W warrants, multiplied by the difference between the exercise price of the Class W warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” for this purpose will mean the average reported last sale price of the shares of common stock for the ten trading days ending on the trading day prior to the date of exercise.
The right to exercise will be forfeited unless the Class W warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
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The redemption criteria for our Class W warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of our redemption call, the redemption will not cause the share price to drop below the exercise price of the Class W warrants.
The Class W warrants will be issued in registered form under a warrant agreement between __________, as warrant agent, and us. The warrant agreement provides that the terms of the Class W warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of the holders of a majority of the then outstanding Class W warrants in order to make any change that adversely affects the interests of the registered holders.
The exercise price and number of shares of Class A common stock issuable on exercise of the Class W warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the Class W warrants will not be adjusted for issuances of shares of Class A common stock at a price below their respective exercise prices.
The Class W warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of Class W warrants being exercised. The warrant holders do not have the rights or privileges of holders of shares of common stock and any voting rights until they exercise their Class W warrants and receive shares of Class A common stock. After the issuance of shares of common stock upon exercise of the Class W warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No fractional shares will be issued upon exercise of the Class W warrants. If, upon exercise of the Class W warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of Class A common stock to be issued to the warrant holder.
2016 Term Notes
We currently have outstanding $1,565,000 principal amount of our 2016 Term Notes. The maturity date of the 2016 Term Notes is the earlier of (a) June 30, 2017 and (b) three business days following the closing date of our initial public offering.
The 2016 Term Notes bear interest at the rate of 5% per annum. Interest is payable in cash monthly in arrears on the basis of a 365-day year and actual days elapsed.
The 2016 Term Notes rank pari passu with our existing senior secured debt, including the CSS License Note and the Credit Facility, and senior to any of our other existing or future indebtedness. The 2016 Term Notes are secured by a first priority security interest and lien in all of our tangible and intangible assets, subject to an intercreditor agreement with respect to the CSS Note and Credit Facility.
The 2016 Term Notes will be mandatorily repaid at 100% of par value with the net proceeds from any equity financing we consummated that results in gross proceeds to us of $7 million or greater in any single financing, other than cash proceeds from the exercise of Class W warrants.
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We may repay the 2016 Term Notes at any time prior to their maturity date, at our election and without notice to the holders thereof, by paying the holder 101% of the then outstanding aggregate principal of the 2016 Term Notes, together with all interest accrued and unpaid thereon through the date of such payment.
Dividends
We have not paid any cash dividends on our shares of Class A common stock to date. The payment of cash dividends on our shares of Class A common stock in the future will be entirely within the discretion of our board of directors and will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition as well as the limitations on dividends and distributions that exist under the laws and regulations of the State of Delaware. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board of directors does not anticipate declaring any dividends in the foreseeable future.
Our Transfer Agent and Warrant Agent
The transfer agent for our securities and the warrant agent for our Class W warrants is __________, _________________.
Quotation of our Securities
There is presently no public market for our securities. We intend to have our Class A common stock and Class W warrants quoted on the OTCQB under the symbol _____ and ___, respectively, on the closing of this offering. We cannot guarantee that our securities will be quoted on the OTCQB following the closing of this offering.
Certain Anti-Takeover Provisions of CSS Entertainment’s Certificate of Incorporation and By-Laws
Special meeting of stockholders
Our bylaws provide that special meetings of our stockholders may be called only by a majority vote of our board of directors, or by our executive chairman or by our secretary at the request in writing of stockholders owning a majority of our issued and outstanding capital stock entitled to vote.
Advance notice requirements for stockholder proposals and director nominations
Our bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders must provide timely notice of their intent in writing. To be timely, a stockholder’s notice will need to be delivered to our principal executive offices not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the scheduled date of the annual meeting of stockholders. In the event that less than 70 days’ notice or prior public disclosure of the date of the annual meeting of stockholders is given, a stockholder’s notice shall be timely if delivered to our principal executive offices not later than the 10th day following the day on which public announcement of the date of our annual meeting of stockholders is first made or sent by us. Our bylaws also specify certain requirements as to the form and content of a stockholders’ meeting. These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
Dual Voting Structure
Our certificate of incorporation provides for two classes of common stock. Holders of shares of Class A common stock and Class B common stock have identical rights, except that holders of shares of Class A common stock are entitled to one vote per share and holders of shares of Class B common stock are entitled to ten votes per share. Holders of shares of Class A common stock and Class B common stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law. Accordingly, the holders of shares of Class B common stock will exert significant control over our actions.
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Removal and Appointment of
Our entire board of directors or any individual director may be removed from office with or without cause by a majority vote of the holders of the outstanding voting power of the shares then entitled to vote at an election of directors. In such case, new directors may be elected by the stockholders then holding a majority of our voting power. Immediately following this offering, our Executive Chairman shall control the substantial majority of our voting power and therefore will be able to unilaterally exercise the foregoing rights.
Class B Approval Required for Charter Amendments
Any amendment to our certificate of incorporation requires the approval of the majority of the outstanding Class B common stock. This approval requirement is separate and in addition to any general stockholder approval that would be required under our certificate of incorporation and law.
Exclusive Forum Selection
Our certificate of incorporation requires, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel. Although we believe this provision benefits our company by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our and officers.
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This is an offering of up to 1,358,000 shares of our Class A common stock, including 258,000 outstanding shares that may be sold by certain of our existing stockholders. The shares sold in the offering shall be allocated pro ratably among the Primary Shares and Secondary Shares.
We will pay all of the expenses of the offering (other than the selling agents’ commissions and non-accountable expense allowance payable with respect to the Secondary Shares sold in the offering), but will not receive any of the proceeds from the sale of Secondary Shares in the offering.
| Selling Stockholder Name | Number of Shares Owned | Number of Share to Be Sold in Offering | ||||||
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Shares Eligible for Future Sale
Immediately after this offering, we will have ___________ shares of Class A common stock outstanding, or __________ shares if we sell all of the Additional Shares. These shares will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased in this offering by one of our affiliates within the meaning of Rule 144 under the Securities Act. We will also have __________ shares of Class B common stock, all of which are restricted securities under Rule 144 in that they were issued in private transactions not involving a public offering. Such restricted securities would be available for sale in the public market pursuant to Rule 144, subject to contractual lockup agreements described below, as follows:
| Number of Shares | Date | |
Rule 144
A person who has beneficially owned restricted shares of common stock, preferred stock or Class W warrants for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been an affiliate of the subject company at the time of, or at any time during the three months preceding, a sale and (ii) the subject company is subject to the Exchange Act periodic reporting requirements for at least three months before the sale. Persons who have beneficially owned restricted shares of common stock for at least six months but who are an affiliate of the subject company at the time of, or any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following:
| · | 1% of the number of shares of common stock then outstanding, which will equal _________ shares of our common stock immediately after this offering (or __________ shares of our common stock immediately after this offering if we sell all of the Additional Shares); and |
| · | if our common stock is listed on a national securities exchange, the average weekly trading volume of the shares of Class A common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about the subject company.
Lock-Up Agreements
Each holder of shares of our Class B common stock has agreed that he or it will not sell, transfer or otherwise dispose of any such shares (or any shares of Class A common stock issuable upon conversion of the Class B common stock) until one year from the date of this offering circular.
The Subject Securities (as defined below in “Registration Rights”) shall not be transferrable except for Permitted Transfers. “Permitted Transfers” mean transfers of the Subject Securities (a) to affiliates of the holder of the Subject Securities, (b) by such holder for bona fide estate planning purposes or (c) made by such holder in private or market sales following the end of the Lock-Up Period (as defined below); provided that such Permitted Transfers are covered by an effective registration statement or an exemption from registration. The “Lock-Up Period” means the period from the date of consummation of the offering of the units through and including the 90th day after the date the Class A Shares are first traded, listed or quoted on a U.S. trading market or electronic exchange; provided, that the applicable underwriter or placement agent may shorten or waive any lock-up at its sole discretion. Notwithstanding anything to the contrary, sales of any Subject Securities included for resale in a Regulation A offering as described above under “Registration and Related Rights” shall not be subject to lock-up.
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Registration Rights
We have entered into an agreement with an affiliate of Mr. Rouhana and another stockholder of our company, pursuant to which these stockholders shall have the right to demand, on one occasion commencing one year from the date of our initial public offering, that we register under the Securities Act the resale of the shares of Class A common stock issuable to them upon exchange of their Class B common stock (“Registrable Shares”) if and only if the Registrable Shares cannot be freely sold by such holders without volume restrictions under Rule 144. In addition, these stockholders have certain “piggyback” registration rights with respect to certain registration statements filed by us after this offering. We will bear the expenses incurred in connection with the filing of any such registration statement.
We granted certain registration and related rights in connection with our Equity Private Placement and Debt Offering consummated in July 2016. These rights included our obligation to include the resale of the Subject Securities (as defined below) on the form of registration used in connection with this offering, pro ratably among the holders of the Subject Securities, up to the maximum amount permitted by Regulation A, and subject to underwriter approval, unless a resale exemption otherwise exists for the Subject Securities.
Further, if we complete an initial public offering of our Class A common stock that results in the Class A common stock being traded on a national stock exchange in the United States (a “Qualified IPO”), the shares of Class A common stock, Class W warrants and Class A common stock underlying the Class W Warrants sold in the Equity Offering and Debt Offering (collectively, the “Subject Securities”) shall be entitled to unlimited piggy-back registration rights, subject to underwriter approval, unless a resale exemption otherwise exists for the Subject Securities.
If we have not completed a Qualified IPO by June 30, 2017, or a public trading market has not otherwise then developed for the Subject Securities, we shall take commercially reasonable steps to enable public trading for such securities by filing such forms or documents reasonably necessary to facilitate such public trading.
Repurchases
We may seek to repurchase shares of our outstanding Class A common stock and Class B common stock from time to time in market or private transactions.
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We are offering the Primary Shares, Secondary Shares and Additional Shares through [____________] and [____________], which have agreed to act as the co-bookrunning selling agents for this offering.
The co-bookrunning selling agents are not purchasing any of the shares offered by us and are not required to sell any specific number or dollar amount of securities, but will instead arrange for the sale of securities to investors on a “best efforts” basis, meaning that they need only use their best efforts to sell the securities. The co-bookrunning selling agents may sell some of our securities through selected dealers.
The offering price of the shares of Class A common stock offered hereby was determined by the co-bookrunning selling agents and us. This determination was done without reference to our book value or asset values or by the application of any customary, established models for valuing companies or securities. Accordingly, the offering price may not be indicative of any amounts you might receive should you seek to sell your shares or should there be a liquidation of our company. In addition, such prices are not necessarily indicative of any prices at which our securities may trade, or any value that might be ascribed to our company after the completion of the offering.
This is an offering of up to __________ shares of our Class A common stock comprised of (a) _____________ Primary Shares to be sold by us and (b) _____________ Secondary Shares that may be sold by certain of our existing stockholders, with such shares allocated pro ratably among the Primary Shares and Secondary Shares. We will have the option to sell up to ________ Additional Shares, if all of the Primary Shares have been sold in the offering. There is no minimum number of Primary Shares that we must sell in order to conduct a closing in this offering.
We will pay all of the expenses of the offering (other than the selling agents’ commissions and non-accountable expense allowance payable with respect to the Secondary Shares sold in the offering), but will not receive any of the proceeds from the sale of Secondary Shares in the offering. Our officers, directors and existing stockholders shall be entitled to purchase shares in the offering.
There is presently no public market for our common stock. We intend to have our Class A common stock and Class W warrants quoted on the OTCQB under the symbols ___ and ____, respectively, on the closing of this offering.
Investors who participate in this offering will be required to deposit their funds in an escrow account managed by __________ and any funds that __________ receives shall be held in escrow until the closing of the offering or such other time as mutually agreed between us and the co-bookrunning selling agents, and then used to complete share purchases, or returned if this offering fails to close. Pursuant to Rule 15c2-4, unless there is a closing of the offering, we will not have any access to the funds held in the escrow account. The offering will close by _____________, 2016, which is ____ days after the date of this offering circular, unless all the shares are sold before that date, or we decide to extend the offering for up to _____ additional days, or we otherwise decide to close the offering early or cancel it, in our sole discretion. If we extend the offering, we will provide that information in an amendment to this offering circular. If we close the offering early or cancel it, we may do so without notice to you, although if we cancel the offering all funds that may have been provided by any investors will be promptly returned without interest or deduction.
We will pay the co-bookrunning selling agents an aggregate fee equal to ______% of the gross proceeds of the sale of shares in the offering. If the co-bookrunning selling agents sell any of our shares through selected dealers, they may remit a portion of their selling agents’ fee to such dealers.
| 61 |
We will pay the co-bookrunning selling agents an aggregate non-accountable expense allowance equal to ____ % of the gross proceeds of the sale of shares in the offering. In addition, we shall be responsible for and pay all expenses relating to the offering, including, without limitation, (a) all filing fees and expenses relating to the registration of the shares to be sold in the offering with the SEC and the filing of the offering materials with FINRA; as applicable, (b) all fees and expenses relating to the qualification of the shares under state “blue sky” laws, (c) all fees, expenses and disbursements relating to the registration or qualification of such shares; as required under the “blue sky” laws and the fees of counsel selected by us; the costs of all mailing and printing of the offering documents, (d) the costs of preparing, printing and delivering certificates representing such securities, (e) fees and expenses of the transfer agent for such shares, (f) our road show expenses and (g) the fees and expenses of our accountants and the fees and expenses of our legal counsel and other agents and representatives.
The agency agreement between us and the co-bookrunning selling agents provides that the respective obligations of the parties are subject to certain customary conditions precedent, including the absence of any material adverse changes in our business and the receipt by the co-bookrunning selling agents of certain customary legal opinions, letters and certificates prior to the completion of the offering.
The co-bookrunning selling agents are underwriters of this offering within the meaning of Section 2(a)(11) of the Securities Act and any commissions received by them and any profit realized on the sale of the shares by them while so acting may be deemed to be underwriting compensation. The co-bookrunning selling agents will be required to comply with the requirements of the Securities Act and the Exchange Act, including, without limitation, Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases and sales of shares by the co-bookrunning selling agents. Under these rules and regulations, the co-bookrunning selling agents may not, among other things, (i) engage in any stabilization activity in connection with our securities or (ii) bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act.
The co-bookrunning selling agents do not have any present intention or arrangement to release any shares of our common stock subject to lock-up agreements prior to the expiration of the prescribed lock-up period.
We have agreed to indemnify the co-bookrunning selling agents against certain liabilities, including liabilities under the Securities Act. We have also agreed to contribute to payments the co-bookrunning selling agents may be required to make in respect of such liabilities.
The transfer agent for our shares is __________.
State Blue Sky Information
We intend to offer and sell our shares of Class A common stock to retail customers in the United States only in [•], [•] and [•], where we have applied to have the shares registered for sale. We will not sell any shares of Class A commons stock to retail customers in these states until our offering is effective in each such state. Notwithstanding the foregoing, we may choose to register, or otherwise qualify, the shares for sale in additional states.
If you are in the United States but not an “institutional investor”, you may purchase our securities in this offering only in the states in which we have registered or otherwise qualified them for sale. Institutional investors in every state may purchase the shares in this offering pursuant to exemptions provided to such entities under the blue sky laws of such states. The definition of an “institutional investor” varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities.
| 62 |
The National Securities Markets Improvement Act of 1996 (“NSMIA”), which is a federal statute, prevents or preempts the states from regulating transactions in certain securities, which are referred to as “covered securities”. NSMIA nevertheless allows the states to investigate if there is a suspicion of fraud or deceit, or unlawful conduct by a broker or dealer, in connection with the sale of securities. If there is a finding of fraudulent activity, the states can regulate or bar the sale of covered securities in a particular case.
State securities laws require that a company’s securities be registered for sale or that the securities themselves or the transaction under which they are issued, be exempt from registration. When a state law provides an exemption from registration, it is excusing an issuer from the general requirement to register securities before they may be sold in that state. States may, by rule or regulation, place conditions on the use of exemptions, so that certain companies may not be allowed to rely on such exemptions for the sale of their securities. If an exemption is not available and the securities the company wishes to sell are not covered securities under NSMIA, then the company must register its securities for sale in the state in question.
We will file periodic and current reports under the Exchange Act. Therefore, under NSMIA, the states and territories of the United States are preempted from regulating the resale by stockholders of our shares. However, NSMIA does allow states and territories to require notice filings and collect fees with regard to resale transactions, and a state may suspend the offer and resale of securities within such state if any such required filing is not made or fee is not paid. As of the date of this offering circular, the following states and territories do not require any resale notice filings or fee payments and stockholders may resell the shares: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Virgin Islands, Washington, West Virginia, Wisconsin and Wyoming.
As of the date of this offering circular, in the following states and territories, stockholders may resell the shares if the proper notice filings have been made and fees paid: the District of Columbia, Maryland, Montana, New Hampshire, North Dakota, Oregon, Puerto Rico, Tennessee, Texas and Vermont. As of the date of this offering circular, we have not determined in which of these states and territories, if any, we will submit the required filings or pay the required fees. Additionally, if any of the states that have not yet adopted a statute, rule or regulation requiring a filing or fee or if any state amends its existing statutes, rules or regulations with respect to its requirements, we would need to comply with those new requirements in order for the securities to continue to be eligible for resale by stockholders in those jurisdictions.
In addition, aside from the exemption from registration provided by NSMIA, we believe that the shares may be eligible for resale in various states without any notice filings or fee payments, based upon the availability of applicable exemptions from such states’ registration requirements, in certain instances subject to waiting periods, notice filings or fee payments.
The various states can impose fines on us or take other regulatory actions against us if we fail to comply with their state securities laws. We cannot assure you that we will be able to comply with all state securities laws or avoid fines or other state regulatory actions if we do not achieve such compliance.
| 63 |
Offer Restrictions Outside the United States
Other than in the United States, no action has been taken by us or the co-bookrunning selling agents that would permit a public offering of the securities offered by this offering circular in any jurisdiction where action for that purpose is required. The securities offered by this offering circular may not be offered or sold, directly or indirectly, nor may this offering circular or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this offering circular comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this offering circular. This offering circular does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this offering circular in any jurisdiction in which such an offer or a solicitation is unlawful.
[Foreign legends as applicable]
| 64 |
The validity of the securities offered in this offering circular are being passed upon for us by Graubard Miller, New York, New York. [___________], [__________], is acting as counsel for the co-bookrunning selling agents in this offering. Graubard Miller and certain of its partners and family members own equity interest in CSS Holdings, our ultimate parent company.
Where You Can Find Additional Information
We have filed with the SEC a Regulation A Offering Statement on Form 1-A, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of securities. Although this offering circular, which forms a part of the Form 1-A, contains all material information included in the Form 1-A, parts of the Form 1-A have been omitted as permitted by rules and regulations of the SEC. We refer you to the Form 1-A and its exhibits for further information about us, our securities and this offering. The Form 1-A and its exhibits, as well as each of CSS Entertainment’s other reports filed with the SEC, can be inspected and copied at the SEC's public reference room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form 1-A and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC.
| 65 |
Chicken Soup for the Soul Productions, LLC
INDEX TO UNAUDITED FINANCIAL STATEMENTS
For the Years Ended December 31, 2015 and 2014
| F-1 |
Chicken Soup for the Soul Productions, LLC
Balance Sheets
As of December 31, 2015 and 2014
(Unaudited)
| Pro Forma | ||||||||||||
| 2015 (1) | 2015 | 2014 | ||||||||||
| ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 4,078 | $ | - | ||||||||
| Accounts receivable, net | 200,000 | - | ||||||||||
| Prepaid offering costs and other expenses | 101,198 | - | ||||||||||
| Due from affiliated companies | 2,111,556 | - | ||||||||||
| Programming costs, net | 951,069 | - | ||||||||||
| Total assets | $ | 3,367,901 | $ | - | ||||||||
| LIABILITIES AND MEMBERS'/STOCKHOLDERS' DEFICIT | ||||||||||||
| Accounts payable and accrued expenses | $ | 23,030 | $ | 23,030 | $ | - | ||||||
| Deferred revenue | 3,700,000 | 3,700,000 | - | |||||||||
| Equity grant in satisfaction of a liability | 792,000 | 792,000 | - | |||||||||
| Due to affiliated companies | - | - | 478,666 | |||||||||
| Total liabilities | 4,515,030 | 4,515,030 | 478,666 | |||||||||
| Commitments and contingencies | ||||||||||||
| Members' deficit | - | (1,147,129 | ) | (478,666 | ) | |||||||
| Stockholders' deficit: | ||||||||||||
| Preferred stock, $.0001 par value, 10,000,000 shares authorized; none issued or outstanding | - | - | - | |||||||||
| Class A Common stock, $.0001 par value, 70,000,000 shares authorized; 0 shares issued and outstanding | - | - | - | |||||||||
| Class B Common stock, $.0001 par value, 20,000,000 shares authorized; 8,760,000 shares issued and outstanding | 876 | - | - | |||||||||
| Additional paid-in capital | - | - | - | |||||||||
| Retained deficit | (1,148,005 | ) | - | - | ||||||||
| Total stockholders' deficit | (1,147,129 | ) | - | - | ||||||||
| Total liabilities and members'/stockholders' deficit | $ | 3,367,901 | $ | 3,367,901 | $ | - | ||||||
(1) Pro forma 2015 gives effect to the Contribution Agreement and the Trema Contribution Agreement described in Notes 1 and 9, as if they occurred on December 31, 2015.
The accompanying notes are an integral part of the unaudited financial statements.
| F-2 |
Chicken Soup for the Soul Productions, LLC
Statements of Operations
For the Years Ended December 31, 2015 and 2014
(Unaudited)
| 2015 | 2014 (2) | |||||||
| Revenues | $ | 1,506,818 | $ | - | ||||
| Cost of revenues | 653,795 | - | ||||||
| Gross profit | 853,023 | - | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative (including $792,000 and $0 of non-cash share-based payment expense in 2015 and 2014, respectively) | 1,242,749 | 403,666 | ||||||
| Management and license fees due to affiliate | 278,750 | 75,000 | ||||||
| Total operating expenses | 1,521,499 | 478,666 | ||||||
| Operating loss | (668,476 | ) | (478,666 | ) | ||||
| Interest income | 13 | - | ||||||
| Net loss | $ | (668,463 | ) | $ | (478,666 | ) | ||
| Pro forma loss per common share (1): | ||||||||
| Basic and diluted loss per common share | $ | (0.08 | ) | $ | (0.05 | ) | ||
(1) Pro forma basic and diluted net loss per common share assumes that Class B common stock of CSS Entertainment issued pursuant to both the Contribution Agreement and the Trema Contribution Agreement is issued and outstanding as of January 1, 2014 (Notes 1 and 9). The weighted average shares outstanding used in the computation is 8,760,000 for both 2015 and 2014. Excluded from the calculation of weighted average shares outstanding are the following securities issued in 2016 by CSS Entertainment, which would be antidilutive; Class A common stock issued pursuant to the initial public offering contemplated herein, Class W warrants issued in conjunction with the 2016 Term Notes, Class A common stock and Class W warrants issued in the Equity Private Placement and Class W warrants issued pursuant to the Credit Facility (Note 9).
