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CSSE: CSSE Shows Crackle How to Go From Broke

By Lisa Thompson



Mirroring its new original content show Going From Broke, Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) has given Crackle a financial makeover and is on the cusp of bring an entity that was losing $50 million a year to sustainable profitable growth in a few short months. This huge undertaking was achieved by slashing original content spending and corporate overhead while attempting to smooth revenues and reducing production risk. No doubt one might expect a few bumps in the road.

Q3 2019 Results

Chicken Soup for the Soul Entertainment came in with Q3 results below forecasts presenting an opportunity for investors to get involved with the stock. CSSE the only public company other than Roku and Netflix with revenues almost entirely from OTT streaming. It also has a large market share in the AVOD business. It should benefit from the trend in cord cutting while avoiding taking fire in the subscription-based (SVOD) wars. No doubt it was unrealistic to expect that absorbing Crackle into Chicken Soup for the Soul Entertainment would be seamless. So no one should be surprised that Q3 results “missed expectations,” which, in all honesty, were created with little insight into the future business model specifics. The Q3 2019 results just reported was of the first full quarter combined with Sony’s Crackle. Revenues for the quarter were $17.0 million versus $6.6 million last year. From Q2 to Q3 there was a 40% sequential increase. Revenue was below expectations for two reasons: a technical problem with the Crackle app on Roku that was corrected before the quarter ended, and a delay of the acquisition of films in the Foresight Unlimited film library which delayed expected revenue recognition.

Online revenues, (which are now the numbers for the new Crackle Plus,) were reported as $14.4 million. In Q2, pro forma online revenues were $18.8 million, which means they declined 23% sequentially due to seasonality plus this technical issue that caused the new version of the Crackle app on Roku to keep crashing. The bug is believed to have lost $1 million in revenues for CSSE in Q3.

Distribution revenues were only $2.6 million compared to $2.5 million a year ago. Built into the Q3 forecast had been $4 million for presales for films acquired from the Foresight film library that was expected to close in Q3 but slipped to October 28, 2019, in Q4.

Q3 Expenses

Expenses were also higher than forecast. Gross margin before amortization of the film library declined from 78% to 28% for the quarter. After amortization, gross margin was down from 61% to 19%. Management believes this is temporary due to the revenue mix which was heavy on lower margin online revenues, and that margins will go back up to their historical rates in future quarters.

Operating expenses grew from $2.9 million in Q3 2018 to $34.6 million this year (with a full quarter of Crackle.) This was up $2.6 sequentially on a pro forma basis. While SG&A did go up due to a full quarter of Crackle and increased advertising, the biggest surprise was amortization, which was the greatest cause of the earnings miss. This number was an unexpected $4.7 million. Management had originally thought that the value for the Crackle brand would have an unlimited life, but the auditors decided on seven years making that number alone $3.4 million higher than expected. We expect that it should stay at or near the $4.7 million level. This difference of course does not affect EBITDA, the metric on which the company is being run.

The GAAP loss per share for Q3 2019 was $1.11 versus a loss $0.01 a year ago. On a non-GAAP basis with one-time items and stock based compensation removed, the EPS loss was $1.18 in Q3 2019 versus breakeven in Q3 2018. Shares outstanding increased to 12.0 million versus 11.6 million last year or 3.6%.

Adjusted EBITDA for the quarter was a loss of $372,000 versus $3.1 million a year ago. The company expects to be adding cash next quarter and going forward.

Balance Sheet

CSSE ended the quarter with $6.2 million in cash and $15.8 million in debt compared to $4.5 million and $7.1 million in the June quarter. Since then it has been generating cash and as of November 13th, it had $10 million in cash on hand.

Subsequent Events

Creation of Landmark Studio Group

On Oct. 15, 2019 CSSE launched of Landmark Studio Group in partnership with David Ozer. David founded IDW Entertainment and was its president from 2013-2018, where he developed, produced, and distributed content for a global audience. Landmark will develop, produce, distribute, and own all of its content. It will be independent, and be able to sell its content to any network or platform, while also developing and producing original content for Crackle. Landmark will control all worldwide rights and will distribute through Screen Media division. In addition to producing various stand-up comedy specials and animated series, Landmark has several television and film projects in development.

Launch of Going From Broke

Its original content, the episode series Going From Broke, produced by Ashton Kutcher, launched October 17th and had 5 million views in only four weeks. The series has already generated at an estimated $0.5 million in ad revenue on Crackle to date. The series has been highly profitable for CSSE as the full production costs were paid for by the corporate sponsors. Despite its success, there has been no decision made as to whether any more episodes will be produced.

Purchase of Foresight Unlimited Films

On October 28th, CSSE completed the purchase of films from Foresight Unlimited and owner and producer Mark Damon. These assets, purchased for $2 million in cash, included 14 completed motion pictures and 2 motion pictures that are or will be in production. In addition, Screen Media Ventures created a new Foresight Division to be led by Mark Damon. In addition to the cash, during each of the two years following closing, Mr. Damon will $900,000 per year of Class A common and can earn more based on performance. The biggest hit in this library of is Lone Survivor.


We are maintaining $105 million revenues for 2020 for now with upward revision possible. This assumes that the online business only grows 20% for the year, which we imagine to be conservative. Our EPS estimate has been revised down due to the increased number for amortization. It is now a GAAP loss of $1.80 per share, however the adjusted EBITDA estimate of $30 million remains the same.

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