10-Q 1 csse-20200930x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

OR

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

For the transition period from                                 to

Commission File Number:  001-38125

CHICKEN SOUP FOR THE SOUL ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware

81-2560811

(State or other jurisdiction of incorporation)

(I.R.S. Employer Identification No.)

132 East Putman Avenue – Floor 2W, Cos Cob, CT

06807

(Address of Principal Executive Offices)

(Zip Code)

855-398-0443

(Registrant’s Telephone Number, including Area Code)

Not Applicable

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

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

Title of each class

Trading Symbol(s) 

Name of each exchange on which registered

Class A Common Stock
9.75% Series A Cumulative Redeemable Perpetual Preferred Stock

 

CSSE
CSSEP

 

The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC

9.50% Notes Due 2025

CSSEN

The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

Emerging growth company 

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

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

The number of shares of Common Stock outstanding as of November 12, 2020 totaled 12,670,884 as follows:

transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

-2 of the Exchange Act). Yes  No 

12,642,428 as follows:

Title of Each Class

    

Class A Common Stock, $.0001 par value per share

4,856,946

Class B Common Stock, $.0001 par value per share*

7,813,938


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


Chicken Soup for the Soul Entertainment, Inc.

Table of Contents

 

Page

    

Number

 

 

PART 1 - FINANCIAL INFORMATION

ITEM 1.

Financial Statements (unaudited)

3

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

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019

4

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2020 and 2019

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

45

ITEM 4.

Controls and Procedures

46

PART II - OTHER INFORMATION

ITEM 1.

Legal Proceedings

46

ITEM 1A.

Risk Factors

47

ITEM 2.

Unregistered Sales of Equity Securities

47

ITEM 3.

Defaults Upon Senior Securities

47

ITEM 4.

Mine Safety Disclosures

48

ITEM 5.

Other Information

48

ITEM 6.

Exhibits

48

SIGNATURES

49

2


PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Balance Sheets

    

September 30, 

    

December 31, 

2020

2019

(unaudited)

ASSETS

 

  

 

  

Cash and cash equivalents

$

9,243,315

$

6,447,402

Accounts receivable, net of allowance for doubtful accounts of $1,777,744 and $1,531,247, respectively

 

24,772,024

 

34,661,119

Prepaid expenses and other current assets

 

2,985,503

 

1,173,223

Goodwill

 

21,448,106

 

21,448,106

Indefinite lived intangible assets

 

12,163,943

 

12,163,943

Intangible assets, net

 

20,575,942

 

35,451,951

Film library, net

 

36,878,196

 

33,250,149

Due from affiliated companies

 

6,081,324

 

7,642,432

Programming costs and rights, net

 

20,702,405

 

15,113,574

Other assets, net

 

4,794,239

 

313,585

Total assets

$

159,644,997

$

167,665,484

LIABILITIES AND EQUITY

 

  

 

  

Current maturities of commercial loan

$

$

3,200,000

Commercial loan, net of unamortized deferred finance costs of $0 and $189,525, respectively

11,810,475

9.50% Notes due 2025, net of unamortized deferred finance costs of $1,059,401 and $0, respectively

21,040,599

Notes payable under revolving credit facility

 

2,500,000

 

5,000,000

Film acquisition advance

10,210,000

Accounts payable and accrued expenses

 

25,923,748

 

26,646,390

Ad representation fees payable

3,021,520

12,429,838

Film library acquisition obligations

 

10,609,186

 

5,020,600

Programming obligations

6,416,012

7,300,861

Accrued participation costs

 

12,894,099

 

5,066,512

Other liabilities

 

1,777,548

 

170,106

Total liabilities

 

94,392,712

 

76,644,782

Commitments and contingencies (Note 14)

 

  

 

  

Equity

Stockholders' Equity:

 

  

 

  

Series A cumulative redeemable perpetual preferred stock, $.0001 par value, liquidation preference of $25.00 per share, 10,000,000 shares authorized; 1,732,139 and 1,599,002 shares issued and outstanding, respectively; redemption value of $43,303,475 and $39,975,050, respectively

 

173

 

160

Class A common stock, $.0001 par value, 70,000,000 shares authorized; 4,919,195 and 4,259,920 shares issued, 4,844,960 and 4,185,685 shares outstanding, respectively

 

492

 