(2) Represents pre-formation operations (Note 3 - "Basis of Presentation").
The accompanying notes are an integral part of the unaudited financial statements.
| F-3 |
Chicken Soup for the Soul Productions, LLC
Statements of Members' Deficit
For the Years Ended December 31, 2015 and 2014
(Unaudited)
| Total | ||||||||||||
| Class A | Class B | Members' | ||||||||||
| Members | Members | Deficit | ||||||||||
| Balance, January 1, 2014 | $ | - | $ | - | $ | - | ||||||
| Issuance of Class A member interests upon formation | - | - | - | |||||||||
| Net loss (pre-formation operations) | (478,666 | ) | - | (478,666 | ) | |||||||
| Balance, December 31, 2014 | (478,666 | ) | - | (478,666 | ) | |||||||
| Issuance of Class B member interests to co-founder | - | - | - | |||||||||
| Net loss | (607,632 | ) | (60,831 | ) | (668,463 | ) | ||||||
| Balance, December 31, 2015 | $ | (1,086,298 | ) | $ | (60,831 | ) | $ | (1,147,129 | ) | |||
The accompanying notes are an integral part of the unaudited financial statements.
| F-4 |
Chicken Soup for the Soul Productions, LLC
Statements of Cash Flows
For the Years Ended December 31, 2015 and 2014
(Unaudited)
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (668,463 | ) | $ | (478,666 | ) | ||
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||
| Amortization of programming costs | 646,295 | - | ||||||
| Non-cash share-based payment expense | 792,000 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (200,000 | ) | - | |||||
| Prepaid expenses | (1,198 | ) | - | |||||
| Programming costs | (1,597,364 | ) | - | |||||
| Accounts payable and accrued expenses | 23,031 | - | ||||||
| Deferred revenue | 3,700,000 | - | ||||||
| Net cash provided by (used in) operating activities | 2,694,301 | (478,666 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Net cash from investing activities | - | - | ||||||
| Cash flows from financing activities: | ||||||||
| Increase in due (from) to affiliated companies | (2,590,223 | ) | 478,666 | |||||
| Prepaid offering costs | (100,000 | ) | - | |||||
| Net cash (used in) provided by financing activities | (2,690,223 | ) | 478,666 | |||||
| Increase in cash and cash equivalents | 4,078 | - | ||||||
| Cash and cash equivalents at beginning of period | - | - | ||||||
| Cash and cash equivalents at end of period | $ | 4,078 | $ | - | ||||
The accompanying notes are an integral part of the unaudited financial statements.
| F-5 |
Chicken Soup for the Soul Productions, LLC
Notes to Unaudited Financial Statements
December 31, 2015 and 2014
Note 1 - Nature of Business and Organization
Chicken Soup for the Soul Productions, LLC (the “Company”) was formed in December 2014 by Chicken Soup for the Soul, LLC (“CSS”), a media and consumer products company. The Company began operations in January 2015, to take advantage of CSS’ Chicken Soup for the Soul® brand (the “Brand”).
The Company is a producer and distributor of video content consistent with the Brand. The video content includes sponsored family friendly television and cable programming, short-form online video content, and the licensing of Brand-related motion pictures (collectively, “Video Content”). CSS has direct ownership and control over the Brand and has granted the Company a perpetual, exclusive, worldwide license to produce and distribute Video Content using the Brand (Note 9, Subsequent Events).
On May 4, 2016, Chicken Soup for the Soul Entertainment, Inc. (“CSS Entertainment”) was incorporated in Delaware. Also in May 2016, and pursuant to the terms of a Contribution Agreement among CSS Entertainment, CSS and the Company (the “Contribution Agreement”), all Video Content assets owned by CSS and any of its affiliates, including all rights and obligations related thereto, were transferred to CSS Entertainment in consideration for the issuance of 8,600,568 shares of CSS Entertainment’s Class B common stock to the Company. Thereafter, CSS Entertainment will continue the business operations of the Company.
As of December 31, 2015, the Company operates in one business segment, the production and distribution of Video Content. The Company currently operates solely in the United States. The Company is an early stage and emerging growth company and, as such, the Company is subject to all of the risks associated with early stage and emerging growth companies.
Note 2 – Liquidity, Management’s Plans and Business Risks
As successor to the operations of the Company, in order to accomplish its business objectives, CSS Entertainment is in the process of raising capital through debt and equity offerings as described in Note 9. The completion of the debt and equity offerings, cash generated from operations, and together with the availability of capital under the Secured Revolving Line of Credit (“Credit Facility”), will enable CSS Entertainment to meet its working capital needs for at least the next twelve months. The Company's ability to fund its longer term cash requirements is subject to multiple risks, many of which are beyond its control. Should additional funding be required, the Company may need to raise additional capital through the sale of equity or debt securities. Additional financing may not be available at all, or in amounts or on terms acceptable to the Company. Any failure to obtain additional financing may have a material adverse effect upon the Company and could result in a substantial reduction in the planned scope of the Company’s operations.
| F-6 |
Note 3 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements of the Company, which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, member’s deficit and cash flows for the years then ended, are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
As described in Note 1, Nature of Business and Organization, the Company began operations during January 2015. CSS first contemplated commercially selling its Video Content during 2014, prior to the formation of the Company in December 2014. As such, the 2014 unaudited financial statements present the financial position and results of the pre-formation operations. The unaudited financial statements for 2014 were derived from the financial statements of the Company’s ultimate parent company, Chicken Soup for the Soul Holdings, LLC, based on allocations of costs incurred attributable to the development of the Video Content business prior to the formation of the Company.
The financial condition and results of operations of the Company as reflected in the accompanying unaudited financial statements are not necessarily indicative of the results to be obtained during 2016 or for any future annual or interim period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include those related to revenue recognition, accounts receivable allowances, equity awards and programming costs. Actual results could differ from those estimates.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
| F-7 |
As of December 31, 2015 and 2014, the fair value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying value due to the short-term maturity of these instruments.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less and consist primarily of money market funds. Such investments are stated at cost, which approximates fair value.
As of December 31, 2015, CSS and its affiliates, including the Company, utilized a central cash management system (“CCMS”) to manage all cash positions. Cash receipts are transferred through intercompany charge to CSS. As cash disbursements are required in order to pay suppliers and vendors by affiliated companies, including the Company, cash is transferred back through intercompany credit. As a result, the Company’s cash balance as of December 31, 2015 is not reflective of cash generated from the Company’s operations.
Upon closing of the Credit Facility (Note 9), the cash generated from the operations of CSS Entertainment is used only for the investments and obligations of CSS Entertainment, and is no longer subject to transfer within the CCMS.
Accounts Receivable
Accounts receivable are stated at the amounts management expects to collect. An allowance for doubtful accounts is recorded based on a combination of historical experience, aging analysis and information on specific accounts. Account balances are written off against the allowance after all means of collections have been exhausted and the potential for recovery is considered remote. Accounts are considered past due or delinquent based on contractual terms and how recently payments have been received. At December 31, 2015 and 2014, an allowance for uncollectible accounts was not considered necessary.
Programming Costs
Television and film programming costs includes the unamortized costs of completed, in-process, or in-development television programs, short-form online media content and films produced by the Company. For television programs and films produced by the Company, capitalized costs include all direct production and financing costs, capitalized interest, when applicable, and production overhead.
Costs of producing television programs, short-form online media content and films are amortized using the individual-film-forecast method. These costs are accrued and amortized in the proportion that current period’s revenue bears to management’s estimate of ultimate revenue expected to be recognized from the production.
For an episodic television series, the period over which ultimate revenues are estimated does not exceed ten years following the date of delivery of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later.
| F-8 |
Programming costs are stated at the lower of amortized cost or estimated fair value. The valuation of programming costs is reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value may be less than its unamortized cost. The Company performs an annual impairment analysis for unamortized programming costs. Additional amortization is recorded in the amount by which the unamortized costs exceed the estimated fair value. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of programming costs may be required as a consequence of changes in management’s future revenue estimates.
Included in cost of revenues in the statement of operations for the year ended December 31, 2015 and 2014, is amortization of programming costs totaling $646,295 and $0, respectively.
Income Taxes
The Company elected to be treated as a partnership for federal and state income tax purposes and, accordingly, no provision is made for income taxes. The members’ allocable shares of taxable income or loss are reported on their respective income tax returns. The Company is required to disclose unrecognized tax benefits or liabilities resulting from uncertain tax positions. The Company has not been audited by the taxing authorities since its formation. If taxable income is adjusted as a result of an audit, then subject to the discretion of the managing partner, the Company may be required to make distributions to satisfy the members’ tax obligations. At December 31, 2015 and 2014, the Company did not have any unrecognized tax benefits or liabilities.
Interest or penalties will be accrued when it becomes probable that they will be assessed, and will be included in selling, general and administrative expense in the statements of operations.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, the fee is fixed and determinable, delivery has occurred, and collection of the resulting receivable is deemed probable.
The Company derives its revenue from the production and distribution of television programs, short-form online media content and films. For an episodic television program and short-form digital media content, revenues are recognized when the content is available for broadcast. Revenues from television or digital licensing for fixed fees are recognized when the related program is available to the licensee for telecast.
Cash payments received in advance are recorded as deferred revenue until all the conditions of revenue recognition have been met.
The Company received a $75,000 non-refundable deposit pursuant to an extension option agreement for a feature film, which is included in revenues in the statement of operations for the year ended December 31, 2015.
| F-9 |
Share-based Payments
The Company measures a share-based payment issued in satisfaction of a liability, based on the grant date fair value of the equity instrument. The fair value of the equity instrument issued in satisfaction of a liability is accounted for as a liability and is measured at the settlement date. Accordingly, the fair value is adjusted at the end of each accounting period until settled (Note 6, Members’ Deficit and Membership Interests).
Pro Forma Loss Per Share
Pro forma basic and diluted net loss per common share assumes that Class B common stock of CSS Entertainment issued pursuant to both the Contribution Agreement and the Trema Contribution Agreement is issued and outstanding as of January 1, 2014 (Notes 1 and 9). The weighted average shares outstanding used in the computation is 8,760,000 for both 2015 and 2014. Excluded from the calculation of weighted average shares outstanding are the following securities issued in 2016 by CSS Entertainment, which would be antidilutive; Class A common stock issued pursuant to the initial public offering contemplated herein, Class W warrants issued in conjunction with the 2016 Term Notes, Class A common stock and Class W warrants issued in the Equity Private Placement and Class W warrants issued pursuant to the Credit Facility (Note 9).
Concentration of Credit Risk
The Company maintains cash balances at its bank. Accounts for each entity are insured by the Federal Deposit Insurance Corporation subject to certain limitations. At various times during the fiscal year, the Company’s cash in bank balances exceeded the federally insured limits.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivables. Concentrations of credit risk with respect to trade receivables are significant due to the small number of customers comprising the Company’s customer base. For the year ended December 31, 2015, 95% of the Company’s revenues were from one customer. As of December 31, 2015, 100% of accounts receivable was from a different customer.
JOBS Act Accounting Election
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to avail itself of this exemption from new or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting standards as public companies that are not emerging growth companies.
Recently Issued Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance on accounting for employee share-based payment awards to simplify the accounting related to several aspects of accounting for share-based payment transactions, including income tax consequences of share-based payment transactions, classification of awards as equity or liabilities, forfeitures, and classification on the statement of cash flows. The new standard is effective for the annual period beginning after December 15, 2016, including interim reporting periods within that period, which for the Company will be the annual period ending December 31, 2017. Early adoption, including adoption in an interim period, is permitted. The standard requires the use of several transition methods including a modified retrospective transition method, retrospective method and prospective method. The Company is evaluating the effect that this new guidance will have on its financial statements and related disclosures.
| F-10 |
In February 2016, the FASB issued new guidance on leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This new guidance will replace existing guidance on leases in GAAP. The new standard is effective for the annual period beginning after December 15, 2018, including interim reporting periods within that period, which for the Company will be the annual period ending December 31, 2019. Early application is permitted. The standard requires the use of a modified retrospective transition method; however, certain optional practical expedients may be applied. The Company is evaluating the effect that this new guidance will have on its financial statements and related disclosures.
In August 2014, the FASB issued new guidance which requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable), and to provide related footnote disclosures in certain circumstances. The new standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, which for the Company will be the annual period ending December 31, 2016. Early application is permitted. The Company has not yet adopted this guidance nor has it determined the effect of the standard on its financial statements and related disclosures.
In May 2014, the FASB issued new guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer control over promised goods or services to customers. This new guidance will replace most existing revenue recognition guidance in GAAP. The new standard is effective for the annual period ending after December 15, 2017, including interim reporting periods within that period, which for the Company will be the annual period ending December 31, 2018. Early application as of January 1, 2017 is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that this new guidance will have on its financial statements and related disclosures. The Company has not yet selected a transition method.
Note 4 – Episodic Television Programs
In September 2014, CSS and The Boniuk Foundation (the “Foundation”) entered into an agreement under which the Foundation agreed to sponsor a Saturday morning family television show. The Foundation is a not-for-profit charity that promotes tolerance, compassion and respect. In October 2015, Chicken Soup for the Soul’s Hidden Heroes (“CSS’s Hidden Heroes”), a half-hour hidden-camera family friendly show, premiered on the CBS Television Network (“CBS”). The program is slated for 26 episodes (22 originals and four “best ofs”) airing weekly for an initial season of 52 consecutive weekly time slots, including repeats. The Company recognizes revenues under this agreement as the episodes became available for delivery. For the year ended December 31, 2015, nine original episodes have either aired on CBS or the content was available for broadcast. The Foundation has agreed to fund this program for a second, 26-episode/52-week season, and possible commitments for up to three additional seasons thereafter. The sponsorship payments were received by CSS and made available to the Company, as needed, through the CCMS. The Company recognized $1,431,818 of revenue related to CSS’s Hidden Heroes during the year ended December 31, 2015.
| F-11 |
In December 2014, the Company entered into a co-production and distribution agreement with Litton Entertainment (“Litton”) whereby Litton is to provide all co-production services for CSS’s Hidden Heroes for a turn-key fee (the “Co-Production Fee”) payable by the Company. The Co-Production fee is payable to Litton, based on the completion and delivery of the episodes for the first season. In addition, Litton has agreed that it will make available within its Saturday morning programming block on CBS, time slots approved by the Company to air CSS’s Hidden Heroes. Litton has exercised its option to produce a second season and has an option, if the Company agrees, to extend CSS’s Hidden Heroes, including spin-off’s, for additional seasons.
During 2015, the Company received corporate sponsorship funding from Boniuk Interests, Ltd. to develop a second episodic television series, tentatively entitled Project Dad, a Chicken Soup for the Soul Original (“CSS’s Project Dad”), which will present three busy celebrity dads as they put their careers on the “sidelines” and get to know their children like never before. Boniuk Interests, Ltd is a for-profit real estate company. The Company will have a scheduled run of weekly episodes for a year on Discovery Communications, LLC’s network, which consists of TLC, Discovery Family and Discovery Life. CSS’s Project Dad is based on an original, on-going series produced by the Korean Broadcast Network (the “Show”). The Show is top-rated in Korea, where more than 100 episodes have aired. The Show is also a popular in China, where more than 50 episodes of the Chinese version have aired. The Company has rights to the Show’s format in all markets around the world except Korea, China and Turkey.
Sponsorship payments received for CSS’s Project Dad are included in deferred revenue on the accompanying balance sheet as of December 31, 2015.
| F-12 |
Note 5 – Programming Costs
Programming costs, net of amortization, consists of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Released, net of amortization of $646,295 | $ | 688,576 | $ | - | ||||
| In production | 104,614 | - | ||||||
| In development | 157,879 | - | ||||||
| $ | 951,069 | $ | - | |||||
The Company expects that approximately 37% or $353,000 of the above programming costs, net of accumulated amortization, will be amortized during the year ending December 31, 2016. The Company expects that 80% of the unamortized balance for released programming, or $550,861, will be amortized during the three years ending December 31, 2018. See Note 8, Commitments and Contingencies.
Note 6 - Members’ Deficit and Membership Interests
The operating agreement of the Company created Class A and Class B membership interests. Only Class A membership interests have voting rights. Class A and Class B membership interests will share in distributions upon a sale on a pro rata basis. CSS is the managing member and held 100% of the Class A membership interests upon formation of the Company.
In October 2015, Trema, LLC (“Trema”), a company principally owned and controlled by our executive chairman, acquired certain rights held by a third party relating to the Company’s Video Content. Among the rights acquired by Trema, was the right to receive contractual payments from CSS or its affiliates for a period of time. The contract required cash payments based on a fixed percentage of revenues less direct operating expenses resulting from television and film activities of the Company.
The Company exchanged 1.82% of Class B membership interests to Trema in full satisfaction of its projected liability for the contractual payments (the “Class B Exchange”). The Class B Exchange is accounted for as a liability and is adjusted to fair value until settlement. As of December 31, 2015, the Class B membership interests included in the Class B Exchange was determined to have a fair value of $792,000, based on a term of 1.42 years, a risk-free interest rate of .51% and projected volatility of 60%. As a result, the Company recorded share-based payment expense during the year ended December 31, 2015 of $792,000, which is included in selling, general and administrative expense in the accompanying statement of operations (Note 9).
On September 30, 2015, CSS made a charitable donation of six percent of the membership interests it owned in the Company to the Foundation. After the donation, CSS owned 94% of the Class A membership interests in the Company.
| F-13 |
As described in Note 1, the Company was formed in December 2014 and began operations in January 2015. During the period September 2014 through January 2015, CSS hired an individual to assist in developing a plan for the future of its television and film business, and based on that plan, to become a co-founder of the Company. The related costs of the individual have been included in the costs allocated by CSS to pre-formation expenses of the Company in the accompanying statement of operations for the year ended December 31, 2014.
On February 13, 2015, the Company entered into an agreement with the individual whereby he became an executive officer and co-founder of the Company (“EO”). On that date, the Company also issued a Class B membership award (the “Founder Award”) to the EO that contained provisions that required the EO to return certain amounts of the Founder Award if he left the Company prior to the completion of five years with the Company. The Founder Award, if it had become fully earned, would have represented an aggregate of 10% profits interest in the Company, subject to future dilution along with the Company. Management determined that the Founder Award issued to the EO had minimal value when issued.
As discussed in Note 8, the EO’s last day with the Company was July 31, 2016. In connection with the EO leaving the Company, the EO and the Company agreed that the EO would retain 50% of the Founder Award and the balance was returned to the Company. Further, CSS agreed to exchange the 50% of the Founder Award retained, for Class B membership interests that CSS owned (Note 9).
Note 7 - Related Party Transactions
For the year ended December 31, 2015, the Company and CSS were parties to a management services agreement and a license agreement. The Company paid CSS 4% and 1%, pursuant to the management services and license agreement, respectively, based on cash revenues collected. See Note 9 – “Subsequent Events - Affiliate Resources and Obligations” for a discussion of the license agreement and management services agreement entered into in May 2016 by CSS Entertainment.
Consulting Agreement
The Company had a consulting agreement with Low Profile Films, Inc. (“Low Profile”). Low Profile provided executive production services for the Company that included all activities necessary to establish and maintain relationships regarding the Company’s proposed feature length film, a possible talk show and, Low Profile was to oversee the production to facilitate the public viewing or distribution of same. The owner of Low Profile is the son of the Company’s executive chairman.
The Company’s agreement with Alcon Entertainment LLC for a feature length film expired on July 15, 2016 and as a result, the Company and Low Profile mutually agreed to terminate the executive production services agreement as of July 15, 2016.
| F-14 |
For the years ended December 31, 2015 and 2014, the Company paid Low Profile $60,000 and $56,000, respectively, for services provided, which are included in selling, general and administrative expenses in the accompanying statements of operations.
Note 8 - Commitments and Contingencies
As described in Note 6, the Company had entered into an agreement with an EO. The EO was entitled to annual base compensation of $200,000 and a guaranteed annual bonus of $125,000, and was entitled to all employee benefits offered by the Company. The agreement included a non-compete and non-solicitation terms, and bonus provisions on an annual basis. Effective July 1, 2016, the Company and the EO agreed to amend the terms of the agreement (the “Amendment”). The Amendment provided that the EO’s last with the Company was July 31, 2016. The EO is entitled to six months of severance and benefits, payable in accordance with the Company’s normal payroll practices. The EO may also be entitled to a pro rata bonus for 2016 (Note 9 – “Subsequent Events – Equity Exchange”.
As of December 31, 2015, the Company has commitments to make cash payments to third parties for programming costs totaling approximately $4,507,000. Through August 31, 2016, the Company has made cash payments of $2,648,000 to third parties relating to this commitment.
Note 9 – Subsequent Events
Debt Private Placement
Beginning in July 2016 and through September 16, 2016, CSS Entertainment has sold in a private placement (“Debt Private Placement”) $1,565,000 aggregate principal amount of 5% senior secured term notes (the “2016 Term Notes”) and Class W warrants to purchase an aggregate of 133,025 shares of Class A common stock (the “Warrants”). Subsequent to September 16, 2016, CSS Entertainment may continue to sell the Debt Private Placement. The 2016 Term Notes bear interest at 5% per annum, payable monthly in arrears in cash. The principal of the 2016 Term Notes (including all accrued, but unpaid interest thereon) is due on the earlier of (a) June 30, 2017 and (b) the third business day following consummation of (i) an initial public offering of CSS Entertainment’s common stock and (ii) mandatorily repaid at 100% of par value from any future equity offering (other than as a result of the exercise of the Warrants) resulting in gross proceeds of at least $7,000,000 (the “Maturity Date”).
The 2016 Term Notes rank pari passu with the CSS License Note and the Credit Facility, and senior to any existing or future indebtedness of CSS Entertainment. The 2016 Term Notes are secured by a first priority security interest and lien in all tangible and intangible assets of CSS Entertainment, subject to an intercreditor agreement with respect to the Credit Facility.
