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Edited Transcript of CSSE.OQ earnings conference call or presentation 14-Aug-19 8:30pm GMT

Q2 2019 Chicken Soup for The Soul Entertainment Inc Earnings Call

COS COB Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Chicken Soup for The Soul Entertainment Inc earnings conference call or presentation Wednesday, August 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Mitchell

Chicken Soup for the Soul Entertainment, Inc. - CFO

* William J. Rouhana

Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO

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Conference Call Participants

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* Allen Robert Klee

Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst

* Austin William Moldow

Canaccord Genuity Corp., Research Division - Associate

* Daniel Louis Kurnos

The Benchmark Company, LLC, Research Division - MD

* Jon Robert Hickman

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst

* James Carbonara

Hayden IR, LLC - Partner of IR Strategy & Operations

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Presentation

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Operator [1]

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Hello, and welcome to Chicken Soup for the Soul Entertainment's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded It is now my pleasure to introduce James Carbonara of Hayden IR.

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James Carbonara, Hayden IR, LLC - Partner of IR Strategy & Operations [2]

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Thank you, and welcome. With me on the call today are William J. Rouhana, Chairman and Chief Executive Officer; and Chris Mitchell, Chief Financial Officer, to review results of the second quarter as well as a business update and an update on the Crackle Plus joint venture. Following this discussion, there will be a moderated Q&A session open to the participants on the call.

During this call, management will make forward-looking statements. These statements are based on the current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary text regarding forward-looking statements contained in the earnings release, which also applies to the content of this call.

As a reminder, on May 14, 2019, Chicken Soup for the Soul Entertainment completed the joint venture with Sony Pictures Television launching Crackle Plus. On today's call, management will make comments on certain GAAP-based and non-GAAP pro forma financial information of the combined company that includes Crackle's financial results for the relevant periods prior to the closing date as if the acquisition occurred on January 1, 2018.

Please refer to the company's recently filed Amendment No. 1 to the current report on Form 8-K/A filed with the Securities and Exchange Commission on July 30, 2019, for further details. If you have not had the chance to review this Form 8-K/A, now would be a good time to retrieve it.

I would now like to turn the call over to William Rouhana, Chairman and CEO. Bill, please go ahead.

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [3]

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Thanks, James. Good afternoon, everybody, and thanks for joining us today. We had an incredibly productive and busy quarter as we completed our joint venture with Sony creating Crackle Plus, which is the name of our online networks business, which includes Crackle, Popcornflix, Truli and Pivotshare. And in our financial statements, the results of Crackle Plus are listed as online networks.

So in addition to completing our joint venture, we implemented our plan to operate Crackle profitably and to generate cash flow from this division, and I'm going to go through the details of the results of that implementation in a minute. With the scale of Crackle Plus, we now have new ways we can generate revenue, reduce risk and increase profitability, and more on that later.

Now a bit about the implementation of our plan. Before we entered the joint venture with Sony, which officially closed on May 14, we had already identified a number of opportunities for cost savings, which enabled this very smooth integration. As a result, and as detailed in the 8-K/A filed on July 30 that James mentioned earlier and that we were required to file with the SEC, we have streamlined the organization, eliminating approximately $65.3 million in total annualized costs on estimated pro forma 2018 net revenue of $92.6 million.

As a result and as expected, Crackle Plus was EBITDA positive for us in the second quarter, even with just 45 days of control. And we believe the profitability of this unit will grow in the future. The 4 key areas we identified to reduce costs and improve margins were in technology, marketing, content and SG&A. Let me break this down further. In cost of goods sold, we managed to get technology costs decreased from $18 million annually to about $5 million as a result of working with Sony to consolidate technology costs on to Sony's shared platform.

We also replaced fixed fee content agreements with revenue sharing agreements between Crackle Plus, CSSE and Sony. In marketing, we excluded Sony's marketing agreements from transferred assets, thereby freeing ourselves from their marketing commitments. We are utilizing our owned and operated networks and brand-related social media as a more cost-effective means of marketing. In addition, we have received substantial marketing commitments from our platform partners, which we'll use in the near future to drive growth.