425

Class B common stock, $.0001 par value, 20,000,000 shares authorized; 7,813,938 shares issued and outstanding

 

782

 

782

Additional paid-in capital

 

96,498,618

 

87,610,030

Deficit

 

(67,182,836)

 

(32,695,629)

Class A common stock held in treasury, at cost (74,235 shares)

 

(632,729)

 

(632,729)

Total stockholders’ equity

 

28,684,500

 

54,283,039

Subsidiary convertible preferred stock

36,350,000

36,350,000

Noncontrolling interests

217,785

387,663

Total equity

65,252,285

91,020,702

Total liabilities and equity

$

159,644,997

$

167,665,484

See accompanying notes to unaudited condensed consolidated financial statements.

3


Chicken Soup for the Soul Entertainment, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

Revenue:

  

  

  

  

Online networks

$

6,652,562

$

14,383,659

$

21,038,965

$

25,128,001

Distribution and Production

 

13,318,050

 

2,662,429

 

26,948,795

 

6,655,114

Total revenue

 

19,970,612

 

17,046,088

 

47,987,760

 

31,783,115

Less: returns and allowances

 

(608,861)

 

(255,394)

 

(1,861,396)

 

(828,785)

Net revenue

 

19,361,751

 

16,790,694

 

46,126,364

 

30,954,330

Cost of revenue

 

14,840,851

 

13,614,648

 

37,684,786

 

23,568,743

Gross profit

 

4,520,900

 

3,176,046

 

8,441,578

 

7,385,587

Operating expenses:

 

 

  

 

 

  

Selling, general and administrative

 

9,301,550

 

6,371,870

 

23,194,223

 

13,894,351

Amortization and depreciation

 

4,576,742

 

4,695,522

 

15,022,885

 

5,631,136

Management and license fees

 

1,936,175

 

1,676,303

 

4,612,636

 

3,091,093

Total operating expenses

 

15,814,467

 

12,743,695

 

42,829,744

 

22,616,580

Operating loss

 

(11,293,567)

 

(9,567,649)

 

(34,388,166)

 

(15,230,993)

Interest expense

 

659,803

 

195,881

 

1,322,831

 

483,363

Loss on extinguishment of debt

169,219

350,691

169,219

350,691

Acquisition-related costs

 

1,078,637

 

98,926

 

3,735,373

Other non-operating income, net

 

(43,445)

 

(8,997)

 

(4,381,292)

 

(34,546)

Loss before income taxes and preferred dividends

 

(12,079,144)

 

(11,183,861)

 

(31,597,850)

 

(19,765,874)

Provision for income taxes

 

26,000

 

1,248,000

 

93,000

 

557,000

Net loss before noncontrolling interests and preferred dividends

 

(12,105,144)

 

(12,431,861)

 

(31,690,850)

 

(20,322,874)

Net loss attributable to noncontrolling interests

(73,135)

(37,473)

(169,878)

(36,960)

Net loss attributable to Chicken Soup for the Soul Entertainment, Inc.

(12,032,009)

(12,394,388)

(31,520,972)

(20,285,914)

Less: preferred dividends

 

1,017,691

 

929,387

 

2,966,235

 

2,330,675

Net loss available to common stockholders

$

(13,049,700)

$

(13,323,775)

$

(34,487,207)

$

(22,616,589)

Net loss per common share:

 

  

 

  

 

  

 

  

Basic and diluted

$

(1.04)

$

(1.11)

$

(2.83)

$

(1.89)

See accompanying notes to unaudited condensed consolidated financial statements.

4


Chicken Soup for the Soul Entertainment, Inc

Condensed Consolidated Statements of Equity

(unaudited)

Preferred Stock

Common Stock

Subsidiary

Class A

Class B

Additional

convertible

Par

Par

Par

Paid-In

Treasury

Preferred

Noncontrolling

    

Shares

    

Value

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Deficit

    

Stock

    

Stock

    

Interests

    

Total

Balance, December 31, 2019 (audited)

1,599,002

$

160

4,259,920

$

425

7,813,938

$

782

$

87,610,030

$

(32,695,629)

$

(632,729)

$

36,350,000

$

387,663

$

91,020,702

Share based compensation - stock options

 

 

 

  

 

  

 

  

 

  

 

213,585

 

  

 

  

 

  

 

  

213,585

Share based compensation - common stock

31,250

31,250

Shares issued to directors

 