The Warrants are exercisable at $7.50 per share at any time prior to June 30, 2021. The Warrants are callable under certain circumstances, but in no event prior to January 31, 2018. The fair value of the Warrants upon issuance will be recorded as a discount to the 2016 Term Notes and amortized to interest expense over the term of the debt.
| F-15 |
Equity Private Placement
Beginning in June 2016 and through September 16, 2016, CSS Entertainment sold in a private placement (the “Equity Private Placement”) 11,679 units, consisting of an aggregate of 104,270 shares of Class A common stock and Warrants to purchase an aggregate of 35,037 shares of Class A common stock. The purchase price of each unit was $60 and each unit consisted of 10 shares of Class A common stock and 3 Warrants exercisable at $7.50 each. As of September 16, 2016, CSS Entertainment has sold $700,740 of units. Subsequent to September 16, 2016, CSS Entertainment may continue to sell the Equity Private Placement.
Secured Revolving Line of Credit
On May 12, 2016, CSS Entertainment entered into the Credit Facility with an entity controlled by CSS Entertainment’s executive chairman (the “Lender”). Under the terms of the Credit Facility, CSS Entertainment may borrow up to an aggregate of $3,000,000. Payment obligations under the Credit Facility are senior debt and secured by a first priority security interest in all assets of CSS Entertainment. The proceeds of loans made under the Credit Facility may be used for working capital and general corporate purposes, including payments of a portion of amounts due pursuant to the License Agreement (See “Affiliate Resources and Obligations” below). Borrowings under the Credit Facility shall bear interest at 5% per annum and an annual fee equal to 0.75% of the unused portion of the Credit Facility, payable monthly in arrears in cash. Principal obligations (and all accrued but unpaid interest thereon) are due on the earlier of (a) June 30, 2017 or (b) the third business day following consummation of (i) an initial public offering of CSS Entertainment’s common stock and (ii) any future debt or equity offering resulting in gross proceeds to CSS Entertainment of at least $7 million (“Maturity Date”).
If payment obligations are still outstanding at the Maturity Date, or, if prior to the Maturity Date there is an event of default, all principal and interest will be converted into shares of Class A common stock of CSS Entertainment on the same terms as CSS Entertainment’s most recently completed equity financing immediately prior to the Maturity Date or the event of default giving rise to the mandatory conversion, as the case may be; provided, that under no circumstances shall the pre-money valuation used for this mandatory conversion be less than $52,560,000.
In connection with the Credit Facility, CSS Entertainment issued warrants to the Lender to purchase an aggregate of 105,000 shares of CSS Entertainment’s Class A common stock at an exercise price of $7.50 per share. The warrants issued to the Lender expire on May 12, 2021. The fair value of the warrants upon issuance will be recorded as a discount to the debt under the Credit Facility and amortized to interest expense over the term.
As of September 16, 2016, the balance payable by CSS Entertainment under the Credit Facility is $2,800,000.
| F-16 |
Trema Contribution Agreement
Concurrently with the consummation of the Contribution Agreement, and as described in Note 6 above, certain rights were held by Trema, an entity controlled by CSS Entertainment’s executive chairman, to receive contractual payments (the “Rights”) with respect to part of the assets contributed to CSS Entertainment pursuant to the Contribution Agreement. The Rights under these agreements were assigned to CSS Entertainment in consideration for the issuance of 159,432 shares of Class B common stock. Such Class B common stock has certain demand and piggyback registration rights with respect to these shares that would be effective only after an initial public offering of common stock by CSS Entertainment.
Equity Exchange
Effective July 31, 2016, the Company entered into an exchange agreement with the EO, in which he exchanged all membership interest in CSS Productions which had been issued to him for 430,028 shares of CSS Entertainment Class B common stock then owned by CSS Productions. The EO simultaneously elected to convert the Class B common stock into a like number of shares of our Class A common stock.
Affiliate Resources and Obligations
In May 2016, the CSS Entertainment entered into agreements with CSS and affiliated companies that provide the Company with access to important assets and resources as described below (the “2016 Agreements”). The 2016 Agreements include a management services agreement and a license agreement. A summary of the 2016 Agreements is as follows:
Management Services Agreement
CSS Entertainment is a party to a Management Services Agreement with CSS (the “Management Agreement”). Under the terms of the Management Agreement, CSS Entertainment will be provided with the operational expertise of the CSS companies’ personnel, including its executive chairman. The Management Agreement also provides for CSS Entertainment to receive other services, including accounting, legal, marketing, management, data access and back office systems, and requires CSS to provide us with office space and equipment usage.
Under the terms of the Management Agreement, commencing with the fiscal quarter ended March 31, 2016, CSS Entertainment shall pay a quarterly fee to CSS equal to 5% of the gross revenues as reported under GAAP for each fiscal quarter by the Company. If CSS Entertainment or its successor then reports under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the quarterly fee will be based on gross revenues as reported in the applicable public filing under the Exchange Act for each fiscal quarter. Each quarterly amount due shall be paid on or prior to the later of the 45th day after the end of such quarter, or the 10th day after the filing of the applicable Exchange Act report for such quarter.
In addition, for any sponsorship that is arranged by CSS for CSS Entertainment’s Video Content or that contains a multi-element transaction for which CSS Entertainment receives a portion of such revenue and CSS receives the remaining revenue (for example, a transaction that relates to both Video Content and CSS’s printed products), CSS Entertainment shall pay a sales commission to CSS equal to 20% of the portion of such revenue earned. Each sales commission shall be paid within 30 days of the end of the month in which received. If CSS actually collects CSS Entertainment’s portion of such fee, CSS will remit the revenue due to CSS Entertainment after deducting the sales commission.
| F-17 |
The term of the Management Agreement is five years, with automatic one-year renewals thereafter unless either party elects to terminate by delivering written notice at least 90 days prior to the end of the then current term. The Management Agreement is terminable earlier by either party by reason of certain prescribed and uncured defaults by the other party. The Management Agreement will automatically terminate in the event of CSS Entertainment’s bankruptcy or a bankruptcy of CSS or if CSS Entertainment no longer has licensed rights from CSS under the License Agreement described below.
License Agreement
CSS Entertainment is a party to a trademark and intellectual property license agreement with CSS (the “License Agreement”). Under the terms of the License Agreement, CSS Entertainment has been granted a perpetual, exclusive license to utilize the Brand and related content, such as stories published in the Chicken Soup for the Soul books, for visual exploitation worldwide, subject only to the rights relating to scripted audio and visual content previously granted by CSS to Alcon Entertainment LLC.
In consideration of the License Agreement, in May 2016 CSS Entertainment paid to CSS an initial fee of $5 million, made through a combination of cash and promissory notes (the “Note”). CSS Entertainment paid $1.5 million to CSS upon execution of the License Agreement and signed the Note for $3.5 million. The Note may be prepaid at any time in the discretion of CSS Entertainment and bears interest at the rate of .5% (1/2 of 1%) per annum. The Note is due on the earlier of (a) five business days after the date of written demand by CSS and (b) the third business day following the closing date of an initial public offering of the common stock of CSS Entertainment. As of September 16, 2016, the Note has been repaid in full.
Under the terms of the License Agreement, commencing with the fiscal quarter ended March 31, 2016, CSS Entertainment shall pay a quarterly fee to CSS equal to 4% of gross revenues as reported under GAAP for each fiscal quarter. If CSS Entertainment or its successor then reports under the Exchange Act, the quarterly fee will be based on gross revenues as reported in the applicable public filing under the Exchange Act for each fiscal quarter. Each quarterly amount shall be paid on or prior to the later of the 45th day after the end of such quarter, or the 10th day after the filing of the applicable Exchange Act report for such quarter.
In addition, CSS shall provide marketing support for CSS Entertainment’s productions through its email distribution, blogs and other marketing and public relations resources. Commencing with the fiscal quarter ended March 31, 2016, CSS Entertainment shall pay a quarterly fee to CSS equal to 1% of gross revenues as reported under GAAP for each fiscal quarter for such support. If CSS Entertainment or its successor then reports under the Exchange Act, the quarterly fee will be based on gross revenues as reported in the applicable public filing under the Exchange Act for each such fiscal quarter. Each quarterly amount shall be paid on or prior to the later of the 45th day after the end of such quarter, or the 10th day after the filing of the applicable Exchange Act report for such quarter.
| F-18 |
Subject Offering of CSS Entertainment Class A Common Stock
CSS Entertainment is offering to sell up to 1,100,000 newly issued shares of its Class A common stock at a per share price to be determined (“Subject Offering”), which excludes 258,000 shares that may be sold by certain of its existing stockholders as CSS Entertainment will not receive any of the net proceeds of those shares sold by existing stockholders. CSS Entertainment has the option to sell additional newly issued shares in its sole discretion. There is no minimum number of shares that must be sold in order to conduct a closing of the Subject Offering.
Prior to the Subject Offering, there has been no public market for CSS Entertainment common stock. CSS Entertainment expects that its Class A common stock will be quoted for trading on the OTCQB market or another over-the-counter market on the closing of the Subject Offering under a symbol to be determined.
The Subject Offering is a Regulation A+ Tier 1 offering, although CSS Entertainment may determine to amend the Subject Offering to a Regulation A+ Tier 2 offering prior to its qualification by the Securities and Exchange Commission.
Equity Structure of CSS Entertainment
CSS Entertainment is authorized to issue 70 million shares of Class A common stock, par value $.0001 (“Class A Stock”), 20 million shares of Class B common stock, par value $.0001 (“Class B Stock”), and 10 million shares of preferred stock, par value $.0001. As of September 16, 2016, CSS Entertainment has 813,167 shares of Class A Stock outstanding, 8,071,955 shares of Class B Stock outstanding and no shares of preferred stock outstanding. A general description of these securities is as follows:
Common Stock
Holders of Class A Stock and Class B Stock have identical voting rights, except that holders of Class A Stock are entitled to one vote per share and holders of Class B Stock are entitled to ten votes per share. Class A Stock and Class B Stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law or our charter documents. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors.
Holders of Class A Stock and Class B Stock shall be treated equally, identically and ratably, on a per share basis, with respect to any dividends or distributions as may be declared and paid from time to time by the board of directors out of any assets legally available.
Holders of common stock of CSS Entertainment are not entitled to preemptive rights and are not subject to conversion, redemption or sinking fund provisions.
| F-19 |
Subject to preferential or other rights of any holders of preferred stock then outstanding, upon the dissolution, liquidation or winding up of CSS Entertainment, whether voluntary or involuntary, holders of Class A Stock and Class B Stock will be entitled to receive ratably all assets of CSS Entertainment available for distribution to its stockholders unless disparate or different treatment of the shares with respect to distributions upon any such liquidation, dissolution or winding up is approved in advance by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under CSS Entertainment’s Certificate of Incorporation) of the holders of a majority of the outstanding Class A Stock and Class B Stock, each voting separately as a class.
In the case of a merger or consolidation that results in any distribution or payment in respect of the shares of Class A Stock or Class B Stock upon such consolidation or merger with or into any other entity, or in the case of any other transaction having an effect on stockholders substantially similar to that resulting from a consolidation or merger, such distribution or payment shall be made ratably on a per share basis among the holders of Class A Stock and Class B Stock as a single class; provided, however, that shares of one such class may receive different or disproportionate distributions or payments in connection with such merger, consolidation or other transaction if (i) the only difference in the per share distribution to the holders of the Class A Stock and Class B Stock is that any securities distributed to the holder of a share of Class B Stock have ten times the voting power of any securities distributed to the holder of a share of Class A Stock, or (ii) such merger, consolidation or other transaction is approved by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under CSS Entertainment’s Certificate of Incorporation) of the holders of a majority of the outstanding shares of Class A Stock and Class B Stock, each voting separately as a class.
The outstanding shares of Class B Stock are convertible at any time as follows: (1) at the option of the holder, a share of Class B Stock may be converted at any time into one share of Class A Stock or (2) upon the election of the holders of a majority of the then outstanding shares of Class B Stock, all outstanding shares of Class B Stock may be converted into shares of Class A Stock. Once converted into Class A Stock, the Class B Stock will not be reissued.
Preferred Stock
The certificate of incorporation of CSS Entertainment currently authorizes the issuance of 10 million shares of blank check preferred stock. The blank check preferred stock may be issued in the future by the CSS Entertainment board of directors, without stockholder approval, with such designation, rights and preferences as it may be determined from time to time. Accordingly, such preferred stock could adversely affect the voting power or other rights of the holders of common stock.
Class W Warrants
As of September 16, 2016, CSS Entertainment has 273,062 Class W warrants (the “Warrants”) outstanding. Each Warrant entitles the registered holder to purchase one share of our Class A Stock at a price of $7.50 per share, subject to adjustment as discussed below. Each Warrant is exercisable at anytime through June 30, 2021 at 5:00 p.m., New York City time.
| F-20 |
If CSS Entertainment’s Class A Stock is traded, listed or quoted on any U.S. market or electronic exchange, and the closing per-share sales price of the Class A Stock for any twenty (20) trading days during a consecutive thirty (30) trading days period (the “Measurement Period”) exceeds $15.00 (subject to adjustment for forward and reverse stock splits, recapitalizations, stock dividends and the like), then CSS Entertainment may call for cancellation of all or any portion of the Warrants for which a notice of exercise has not yet been delivered for consideration equal to $.01 per Warrant, in accordance with the provisions of the Warrants. Notwithstanding anything to the contrary, we shall not make a call of the Class W warrants prior to January 31, 2018.
If the resale of the Class A Stock issuable upon exercise of the Warrants is not covered by an effective registration statement or an exemption from registration (a) at the time of a call by CSS Entertainment of the Warrants as described above, (b) at any time the Class A Stock is traded, listed or quoted on a U.S. trading market or electronic exchange or (c) after January 31, 2018, the holders of the Warrants shall be afforded cashless exercise rights as further described in the Warrant agreement. In such event, each holder would pay the exercise price by surrendering the Warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A Stock underlying the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” for this purpose will mean the average reported last sale price of the shares of common stock for the ten trading days ending on the trading day prior to the date of exercise.
The right to exercise will be forfeited unless the Warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a Warrant will have no further rights except to receive the redemption price for such Warrant upon surrender thereof.
The redemption criteria for the Warrants has been established at a price which is intended to provide holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of a redemption call, the redemption will not cause the share price to drop below the exercise price of the Warrants.
The exercise price and number of shares of Class A Stock issuable on exercise of the Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the Warrants will not be adjusted for issuances of shares of Class A Stock at a price below their respective exercise prices. Holders of the Warrants do not have the rights or privileges of holders of shares of common stock or any voting rights until they exercise the Warrants and receive shares of Class A Stock. After the issuance of shares of common stock upon exercise of the Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. No fractional shares will be issued upon exercise of the Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of Class A Stock to be issued to the holder.
| F-21 |
PART III - EXHIBITS
Index to Exhibits.
| Exhibit No. | Description | |
| 1.1 | Form of Agency Agreement.* | |
| 2.1 | Certificate of Incorporation of CSS Entertainment. | |
| 2.2 | By-laws of CSS Entertainment | |
| 3.2 | Specimen CSS Entertainment Class A Common Stock Certificate.* | |
| 6.1 | Trademark and Intellectual Property License Agreement between CSS Entertainment and CSS Entertainment for the Soul, LLC. | |
| 6.2 | Management Services Agreement between CSS Entertainment and Chicken Soup for the Soul, LLC. | |
| 6.3 | Contribution Agreement between CSS Entertainment and Chicken Soup for the Soul, LLC and Chicken Soup for the Soul Productions, LLC. | |
| 6.4 | Contribution Agreement between CSS Entertainment and Trema, LLC | |
| 6.5 | Form of indemnification agreement.* | |
| 10 | Power of Attorney (included on signature page of this Offering statement). |
*To be filed by amendment.
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this offering statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cos Cob, State of Connecticut, on September __, 2016.
| CHICKEN SOUP FOR THE SOUL ENTERTAINMENT, INC. | ||
| By: | ||
| William J. Rouhana, Jr. | ||
| Executive Chairman | ||
| (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Act of 1933, this Form 1-A has been signed by the following persons in the capacities and on the dates indicated.
| Name | Position | Date | ||
| Executive Chairman | ||||
| William J. Rouhana, Jr. | ||||
| Vice Chairman and Director | ||||
| Scott W. Seaton | ||||
| Director | ||||
| Amy Newmark | ||||
| Director | ||||
| Peter Dekom | ||||
| Director | ||||
| Fred Cohen | ||||
| Director | ||||
| Christina Weiss Lurie | ||||
| Director | ||||
| Diana Wilkin |
Exhibit 2.1
CERTIFICATE OF INCORPORATION
OF
CHICKEN SOUP FOR THE SOUL ENTERTAINMENT INC.
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
Pursuant to Section 102 of the
Delaware General Corporation Law
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
I, the undersigned, in order to form a corporation for the purposes hereinafter stated, under and pursuant to the provisions of the General Corporation Law of the State of Delaware (the “GCL”), do hereby certify as follows:
First: The name of the corporation is Chicken Soup for the Soul Entertainment Inc. (hereinafter sometimes referred to as the “Corporation”).
Second: The registered office of the Corporation is to be located at 615 S. DuPont Hwy., Kent County, Dover, Delaware. The name of its registered agent at that address is National Corporate Research, Ltd.
Third: The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized under the GCL.
Fourth: The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 100 million, of which 70 million shares shall be Class A Common Stock of the par value $.0001 per share (“Class A Common Stock”), 20 million shares shall be Class B Common Stock of the par value $.0001 per share (“Class B Common Stock” and together with the Class A Common Stock, the “Common Stock”) and 10 million shares shall be preferred stock of the par value of $.0001 per share (“Preferred Stock”).
A. Rights of Class A Common Stock and Class B Common Stock.
1. Equal Status. Except as otherwise provided in this Certificate of Incorporation or required by applicable law, shares of Class A Common Stock and Class B Common Stock shall have the same rights and powers, rank equally (including as to dividends and distributions, and upon any liquidation, dissolution or winding up of the Corporation), share ratably and be identical in all respects and as to all matters.
2. Voting Rights. Except as otherwise expressly provided by this Certificate of Incorporation or as provided by law, the holders of shares of Class A Common Stock and Class B Common Stock shall (a) at all times vote together as a single class on all matters (including the election of directors) submitted to a vote or for the consent (if action by written consent of the stockholders is permitted at such time under this Certificate of Incorporation) of the stockholders of the Corporation, (b) be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Corporation and (c) be entitled to vote upon such matters and in such manner as may be provided by applicable law. Except as otherwise expressly provided herein or required by applicable law, each holder of Class A Common Stock shall have the right to one (1) vote per share of Class A Common Stock held of record by such holder and each holder of Class B Common Stock shall have the right to ten (10) votes per share of Class B Common Stock held of record by such holder.
3. Dividend and Distribution Rights. Shares of Class A Common Stock and Class B Common Stock shall be treated equally, identically and ratably, on a per share basis, with respect to any dividends or distributions as may be declared and paid from time to time by the Board of Directors out of any assets of the Corporation legally available therefor; provided, however, that in the event a dividend is paid in the form of shares of Class A Common Stock or Class B Common Stock (or rights to acquire such shares), then holders of Class A Common Stock shall receive shares of Class A Common Stock (or rights to acquire such shares, as the case may be) and holders of Class B Common Stock shall receive shares of Class B Common Stock (or rights to acquire such shares, as the case may be), with holders of shares of Class A Common Stock and Class B Common Stock receiving, on a per share basis, an identical number of shares of Class A Common Stock or Class B Common Stock, as applicable. Notwithstanding the foregoing, the Board of Directors may pay or make a disparate dividend or distribution per share of Class A Common Stock or Class B Common Stock (whether in the amount of such dividend or distribution payable per share, the form in which such dividend or distribution is payable, the timing of the payment, or otherwise) if such disparate dividend or distribution is approved in advance by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under this Certificate of Incorporation) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting separately as a class.
4. Subdivisions, Combinations or Reclassifications. Shares of Class A Common Stock or Class B Common Stock may not be subdivided, combined or reclassified unless the shares of the other class are concurrently therewith proportionately subdivided, combined or reclassified in a manner that maintains the same proportionate equity ownership between the holders of the outstanding Class A Common Stock and Class B Common Stock on the record date for such subdivision, combination or reclassification; provided, however, that shares of one such class may be subdivided, combined or reclassified in a different or disproportionate manner if such subdivision, combination or reclassification is approved in advance by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under this Certificate of Incorporation) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting separately as a class.
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5. Liquidation, Dissolution or Winding Up. Subject to the preferential or other rights of any holders of Preferred Stock then outstanding, upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, holders of Class A Common Stock and Class B Common Stock will be entitled to receive ratably all assets of the Corporation available for distribution to its stockholders unless disparate or different treatment of the shares of each such class with respect to distributions upon any such liquidation, dissolution or winding up is approved in advance by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under this Certificate of Incorporation) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting separately as a class.
6. Merger or Consolidation. In the case of any distribution or payment in respect of the shares of Class A Common Stock or Class B Common Stock upon the consolidation or merger of the Corporation with or into any other entity, or in the case of any other transaction having an effect on stockholders substantially similar to that resulting from a consolidation or merger, such distribution or payment shall be made ratably on a per share basis among the holders of the Class A Common Stock and Class B Common Stock as a single class; provided, however, that shares of one such class may receive different or disproportionate distributions or payments in connection with such merger, consolidation or other transaction if (i) the only difference in the per share distribution to the holders of the Class A Common Stock and Class B Common Stock is that any securities distributed to the holder of a share Class B Common Stock have ten times the voting power of any securities distributed to the holder of a share of Class A Common Stock, or (ii) such merger, consolidation or other transaction is approved by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under this Certificate of Incorporation) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting separately as a class.
7. Conversion of Class B Common Stock.
(a) Voluntary Conversion. Each share of Class B Common Stock shall be convertible into one (1) fully paid and nonassessable share of Class A Common Stock at the option of the holder thereof at any time upon written notice to the Corporation. Before any holder of Class B Common Stock shall be entitled to voluntarily convert any shares of such Class B Common Stock, such holder shall surrender the certificate or certificates therefor (if any), duly endorsed, at the principal corporate office of the Corporation or of any transfer agent for the Class B Common Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names (i) in which the certificate or certificates representing the shares of Class A Common Stock into which the shares of Class B Common Stock are so converted are to be issued if such shares are certificated or (ii) in which such shares are to be registered in book entry if such shares are uncertificated. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Class B Common Stock, or to the nominee or nominees of such holder, a certificate or certificates representing the number of shares of Class A Common Stock to which such holder shall be entitled as aforesaid (if such shares are certificated) or, if such shares are uncertificated, register such shares in book-entry form. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Class B Common Stock to be converted following or contemporaneously with the written notice of such holder’s election to convert required by this sub-section 7(a) of this Article FOURTH, and the person or persons entitled to receive the shares of Class A Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Class A Common Stock as of such date. Each share of Class B Common Stock that is converted pursuant to this sub-section 7(a) of this Article FOURTH shall be retired by the Corporation and shall not be available for reissuance.