In content, we now have access to the Sony library on a revenue share basis pursuant to a master agreement, as compared to the previous approach which included substantial guarantees for the acquisition of content. In addition, the thousands of hours of television and film rights that we have in Screen Media and in Chicken Soup for the Soul Entertainment are also being made available to our online networks business.

An interesting side note is that since we have acquired Crackle, we have been inundated with requests from major media companies and producers to exhibit their content on our online networks. And we have tasked Screen Media with the job of acquiring AVOD rights across the industry. In the SG&A area, duplicative roles in the operations teams were eliminated, and we eliminated Sony's corporate overhead allocation expenses not applicable to the Crackle Plus business.

These measures resulted in estimated pro forma SG&A annual cost reductions of $35.6 million. To provide some context to all of these numbers, on a pro forma net revenue of $92.6 million for 2018, we would have generated GAAP EPS of $0.02 per diluted share versus a reported loss of $0.16, and our adjusted EBITDA would have been slightly more than $25 million, all as outlined in the 8-K/A. When we released our first quarter results, we provided you with a look at the results of the combined companies as though we had achieved our operating plan in the first quarter of 2019.

The combined entities generated net revenue of $17 million, operating profit of over $987,000 and adjusted EBITDA of $2.4 million. While we haven't provided the same pro forma detail in our press release and 10-Q for the second quarter because we actually include half a quarter of Crackle in the real numbers, when we look at the second quarter the pro forma Q2 revenue would have been over $21 million. And the pro forma adjusted EBITDA calculated using the methodology in our 8-K/A, combining it with the actual results and looking at it the way we did in our last release, would have approached $3 million.

Now shifting gears to actual second quarter results for 2019 filed today in our 10-Q. As I stated in our previous call, we expected reported second quarter results to be much better than the actual first quarter results, and as you can see from today's reported results, second quarter revenue and adjusted EBITDA grew significantly year-over-year and sequentially. Given that we only had 45 days of Crackle in the quarter, we anticipate that the third quarter results should be stronger than the second quarter with a full 90 days of operating Crackle. Second quarter net revenue was $12.2 million, which is a record quarter for us, and adjusted EBITDA was $1.3 million. Chris will go into more detail about all of this shortly.

Let me talk to you a little bit about our 3 business areas. I'm going to begin with online networks. The scale of the combined organization we now have is attracting increased interest from advertisers, increased upfront deals, and not surprisingly, strategic partners. We are now one of the largest ad-supported networks in the industry and have solidified our position as a leader in the high-growth AVOD business. We've created a unique model with advantages that will allow us to continue to expand this business.

With a combined audience of nearly 10 million monthly active users on our owned and operated networks plus millions more on our ad rep network, we see a path to profitable growth. We're going to begin sharing some new key metrics that we believe are more valuable to our shareholders and potential investors. Even though many of our competitors in the industry are focused on monthly active users, the number of users does not directly translate to revenue, which is why we are now focusing on registered users, minutes streamed and ad impressions served. Each of these directly relates to revenue and profitability.

In the second quarter, we had over 2.6 billion minutes streamed on our online networks. We had 680 million ad impressions on our owned and operated networks. And our average eCPMs were $19. We have a world-class group of advertisers that are serviced by our first-class sales organization, including companies like Chrysler, Facebook, GEICO, Lexus, Unilever, the U.S. Army and Verizon. We have significant upfront commitments signed and expected from advertisers and agencies approaching $70 million for this year and next. And then of course, we have scatter and programmatic ad revenue as well.

All of this is made possible by our over 26 million registered users, our over 46,000 combined hours of programming, our 90 content partners -- partnerships on our combined VOD services, and the demographic composition of our audience. Our audience gender skews slightly male. Over 1/2 of our viewers have household income in excess of $60,000. And the age of our viewers ranges from 18 to 65 and is surprisingly evenly distributed across the years.

Moving to our content strategy, the vast majority of our content for the online network business is now made available to us on a revenue-sharing basis. This reduce our costs. There was an interesting statistic from Nielsen in The Hollywood Reporter last month that pointed out that viewers spend the majority of their time watching library titles on Netflix rather than Netflix originals. In fact, it's a 70-30 split, library to originals.