 

 

7,805

 

1

 

  

 

  

 

(1)

 

  

 

  

 

  

 

  

Dividends

 

 

 

  

 

  

 

  

 

  

 

  

 

(974,272)

 

  

 

  

 

  

(974,272)

Net loss attributable to noncontrolling interest

(52,854)

(52,854)

Net loss

 

 

 

  

 

  

 

  

 

  

 

  

 

(10,453,108)

 

  

 

  

 

  

(10,453,108)

Balance, March 31, 2020

 

1,599,002

$

160

 

4,267,725

$

426

 

7,813,938

$

782

$

87,854,864

$

(44,123,009)

$

(632,729)

$

36,350,000

$

334,809

$

79,785,303

Share based compensation - stock options

 

 

 

  

 

  

 

  

 

  

 

198,023

 

  

 

  

 

  

 

  

198,023

Share based compensation - common stock

31,250

31,250

Dividends

(974,272)

(974,272)

Net loss attributable to noncontrolling interest

(43,889)

(43,889)

Net loss

 

(9,035,855)

(9,035,855)

Balance, June 30, 2020

 

1,599,002

$

160

 

4,267,725

$

426

 

7,813,938

$

782

$

88,084,137

$

(54,133,136)

$

(632,729)

$

36,350,000

$

290,920

$

69,960,560

Share based compensation - stock options

 

 

 

  

 

  

 

  

 

  

 

230,123

 

  

 

  

 

  

 

  

230,123

Share based compensation - common stock

 

116,650

116,650

Stock options exercised

 

10,000

1

74,999

75,000

Shares issued to directors

 

6,470

1

(1)

Common stock grant

 

10,000

1

(1)

Issuance of common stock

625,000

63

4,999,937

5,000,000

Issuance of preferred stock, net

 

133,137

13

2,992,774

2,992,787

Dividends

(1,017,691)

(1,017,691)

Net loss attributable to noncontrolling interest

(73,135)

(73,135)

Net loss

 

(12,032,009)

(12,032,009)

Balance, September 30, 2020

1,732,139

$

173

4,919,195

$

492

7,813,938

$

782

$

96,498,618

$

(67,182,836)

$

(632,729)

$

36,350,000

$

217,785

$

65,252,285

See accompanying notes to unaudited condensed consolidated financial statements.

5


Preferred Stock

Common Stock

Subsidiary

Class A

Class B

Additional

Retained

convertible

Par

Par

Par

Paid-In

(Deficit)

Treasury

Preferred

Noncontrolling

    

Shares

    

Value

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Earnings

    

Stock

    

Stock

Interests

Total

Balance, December 31, 2018  (audited)

918,497

$

92

4,227,740

$

421

7,817,238

$

782

$

59,360,583

$

2,281,187

$

(632,729)

$

$

$

61,010,336

Share based compensation - stock options

 

 

 

  

 

  

 

  

 

  

 

190,847

 

  

 

  

 

190,847

Share based compensation - common stock

25,000

25,000

Issuance of preferred stock

140,000

 

14

3,499,986

3,500,000

Preferred stock issuance costs

(288,160)

(288,160)

Dividends

 

 

 

 

 

  

 

  

 

 

(603,307)

 

  

 

(603,307)

Net loss

 

 

 

  

 

  

 

  

 

  

 

  

 

(2,773,430)

 

  

 

(2,773,430)

Balance, March 31, 2019

 

1,058,497

$

106

 

4,227,740

$

421

 

7,817,238

$

782

$

62,788,256

$

(1,095,550)

$

(632,729)

$

$

$

61,061,286

Share based compensation - stock options

 

 

  

 

  

 

  

 

  

 

250,097

 

  

 

  

 

250,097

Share based compensation - common stock

25,000

25,000

Issuance of preferred stock

279,505

28

6,987,597

6,987,625

Preferred stock issuance costs

(538,295)

(538,295)

Stock options exercised

16,666

2

160,159

160,161

Conversion of class B shares to class A shares

3,300

(3,300)

Dividends

(797,981)

(797,981)

Crackle business combination

15,322,531

36,350,000

521,945

52,194,476

Net income attributable to noncontrolling interest

513

513

Net loss

 

(5,118,096)

(5,118,096)

Balance, June 30, 2019

 

1,338,002

$

134

 