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(b) Automatic Conversion. All shares of Class B Common Stock shall be automatically, without further action by any holder thereof, converted into an identical number of shares of Class A Common Stock at such date and time specified by the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under this Certificate of Incorporation) of the holders of a majority of the then outstanding shares Class B Common Stock, voting as a separate class (a “Conversion Event”). Each outstanding stock certificate that, immediately prior to a Conversion Event, represented one or more shares of Class B Common Stock subject to such Conversion Event shall, upon such Conversion Event, be deemed to represent an equal number of shares of Class A Common Stock, without the need for surrender or exchange thereof. The Corporation shall, upon the request of any holder whose shares of Class B Common Stock have been converted into shares of Class A Common Stock as a result of a Conversion Event and upon surrender by such holder to the Corporation of the outstanding certificate(s) formerly representing such holder’s shares of Class B Common Stock (if any), issue and deliver to such holder certificate(s) representing the shares of Class A Common Stock into which such holder’s shares of Class B Common Stock were converted as a result of such Conversion Event (if such shares are certificated) or, if such shares are uncertificated, register such shares in book-entry form. Each share of Class B Common Stock that is converted pursuant to this sub-section 7(b) of this Article FOURTH shall thereupon be retired by the Corporation and shall not be available for reissuance.
(c) Other Conversion Matters. The Corporation may, from time to time, establish such policies and procedures, not in violation of applicable law or the other provisions of this Certificate of Incorporation, relating to the conversion of the Class B Common Stock into Class A Common Stock, as it may deem necessary or advisable in connection therewith. In connection with any action of stockholders taken at a meeting or by written consent (if action by written consent of stockholders is permitted at such time under this Certificate of Incorporation), the stock ledger of the Corporation shall be presumptive evidence as to who are the stockholders entitled to vote in person or by proxy at any meeting of stockholders or in connection with any such written consent and the class or classes or series of shares held by each such stockholder and the number of shares of each class or classes or series held by such stockholder.
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8. Reservation of Stock. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of effecting the conversion of the shares of Class B Common Stock, such number of shares of Class A Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Class B Common Stock into shares of Class A Common Stock.
9. Protective Provision. The Corporation shall not, whether by merger, consolidation or otherwise, amend, alter, repeal or waive Section A of this Article FOURTH (or adopt any provision inconsistent therewith), without first obtaining the affirmative vote (or written consent if action by written consent of stockholders is permitted at such time under this Certificate of Incorporation) of the holders of a majority of the then outstanding shares of Class B Common Stock, voting as a separate class, in addition to any other vote required by applicable law, this Certificate of Incorporation or the Bylaws.
B. Preferred Stock. The Board of Directors of the Corporation is expressly granted authority to issue shares of the Preferred Stock in one or more series and to fix for each such series such voting powers, full or limited, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series (a “Preferred Stock Designation”) and as may be permitted by the GCL. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation.
Fifth: The name and mailing address of the sole incorporator of the Corporation is as follows:
| Name | Address | |
| Brian L. Ross | c/o Graubard Miller | |
| The Chrysler Building | ||
| 405 Lexington Avenue | ||
| New York, NY 10174-1901 |
Sixth: The number of directors of the Corporation shall be fixed by, or in the manner provided in, the Bylaws of the Corporation (the “Bylaws”).
Seventh: To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or to its stockholders for monetary damages for any breach of fiduciary duty as a director. No amendment to, modification of or repeal of this Paragraph SEVENTH shall apply to, or have any effect on the liability or alleged liability of, any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.
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Eighth: The Corporation shall indemnify, advance expenses, and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a “Covered Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that lie or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liabilities and losses suffered and expenses (including attorneys’ fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except for claims for indemnification (following the final disposition of such Proceeding) or advancement of expenses not paid in full, the Corporation shall be required to indemnify a Covered Person in connection with a Proceeding (or part thereof) commenced by such Covered Person only if the commencement of such Proceeding (or part thereof) by the Covered Person was authorized in the specific case by the Board of Directors of the Corporation. Any amendment, repeal or modification of this Paragraph EIGHTH shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.
Ninth: Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. Meetings of the stockholders of the Corporation may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside of the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the Bylaws.
Tenth: In anticipation that the Corporation will cease to be a wholly owned subsidiary of Chicken Soup for the Soul Productions, LLC (“CSS Productions”) but will continue as a majority owned subsidiary of CSS Productions and that the Corporation or its subsidiaries and CSS Productions may each engage in businesses utilizing the same brand identity and have interests in the same or similar areas of corporate opportunities, and in recognition of (i) the benefits to be derived by the Corporation through its continued contractual, corporate and business relations with CSS Productions and its affiliates (collectively, the “CS Companies”), including the licensing of certain brands and the service of officers and directors of the CS Companies as officers and directors of the Corporation) and (ii) the difficulties attendant to any director, who desires and endeavors fully to satisfy such director’s fiduciary duties, in determining the full scope of such duties in any particular situation, the provisions of this Paragraph TENTH are set forth to regulate, define and guide the conduct of certain affairs of the Corporation as they may involve the CS Companies and their respective officers and directors and the powers, rights, duties and liabilities of the Corporation and its officers, directors and stockholders in connection therewith. Accordingly:
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(a) the CS Companies shall have no duty to refrain from engaging in any business activities or lines of business, except as may be prescribed by any written agreement between any of the CS Companies and the Corporation (“Written Agreement”).
(b) the CS Companies and their officers, directors and employees shall not be liable to the Corporation or its stockholders for breach of any fiduciary duty by reason of any activities of any of the CS Companies authorized under sub-section (a) above.
(c) in the event that any of the CS Companies acquires knowledge of a potential transaction or matter that may be a corporate opportunity for the Corporation, the CS Companies shall have no duty to communicate or offer the corporate opportunity to the Corporation, except as may be prescribed by a Written Agreement, and shall not be liable to the Corporation or its stockholders for breach of any fiduciary duty as a stockholder of the Corporation or controlling person of a stockholder by reason of the fact that any of such CS Companies pursues or acquires the corporate opportunity for itself, directs the corporate opportunity to another person or entity, or does not communicate information regarding, or offer, the corporate opportunity to the Corporation, provided same does not constitute a breach of any Written Agreement.
(d) in the event that a director or officer of the Corporation who is also a director, officer or employee of any of the CS Companies acquires knowledge of a potential transaction or matter that may be a corporate opportunity for the Corporation and any of the CS Companies (whether the potential transaction or matter is proposed by a third party or is conceived of by such director, officer or employee of the Corporation), such director, officer or employee shall, except as may be prescribed by any Written Agreement, be entitled to offer such corporate opportunity to the Corporation or any of the CS Companies such director, officer or employee deems appropriate under the circumstances in his sole discretion and no such director, officer or employee shall be liable to the Corporation or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Corporation or for deriving an improper personal benefit by reason of the fact that (i) such director, officer or employee offered such corporate opportunity to any of the CS Companies (rather than the Corporation) or did not communicate information regarding such corporate opportunity to the Corporation or (ii) any of the CS Companies pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Corporation, in either case, provided same does not constitute a breach of any written agreement.
(e) Any person or entity purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article TENTH.
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(f) For purposes of this Article TENTH only, the term “Corporation” shall mean the Corporation and all corporations, partnerships, joint ventures, associations and other entities in which the Corporation beneficially owns (directly or indirectly) at least fifty (50%) percent or more of the outstanding voting stock, voting power or similar voting interests.
(g) Neither the alteration, amendment, change or repeal of any provision of this Article TENTH nor the adoption of any provision of this Certificate of Incorporation inconsistent with any provision of this Article TENTH shall eliminate or reduce the effect of this Article TENTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article TENTH would accrue or arise, prior to such alteration, amendment, repeal or adoption.
Eleventh: In furtherance of, and not in limitation of, the powers conferred by the GCL, the board of directors is expressly authorized to adopt, amend or repeal the Bylaws or adopt new Bylaws without any action on the part of the stockholders; provided that any Bylaw adopted or amended by the board of directors, and any powers thereby conferred, may be amended, altered or repealed by the stockholders.
Twelfth: (a) Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the GCL or this Certificate of Incorporation or the Corporation’s Bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another state court located within the State of Delaware, or if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants.
B. If any action the subject matter of which is within the scope of Section A immediately above is filed in a court other than a court located within the State of Delaware (a “Foreign Action”) in the name of any stockholder, such stockholder shall be deemed to have consented to (i) the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce Section A immediately above (an “FSC Enforcement Action”) and (ii) having service of process made upon such stockholder in any such FSC Enforcement Action by service upon such stockholder’s counsel in the Foreign Action as agent for such stockholder.
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C. If any provision or provisions of this Article TWELFTH shall be held to be invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest extent permitted by law, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article TWELFTH (including, without limitation, each portion of any sentence of this Article TWELFTH containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the application of such provision to other persons or entities and circumstances shall not in any way be affected or impaired thereby. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article TWELFTH.
IN WITNESS WHEREOF, I have signed this Certificate of Incorporation this 4th day of March, 2016.
| /s/ Brian L. Ross | ||
| Brian L. Ross, Sole Incorporator |
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Exhibit 2.2
Adopted as of May 4, 2016
BY LAWS
OF
CHICKEN SOUP FOR THE SOUL ENTERTAINMENT INC.
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of Chicken Soup for the Soul Entertainment Inc. (the “Corporation”) in the State of Delaware shall be established and maintained at 615 S. DuPont Highway, Kent County, Dover, Delaware and National Corporate Research, Ltd. shall be the registered agent of the corporation in charge thereof.
1.2 Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the board of directors of the Corporation (the “Board of Directors”) may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings. All meetings of the stockholders shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof.
2.2 Annual Meetings. The annual meeting of stockholders shall be held on such date and at such time as may be fixed by the Board of Directors and stated in the notice of the meeting, for the purpose of electing directors and for the transaction of only such other business as is properly brought before the meeting in accordance with these Bylaws (the “Bylaws”).
Written notice of an annual meeting stating the place, date and hour of the meeting, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the annual meeting.
To be properly brought before the annual meeting, business must be either (i) specified in the notice of annual meeting (or any supplement or amendment thereto) given by or at the direction of the Board of Directors, (ii) otherwise brought before the annual meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the annual meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than seventy (70) days’ notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by a stockholder, to be timely, must be received no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder’s notice to the Secretary shall set forth (a) as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, and (ii) any material interest of the stockholder in such business, and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class, series and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Article II, Section 2. The officer of the Corporation presiding at an annual meeting shall, if the facts warrant, determine and declare to the annual meeting that business was not properly brought before the annual meeting in accordance with the provisions of this Article II, Section 2, and if such officer should so determine, such officer shall so declare to the annual meeting and any such business not properly brought before the meeting shall not be transacted.
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2.3 Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation of the Corporation (the “Certificate of Incorporation”), may only be called by a majority of the entire Board of Directors, or the Executive Chairman, and shall be called by the Secretary at the request in writing of stockholders owning a majority in amount of the voting power of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Unless otherwise provided by law, written notice of a special meeting of stockholders, stating the time, place and purpose or purposes thereof, shall be given to each stockholder entitled to vote at such meeting, not less than ten (10) or more than sixty (60) days before the date fixed for the meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
2.4 Quorum. The holders of a majority of the voting power of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the holders of a majority of the votes entitled to be cast by the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting.
2.5 Organization. The Executive Chairman shall act as chairman of meetings of the stockholders. The Board of Directors may designate any other officer or director of the Corporation to act as chairman of any meeting in the absence of the Executive Chairman, and the Board of Directors may further provide for determining who shall act as chairman of any stockholders meeting in the absence of the Chairman of the Board of Directors and such designee. The Secretary of the Corporation shall act as secretary of all meetings of the stockholders, but in the absence of the Secretary the presiding officer may appoint any other person to act as secretary of any meeting.
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2.6 Voting. Unless otherwise required by law, the Certificate of Incorporation or these Bylaws, any question (other than the election of directors) brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the voting power of the stock represented and entitled to vote thereon. At all meetings of stockholders for the election of directors, a plurality of the votes cast shall be sufficient to elect. Each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder, unless otherwise provided by the Certificate of Incorporation. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize any person or persons to act for him by proxy. All proxies shall be executed in writing and shall be filed with the Secretary of the Corporation not later than the day on which exercised. No proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot.
2.7 Action of Shareholders without Meeting. Unless otherwise provided by the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.
2.8 Voting List. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the election, either at a place within the city, town or village where the election is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held. The list shall be produced and kept at the time and place of election during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present.
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2.9 Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 8 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.
2.10 Adjournment. Any meeting of the stockholders, including one at which directors are to be elected, may be adjourned for such periods as the presiding officer of the meeting or the stockholders present in person or by proxy and entitled to vote shall direct.
2.11 Ratification. Any transaction questioned in any stockholders’ derivative suit, or any other suit to enforce alleged rights of the Corporation or any of its stockholders, on the ground of lack of authority, defective or irregular execution, adverse interest of any director, officer or stockholder, nondisclosure, miscomputation or the application of improper principles or practices of accounting may be approved, ratified and confirmed before or after judgment by the Board of Directors or by the holders of Common Stock, as applicable, and, if so approved, ratified or confirmed, shall have the same force and effect as if the questioned transaction had been originally duly authorized, and said approval, ratification or confirmation shall be binding upon the Corporation and all of its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction.
2.12 Inspectors. The election of directors and any other vote by ballot at any meeting of the stockholders shall be supervised by at least one inspector. Such inspectors shall be appointed by the Board of Directors in advance of the meeting. If the inspector so appointed shall refuse to serve or shall not be present, such appointment shall be made by the officer presiding at the meeting.
ARTICLE III
DIRECTORS
3.1 Powers; Number; Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the Certificate of Incorporation. The number of directors which shall constitute the Board of Directors shall be not less than one (1) nor more than nine (9). The exact number of directors shall be fixed from time to time, within the limits specified in this Article III Section 1 or in the Certificate of Incorporation, by the Board of Directors. Directors need not be stockholders of the Corporation.
3.2 Election; Term of Office; Resignation; Removal; Vacancies. Each director shall hold office until the next annual meeting of stockholders at which his class of directors stands for election or until such director’s earlier resignation, removal from office, death or incapacity. Unless otherwise provided in the Certificate of Incorporation, and subject to the provisions of Section 3.8, vacancies and newly created directorships resulting from any increase in the authorized number of directors or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director and each director so chosen shall hold office until the next annual meeting and until such director’s successor shall be duly elected and shall qualify, or until such director’s earlier resignation, removal from office, death or incapacity.
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3.3 Nominations. Nominations of persons for election to the Board of Directors of the Corporation at a meeting of stockholders of the Corporation may be made at such meeting by or at the direction of the Board of Directors, by any committee or persons appointed by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Article III, Section 3. Such nominations by any stockholder shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided however, that in the event that less than seventy (70) days’ notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder, to be timely, must be received no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder’s notice to the Secretary shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the person, (c) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person, and (d) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the Rules and Regulations of the Securities and Exchange Commission under Section 14 of the Securities Exchange Act of 1934, as amended, and (ii) as to the stockholder giving the notice (a) the name and record address of the stockholder and (b) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The officer of the Corporation presiding at an annual meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.
3.4 Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. The first meeting of each newly elected Board of Directors shall be held immediately after and at the same place as the meeting of the stockholders at which it is elected and no notice of such meeting shall be necessary to the newly elected directors in order to legally constitute the meeting, provided a quorum shall be present. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Executive Chairman or a majority of the entire Board of Directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone, facsimile, telegram or e-mail on twenty-four (24) hours’ notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.
3.5 Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors or any committee thereof, a majority of the entire Board of Directors or such committee, as the case may be, shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors or of any committee thereof, a majority of the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
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3.6 Organization of Meetings. The Executive Chairman shall be the Chairman of the Board of Directors. The Chairman of the Board of Directors shall lead the Board of Directors in fulfilling its responsibilities as set forth in these By-Laws, including its responsibility to oversee the performance of the Corporation, and shall determine the agenda and perform all other duties and exercise all other powers which are or from time to time may be delegated to him or her by the Board of Directors. Meetings of the Board of Directors shall be presided over by the Chairman of the Board of Directors, or in his or her absence, by the President, or in the absence of the Chairman of the Board of Directors and the Chief Executive Officer by such other person as the Board of Directors may designate or the members present may select.
3.7 Actions of Board of Directors without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filled with the minutes of proceedings of the Board of Directors or committee.
3.8 Removal of Directors by Stockholders. Notwithstanding anything to the contrary contained in these Bylaws, the entire Board of Directors or any individual director may be removed from office with or without cause by a majority vote of the holders of the outstanding voting power of the shares then entitled to vote at an election of directors. In case the Board of Directors or any one or more directors be so removed, new directors may be elected by the stockholders in accordance with the foregoing and the other provisions of these bylaws at the same time for the unexpired portion of the full term of the director or directors so removed.
3.9 Resignations. Any director may resign at any time by submitting his written resignation to the Board of Directors or Secretary of the Corporation. Such resignation shall take effect at the time of its receipt by the Corporation unless another time be fixed in the resignation, in which case it shall become effective at the time so fixed. The acceptance of a resignation shall not be required to make it effective.
3.10 Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided by law and in the resolution of the Board of Directors establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution or amending the Bylaws of the Corporation; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
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3.11 Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed amount (in cash or other form of consideration) for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.
3.12 Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. This Section 3.12 shall remain in all respects subject to, and the case of any conflict, superseded by, the provisions of the Corporation’s certificate of incorporation.
3.13 Meetings by Means of Conference Telephone. Members of the Board of Directors or any committee designed by the Board of Directors may participate in a meeting of the Board of Directors or of a committee of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at such meeting.
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ARTICLE IV
OFFICERS
4.1 General. The officers of the Corporation shall be elected by the Board of Directors and may consist of: an Executive Chairman (who shall also serve as the Chairman of the Board), Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer. The Board of Directors, in its discretion, may also elect one or more Vice Presidents (including Executive Vice Presidents and Senior Vice Presidents), Assistant Secretaries, Assistant Treasurers, a Controller and such other officers as in the judgment of the Board of Directors may be necessary or desirable. Any number of offices may be held by the same person and more than one person may hold the same office, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation, nor need such officers be directors of the Corporation.
4.2 Election. The Board of Directors at its first meeting held after each annual meeting of stockholders shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Except as otherwise provided in this Article IV, any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers who are directors of the Corporation shall be fixed by the Board of Directors.
4.3 Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Executive Chairman, Chief Executive Officer, or Chief Operating Officer and any such officer may, in the name and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.
4.4 Executive Chairman. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the Executive Chairman shall have ultimate authority for decisions relating to the general management and control of the affairs and business of the Corporation and shall perform such other duties and exercise such other powers which are or from time to time may be delegated to him or her by the Board of Directors or these Bylaws, all in accordance with basic policies as established by and subject to the oversight of the Board of Directors. The Executive Chairman shall be deemed the principal executive officer of the Corporation.
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4.5 Vice Chairman. Subject to the provisions of these Bylaws and to the direction of the Board of Directors and the Executive Chairman, the Vice Chairman shall oversee the general day to day operations of the Corporation and the implementation of the directions of the Executive Chairman and the Board of Directors and shall perform such other duties and exercise such other powers which are or from time to time may be delegated to him or her by the Board of Directors, the Executive Chairman or these Bylaws, all in accordance with basic policies as established by and subject to the oversight of the Board of Directors and the Executive Chairman.
4.6 Chief Financial Officer. The Chief Financial Officer shall have general supervision, direction and control of the financial affairs of the Corporation and shall perform such other duties and exercise such other powers which are or from time to time may be delegated to him or her by the Board of Directors or these Bylaws, all in accordance with basic policies as established by and subject to the oversight of the Board of Directors. In the absence of a named Treasurer, the Chief Financial Officer shall also have the powers and duties of the Treasurer as hereinafter set forth and shall be authorized and empowered to sign as Treasurer in any case where such officer’s signature is required.
4.7 Vice Presidents. At the request of the Executive Chairman or the Chief Executive Officer, or in the absence of the Chief Executive Officer, or in the event of his or her inability or refusal to act, the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon such office. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the Chief Executive Officer or in the event of the inability or refusal of such officer to act, shall perform the duties of such office, and when so acting, shall have all the powers of and be subject to all the restrictions upon such office.
4.8 Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Executive Chairman or the Chief Executive Officer, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, then any Assistant Secretary shall perform such actions. If there be no Assistant Secretary, then the Board of Directors or the Executive Chairman or the Chief Executive Officer may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.
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4.9 Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Executive Chairman, Chief Executive Officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.
4.10 Assistant Secretaries. Except as may be otherwise provided in these Bylaws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, Executive Chairman, Chief Executive Officer, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.
4.11 Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Executive Chairman, the Chief Executive Officer, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.
4.12 Controller. The Controller shall establish and maintain the accounting records of the Corporation in accordance with generally accepted accounting principles applied on a consistent basis, maintain proper internal control of the assets of the Corporation and shall perform such other duties as the Board of Directors, the Executive Chairman, the Chief Executive Officer or any Vice President of the Corporation may prescribe.
4.13 Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.
4.14 Vacancies. The Board of Directors shall have the power to fill any vacancies in any office occurring from whatever reason.
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4.15 Resignations. Any officer may resign at any time by submitting his written resignation to the Corporation. Such resignation shall take effect at the time of its receipt by the Corporation, unless another time be fixed in the resignation, in which case it shall become effective at the time so fixed. The acceptance of a resignation shall not be required to make it effective.
4.16 Removal. Subject to the provisions of any employment or other agreement approved by the Board of Directors, any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors.
ARTICLE V
CAPITAL STOCK
5.1 Form of Certificates. The shares of stock in the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation’s stock shall be in uncertificated form. Stock certificates shall be in such forms as the Board of Directors may prescribe and signed by the Chairman of the Board, President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation.
5.2 Signatures. Any or all of the signatures on a stock certificate may be a facsimile, including, but not limited to, signatures of officers of the Corporation and countersignatures of a transfer agent or registrar. In case an officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.