Through the Crackle Plus joint venture, we have access to the Sony library, which I'm sure you can imagine is quite large as well as thousands of titles from our Screen Media library and contracts with other major content providers like Paramount. In furtherance of the expansion of our library titles, we have charged Screen Media with the job of acquiring AVOD rights from across the media industry.

In just 2 months, we have finalized 13 agreements and have over a dozen in deal memo stage, which all together include thousands of hours of programming. We have initiated conversations with over 70 media companies, including some of the world's biggest. We've developed a plan to continue to have exclusive and original content available on our online networks, and we will do this by utilizing our distribution and production business to obtain AVOD rights on a favorable basis as we've always done.

A couple of examples may help explain this. We have now decided to release Going From Broke, the Ashton Kutcher executive produced series, as an original on Crackle and Popcornflix this October. This will make an original series available exclusively to our online networks that has been fully funded by sponsors. In November, we will make The Man Who Killed Don Quixote available exclusively on our VOD networks. This is a Terry Gilliam film, 20 years in the making, with a passionate Monty Python following. We chose the timing of this release to coincide with the new Star Wars release since Adam Driver stars in both films. We have already recovered much of the cost of this film from release in other media. We expect to be able to repeat both of these models time and time again.

Turning to our other business areas, we'll start with television and film distribution. By the end of Q2, we had released 12 titles. We have upcoming film releases such as: Corporate Animals, starring Demi Moore and Ed Helms, in September; Cold Blood, starring Jean Reno; Memory: Origin of Alien in October, which is a documentary of the sci-fi classic, Alien, that is celebrating its 40th anniversary this year; Crown Vic in October, which was produced by Alec Baldwin and stars Thomas Jane; the action thriller Grand Isle, starring Nicolas Cage and Kelsey Grammer, in December; and some others.

The acquisition of these films further supports our efforts to acquire content cost effectively, and most will be made available on exclusive basis on our owned and operating networks. We expect the impact of these films and other film acquisitions we currently have in the pipeline to increase second half revenue and EBITDA and expect overall that Screen Media will perform better than last year. On the flip side, our content acquisition efforts at Screen Media are enhanced by our ownership of our online networks, as we are one of the few places producers can go to obtain meaningful AVOD revenue for their films and TV series.

In television and short-form video production, we began production on the second season of Chicken Soup for the Soul’s Animal Tales. Our business model for this segment is to limit operational and financial risk by producing content once we have secured sponsorships or commitments that exceed the production costs. This strategy generates a reliable pipeline of content for our online network business with minimal financial risk. We currently have 13 series in various stages of development with full or partial sponsor commitments on many of them. We are deliberately moving slowly in this area as it is our preference to develop separate production entities in partnership with major producers designed to feed our Screen Media and online network businesses.

We feel this structure gives us the ability to scale more quickly with limited risk. We are following the pattern established by other major media companies by allying ourselves with talented producers to accelerate production activity. And we will not only continue to cover nonscripted programming, but we will use these vehicles to begin to facilitate production of scripted series and films. We plan to do this by creating entities which we will help seed finance in exchange for distribution rights for Screen Media and online networks. The net effect will be that we will use our distribution capability to facilitate the creation of more production with less risk while we retain partial ownership of content that is produced.

All of this is only possible because of the acquisition of Crackle, which gives us an ability to guarantee a certain amount of AVOD revenue for productions to be created by these entities. This will also increase the flow of product for Screen Media. The Crackle Plus division remains our primary focus given its ability to drive revenue and profit across all our business areas. Crackle sales force has a solid pipeline, great relationships, and they are doing a wonderful job in discussions to add new ad rep network partners and sponsors. The Crackle Plus joint venture has positioned Chicken Soup for the Soul Entertainment as a leader in the AVOD space and allows us to effectively tie all of our operating areas together.