4,247,706

$

423

 

7,813,938

$

782

$

84,995,345

$

(7,011,627)

$

(632,729)

$

36,350,000

$

522,458

$

114,224,786

Share based compensation - stock options

 

 

 

  

 

  

 

  

 

  

 

236,351

 

  

 

  

 

  

 

  

236,351

Issuance of preferred stock

 

261,000

 

26

 

 

 

  

 

  

 

6,524,974

 

  

 

  

 

  

 

  

6,525,000

Preferred stock issuance costs

 

 

  

 

  

 

  

 

  

 

(663,251)

 

 

  

 

  

 

  

(663,251)

Shares issued to directors

 

 

6,956

 

1

 

  

 

  

 

25,000

 

 

  

 

  

 

  

25,001

Employee stock grant

 

 

5,258

 

1

 

 

 

41,854

 

 

 

  

 

  

41,855

Dividends

(929,387)

(929,387)

Crackle business combination

 

 

 

 

 

 

(3,083,130)

 

  

 

 

 

(3,083,130)

Net loss attributable to noncontrolling interest

(37,473)

(37,473)

Net loss

 

(12,394,388)

(12,394,388)

Balance, September 30, 2019

1,599,002

$

160

4,259,920

$

425

7,813,938

$

782

$

88,077,143

$

(20,335,402)

$

(632,729)

$

36,350,000

$

484,985

$

103,945,364

See accompanying notes to unaudited condensed consolidated financial statements.

6


Chicken Soup for the Soul Entertainment, Inc

Condensed Consolidated Statements of Cash Flows

(unaudited)

Nine months ended September 30, 

    

2020

    

2019

Cash flows from Operating Activities:

  

  

Net loss

$

(31,690,850)

$

(20,322,874)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

  

Share-based compensation

 

820,881

 

794,149

Amortization of programming costs and rights

 

216,486

 

451,050

Amortization of deferred financing costs

 

65,905

 

72,063

Amortization and depreciation of intangibles, property and equipment

 

15,661,774

 

5,631,136

Amortization of film library

 

16,781,685

 

3,475,471

Bad debt and video return expense

 

4,072,785

 

1,241,243

Realized and unrealized losses on marketable securities

 

183,815

 

Loss on debt extinguishment

169,219

350,691

Other non-operating income

(5,530,650)

Deferred income taxes

 

 

452,000

Changes in operating assets and liabilities:

 

  

 

Trade accounts receivable

 

5,816,310

 

(16,132,075)

Prepaid expenses and other assets

 

(2,691,799)

 

(933,210)

Programming costs and rights

 

(5,805,317)

 

(1,622,067)

Film library

 

(20,409,732)

 

(10,134,353)

Accounts payable, accrued expenses and other payables

 

(7,000,310)

 

17,797,811

Film library acquisition and programming obligations

 

6,093,737

 

3,019,500

Accrued participation costs

 

7,827,587

 

(230,564)

Other liabilities

 

1,607,442

 

(278,870)

Net cash used in operating activities

 

(13,811,032)

 

(16,368,899)

Cash flows from Investing Activities:

 

  

 

  

Expenditures for property and equipment

 

(2,811,225)

 

Sales of marketable securities

640,510

Decrease (increase) in due from affiliated companies

 

1,561,108

 

(5,796,629)

Net cash used in investing activities

 

(609,607)

 

(5,796,629)

Cash flows from Financing Activities:

  

  

Proceeds from commercial loan

 

 

8,665,000

Repayments of commercial loan

 

(15,200,000)

 

(666,667)

Repayments of revolving credit facility

(2,500,000)

Proceeds from 9.50% notes due 2025, net

20,995,000

Proceeds from film acquisition advance

8,820,000

Proceeds from issuance of Class A common stock

5,000,000

Proceeds from issuance of common stock under equity plans

 

75,000

 

160,161

Proceeds from issuance of Series A preferred stock, net

2,992,787

15,522,919

Dividends paid to preferred stockholders

(2,966,235)

(2,330,675)

Payment of deferred financing costs

 

 

(192,004)

Net cash provided by financing activities

 

17,216,552

 

21,158,734

Net increase (decrease) in cash and cash equivalents

 

2,795,913

 

(1,006,794)

Cash and cash equivalents at beginning of period

 

6,447,402

 

7,201,758

Cash and cash equivalents at end of the period

$

9,243,315

$

6,194,964

Supplemental data:

 

  

 

  

Interest paid

$

977,925

$

376,881

Non-cash investing activities:

Property and equipment in accounts payable and accrued expenses

$

2,400,000

$

Crackle Plus business combination

$

$

51,672,531

See accompanying notes to unaudited condensed consolidated financial statements.