5.3 Lost Certificates. The Board of Directors may direct a new stock certificate or certificates to be issued in place of any stock certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new stock certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
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5.4 Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws. Transfers of certificated stock shall be made on the books of the Corporation only by the person named in the certificate or by such person’s attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. Transfers of uncertificated stock shall be made on the books of the Corporation only by the person then registered on the books of the Corporation as the owner of such shares or by such person's attorney lawfully constituted in writing and written instruction to the Corporation containing such information as the Corporation or its agents may prescribe. No transfer of uncertificated stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. The Corporation shall have no duty to inquire into adverse claims with respect to any stock transfer unless (a) the Corporation has received a written notification of an adverse claim at a time and in a manner which affords the Corporation a reasonable opportunity to act on it prior to the issuance of a new, reissued or re-registered share certificate, in the case of certificated stock, or entry in the stock record books of the Corporation, in the case of uncertificated stock, and the notification identifies the claimant, the registered owner and the issue of which the share or shares is a part and provides an address for communications directed to the claimant; or (b) the Corporation has required and obtained, with respect to a fiduciary, a copy of a will, trust, indenture, articles of co-partnership, Bylaws or other controlling instruments, for a purpose other than to obtain appropriate evidence of the appointment or incumbency of the fiduciary, and such documents indicate, upon reasonable inspection, the existence of an adverse claim. The Corporation may discharge any duty of inquiry by any reasonable means, including notifying an adverse claimant by registered or certified mail at the address furnished by him or, if there be no such address, at his residence or regular place of business that the security has been presented for registration of transfer by a named person, and that the transfer will be registered unless within thirty days from the date of mailing the notification, either (a) an appropriate restraining order, injunction or other process issues from a court of competent jurisdiction; or (b) an indemnity bond, sufficient in the Corporation’s judgment to protect the Corporation and any transfer agent, registrar or other agent of the Corporation involved from any loss which it or they may suffer by complying with the adverse claim, is filed with the Corporation.
5.5 Fixing Record Date. In order that the Corporation may determine the stockholders entitled to notice or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than ten (10) days after the date upon which the resolution fixing the record date of action with a meeting is adopted by the Board of Directors, nor more than sixty (60) days prior to any other action. If no record date is fixed:
(a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.
(b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the first date on which a signed written consent is delivered to the Corporation.
(c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
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A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
5.6 Registered Stockholders. Prior to due presentment for transfer of any share or shares, the Corporation shall treat the registered owner thereof as the person exclusively entitled to vote, to receive notifications and to all other benefits of ownership with respect to such share or shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State Delaware.
ARTICLE VI
NOTICES
6.1 Form of Notice. Notices to directors and stockholders other than notices to directors of special meetings of the Board of Directors which may be given by any means stated in Article III, Section 4, shall be in writing and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram.
6.2 Waiver of Notice. Whenever any notice is required to be given under the provisions of law or the Certificate of Incorporation or by these Bylaws of the Corporation, a written waiver, signed by the person or persons entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular, or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
7.1 The Corporation shall indemnify, advance expenses, and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a “Covered Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liabilities and losses suffered and expenses (including attorneys’ fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except for claims for indemnification (following the final disposition of such Proceeding) or advancement of expenses not paid in full, the Corporation shall be required to indemnify a Covered Person in connection with a Proceeding (or part thereof) commenced by such Covered Person only if the commencement of such Proceeding (or part thereof) by the Covered Person was authorized in the specific case by the Board of Directors of the Corporation.
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7.2 No director or officer of the Corporation shall be personally liable to the Corporation or to any stockholder of the Corporation for monetary damages for breach of fiduciary duty as a director or officer, provided that this provision shall not limit the liability of a director or officer (i) for any breach of the director’s or the officer’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director or officer derived an improper personal benefit.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Reliance on Books and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation, shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care.
8.2 Maintenance and Inspection of Records. The Corporation shall, either at its principal executive office or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these by-laws, as may be amended to date, minute books, accounting books and other records.
Any such records maintained by the Corporation may be kept on, or by means of, or be in the form of, any information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to the provisions of the Delaware General Corporation Law. When records are kept in such manner, a clearly legible paper form produced from or by means of the information storage device or method shall be admissible in evidence, and accepted for all other purposes, to the same extent as an original paper form accurately portrays the record.
Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation’s stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal executive office.
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8.3 Inspection by Directors. Any director shall have the right to examine the Corporation’s stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director.
8.4 Dividends. Subject to the provisions of the Certificate of Incorporation, if any, dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.
8.5 Annual Statement. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation.
8.6 Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other persons as the Board of Directors may from time to time designate.
8.7 Fiscal Year. The fiscal year of the Corporation shall be as determined by the Board of Directors. If the Board of Directors shall fail to do so, the President shall fix the fiscal year.
8.8 Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced.
8.9 Amendments. The original or other Bylaws may be adopted, amended or repealed by the stockholders entitled to vote thereon at any regular or special meeting or, if the Certificate of Incorporation so provides, by the Board of Directors. The fact that such power has been so conferred upon the Board of Directors shall not divest the stockholders of the power nor limit their power to adopt, amend or repeal Bylaws.
8.10 Interpretation of Bylaws. All words, terms and provisions of these Bylaws shall be interpreted and defined by and in accordance with the General Corporation Law of the State of Delaware, as amended, and as amended from time to time hereafter.
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Exhibit 6.1
Execution Version
LICENSE AGREEMENT
THIS AGREEMENT (the “Agreement”), made and entered into as of May 12, 2016 (“Effective Date”), by and between Chicken Soup for the Soul Entertainment Inc. (“Company”), and Chicken Soup for the Soul, LLC (“Licensor”). Company and Licensor shall be referred to together as the “Parties” and individually as a “Party.”
WHEREAS, Licensor is the owner of the Property (as hereinafter defined) and has the rights to Exploit (as hereinafter defined) the Property on and in connection with products and services and has the right to license such rights;
WHEREAS, Company desires to obtain the right to Exploit the Property in connection with television programming, motion pictures and online video content (“Video Content”); and
WHEREAS, Licensor is willing to grant such rights to Company, upon the terms and conditions hereinafter contained.
NOW, THEREFORE, for and in consideration of the premises and of the mutual promises and conditions herein contained, the Parties do hereby agree as follows:
1. Definitions. As used herein, the following terms will be defined as follows:
(a) “Exploit” and “Exploitation” shall each mean create, design, develop, publish, manufacture, advertise, promote, market, sell, use and otherwise exploit (but not sublicense except as provided herein).
(b) “Licensed Rights” shall mean the right to Exploit the Property for the production and distribution of Video Content as further provided herein.
(c) “Property” shall mean the name Chicken Soup for the Soul and any related trademark, copyright and design and derivative thereof, including the stories and themes in existing published works.
(d) “Term” shall mean a perpetual term commencing on the Effective Date, subject to Section 13 hereof.
2. Grant of Rights.
(a) Subject to (i) all of the terms and conditions of this Agreement (including the Code of Conduct for Manufacturers and Producers set forth on Exhibit A hereto) and (ii) the rights granted under the option agreement annexed hereto as Exhibit B (“Movie Option Agreement”) between the Licensor and Claymore Entertainment Company LLC, an affiliate of Alcon Entertainment LLC, dated as of July 15, 2013 (which Movie Option Agreement has been separately assigned to Company as of the Effective Date), as such rights may be assigned, reassigned, granted or transferred by Licensor or Company to other persons hereafter, Licensor hereby grants to Company, during the Term, the exclusive worldwide right and license to Exploit the Licensed Rights, subject to the terms herein. This Agreement expressly includes the right to sublicense these rights to Company’s affiliates and third-party sublicensees of Company engaged in the production, distribution and exhibition of Video Content or tangible merchandise or publishing products directly and solely related to Video Content created through the Exploitation of the Licensed Rights. It is expressly understood and agreed by Company that Company may Exploit the Property only in connection with the Licensed Rights and only in accordance with the terms hereof. Company agrees that it will not use or adopt any corporate name, trade name, trade dress or other form of corporate identification (which includes the Property) or any portion thereof other than its current name without Licensor’s approval.
(b) During the Term, (i) Licensor shall not Exploit and will not grant to any third party the right to Exploit the Property in connection with Video Content, and (ii) Licensor shall not, and shall not permit any of its subsidiaries or affiliates (other than Company) to Exploit any Video Content or related products or services, whether relating to the Property or otherwise, unless consented to in writing by Company or used solely for the marketing of their other products and services.
3. Fees; and Reports.
(a) Company shall pay Licensor the following fees in consideration of the Licensed Rights granted hereunder, (a) an initial fee of $5 million, payable on the date hereof through the payment by Company to Licensor of $1.5 million cash and the issuance by Company to Licensor of a $3.5 million principal amount promissory note (in the form of Exhibit C hereto), and (b) commencing with the fiscal quarter ended March 31, 2016 (as Licensor had already been providing the license rights to our predecessor with respect to the Video Content assets that have since been transferred to us), a quarterly fee (“License Fee”) equal to 4% of gross revenues as reported under GAAP for each fiscal quarter by Company (or its predecessor with respect to such predecessor’s Video Content revenues). Each quarterly License Fee shall be paid on or prior to the 45th day after the end of such quarter, and shall be accompanied by a sales report setting forth detail as reasonably requested by Licensor and a statement setting forth the calculation of gross revenues and the License Fee for such quarter.
(b) Licensor shall provide commercially reasonable support of the Licensed Rights through its email distribution chains, blogs and other marketing and public relations resources. Commencing with the fiscal quarter ended March 31, 2016 (as Licensor had already been providing the license rights to our predecessor with respect to the Video Content assets that have since been transferred to us), Company shall pay Licensor a quarterly fee (“Marketing Fee”) equal to 1% of gross revenues as reported under GAAP for each fiscal quarter by Company (or its predecessor with respect to such predecessor’s Video Content revenues). Each quarterly Marketing Fee shall be paid on or prior to the 45th day after the end of such quarter, and shall be accompanied by a sales report setting forth detail as reasonably requested by Licensor and a statement setting forth the calculation of gross revenues and the Marketing Fee for such quarter.
(c) Company will maintain, or have maintained on its behalf, accurate books and records with respect to all revenues and expenses of Company related to the Licensed Rights. Such books and records will be available upon reasonable advance notice for inspection, auditing and copying by Licensor or its authorized agents or representatives during ordinary business hours prior to the conclusion of a two (2) year period following the conclusion of the relevant calendar year quarter.
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4. Protection of the Property. Company agrees not to Exploit and not to permit its affiliates and other sublicensees to Exploit the Property in such a way as to injure, damage, or otherwise negatively affect the good will of the Property. Company, its affiliates and other sub-licensees shall Exploit the Property in accordance with sound trademark and trade name usage principles and in accordance with all applicable laws and regulations.
5. Approval and Quality Control.
(a) Licensor has the right to approve or disapprove in advance:
(i) the quality, style, design, themes, images and all other aspects of the Video Content and related products to the Licensed Rights;
(ii) any and all endorsements, trademarks, trade names, designs, slogans, and/or logos used on or in connection with the Licensed Rights;
(iii) the contents, appearance and presentation of any and all advertising, promotional and marketing materials created or distributed by Company (“Advertising Materials”) which incorporate the Property or which make reference in any way to Licensor;
(iv) any promotions conducted by Company pursuant to this Agreement; and
(v) the manner in which any content or products using the Licensed Rights are displayed to consumers and the trade, including, without limitation, the quantity and types of media vehicles through which Company advertises, markets and promotes any content or products using the Licensed Rights.
(b) Prior to entering into any agreement or arrangement for any works to be produced or distributed pursuant to the Licensed Rights, or any merchandising or commercial tie-in allowed pursuant to this Agreement, Company will submit to Licensor, for its examination and approval or disapproval, the proposed terms of such agreement or arrangement, together with such materials and information as may be reasonably requested by Licensor. Licensor agrees that it will promptly examine and, within seven (7) calendar days following receipt, either approve or disapprove such agreement or arrangement, and that Licensor will promptly notify Company of its approval or disapproval. If Company does not receive an approval or disapproval from Licensor within seven (7) calendar days of submitting the foregoing, same shall be deemed approved for distribution by Company.
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(c) As and when Company desires to place advertising in a particular media or media vehicle or use any Advertising Materials, Company will submit to Licensor, in advance, a sample of such Advertising Materials, written notification of the particular media vehicle in which the advertising would be placed, including where appropriate a notification of the media provider (for example, the magazine or newspaper in which print advertisements would be placed or the television or radio station that would broadcast the advertisements). Licensor agrees that it will, within seven (7) calendar days following receipt, examine and either approve or disapprove such proposed Advertising Materials or media vehicle and that Licensor will promptly notify Company of its approval or disapproval. If Company does not receive an approval or disapproval from Licensor within seven (7) calendar days of submitting proposed Advertising Materials or media vehicle notification, same shall be deemed approved for execution by Company.
(d) In the event any foregoing item is disapproved, Company agrees to consult with Licensor regarding its objections and any changes or modifications proposed by Licensor, and will use reasonable efforts to make such modifications or adjustments. It is understood and agreed, however, that in the event of a dispute between Licensor and Company regarding any content or product related to the Licensed Rights or any Advertising Materials or media vehicle, Licensor will have final control and approval with respect to same.
6. Future Approvals. With respect to approvals granted in accordance with Paragraph 5, above, it will not be necessary to obtain additional approvals for substantially similar product or content samples, Advertising Materials or media vehicles consistent with the terms of the original approval, unless Licensor notifies Company that it wishes to see and approve such products or content samples, Advertising Materials or media vehicles, which it may do in its sole discretion.
7. Notices. Any notices required or permitted under this Agreement will be considered duly made if delivered to the intended Party by certified or registered mail (return receipt requested), any reputable international courier service, or by facsimile (with a confirming copy sent by any of the other options) at the following address. Notice will be deemed given on the date of receipt.
| Licensor: | Chicken Soup for the Soul, LLC |
| 132 East Putnam Avenue | |
| Cos Cob, CT 06807-0700 | |
| Attention: William J. Rouhana, Jr. | |
| Fax: (203) 861-4060 | |
| To Company: | Chicken Soup for the Soul Entertainment Inc. |
| 132 East Putnam Avenue | |
| Cos Cob, CT 06807 | |
| Attention: President | |
| Fax: (203) 862-9613 |
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| With a copy in any case to: | |
| Graubard Miller | |
| The Chrysler Building | |
| 405 Lexington Avenue | |
| New York, New York 10174 | |
| Attn: David Alan Miller and Brian L. Ross, Esq. | |
| Fax: (212) 818-8881 |
8. Trademark and Copyright Notices. Company shall cause to be imprinted legibly on any content or products using the Licensed Rights under this Agreement, and on all material used in connection therewith, including, but not limited to, Advertising Materials, promotional, adhesive-backed stickers and hangtags, and any other such materials wherein the Property or any portion thereof appears, the designation ® or TM or © after the appearance of such Property or portion thereof, as Licensor deems appropriate, to protect the Property.
9. Ownership.
(a) Nothing herein shall give to Company any right, title or interest in the Property except the Licensed Rights in accordance with this Agreement. As between the Parties, the Property is the sole property of Licensor, and any and all goodwill arising from the Exploitation thereof by Company, shall inure to the benefit of Licensor. Company shall not, either directly or indirectly, anywhere in the world: (i) contest, object to or challenge the validity of, or Licensor’s rights in, any of the Property or any portion thereof on any grounds; (ii) register or attempt to register any mark identical with or confusingly similar to any of the Property or any portion thereof; or (iii) use any combination, variation, stylization, abbreviation or derivative of Property other than that expressly licensed under this Agreement, regardless of whether the Property or any portion thereof are formally registered.
(b) At the request and expense of Licensor, Company shall take all actions and execute all documents necessary or desirable to vest in Licensor ownership and title in any part of the Property. If Company is deemed, in law, to own any mark that is substantially similar to the Property, then Company shall assign all such rights in the mark or property (including any related registrations) to Licensor at no charge.
(c) All final Video Content related to the Licensed Rights and any artwork, slogans, patterns, text, brand names, photographs, designs, literary or musical work that becomes either inseparably embodied in, or associated with the branding of, any content or products using the Licensed Rights, whether created by Company or any person hired or retained by Company, including any sublicensee thereof (collectively, the “Creations”), together with any copyrights, trademarks, service marks, design rights or other similar rights of ownership arising from such Creations, shall be retained by Company, subject in all events to the prior or superior rights of any third party utilized in the development of the Creations, and as between Company and Licensor, shall be the sole property of Company; provided that, Company disclaims any ownership rights in the Property.
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10. Infringement of the Property; Maintenance of Rights.
(a) Licensor shall use its commercially reasonable efforts to pursue the elimination of any infringement of the Property in connection with any content or products or Advertising Materials or media vehicle using the Licensed Rights. Company agrees to notify Licensor in writing of any infringement or imitations by others of the Property on any content or products or Advertising Materials or media vehicle using the Licensed Rights if and when such become known to Company.
(b) If there should occur any infringement of the Property in connection with any content or products or Advertising Materials or media vehicle using the Licensed Rights, Licensor and Company shall consult with each other and with their respective counsel in order to determine what remedies, if any, may be available to eliminate such infringement, including legal action. If such legal remedies exist, and if in the sole opinion of Licensor they are commercially and financially reasonable under the circumstances, Licensor will instruct its lawyers to institute such action (“Licensor Action”). Company agrees to assist Licensor at Licensor’s cost, to the extent necessary, in connection with any Licensor Action. The net recovery (after deducting all related costs incurred by the Party prosecuting same) from any Licensor Action shall be divided between Company (which shall retain that percentage to which it would have been entitled had the performance(s) in question been licensed in accordance with this Agreement) and Licensor and any other royalty participants entitled to share therein.
(c) Notwithstanding anything to the contrary contained herein, in the event Company reasonably concludes that Licensor has unreasonably elected not to pursue claims for infringement of the Property, or in the event the failure to pursue such action shall be materially detrimental to Licensed Rights or the Company’s interests under this Agreement, Company may take action against such infringement at Company’s cost (“Company Action”). Licensor agrees to assist Company at Company’s cost, to the extent necessary, in connection with any Company Action. The net recovery (after deducting all related costs incurred by the Party prosecuting same) from any Company Action shall belong solely to Company.
(d) Licensor shall be responsible for all costs and fees in maintaining any and all registrations, including trademark registrations, relating to the Property.
11. Indemnity.
(a) Company shall indemnify and hold harmless each of Licensor, its members, and their respective (where applicable) principals, officers, directors, employees, agents, and representatives, from and against any and all expenses, damages, claims, suits, actions, judgments and costs whatsoever, including reasonable lawyers' fees, arising out of, or in any way connected with, any third-party claim or action for (i) personal injury, death or other cause of action involving any content or products created by Company using the Licensed Rights, (ii) any breach of any law, regulation or statutory obligation by Company, (iii) any infringement by Company of the trademark, copyright, personal or other proprietary rights of any third party excluding any claims to the extent arising from Company's proper Exploitation of the Property in accordance with this Agreement, (iv) Company’s material breach of any representation, warranty or term herein; or (v) the negligent act or omission of Company or any subcontractor of Company or their failure to comply with the terms in this Agreement. Company shall undertake and conduct the defense and/or settlement of each third-party claim with counsel of Company’s choice, which counsel must be reasonably acceptable to Licensor, such approval not to be unreasonably withheld. Company shall not settle any third-party claim in respect of which indemnity may be sought under this Agreement, without Licensor’s prior written consent, which shall not be unreasonably withheld or delayed.
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(b) Licensor shall indemnify and hold harmless each of Company, its members and their parents and affiliates, and their respective (where applicable) principals, officers, shareholders, members directors, employees, agents, and representatives, from and against any and all expenses, damages, claims, suits, actions, judgments and costs whatsoever, including reasonable lawyers' fees, arising out of, or in any way connected with, any third-party claim or action for (i) any breach of any law, regulation or statutory obligation by Licensor, (ii) any infringement of the trademark, copyright, personal or other proprietary rights of any third party arising from Company’s proper Exploitation of the Licensed Rights in accordance with this Agreement, (iii) Licensor’s material breach of any representation, warranty or term herein; or (iv) the negligent act or omission of Licensor or its failure to comply with the terms in this Agreement. Licensor shall undertake and conduct the defense and/or settlement of each claim third-party with counsel of Licensor’s choice, which counsel must be reasonably acceptable to Company, such approval not to be unreasonably withheld. Licensor shall not settle any third-party claim in respect of which indemnity may be sought under this Agreement, without Company’s prior written consent, which shall not be unreasonably withheld or delayed.
12. Liability Insurance.
(a) Company will maintain in effect, at its own expense, general commercial liability insurance (including product liability), which insurance will be in the amount of no less than $5 million. Licensor shall be named as an additional insured party on such policy on such policy on a primary and non-contributory basis and Company shall provide Licensor with a current Certificate of Insurance evidencing same. Company’s insurance policy shall contain a waiver of subrogation provision in favor of Licensor, and any insurance certificates issued to Licensor shall refer to such waiver of subrogation.
(b) Licensor will maintain in effect, at its own expense, throughout the Contract Period, general commercial liability, which insurance will be in the amount of no less than $2 million and errors and omissions insurance in an amount no less than $5 million. Company shall be named as an additional insured on each policy on a primary and non-contributory basis and Licensor shall provide Company with a current Certificate of Insurance evidencing same. Licensor’s insurance policy shall contain a waiver of subrogation provision in favor of Company, and any insurance certificates issued to Company shall refer to such waiver of subrogation.
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13. Termination.
(a) If either Party at any time will (i) fail to make any payment of any sum of money herein specified to be made that is not the subject of a good faith dispute, or (ii) fail to observe or perform any of the covenants, agreements, or obligations hereunder (other than the payment of money), the non-defaulting party may terminate this Agreement as follows: as to (i) if such payment is not made within thirty (30) days following a second written request by the non-infringing party, or as to (ii) if such default is not cured within thirty (30) days after the defaulting party will have received a second written notice specifying such default. Any unpaid sum of money due under this Agreement shall incur late charges at the rate of 2.0% of the outstanding balance per month, or the maximum rate permitted by law, whichever is lower, from the date such payment was due until the date paid.
(b) Licensor may terminate this Agreement immediately following written notice to Company, if Company (i) ceases to do business in the normal course, (ii) is the subject of any proceeding related to its liquidation or insolvency (whether voluntary or involuntary) which is not dismissed within ninety (90) calendar days, (iii) makes an assignment for the benefit of creditors, or (iv) any secured creditor or lender of Company exercises or purports to exercise any foreclosure right or remedy as a secured creditor with respect to any collateral consisting, in whole or in part, of any of any content or products using the Licensed Rights or any of the results, products or proceeds of this Agreement.
(c) Company may terminate this Agreement immediately following written notice to Licensor, if Licensor (i) ceases to do business in the normal course, (ii) is the subject of any proceeding related to its liquidation or insolvency (whether voluntary or involuntary) which is not dismissed within ninety (90) calendar days, or (iii) makes an assignment for the benefit of creditors. For the purpose of this Paragraph 13(c), the license granted to Company by Licensor herein shall be deemed to be, for purposes of § 365(n) of the United States Bankruptcy Code (as it may be amended, the “Bankruptcy Code”), a license to rights to “intellectual property” as defined under the Bankruptcy Code. Company, as licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. In the event of the commencement of proceedings by or against Licensor under the Bankruptcy Code, Company may retain all of the Licensed Rights and its rights and interests under this Agreement.
(d) Failure to terminate this Agreement pursuant to this Paragraph will not effect or constitute a waiver of any remedies the non-defaulting Party would have been entitled to demand in the absence of this paragraph, whether by way of damages, termination or otherwise. Termination of this Agreement for whatever reason will be without prejudice to the rights and liabilities of either Party to the other in respect of any matter arising under this Agreement.
14. No free use of Licensed Rights. Company agrees, that without Licensor’s prior written consent, no content or products using the Licensed Rights will be given away free of charge by Company, or authorized by Company to be given away free of charge by any third party.
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15. Confidentiality. Each Party acknowledges that it may have access to certain confidential and proprietary information of the other Party. Neither of the Parties nor their directors, officers, employees or agents, will publicize, disclose or use (except as provided in this Agreement) any such confidential or proprietary information that is the property of the other Party that is disclosed to that Party pursuant to this Agreement. It is agreed that neither Party will be under any obligation not to publicly disclose or use any information that: (i) was already known to the recipient at the time of its receipt; (ii) was publicly known or becomes so through no fault of the recipient; (iii) is required to be disclosed by law; (iv) was received from third party not in breach of a confidentiality obligation; or (v) was independently developed by the recipient without use of the disclosing party’s confidential information. Each Party may make disclosure to attorneys, agents and accountants of each Party on a need to know basis. The obligations set forth in this paragraph will survive the termination of the Agreement for a period of two years. Upon the termination of this Agreement, each Party will return to the other all confidential materials belonging to the other Party that were delivered during the Contract Period.
16. Waiver. The failure of either Party at any time or times to demand strict performance by the other of any of the terms, covenants or conditions set forth herein will not be construed as a continuing waiver or relinquishment thereof and each may at any time demand strict and complete performance by the other of said terms, covenants and conditions.
17. Representations and Warranties.
(a) Company hereby represents and warrants that: (i) it is duly organized, validly existing, and in good standing under the laws of its jurisdiction of charter, having all requisite power and authority to own its assets and carry on its business as presently conducted; and (ii) the execution, delivery, and performance of this Agreement by Company has been duly and validly authorized and is the legal, valid, and binding obligation of Company, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency, moratorium, reorganization, and other laws of general application affecting the enforcement of creditors’ rights and by the availability of equitable remedies.
(b) Licensor hereby represents and warrants that: (i) it is duly organized, validly existing, and in good standing under the laws of its jurisdiction of charter, having all requisite power and authority to own its assets and carry on its business as presently conducted; (ii) the execution, delivery, and performance of this Agreement by Licensor has been duly and validly authorized and is the legal, valid, and binding obligation of Licensor, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency, moratorium, reorganization, and other laws of general application affecting the enforcement of creditors’ rights and by the availability of equitable remedies; and (iii) the Exploitation of the Property by Company in accordance with this Agreement will not violate or infringe any third party’s patents, trade secrets, trademarks or other intellectual property rights.
18. Assignment. This Agreement will bind and inure to the benefit of Licensor, its successors and assigns. Subject to the right to sublicense as prescribed by Section 2, above, the rights granted to Company hereunder will be personal to it and may not, without the prior written consent of Licensor, be transferred or assigned to any other party. Any assignment or transfer by Company in violation of this Section 18 shall be null, void and without effect. Notwithstanding the foregoing, Company may assign its rights and obligations under this agreement to a subsidiary or affiliate under common control. Subject to the terms of this Paragraph 18, this Agreement will bind and inure to the benefit of Company, its permitted successors and permitted assigns. Licensor may assign this Agreement to any third party without Company's consent, including without limitation, its interests in and under this Agreement to lenders and their administrative agents as collateral security for the obligations of Licensor and its affiliates under bank, institutional or commercial financing and any renewal, extension or refinancing thereof.
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19. Prevailing Party. If any Party to this Agreement brings an action to enforce its rights under this Agreement, the prevailing Party will be entitled to recover its costs and expenses, including reasonable attorneys’ fees, incurred in connection with such action, including any appeal of such action. For these purposes, the term “prevailing Party” will mean the Party that will have substantively prevailed on the principal substantive issues in dispute.
20. Governing Law/Jurisdiction. This Agreement shall be construed in accordance with the laws of the United States of America and the State of Delaware, without regard to its conflict of laws principles. Any and all disputes between the Parties arising from or related to this Agreement shall be heard and determined by binding arbitration before a single arbitrator, and judgment upon the award(s) rendered by the arbitrator may be entered in any court of competent jurisdiction. The arbitrator shall be named by the American Arbitration Association (“AAA”). Arbitration proceedings will be held in Connecticut under the Rules of Commercial Arbitration and under the institutional supervision of the AAA. Witnesses residing outside of the State of Connecticut may testify telephonically or via such other audio/visual means as the arbitrator approves. A final arbitral award against either Party in any proceeding arising out of or relating to this Agreement shall be conclusive. The foregoing provisions shall not limit the right of either Party to commence any action or proceeding to compel arbitration, to obtain injunctive relief pending the appointment of an arbitrator, or to obtain execution of any award rendered in any such action or proceeding, in any other appropriate jurisdiction or in any other manner. The Parties consent to the jurisdiction of federal courts in Connecticut for such purpose. The Parties agree to accept service of process by certified mail at its or their business address listed in Paragraph 7 herein and waive any jurisdictional or venue defenses available to them.
21. Miscellaneous. This Agreement is the product of arms’ length negotiations between parties knowledgeable of its subject matter who have had the opportunity to consult counsel concerning the terms and conditions of this Agreement prior to the execution of this Agreement and any rule of law that would cause interpretation of any provision against the Party responsible for its inclusion herein will have no effect on the interpretation of this Agreement. If any part of this Agreement shall be declared invalid or unenforceable by a duly appointed arbitrator, it shall not affect the validity of the balance of this Agreement; provided, however, that if any provision of this Agreement pertaining to the payment of monies to Licensor shall be declared invalid or unenforceable, Licensor shall have the right, at its sole option, to terminate this Agreement upon giving not less than ten (10) calendar days written notice to Company.
22. Significance of Headings. Paragraph headings contained herein are solely for the purpose of aiding in speedy location of subject matter and are not in any sense to be given weight in the construction of this Agreement. Accordingly, in case of any question with respect to the construction of this Agreement, it is to be construed as though such paragraph headings had been omitted.
23. No Joint Venture. This Agreement does not constitute and will not be construed as constituting a partnership or joint venture between Licensor and Company. Neither Party will have any right to obligate or bind the other Party in any manner whatsoever, nor nothing herein contained will give, or is intended to give, any rights of any kind to any third persons.
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24. Limited Liability. Notwithstanding anything to the contrary contained herein, in the event either Party incurs any expenses, damages or other liabilities (including without limitation, reasonable attorneys’ fees) in connection herewith, the other Party’s liability will be limited to proven, direct, actual damages incurred by the injured Party, In no event will either Party be liable for consequential, punitive, indirect, reliance or incidental damages or lost profits, whether or not the other Party has been advised of the possibility of such damages or lost profits.
25. Survival. The provisions of Paragraphs 3(c), 4, 7, 9, 11, 14, 15, 16, 18, 19, 20, 21, 22, 23, 24, 25, 26 and 27 of this Agreement shall survive any termination or expiration of this Agreement.
26. Entire Agreement. This Agreement constitutes the entire agreement and understanding between the Parties hereto with respect to the subject matter hereof and their affiliates and terminate and supersedes any prior agreement or understanding relating to the subject matter of such agreement. None of the provisions of this Agreement can be waived or modified except in writing signed by both Parties, and there are no representations, promises, agreements, warranties, covenants or undertakings other than those contained herein.
27. Signatures. This instrument may be signed in counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same Agreement. Signatures transmitted by facsimile or electronic mail shall be deemed acceptable as originals.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date first above written.
| CHICKEN SOUP FOR THE SOUL, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Chief Executive Officer | ||
| CHICKEN SOUP FOR THE SOUL ENTERTAINMENT INC. | ||
| By: | /s/ Scott W. Seaton | |
| Name: | Scott W. Seaton | |
| Title: | Vice Chairman | |
Acknowledged, agreed and accepted:
CHICKEN SOUP FOR THE SOUL HOLDINGS, LLC
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Chief Executive Officer |
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EXHIBIT A
All licensed products will be manufactured and/or produced in accordance with the
Code of Conduct for Manufacturers and Producers.
CODE OF CONDUCT FOR MANUFACTURERS AND PRODUCERS
Child Labor
Manufacturers and producers will not use child labor. The term “child” refers to a person younger than age 15 (or 14 where local law allows) or, if higher, the local legal minimum age for employment or the age for completing compulsory education. Manufacturers and producers employing young persons who do not fall within the definition of “children” will also comply with any laws and regulations applicable to such persons.
Involuntary Labor
Manufacturers will not use any forced or involuntary labor, whether prison, bonded, indentured or otherwise.
Coercion and Harassment
Manufacturers and producers will treat each employee with dignity and respect, and will not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse.
Nondiscrimination
Manufacturers and producers will not discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability.
Association
Manufacturers and producers will respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, without penalty or interference.
Health and Safety
Manufacturers and producers will provide employees with a safe and healthy workplace in compliance with all applicable laws and regulations, ensuring at a minimum, reasonable access to potable water and sanitary facilities, fire safety, and adequate lighting and ventilation.
Manufacturers and producers will also ensure that the same standards of health and safety are applied in any housing they provide for employees.
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Compensation
We expect manufacturers and producers to recognize that wages are essential to meeting employees’ basic needs. Manufacturers and producers will, at a minimum, comply with all applicable wage and hour laws and regulations, including those relating to minimum wages, overtime, maximum hours, piece rates and other elements of compensation, and provide legally mandated benefits. If local laws do not provide for overtime pay, manufacturers and producers will pay at least regular wages for overtime work. Except in extraordinary business circumstances, manufacturers will not require employees to work more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limits on regular and overtime hours allowed by local law or, where local law does not limit the hours of work, the regular work week in such country plus 12 hours overtime. In addition, except in extraordinary business circumstances, employees will be entitled to at least one day off in every seven-day period.
Where local industry standards are higher than applicable legal requirements, we expect manufacturers and producers to meet the higher standards.
Protection of the Environment
Manufacturers and producers will comply with all applicable environmental laws and regulations. Without limiting the generality of the foregoing, the Licensed Products will be manufactured or produced using environment-friendly materials and processes.
Other Laws
Manufacturers and producers will comply with all applicable laws and regulations, including those pertaining to the manufacture and produced, pricing, sale and distribution of merchandise.
All references to “applicable laws and regulations” in this Code of Conduct include local and national codes, rules and regulations as well as applicable treaties and voluntary industry standards.
Subcontracting
Manufacturers and producers will not use subcontractors for the manufacture or production of Licensed Products or components of this Agreement without Licensors express written consent, and only after the subcontractor has entered into a written commitment with Licensor to comply with this Code of Conduct.
Monitoring and Compliance
Manufacturers and producers will authorize Licensor and its designated agents (including third parties) to engage in monitoring activities to confirm compliance with this Code of Conduct, including unannounced onsite inspections of manufacturing facilities and employer-provided housing; reviews of books and records relating to employment matters; and private interviews with employees. Manufacturers and producers will maintain on site all documentation that may be needed to demonstrate compliance with this Code of Conduct.
Publication
Manufacturers and producers will take appropriate steps to ensure that the provisions of this Code of Conduct are communicated to employees, including the prominent posting of a copy of this Code of Conduct, in the local language and in a place readily accessible to employees, at all times.
| 14 |
EXHIBIT B
Movie Option Agreement
| 15 |
Exhibit C
Form of Promissory Note
| 16 |
Exhibit 6.2
Execution Version
MANAGEMENT SERVICES AGREEMENT
This MANAGEMENT SERVICES AGREEMENT (this “Agreement”) is made and entered into as of May 12, 2016 (“Effective Date”) by and among Chicken Soup for the Soul Entertainment Inc. (“Service Recipient”), and Chicken Soup for the Soul, LLC (“Parent”), and the subsidiaries of Parent listed on Schedule A hereto (collectively, with Parent, the “Service Providers”). Service Recipient and the Service Providers shall be referred to collectively as the “Parties” and, individually, as a “Party.
WITNESSETH:
WHEREAS, the Service Recipient was formed in May 2016 by Parent in order to take advantage of industry trends and consumer awareness of Parent’s Chicken Soup for the Soul brand (the “Brand”) through the production and distribution of television, motion pictures and online video content related to the Brand (“Video Content”); and
WHEREAS, the Parent and the other Service Providers desire and are willing to provide, or cause to be provided, to the Service Recipient, the resources and services set forth herein and in the schedules hereto (each, as it may be amended from time to time, a “Schedule”), during the periods set forth herein and in the Schedules hereto.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
TERMS AND CONDITIONS
1. Agreement to Provide Services.
1.1. Agreement. Upon the terms and subject to the conditions contained herein and in the Schedules attached hereto, the Service Providers hereby agree to provide, or cause their affiliates to provide, to the Service Recipient the services (the “Services”) listed in the Schedules, and the Service Recipient hereby appoints the Service Providers to provide the Services. Each of the Services shall be provided and accepted in accordance with the terms, limitations and conditions set forth herein and in the Schedules.
1.2. Additional Services. The Parties agree that upon the terms and subject to the conditions contained herein, additional or new services that are not currently contemplated in this Agreement may be added to the Schedules from time to time by mutual agreement of Parent and the Service Recipient.
1.3. Review of Services. The Parties agree that: (i) the scope, frequency and manner of delivery of the Services detailed herein are subject to periodic review by the parties; and (ii) changes to any of the Services (including the addition or deletion of services) may be made at any time if mutually agreed to by Parent and the Service Recipient.
1.4. Instructions.
a. The Service Recipient, acting through any of its authorized officers may, from time to time, deliver to a Service Provider instructions with respect to matters arising under this Agreement, and the Service Provider shall follow such instructions provided they are consistent with the terms and conditions of this Agreement.
b. At any time, any Service Provider may, if it reasonably deems it necessary or appropriate, request instructions from the Service Recipient, within a reasonable period prior to the time necessary for taking action with respect to any matter contemplated by this Agreement, and may defer action thereon pending receipt of such instructions. Any action taken by a Service Provider, its officers, directors, employees, agents or representatives in accordance with the instructions of the Service Recipient, or failure to act by a Service Provider pending the receipt of such instructions after request therefor, shall be deemed to be proper conduct within the scope of service authority under this Agreement.
1.5. Service Designees. Each Service Provider may perform the services to be provided hereunder through its own officers and employees, or through agents, independent contractors or other persons designated by it; provided, however, that each Service Provider shall remain liable hereunder as if it has performed such services directly and the Services of those officers identified on Schedule B(1) hereto shall only be provided by those officers.
1.6. New Service Providers and Service Recipients. Additional subsidiaries of Parent may become Service Providers or Service Recipients under this Agreement, as mutually determined by Parent and the Service Recipient.
1.7. Standards for Performance of Service. Each Service Provider shall perform its obligations hereunder in a prudent and efficient manner and in accordance with applicable law and good industry practice.
1.8. Review of Terms. The Parent and the Service Recipient will periodically review this Agreement as to the reasonableness of its terms on a quarterly basis and, in any case, not later than three (3) months after the end of each of the Service Recipient’s accounting years.
| 2. | Fees. |
2.1. Management Fee. In lieu of any other compensation to, or reimbursement of expenses incurred by any of the Service Providers hereunder, commencing with the fiscal quarter ended March 31, 2016 (as the Service Providers had already been providing services to our predecessor with respect to the Video Content assets that have since been transferred to us), the Service Recipient shall pay a quarterly fee to Parent equal to 5% of the gross revenues as reported under GAAP for each fiscal quarter by Service Recipient (or its predecessor with respect to such predecessor’s Video Content revenues) (“Fee”). Each quarterly Fee shall be paid on or prior to the 45th day after the end of such quarter.
| -2- |
2.2. Sales Commission. For any sponsorship which is arranged by Service Providers for (i) Service Recipient’s Video Content or (ii) a multi-element transaction for which Service Recipient receives a portion of the revenue generated thereby (“Service Recipient Portion”) and Parent or its subsidiaries receives the remaining revenue (for example, a transaction that relates to both Service Recipient’s Video Content and Service Providers’ printed products), Service Recipient shall pay a commission to Service Providers equal to 20% of the Service Recipient Portion (“Sales Commission”). Each Sales Commission shall be paid by Service Recipient within 30 days of the end of each month in which it actually receives any Service Recipient Portion and shall be accompanied by a statement setting forth the calculation of the Service Recipient Portion collected during such month. If a Party collects any revenues otherwise payable to the other Party, it shall remit such revenues to such other Party within 30 days of the end of the month in which such revenues are received, accompanied by a statement setting forth the calculation of such revenues.
2.3. Books and Records; Access. The Service Providers shall keep and maintain accurate books and records with respect to all revenues and expenses related to Service Recipient’s operations and business, which books and records will be available upon reasonable advance notice for inspection, auditing and copying by Service Recipient or its authorized agents or representatives during ordinary business hours prior to the conclusion of a two (2) year period following the conclusion of the relevant fiscal quarter. Each Service Provider hereby agrees that, upon reasonable notice from the Service Recipient, it shall make its books and records with respect to Services and payment therefor available to the Service Recipient and its representatives for inspection during normal business hours at such Service Provider’s principal place of business.
3. Access to Employees. At the request of the Service Recipient, each Service Provider shall, and shall cause its affiliates to, use its reasonable best efforts to provide for consultation with the Service Recipient, shortly after such request, its employees providing the Services hereunder. At the request of the Service Recipient, each Service Provider shall, and shall cause its affiliates to, make available information relating to such Service Provider’s business and operations.
4. Force Majeure. No Party shall be liable for any failure of performance attributable to acts, events or causes (including, but not limited to, war, riot, rebellion, civil disturbances, power failures, failure of telephone lines and equipment, flood, storm, fire and earthquake or other acts of God or conditions or events of nature, or any law, order, proclamation, regulation, ordinance, demand or requirement of any Governmental Authority) beyond its control that prevent in whole or in part performance by such party hereunder. The affected provisions and/or other requirements of this Agreement shall be suspended during the period of such disability and no Service Provider shall have any liability to the Service Recipient or any other party in connection therewith with respect to the period of such disability. The Service Providers shall make all reasonable efforts to remove such disability as soon as and to the extent reasonably possible and to assist the Service Recipient in finding third parties to provide affected Services during the period of such disability.
| -3- |
5. Indemnification.
5.1. The Service Recipient shall indemnify, defend and hold harmless the Service Providers, their affiliates, their officers, directors, employees, agents and representatives from and against any and all losses, liabilities, claims, damages, actions, fines, penalties, expenses or costs (including court costs and reasonable attorneys’ fees) (“Losses”) suffered or incurred by any such person arising from or in connection with any Service Providers’ performance of any covenant, agreement or obligation of the Service Provider hereunder, other than by reason of the Service Providers’ or any of their affiliates’ gross negligence, willful misconduct or bad faith. This Section 5.1 shall survive any termination or expiration of this Agreement.
5.2. The Service Providers shall jointly and severally indemnify, defend and hold harmless the Service Recipient, its affiliates, its officers, directors, employees, agents and representatives from and against any and all Losses suffered or incurred by any such person arising from or in connection with any Service Providers’ gross negligence, willful misconduct or bad faith. This Section 5.2 shall survive any termination or expiration of this Agreement.
6. Term and Termination.
6.1. Term of Services. The term of this Agreement shall be five (5) years beginning on the Effective Date; provided, however, that such term shall renew automatically for successive terms of one (1) year thereafter unless the Parent or the Service Recipient provides written notice to the other that this Agreement shall not be renewed at least ninety (90) days prior to the expiration of the then current term.
6.2. Termination by Service Recipient for Material Breach. This Agreement may be terminated by Service Recipient if any of the Service Provider breaches its obligations hereunder and such breach remains uncured for thirty (30) days after the Parent receives written notice of the breach from the Service Recipient.
6.3. Termination by Parent for Material Breach. This Agreement may be terminated by Parent if the Service Recipient breaches its obligations hereunder and such breach remains uncured for thirty (30) days after the Service Recipient receives written notice of the breach from the Parent.
6.4. Automatic Termination. This Agreement shall terminate automatically, without any notice or other action whatsoever on the part of any party hereto, if (a) either Parent or Service Recipient becomes the subject of an involuntary petition in bankruptcy or any other involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within ninety (90) days of the filing or initiation thereof; and (b) Service Recipient no longer has any license from Parent or any other Service Provider to utilize any of the brands of same in connection with Service Recipient’s business.
| -4- |
7. General Provisions.
7.1. Assignment. This Agreement will bind and inure to the benefit of each Party, its successors and assigns. The rights granted to each Party hereunder will be personal to it and may not, without the prior written consent of the other Parties, be transferred or assigned to any other person and any assignment or transfer in violation of the foregoing shall be null, void and without effect. Notwithstanding the foregoing, each Service Provider may assign its rights and obligations under this agreement to a subsidiary or affiliate under common control; provided such assignee is reasonably deemed capable of providing the services to be provided hereunder. Parent (and each other Service Provider) may assign this Agreement, without Company's consent, including without limitation, its interests in and under this Agreement, to lenders and their administrative agents as collateral security for the obligations of Parent and its affiliates under bank, institutional or commercial financing and any renewal, extension or refinancing thereof. Notwithstanding anything in this Agreement to the contrary, any transfer of assets or equity to a transferee resulting from an exercise by any such lender or administrative agent of rights in respect of collateral security will be a permitted assignment hereunder and will not be deemed an event entitling Service Provider or Service Recipient to terminate this Agreement.
7.2. Remedies. Except as otherwise expressly provided herein, none of the remedies set forth in this Agreement is intended to be exclusive, and each Party shall have all other remedies now or hereafter existing at law or in equity or by statute or otherwise, and the election of any one or more remedies shall not constitute a waiver of the right to pursue other available remedies.