7


Table of Contents

Chicken Soup for the Soul Entertainment, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – Description of the Business

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

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

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

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

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

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

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

Note 3 – Recent Accounting Pronouncements

Recently Issued Accounting Standards

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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

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

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

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for public companies’ fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. Because the Company is an emerging growth company, adoption is not required until fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021 as recently voted and deferred by FASB. The Company is currently assessing the potential impact ASU 2016-02 will have on its consolidated financial statements. Based on the Company’s preliminary assessment, the impact of implementation is expected to have a material impact on its condensed consolidated financial statements. If adopted, the Company estimates the right-of-use lease asset and corresponding lease liability will each total approximately $15,600,000, respectively, as of September 30, 2020.  The Company does not expect adoption to have any material impact on its results from operations and financial condition.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Note 4 – Business Combination

The Company consummated the creation of its Crackle Plus subsidiary on May 14, 2019. In consideration for assets contributed to Crackle Plus by CPE Holdings, Inc. (“CPEH”), a Delaware corporation and affiliate of Sony Pictures Television Inc. (“Sony”), and Crackle, Inc., a Delaware corporation and wholly owned subsidiary of CPEH (“Crackle”), Crackle Plus issued to Crackle 37,000 units of preferred equity (“Preferred Units”) and 1,000 units of common equity (“Common Units”), which are now held by CPEH. In consideration for assets contributed to Crackle Plus by the Company, Crackle Plus issued to the Company 99,000 Common Units. From May 2020 to October 2020 (“Exercise Period”), CPEH will have the right to either convert its Preferred Units into Common Units of Crackle Plus or require us to purchase all, but not less than all, of its interest in Crackle Plus (“Put Option”). We would likely elect to pay the Put Option in cash or through the issuance of our 9.75% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) using a price per share of $25, unless we are able to raise sufficient cash to pay the Put Option in cash. Subject to certain limitations, in the event that CPEH hasn’t converted its Preferred Units into Common Units of Crackle Plus or exercised its Put Option, Crackle shall be deemed to have automatically exercised the Put Option on the last day of the Exercise Period.

As additional consideration to CPEH, the Company issued to CPEH warrants to purchase (a) Eight Hundred Thousand (800,000) shares of the Class A common stock of the Company at an exercise price of $8.13 per share (the “CSSE Class I Warrants”), (b) warrants to purchase One Million Two Hundred Thousand (1,200,000) shares of the Class A common stock of the Company at an exercise price of $9.67 per share, (the “CSSE Class II Warrants”); (c) warrants to purchase Three Hundred Eighty Thousand (380,000) shares of the Class A common stock of the Company at an exercise price of $11.61 per share, (the “CSSE Class III-A Warrants”); and (d) warrants to purchase One Million Six Hundred Twenty Thousand (1,620,000) shares of the Class A common stock of the Company at an exercise price of $11.61 per share, (the “CSSE Class III-B Warrants”). All the CSSE Warrants have a five-year term commencing on the closing and are exercisable at any time and from time to time during such term.

The Crackle Plus transaction was accounted for as a purchase of a business in accordance with FASB ASC 805, Business Combinations and the aggregate purchase price consideration of $51,672,531 has been allocated to assets acquired and liabilities assumed, based on management’s analysis and information received from an independent third-party appraisal.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

The initial purchase price allocation was preliminary and subject to change up to one year after the date of acquisition. The final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the date of the acquisition was as follows:

May 14, 2019

Accounts receivable, net

    

$

5,360,667

Prepaid expenses

 

892,200

Programming Rights

 

1,155,363

Goodwill

 

18,911,027

Brand Value

 

18,807,004

Customer User Base

 

21,194,641

Content Rights

 

1,708,270

Partner Agreements

 

4,005,714

Assets acquired

 

72,034,886

Accounts payable and accrued expenses

 

(13,061,494)

Programming Obligations

 

(7,300,861)

Liabilities assumed

 

(20,362,355)

Total purchase consideration