7.3. Interpretation; Definitions. The headings contained in this Agreement or in any Schedule hereto are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted. When a reference is made in this Agreement to Articles, Sections or Schedules, such reference shall be to an Article or Section of or Schedule to this Agreement unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” The phrases “the date of this Agreement,” “the date hereof’ and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date set forth in the first paragraph of this Agreement. The words “hereof,” “hereby,” “herein,” “hereunder” and similar terms in this Agreement shall refer to this Agreement as a whole (including the Schedules) and not to any particular Section in which such words appear.
7.4. Amendments.
a. No amendment to this Agreement (or any Schedule hereto) shall be effective unless it shall be in writing and signed by Parent and the Service Recipient.
b. This Agreement shall not be amended in any manner materially adverse to the creditors of or debt providers to Parent or the Service Recipient.
| -5- |
7.5. Cooperation. The Service Recipient will provide all information that the Service Providers reasonably request for performance of services pursuant hereto, and the Service Recipient will cooperate with any reasonable request of the Service Provider in connection with the performance of services pursuant hereunder.
7.6. Counterparts. This Agreement and any amendments hereto may be executed by facsimile and in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the Parties and delivered to the other Party.
7.7. Severability. If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof.
7.8. Governing Law. This Agreement shall be construed in accordance with the laws of the United States of America and the State of Delaware, without regard to its conflict of laws principles. Any and all disputes between the Parties arising from or related to this Agreement shall be heard and determined by binding arbitration before a single arbitrator, and judgment upon the award(s) rendered by the arbitrator may be entered in any court of competent jurisdiction. The arbitrator shall be named by the American Arbitration Association (“AAA”). Arbitration proceedings will be held in Connecticut under the Rules of Commercial Arbitration and under the institutional supervision of the AAA. Witnesses residing outside of the State of Connecticut may testify telephonically or via such other audio/visual means as the arbitrator approves. A final arbitral award against any Party in any proceeding arising out of or relating to this Agreement shall be conclusive. The foregoing provisions shall not limit the right of any Party to commence any action or proceeding to compel arbitration, to obtain injunctive relief pending the appointment of an arbitrator, or to obtain execution of any award rendered in any such action or proceeding, in any other appropriate jurisdiction or in any other manner. The Parties consent to the jurisdiction of federal courts in Connecticut for such purpose. The Parties agree to accept service of process by certified mail at its or their business address listed in Section 7.10 herein and waive any jurisdictional or venue defenses available to them.
7.9. Waiver. Except as otherwise provided in this Agreement, any failure of any of the Parties hereto to comply with any obligation, covenant, agreement or condition herein may be waived by the Party entitled to the benefits thereof only by a written instrument signed by the Party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Any consent given by any Party pursuant to this Agreement shall be valid only if contained in a written consent signed by such party.
8. Notices. Any notices required or permitted under this Agreement will be considered duly made if delivered to the intended Party by certified or registered mail (return receipt requested), any reputable international courier service, or by facsimile (with a confirming copy sent by any of the other options) at the following address. Notice will be deemed given on the date of receipt.
| -6- |
With respect to any Service Provider:
Chicken Soup for the Soul, LLC
132 East Putnam Avenue
Cos Cob, CT 06807-0700
Attention: William J. Rouhana, Jr.
Fax: (203) 861-4060
With respect to the Service Recipient:
Chicken Soup for the Soul Entertainment Inc.
132 East Putnam Avenue
Cos Cob, CT 06807
Attention: President
Fax: (203) 862-9613
With a copy in any case to:
Graubard Miller
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Attn: David Alan Miller and Brian L. Ross, Esq.
Fax: (212) 818-8881
8.1. Authority. None of the Parties hereto shall act or represent or hold itself out as having authority to act as an agent or partner of the other party, or in any way bind or commit the other party to any obligations. Nothing contained in this Agreement shall be construed as creating a partnership, joint venture, agency, trust or other association of any kind, each Party being individually responsible only for its obligations as set forth in this Agreement.
8.2. Confidentiality. Each Party acknowledges that it may have access to certain confidential and proprietary information of the other Party. No Party, or their directors, officers, employees or agents, will publicize, disclose or use (except as provided in this Agreement) any such confidential or proprietary information that is the property of the other Party that is disclosed to that Party pursuant to this Agreement. It is agreed that neither Party will be under any obligation not to publicly disclose or use any information that: (i) was already known to the recipient at the time of its receipt; (ii) was publicly known or becomes so through no fault of the recipient; (iii) is required to be disclosed by law; (iv) was received from third party not in breach of a confidentiality obligation; or (v) was independently developed by the recipient without use of the disclosing party’s confidential information. Each Party may make disclosure to attorneys, agents and accountants of each Party on a need to know basis; provided that such Party shall remain liable for any breaches of this Section 8.2 by any such persons. The obligations set forth in this paragraph will survive the termination of the Agreement for a period of two years. Upon the termination of this Agreement, each Party will return to the other all confidential materials belonging to the other Party that were delivered during the Contract Period.
| -7- |
8.3. Miscellaneous. This Agreement is the product of arms’ length negotiations between parties knowledgeable of its subject matter who have had the opportunity to consult counsel concerning the terms and conditions of this Agreement prior to the execution of this Agreement and any rule of law that would cause interpretation of any provision against the Party responsible for its inclusion herein will have no effect on the interpretation of this Agreement. If any part of this Agreement shall be declared invalid or unenforceable by a duly appointed arbitrator, it shall not affect the validity of the balance of this Agreement.
8.4. Significance of Headings. Paragraph headings contained herein are solely for the purpose of aiding in speedy location of subject matter and are not in any sense to be given weight in the construction of this Agreement. Accordingly, in case of any question with respect to the construction of this Agreement, it is to be construed as though such paragraph headings had been omitted.
8.5. Schedules. All Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein.
8.6. Entire Agreement. This Agreement constitutes the entire agreement and understanding between the Parties hereto with respect to the subject matter hereof and their affiliates and terminate and supersedes any prior agreement or understanding relating to the subject matter of such agreement. None of the provisions of this Agreement can be waived or modified except in writing signed by both Parties, and there are no representations, promises, agreements, warranties, covenants or undertakings other than those contained herein.
[Signature Page Follows]
| -8- |
Execution Version
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above mentioned.
| CHICKEN SOUP FOR THE SOUL ENTERTAINMENT INC. | ||
| By: | /s/ Scott W. Seaton | |
| Name: | Scott W. Seaton | |
| Title: | Vice Chairman | |
| CHICKEN SOUP FOR THE SOUL, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Chief Executive Officer | ||
| CSS Subsidiaries Acting As Service Providers: | ||
| CHICKEN SOUP FOR THE SOUL DIGITAL, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Chief Executive Officer | ||
| CHICKEN SOUP FOR THE SOUL PRODUCTIONS, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Executive Chairman | ||
[SIGNATURE PAGE: MANAGEMENT SERVICES AGREEMENT]
| -9- |
Execution Version
Index of Schedules
| Service Providers | A-l |
| Administrative Services | B-l |
| Sales and Marketing Services | C-l |
| Technical Services | D-l |
| -10- |
Execution Version
Schedule A
Service Providers Other Than CSS
Chicken Soup for the Soul Digital, LLC
Chicken Soup for the Soul Productions, LLC
| A-1 |
Execution Version
Schedule B
Management and Administrative Services
Each Service Provider shall provide all management and administrative services to the Service Recipient as the Service Recipient may from time to time reasonably request from the Service Provider, including without limitation the following:
| 1. | General Management Support |
Parent shall supply the services of William J. Rouhana, Jr., to serve in the capacity of executive chairman of the Service Recipient and shall make him, as well as the Parent’s COO and CFO, available as reasonably necessary for the proper supervision and implementation of the general strategies and business initiatives of the Service Recipient and as otherwise required in connection with the provision of the Services.
| 2. | Support Services |
Such technical, marketing and business support services and assistance as may be requested from time to time.
| 3. | Financial and Treasurer Services |
The Service Providers shall provide budgeting, forecasting, financial planning and analysis services as may be requested. The Service Providers shall provide the services of the chief financial officer of Parent and related personnel as necessary for the Services provided hereby.
Services for the administration of certain treasurer functions as may be requested from time to time, which may include but shall not be limited to managing capital structure, and investment and debt portfolios; financing for operations; managing credit lines and facilities; managing compliance with financial covenants.
| 4. | Tax Services |
Tax support and tax compliance services as may be necessary to ensure that the Service Recipient complies with applicable tax laws and as may be requested from time to time. The Service Providers shall coordinate with and assist the Service Recipient’s certified public accountants (the “Accountants”) in preparing tax returns in order that such tax returns be filed as soon as reasonably practicable after the end of each fiscal year. The Service Providers shall use all reasonable efforts to cause such tax returns to be filed on a timely basis and shall, promptly after the receipt thereof from such Accountants, deposit such copies with the permanent records of the subject entity. Such tax services may also include assistance with respect to tax research and planning; tax examinations; tax provisions; sales, use, liquor, and property tax.
| B-1 |
| 5. | Legal Affairs |
Legal support services as may be requested from time to time, which may include but shall not be limited to the administration of any litigation by, against or involving the Service Recipient, maintenance of trademarks and monitoring compliance with any regulatory requirements to which the Service Recipient is subject or may become subject in the future, but which shall not include any legal services the provision of which (a) the Service Providers conclude, after consultation with counsel, could reasonably be expected to create a conflict of interest or violate an ethical rule or (b) are provided by outside legal counsel.
| 6. | Accounting/Books and Records |
Accounting support services as may be requested from time to time to assist in the maintenance of (a) a system of accounting for the Service Recipient administered in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) consistently applied and other accounting principles reasonably requested, and (b) a set of audit procedures that are consistent with U.S. GAAP. In addition, the Service Provider shall provide such support services for the Service Recipient as they may request from time to time (but such services shall not include any accounting services provided by outside independent auditors), including but not limited to:
Accounts Payable: Invoice processing, expense report processing, vendor file maintenance, 1099 reporting.
Accounts Receivable: Credit, collections, cash application.
General Ledger Accounting: GL maintenance, journal entry processing, account reconciliations, month end close financials, fixed asset accounting.
| 7. | Financial Statements/Periodic Reports |
The Service Providers shall provide such assistance to the Service Recipient as may be requested of it from time to time by the Service Recipient in the preparation of an audited consolidated balance sheet as at the end of each fiscal year and audited statements of income and results of operations and cash flows for such fiscal year (including notes thereto) of Service Recipient and any subsidiary requested by Service Recipient, which set forth in each case (in comparative form) corresponding figures for the preceding fiscal year and which are accompanied by the report thereon of the Accountants to the effect that such financial statements have been prepared in accordance with U.S. GAAP applied on a basis consistent with prior years (except as otherwise specified in such report). In addition, the Service Providers shall provide other financial statements and periodic reports as reasonably requested by the Service Recipient.
| B-2 |
The Service Providers shall provide such assistance to the Service Recipient as may be requested from time to time in the preparation of a report of Service Recipient and any subsidiary consisting of an unaudited consolidated balance sheet as at the end of each fiscal quarter and an unaudited statement of operations, setting forth in each case in comparative form the corresponding figures for the preceding fiscal quarter. If requested by the Service Recipient, any such reports shall be certified by the Service Providers to be correct and complete, to fairly present in all material respects the consolidated financial condition of the Service Recipient, as the case may be, at the date shown and the results of operations for the period then ended and to have been prepared in accordance with U.S. GAAP consistently applied, except for year-end adjustments. The reports for each fiscal quarter shall include a narrative discussion describing the business and operations of the Service Recipient during the preceding quarter.
The Service Providers may engage outside accountants at Service Recipient’s expense in connection with the provision of administrative services relating to the preparation of financial statements and periodic reports, in accordance with applicable corporate policies.
| 8. | Property Management |
The Service Providers shall provide such support and assistance to the Service Recipient as may be requested from time to time in connection with the management of any real or leasehold property interests of the Service Recipient.
| 9. | Government Approvals |
The Service Providers shall provide such support services as may be requested from time to time by the Service Recipient in connection with filings by the Service Recipient with any Governmental Authority of any periodic or other reports required to be filed by such Service Recipient under the provisions of any government rule applicable to it, including any filings or reports required under the U.S. Securities Exchange Act of 1934, as amended, and in connection with maintaining compliance with all permits, licenses and governmental approvals necessary or desirable for the conduct of such Person’s respective business. Such services may include but shall not be limited to preparing any application, filing or notice relating thereto.
| 10. | Public Relations |
The Service Providers shall provide such support services as may be requested from time to time by the Service Recipient relating to public relations.
| 11. | Human Resources |
The Service Providers shall provide and make available as necessary all professional, supervisory, managerial, administrative and other personnel as are necessary to perform its obligations hereunder, which personnel may be employees of the Service Providers or any of its affiliates, or third parties. Such personnel shall be qualified and experienced in the duties to which they are assigned. In addition, the Service Providers shall provide such support and assistance to the Service Recipient as may be requested from time to time in connection with the human resources matters of the Service Recipient, including but not limited to:
| B-3 |
Payroll Administrative: Check and direct deposit processing; vacation tracking and processing; tax set up, reporting, and compliance; W2 processing; and payroll accounting. Service Providers will advance payroll payments and will be immediately repaid for such payments for Service Recipient’s direct employees.
COBRA Administration: Administration of continued medical, dental and vision coverage pursuant to COBRA for those existing employees of the Business as of the Effective Date.
Solution Center: Payroll and benefit call center to the extent that employees have benefits pursuant to COBRA.
| 12. | Strategic Planning and Business Development |
The Service Providers shall provide such support services as may be requested from time to time by the Service Recipient relating to strategic planning and business development matters of the Service Recipient.
| 13. | Corporate Finance Services |
The Service Providers shall provide such support services as may be requested from time to time by the Service Recipient relating to corporate finance matters of the Service Recipient, including but not limited to:
Finance Management: Corporate and Operating Group strategy development; mergers, acquisitions, joint ventures, and other business combination facilitation.
Planning and Analysis: Corporate monthly reporting, forecasting and budgeting; facilitation of capital initiatives; consolidated financials, forecasts and budgets; technical accounting support and external audit facilitation; allocations.
Sourcing: Vendor management; purchase order management.
Audit and Risk Management: Finance, information technology, and operation audits; security; business continuity safety and loss prevention; claims management; risk financing; certificates of insurance.
| 14. | Library and Record Services |
The Service Providers shall provide a technical library, with information, research and business news services for the use of the Service Recipient. The Service Providers shall also perform management of records, including transfer of information to an archiving storage medium, arranging safe storage, cataloguing of information, and ensuring compliance with established document retention policies.
| B-4 |
| 15. | Procurement |
The Service Providers shall provide such support services as may be requested from time to time by the Service Recipient relating to procurement matters of the Service Recipient.
| 16. | Office Resources and Other |
Service Providers shall provide the Service Recipient with office space, systems and infrastructure as provided to other subsidiaries of Parent and as necessary for the commercially reasonable conduct of the Service Recipient’s business and operations.
The Service Providers shall provide such other assistance or services relating to the conduct of the Service Recipient’s business as may be reasonably requested from time to time by the Service Recipient.
| 17. | Sales and Marketing Services |
The Service Providers providing Administrative Services to the Service Recipient shall provide all sales and marketing services to the Service Recipient as the Service Recipient may from time to time reasonably request from the Service Providers.
| B-5 |
Execution Version
Schedule C
Technical Services
Each Service Provider providing Administrative Services to the Service Recipient shall provide such support services as may be requested from time to time by the Service Recipient relating to information technology matters of the Service Recipient. Such support services may include but shall not be limited to:
| 1. | Computer/ Software Support |
Overseeing and arranging provision of computer equipment, software development and maintenance and other software or services necessary or appropriate for the conduct of the business of the Service Recipient.
| 2. | Information Security |
Establishing policies, implementing the necessary systems, enforcing the policies and analyzing any security violations for the Service Recipient’s information assets, including maintaining protection against any virus that may impact the Service Recipient’s computer systems.
| 3. | Infrastructure and Corporate Office Communications |
Designing, implementing and managing the communications systems required to interconnect the various ground segment and local area network functions within the Service Recipient’s office and corporate office facilities for business and technical operation purposes.
| 4. | Servers / Mainframe / Infrastructure |
Support of databases, applications, and utility servers and mainframe services. Database support, storage management, capacity planning, configuration planning, change management, production control and scheduling, and technical support
| 5. | Network Services (Voice & Data) |
Support of Wide Area Network (“WAN”). Local Area Network (“LAN”), voice networks (standard voice, conferencing, mobile handhelds and related voice, web and contract), voice and data moves, adds and changes (“MACS”).
| C-1 |
| 6. | End User Computing |
Support of workstations, software and configurations. Installations, moves, adds, and changes (“IMACS”), operational support, electronic software distribution, software and configuration management, and remote system management
| 7. | Application Development & Maintenance |
Support of core systems, including application planning and analysis, design/build, testing, implementation, maintenance and support
| 8. | Cross Functional IT Services |
Support and management of maintenance contracts, equipment and software, including license management and compliance, asset inventory, asset refresh planning and IT procurement services.
| C-2 |
Exhibit 6.3
Execution Version
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (“Agreement”), dated as of May 12, 2016, is made and entered into by and among Chicken Soup for the Soul Entertainment Inc., a Delaware corporation (the “Company”), on the one hand, and Chicken Soup for the Soul Productions, LLC, a Connecticut limited liability company (“CSS Productions”), and Chicken Soup for the Soul LLC, a Connecticut limited liability company (“CSS” and, together with CSS Productions, the “Contributors”), on the other hand.
RECITALS:
A. Each of the Contributors owns the assets set forth opposite its respective name on Schedule A hereto (the “Assets”);
B. The Assets relate to the production and distribution of visual media content, including television programming, motion pictures and online video content (“Video Content”); and
C. The parties desire that all of the Assets (and all obligations and liabilities relating to the ownership, use and exploitation of the Assets) be assigned and transferred to the Company on the Closing Date (as defined) on the terms set forth herein.
AGREEMENT:
NOW THEREFORE, the parties hereby agree as follows:
Section 1. Agreement to Contribute. Subject to the terms and conditions hereof, on the Closing Date, the Contributors shall assign, transfer and deliver to the Company, and the Company shall acquire from the Contributors, all right, title and interest of the Contributors in and to all of the Assets. The Assets shall be deemed to include: any and all assets owned by the Contributors or any of their subsidiaries or affiliated companies under common control of Chicken Soup for the Soul Holdings, LLC,, including, but not limited to:
| (a) | all intellectual property rights of the Contributors therein and all goodwill therein and any and all information, files, correspondence, records, data, plans, reports and recorded knowledge, and all accounting or other books and records of the Contributors in whatever media retained or stored, including computer programs and disks, that in each case relate to any of the Assets (it being understood and agreed that the Contributors shall be entitled to retain copies of the foregoing); provided, however, that nothing herein shall be deemed a transfer or assignment to the name “Chicken Soup for the Soul” or any rights therein, and the only rights Company shall have therein are those set forth in the license agreement between Company and Chicken Soup for the Soul, LLC of even date herewith; |
| (b) | all insurance benefits, including rights and proceeds arising from or relating to the Assets prior to the Closing Date; |
| (c) | all claims of the Contributors against third parties relating to the Assets, whether choate, inchoate, known or unknown, contingent or non-contingent; |
| (d) | all rights of the Contributors relating to any deposits and prepaid expenses and claims for refunds; and |
| (e) | all ownership of completed Video Content, projects and any and all other rights related thereto or embodied therein. |
Section 2. Assumption of Liabilities. On the Closing Date, the Company shall assume all the liabilities and obligations of the Contributors related to the Assets (collectively, the “Assumed Liabilities”).
Section 3. Consideration. In consideration for the Assets, on the Closing Date, the Company shall issue to CSS Productions 8,600,568 shares (the “Shares”) of the Company’s Class B common stock (“Purchase Price”).
Section 4. Allocation of Purchase Price. The Purchase Price and any other items that are treated as additional Purchase Price for tax purposes shall be allocated as mutually determined by the parties.
Section 5. Investment Representations. CSS Productions hereby acknowledges and represents as of the date hereof and the Closing Date that (a) it understands that the issuance of the Shares shall not be registered under the Securities Act of 1933, as amended (“Act”), or in any state and that the Contributors must hold the Shares for an indefinite period unless the Shares are subsequently registered or a Federal and state exemption from such registration is available; and (b) the Shares are to be purchased for its own account, as a profit-motivated investment, and without the participation of any person in any part of such purchase.
Section 6. Further Cooperation. Each of the parties agrees to execute and deliver at and after the Closing Date any and all further agreements, documents or instruments necessary or convenient to effectuate this Agreement and the transactions referred to herein or contemplated hereby or reasonably requested by the other party to perfect or evidence its rights hereunder.
Section 7. Closing. The closing (“Closing”) of the transactions contemplated hereby (the Closing Date”) shall occur concurrently with the execution of this Agreement.
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Section 8. The Contributors Closing Deliveries. At the Closing, the Contributors shall deliver to the Company the following:
| (a) | executed bills of sale, instruments of assignment, certificates of title documents, deeds and other conveyance documents, dated as of the Closing Date, transferring to the Company all of the Contributors’ right, title and interest in and to the Assets, together with possession of the Assets; |
| (b) | originals or copies of all agreements, contracts, terms sheets and written understandings comprising the Assets and all correspondence, files, certificates of title and other records relating to the Assets; and |
| (c) | such other documents as reasonably requested by the Company and as otherwise necessary to consummate the transactions contemplated hereby. |
Section 9. Company Closing Deliveries. At the Closing, the Company is delivering to the Contributors the following:
| (a) | original certificates representing the Shares comprising the Purchase Price, in the name of CSS Productions; |
| (b) | the documents referred to in Section 8(a), above, executed by the Company as applicable; and |
| (c) | such other documents as reasonably requested by the Contributors and as otherwise necessary to consummate the transactions contemplated hereby. |
Section 10. Notices. Any notices required or permitted under this Agreement will be considered duly made if delivered to the intended party by certified or registered mail (return receipt requested), or any reputable international courier service, or by facsimile (with a confirming copy sent by any of the other options) at the following address. Notice will be deemed given on the date of receipt.
| Contributors: | Chicken Soup for the Soul Productions, LLC |
| Chicken Soup for the Soul, LLC | |
| 132 East Putnam Avenue | |
| Cos Cob, CT 06807-0700 | |
| Attention: William J. Rouhana, Jr. | |
| Fax: (203) 861-4060 | |
| To Company: | Chicken Soup for the Soul Entertainment Inc. |
| 132 East Putnam Avenue | |
| Cos Cob, CT 06807 | |
| Attention: Steven Ronson | |
| Fax: (203) 861-4060 |
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| With a copy in each case to: | |
| Graubard Miller | |
| The Chrysler Building | |
| 405 Lexington Avenue | |
| New York, New York 10174 | |
| Attn: David Alan Miller and Brian L. Ross, Esq. | |
| Fax: (212) 818-8881 |
Section 11. Governing Law. This Agreement shall be construed in accordance with the laws of the United States of America and the State of Delaware, without regard to its conflict of laws principles. Any and all disputes between the parties arising from or related to this Agreement shall be heard and determined by binding arbitration before a single arbitrator, and judgment upon the award(s) rendered by the arbitrator may be entered in any court of competent jurisdiction. The arbitrator shall be named by the American Arbitration Association (“AAA”). Arbitration proceedings will be held in Connecticut under the Rules of Commercial Arbitration and under the institutional supervision of the AAA. Witnesses residing outside of the State of Connecticut may testify telephonically or via such other audio/visual means as the arbitrator approves. A final arbitral award against any party in any proceeding arising out of or relating to this Agreement shall be conclusive. The foregoing provisions shall not limit the right of any party to commence any action or proceeding to compel arbitration, to obtain injunctive relief pending the appointment of an arbitrator, or to obtain execution of any award rendered in any such action or proceeding, in any other appropriate jurisdiction or in any other manner. The parties consent to the jurisdiction of federal courts in Connecticut for such purpose. The parties agree to accept service of process by certified mail at its or their business address listed in Section 10 herein and waive any jurisdictional or venue defenses available to them.
Section 12. Schedules. The Schedules are hereby incorporated into this Agreement and are hereby made a part hereof as if set out in full herein.
Section 13. Integration. This Agreement and the agreements and documents executed in connection herewith, supersede all prior negotiations, agreements and understandings among the parties with respect to the subject matter hereof and constitute the entire agreement among the parties with respect thereto.
Section 14. Transaction Costs. Except as provided above or as otherwise expressly provided herein, the Company and the Contributors shall each pay its own fees, costs and expenses incurred in connection herewith and the transactions contemplated hereby, including the fees, costs and expenses of its financial advisors, accountants and counsel.
(Signature Page Follows)
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INTENDING TO BE BOUND, the parties have caused this Agreement to be duly executed, as of the date first above written.
CHICKEN SOUP FOR THE SOUL ENTERTAINMENT INC.
| By: | /s/ Scott W. Seaton | |
| Scott W. Seaton | ||
| Vice Chairman | ||
| CHICKEN SOUP FOR THE SOUL, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Chief Executive Officer | ||
| CHICKEN SOUP FOR THE SOUL PRODUCTIONS, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Executive Chairman | ||
| Agreed, acknowledged and accepted: | ||
| CHICKEN SOUP FOR THE SOUL HOLDINGS, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Chief Executive Officer | ||
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Schedule A
A copy of each of the following agreements (in current effective form and as amended to date) has been delivered to the Company and its counsel concurrently with the execution of this Agreement. The “Assets” shall be deemed to include any amendment or modification to the following agreements made on or prior to the Closing Date, as well as any additional agreements CSS, the Contributors or any affiliate thereof may enter into on or prior to the Closing Date that relate to Video Content.
| Asset | Date of Agreement |
Contributor | ||
| Alcon Movie Option Agreement | 7/15/13 | CSS | ||
| Litton Co-Production and Distribution Agreement | 12/31/14 | CSS Productions | ||
| Boniuk Foundation agreement solely as it relates to Video Content TV Hidden Heros | 9/29/14 | CSS | ||
| Boniuk Foundation solely as it relates to Video Content TV Hidden Heros | 6/29/15 | CSS | ||
| DB Goldline 1 of 2 – Critical Density Shopping Agreement | 8/6/15 | CSS Productions | ||
| DB Goldline 2 of 2 – Critical Density Shopping Agreement | 8/12/15 | CSS Productions | ||
| DB Goldline – Beth Stern Shopping Agreement for PIF | 7/15/15 | CSS Productions | ||
| DB Goldline – CSS Hidden Heros – Theme Song Video – Letter Agreement | 10/25/15 | CSS Productions | ||
| DB Goldline – Pilot for Shed – Letter Agreement | 8/27/15 | CSS Productions | ||
| DB Goldline – Pitch Development Agreement | 4/22/15 | CSS Productions | ||
| DB Goldline – Return of Superman Net Proceeds Allocation | 12/7/15 | CSS Productions | ||
| DB Goldline – The Daily Sip Project Services Agreement | 4/1/15 | CSS Productions | ||
| DB Goldline – (CORRECTED) Emily Griffith Sips Prod Agreement | 2/3/16 | CSS Productions | ||
| DB Goldline Reframed – Exonerated Shopping Agreement | 10/27/15 | CSS Productions | ||
| Korean Broadcasting System - ROS Format, License Agreement | 10/2/15 | CSS Productions | ||
| Litton Entertainment – LOI ROS TV Services Distribution | 9/1/15 | CSS Productions |
| 6 |
| Asset | Date of Agreement |
Contributor | ||
| Boniuk Interests ROS Agreement | 9/30/15 | CSS Productions | ||
| Emily Griffith – Sip Contract Insertion Order | 1/13/16 | CSS Productions | ||
| Low Profile Films Consulting Agreement | 7/20/12 | CSS |
| 7 |
Exhibit 6.4
Execution Version
EXCHANGE AND CONTRIBUTION AGREEMENT
AGREEMENT, dated as of May 12, 2016, by and between CHICKEN SOUP FOR THE SOUL PRODUCTIONS, LLC (“CSSPR”), CHICKEN SOUP FOR THE SOUL ENTERTAINMENT, INC. (“Entertainment”), and TREMA, LLC (“Owner”).
WHEREAS, concurrently herewith, all of the assets, rights and liabilities of CSSPR and its affiliates relating to the production of distribution of television programming, online video content and motion pictures (“Video Content”) are being assigned to and assumed by Entertainment pursuant to the terms of a contribution agreement of even date herewith (“Contribution Agreement”);
WHEREAS, as of October 30, 2015, Owner purchased certain assets from Robert D. Jacobs (“RDJ”), including all rights of RDJ under the Employment Termination and Consulting Services Agreement, dated April 17, 2012, by and among Chicken Soup for the Soul Holdings, LLC, Chicken Soup for the Soul, LLC and RDJ (“Jacobs Rights and Interests”);
WHEREAS, the Jacobs Right and Interests include the right to certain payments relating to the production and distribution of Video Content;
WHEREAS, CSSPR estimates that the Jacobs Rights and Interests would require total future payments in excess of $1,182,000 to Owner that would otherwise be retained by Entertainment after giving effect to the Contribution Agreement;
WHEREAS, the making of such payments to Owner would reduce Entertainment’s valuation and cash flow;
WHEREAS, the parties hereto have agreed it is in their mutual interests to exchange (“Exchange”) Owner’s rights to receive any and all future payments on the Jacobs Rights and Interests for shares of the Class B common stock of Entertainment (“Class B Entertainment Stock”).
NOW THEREFORE, it is agreed by and among the undersigned, as follows:
1. Exchange. It is hereby agreed that, concurrently with the execution of this Agreement and consummation of the Contribution Agreement, Owner will assign and transfer all of the Jacobs Rights and Interests to Entertainment in exchange for 159,432 shares of Class B Entertainment Stock issued by Entertainment (“Exchange Stock”).
2. Compliance. CSSPR shall take, and cause its affiliates to take, all necessary and lawful measures to ensure all parties comply with the rights, obligations and liabilities of same under the terms of this Agreement.
3. Taxes. Owner shall be responsible for all tax aspects of the Exchange, and neither CSSPR nor Entertainment, nor any other person, has or shall provide any tax advice or be responsible for the payment of any taxes on behalf of Owner with respect to same.
4. Investment Representations. Owner hereby represents to CSSPR as follows: (a) it has consulted with legal counsel with respect to this Agreement and it understands that there will be investment risks with respect to the Exchange Stock; (b) it is aware that the Exchange Stock has not been registered under the Act, and that the Exchange Stock is deemed to constitute “restricted securities” under Rule 144 promulgated under the Act (“Rule 144”); (c) it understands that the Exchange Stock is being offered and sold pursuant to an exemption from registration contained in the Act based in part upon Owner’s representations contained in this Agreement; (d) it is obtaining the Exchange Stock for its own account and has no present intention of distributing or selling the Exchange Stock except as permitted under the Act and applicable state securities laws; (e) it has sufficient knowledge and experience in business and financial matters to evaluate Entertainment, its proposed activities and the risks and merits of this investment and has the ability to accept the high risk and lack of liquidity inherent in this type of investment; (f) it is directly knowledgeable with respect to, or has had had an opportunity to discuss with directors and officers of CSSPR, the business, management and financial affairs of Entertainment and has had access to any information it deems necessary to evaluate the investment represented by the Exchange Stock; (g) it understands that the Exchange Stock must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available; and (h) it been advised or is aware of the provisions of Rule 144, as in effect from time to time, which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the availability of certain current public information about Entertainment, the resale occurring following the required holding period under Rule 144, and the number of shares being sold during any three month period not exceeding specified limitations.
5. Registration Rights. Owner shall have the registration rights set forth on Schedule 5 hereto.
6. Lockups. Owner hereby agrees that it shall execute and deliver any lockup agreement required of “insiders” by the private placement agent or any underwriter in connection with any initial public offering of CSS Entertainment’s common stock (“IPO”).
7. Mutual Representations. Each party represents and warrants to the other parties as follows: it has all necessary company power and authorization to enter into and deliver this Agreement and to perform its obligations hereunder and thereunder, and no consent of any third party is required to be obtained by it in order for it to execute and deliver this Agreement or to perform its obligations hereunder. Upon its execution and delivery, this Agreement will be a valid and binding obligation of such party, enforceable in accordance with this Agreement’s terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, and (b) as limited by general principles of equity that restrict the availability of equitable remedies.
8. No Encumbrances. Owner hereby represents and warrants to CSSPR that it is the sole owner of the Jacobs Rights and Interests, free and clear of all mortgages, liens and other encumbrances.
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9. Reliance. Entertainment may rely on all representations, warranties and covenants made or undertaken by Owner in this Agreement at the time of issuance of the Exchange Stock, as if same had been made directly to Entertainment.
10. Binding Nature. This Agreement is binding upon each party hereto and his heirs, executors, administrators, successors and assigns.
11. Cooperation. The parties hereto shall cooperate to execute such other documents that are necessary to effectuate the terms of this Agreement.
12. Governing Law. This Agreement shall be construed in accordance with the laws of the United States of America and the State of Delaware, without regard to its conflict of laws principles. Any and all disputes between the Parties arising from or related to this Agreement shall be heard and determined by binding arbitration before a single arbitrator, and judgment upon the award(s) rendered by the arbitrator may be entered in any court of competent jurisdiction. The arbitrator shall be named by the American Arbitration Association (“AAA”). Arbitration proceedings will be held in Connecticut under the Rules of Commercial Arbitration and under the institutional supervision of the AAA. Witnesses residing outside of the State of Connecticut may testify telephonically or via such other audio/visual means as the arbitrator approves. A final arbitral award against any Party in any proceeding arising out of or relating to this Agreement shall be conclusive. The foregoing provisions shall not limit the right of any party to commence any action or proceeding to compel arbitration, to obtain injunctive relief pending the appointment of an arbitrator, or to obtain execution of any award rendered in any such action or proceeding, in any other appropriate jurisdiction or in any other manner. The Parties consent to the jurisdiction of federal courts in Connecticut for such purpose.
13. Counterparts. This Agreement may be executed in counterparts and may be executed by facsimile.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| CHICKEN SOUP FOR THE SOUL PRODUCTIONS LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Executive Chairman | ||
| TREMA, LLC | ||
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Manager | ||
| CHICKEN SOUP FOR THE SOUL ENTERTAINMENT INC. | ||
| By: | Scott W. Seaton | |
| Scott W. Seaton | ||
| Vice Chairman | ||
Agreed, acknowledged and agreed:
CHICKEN SOUP FOR THE SOUL HOLDINGS, LLC
| By: | /s/ William J. Rouhana, Jr. | |
| William J. Rouhana, Jr. | ||
| Chief Executive Officer |
| 4 |
Schedule 5
Registration Rights
(i) The Exchange Stock and any shares of Class A Entertainment Stock issuable or issued to Owner upon the exchange of the Exchange Stock for same are referred to herein as “Registrable Securities.”
(ii) At any time commencing after the earlier of the date of an IPO and the date Company otherwise becomes subject to the reporting requirements of the Exchange Act, if the Registrable Securities are not then otherwise freely saleable without volume restrictions under Rule 144, Owner and its transferees and assigns (the “Holders” and, each, individually, a “Holder”), shall have the right to demand, on three occasions, that Entertainment promptly file (and no later than 60 days after such demand) a registration statement (a “Demand Registration”) on appropriate form under the Act to register under the Act the resale of the Registrable Securities. Such demand may be made in writing to Entertainment on behalf of the Holders by holders of at least 51% in interest of the then outstanding Registrable Securities. The Registrable Securities of all Holders shall automatically be included in the Demand Registration upon any such demand.
(iii) Entertainment will keep the Demand Registration effective and current until the earliest of (a) the date by which all the registered Registrable Securities have been sold and (b) the date that the Registrable Securities may be sold pursuant to Rule 144 without any volume restrictions.
(iv) Entertainment will notify each Holder as expeditiously as possible following the effectiveness of the Demand Registration, and/or of any request by the Commission for the amending or supplementing of the Demand Registration or prospectus included in the Demand Registration (“Prospectus”). If the Prospectus is amended to comply with the requirements of the Securities Act, the Holders, if requested by Entertainment, will immediately cease making offers of the Registrable Securities and Entertainment will promptly provide the Holders with revised Prospectuses to enable the Holders to resume making offers of the Registrable Securities. Entertainment will promptly notify the Holders, if after delivery of a Prospectus to the Holders, that, in the judgment of Entertainment, it is advisable to suspend use of the Prospectus delivered to the Holders due to pending material developments or other events that have not yet been publicly disclosed and as to which Entertainment believes public disclosure would be detrimental to Entertainment. Upon receipt of such notice, each such Holder will immediately discontinue any sales of Registrable Securities pursuant to such registration statement until such Holder has received copies of a supplemented or amended Prospectus or until such Holder is advised in writing by Entertainment that the then current Prospectus may be used and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus (such period of discontinuance is referred to herein as a “Black-Out Period”).
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(v) If and whenever Entertainment is required by the provisions of this Agreement to effect the registration of any Registrable Securities under the Securities Act, Entertainment will:
(a) as expeditiously as possible furnish to each Holder such reasonable numbers of copies of the Prospectus, including any preliminary Prospectus, in conformity with the requirements of the Securities Act, and such other documents as such Holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such Holder; and
(b) as expeditiously as possible, notify each Holder, promptly after it receives notice thereof, of the time when such registration statement has become effective or a supplement to any Prospectus forming a part of such registration statement has been filed.
(vi) In any registration statement in which Registrable Securities are included, Entertainment will bear all expenses and pay all fees incurred in connection therewith, excluding underwriting discounts and commissions payable with respect to the Registrable Securities, and fees and expenses of counsel and/or other experts retained by the Holders of the Registrable Securities but including the expenses of preparing the registration statement, filing it with the Commission and FINRA and having it declared effective (or cleared) by such agencies, and providing a reasonable number of copies of the applicable prospectus contained therein to the Holders.
(vii) (a) Entertainment shall indemnify the Holder of the Registrable Securities to be sold or resold pursuant to any registration statement hereunder and any underwriter or person deemed to be an underwriter under the Securities Act and each person, if any, who controls such Holder or underwriters or persons deemed to be underwriters within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act , against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which the Holder may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement, except to the extent (a) arising from information furnished (or omitted to be furnished) by or on behalf of the Holder, in writing, for specific inclusion in such registration statement or (b) because the Holder failed to suspend the use of such registration statement and discontinue any sales of Registrable Securities during a Black-Out Period (of which it was reasonably made aware by Entertainment) or failed to timely deliver a final prospectus to the purchasers of such Holder’s Registrable Securities. The Holder of the Registrable Securities to be sold or resold pursuant to such registration statement, and their successors and assigns, shall indemnify Entertainment, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which Entertainment may become subject under the Securities Act, the Exchange Act or otherwise, (a) arising from information furnished (or omitted to be furnished) by or on behalf of the Holder, in writing, for specific inclusion in such registration statement or (b) because the Holder failed to suspend the use of such registration statement and discontinue any sales of Registrable Securities during a Black-Out Period (of which it was reasonably made aware by Entertainment) or failed to timely deliver a final prospectus to the purchasers of such Holder’s Registrable Securities.
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(b) If any action is brought against a party hereto (“Indemnified Party”) in respect of which indemnity may be sought against the other party (“Indemnifying Party”), such Indemnified Party shall promptly notify Indemnifying Party in writing of the institution of such action and Indemnifying Party shall assume the defense of such action, including the employment and fees of counsel reasonably satisfactory to the Indemnified Party. Such Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the employment of such counsel shall have been authorized in writing by Indemnifying Party in connection with the defense of such action, or (ii) Indemnifying Party shall not have employed counsel to defend such action, or (iii) such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which may result in a conflict between the Indemnified Party and Indemnifying Party (in which case Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party), in any of which events, the reasonable fees and expenses of not more than one additional firm of attorneys designated in writing by the Indemnified Party shall be borne by Indemnifying Party. Notwithstanding anything to the contrary contained herein, if Indemnified Party shall assume the defense of such action as provided above, Indemnifying Party shall not be liable for any settlement of any such action effected without its written consent.
(c) If the indemnification or reimbursement provided for hereunder is finally judicially determined by a court of competent jurisdiction to be unavailable to an Indemnified Party (other than as a consequence of a final judicial determination of willful misconduct, bad faith or gross negligence of such Indemnified Party), then Indemnifying Party agrees, in lieu of indemnifying such Indemnified Party, to contribute to the amount paid or payable by such Indemnified Party (i) in such proportion as is appropriate to reflect the relative benefits received, or sought to be received, by Indemnifying Party on the one hand and by such Indemnified Party on the other or (ii) if (but only if) the allocation provided in clause (i) of this sentence is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in such clause (i) but also the relative fault of Indemnifying Party and of such Indemnified Party.
(d) The rights accorded to Indemnified Parties hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise.
(viii) The Holder hereby agrees not to (and use its commercially reasonable efforts not to permit any of its affiliates to) “short sell” Entertainment’s securities through the date of effectiveness of the Registration Statement and shall not permit any securities owed by such Investor to be loaned or used by any broker or other person for short selling activities.
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(ix) If Entertainment proposes to file a Registration Statement under the Act with respect to an offering of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into equity securities, for its own account or for the account of stockholders of Entertainment (or by Entertainment and by the stockholders of Entertainment), other than a registration statement (i) filed in connection with any employee stock option or other benefit plan, (ii) for an exchange offer or offering of securities solely to Entertainment’s existing stockholders, (iii) for an offering of debt that is convertible into equity securities of Entertainment or (iv) for a dividend reinvestment plan, then Entertainment shall give written notice of such proposed filing to all of the Holders as soon as practicable but not less than ten (10) days before the anticipated filing date of such registration statement, which notice shall (A) describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing underwriter or underwriters, if any, in such offering, and (B) offer to all of the Holders the opportunity to register the sale of such number of Registrable Securities as such Holders may request in writing within five (5) days after receipt of such written notice (such registration a “ Piggyback Registration”). Entertainment shall, in good faith, cause such Registrable Securities to be included in such Piggyback Registration and shall use its best efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Registrable Securities requested by the Holders pursuant to this subsection (ix) to be included in a Piggyback Registration on the same terms and conditions as any similar securities of Entertainment included in such registration and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method(s) of distribution thereof. All such Holders proposing to distribute their Registrable Securities through an underwritten offering under this subsection (ix) shall enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwritten offering by Entertainment.
(x) If the managing underwriter or underwriters in an underwritten registration that is otherwise to be a Piggyback Registration, in good faith, advises Entertainment and the Holders participating in the Piggyback Registration in writing that the dollar amount or number of the common stock that Entertainment desires to sell, taken together with (i) the common stock, if any, as to which registration has been demanded pursuant to separate written contractual arrangements with persons or entities other than the Holders hereunder (ii) the Registrable Securities as to which registration has been requested pursuant subsection (ix) hereof, and (iii) the common stock, if any, as to which registration has been requested pursuant to separate written contractual piggy-back registration rights of other stockholders of Entertainment, exceeds the maximum number of securities that can be included in the opinion of such underwriter (“Maximum Number of Securities”), then:
(1) If the Registration is undertaken for Entertainment’s account, Entertainment shall include in any such Registration (A) first, the common stock or other equity securities that Entertainment desires to sell, which can be sold without exceeding the Maximum Number of Securities; (B) second, to the extent that the Maximum Number of Securities has not been reached under the foregoing clause (A), the Registrable Securities of Holders exercising their rights to register their Registrable Securities pursuant to subsection (ix) hereof, pro rata, which can be sold without exceeding the Maximum Number of Securities; and (C) third, to the extent that the Maximum Number of Securities has not been reached under the foregoing clauses (A) and (B), the Common Stock, if any, as to which registration has been requested pursuant to written contractual piggy-back registration rights of other stockholders of Entertainment, which can be sold without exceeding the Maximum Number of Securities;
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(2) If the Registration is pursuant to a request by persons or entities other than the Holders, then Entertainment shall include in any such Registration (A) first, the common stock or other equity securities, if any, of such requesting persons or entities, other than the Holders, which can be sold without exceeding the Maximum Number of Securities; (B) second, to the extent that the Maximum Number of Securities has not been reached under the foregoing clause (A), the Registrable Securities of Holders exercising their rights to register their Registrable Securities pursuant to subsection (ix), pro rata based on the number of Registrable Securities that each Holder has requested be included in such registration and the aggregate number of Registrable Securities that the Holders have requested to be included in such registration, which can be sold without exceeding the Maximum Number of Securities; (C) third, to the extent that the Maximum Number of Securities has not been reached under the foregoing clauses (A) and (B), the Common Stock or other equity securities that Entertainment desires to sell, which can be sold without exceeding the Maximum Number of Securities; and (D) fourth, to the extent that the Maximum Number of Securities has not been reached under the foregoing clauses (A), (B) and (C), the common stock or other equity securities for the account of other persons or entities that Entertainment is obligated to register pursuant to separate written contractual arrangements with such persons or entities, which can be sold without exceeding the Maximum Number of Securities.
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