One final thought about the AVOD business. A common misconception is that the OTT space is dominated by subscription-based players. But a recent Parks Associates report pointed out that SVOD revenue only makes up 46% of the OTT market. AVOD currently holds 18% of the market, and that number is growing and growing quickly. Interestingly, an IAB report indicates that 45% of the people who watch streaming television watch ad-supported OTT most of the time. There are now connected TVs in over 97 million households in the country. The result of all of this is that ad spending in the AVOD OTT space is estimated to have increased 54% from 2017 to 2018 and by another 40% from 2018 to 2019, all of which explains why we are so excited to be a key player in this space and why we will continue to add tuck-in acquisitions to continue to grow our VOD offerings with the goal of significantly growing revenue and profitability from this area next year.

With that, I'll turn the call over to Chris Mitchell, our CFO, to review the reported second quarter financial results. Chris?

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Christopher Mitchell, Chicken Soup for the Soul Entertainment, Inc. - CFO [4]

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Thank you, Bill. We delivered on our expectation to significantly increase revenue in the second quarter. Total revenue for Q2 2019 was $12.2 million compared to $3.2 million last year. The increase was primarily the result of adding 45 days of Crackle results. Online networks, which again includes the Crackle Plus joint venture, generated $10 million in revenue in Q2 2019 compared to $899,000 in the year ago period. Television and film distribution generated revenue of $2 million in Q2 2019 compared to $2 million in Q2 2018. Television and short-form video production generated revenue of $227,000 in Q2 2019 compared to $230,000 in Q2 2018.

As Bill said, we have finally set a network release for Going From Broke for October on our online networks, and we're still working on how we want to release the fourth season of Chicken Soup for the Soul's Hidden Heroes. We believe we can get significantly more viewers by streaming on our online networks as opposed to airing on cable and thereby generate more revenue from these series. For CSSE as a whole, gross profit for the quarter ended June 30, 2019, was $3.6 million or 30% of total revenue compared to $1.2 million or 39% of total revenue in the year ago period.

Operating loss for the quarter ended June 30, 2019, was $3 million compared to an operating loss of $1.6 million for the year ago period. Without the noncash charges -- without certain noncash charges, operating profit would have been $500,000. Adjusted EBITDA for Q2 2019 was $1.3 million compared to $212,000 for the year ago period.

Turning to our balance sheet. At June 30, 2019, the company had cash and cash equivalents of $5.2 million compared to $7.3 million at December 31, 2018. We had outstanding debt of $7.1 million at June 30, 2019, compared to outstanding debt of $7.6 million as of December 31, 2018. It probably makes sense to take a few minutes to review the balance sheet in light of the Crackle joint venture closing.

Our total assets increased to $157.7 million, and our net worth increased to $113.7 million, which interestingly exceeds our current market value. Finally, I should mention Crackle is now generating positive cash flow, we have filed a registration statement for a small CSSEP preferred stock offering, and also expect to close a $16 million credit facility next week.

I'll now turn the call back over to Bill.

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [5]

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Thanks, Chris. Operator, we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Dan Kurnos with The Benchmark Company.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [2]

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Nice start, Bill, with Crackle here. A couple questions. Just a clarification obviously so people understand. Just looking at the pro forma numbers that we all have, just want to be clear here, Bill. The $92.6 million and the $25 million that you quoted, those are clean post pulling out any nonprofitable revenue contracts or having realigned your contracts that was the baseline that you set in 2018. Is that correct?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [3]

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That is correct.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [4]

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Okay. So a couple things here. Just one point I wanted to touch on that you made in your prepared remarks just around still focusing on production as a funnel for content. I want to get sort of a sense from you on how much of the content over time do you think you own versus license? And given some of the changes that we've seen in the marketplace, obviously the consolidation notably yesterday afternoon with Viacom and CBS, does that impact your ability to do rev share deals? How long are those deals? And how do you think that impacts the marketplace?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [5]

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Yes. That's a complicated question you've just asked, Dan, but that's not surprising. We -- obviously, we're watching what's going on in terms of consolidation in our space, like everybody else. What's interesting to me is that in the first 45 days that we've owned Crackle, we've had over 70 incoming requests for showing people's content on our networks. And these are -- some of these are major, major media companies. So I don't think that we're going to see any near-term difficulty getting access to content on a revenue share basis. Over the long term that may not even be the best strategy for the business, once we have built enough critical mass so that we know precisely what we will generate from specific shows. And we obviously have the data now that we will start to watch very carefully to see what a typical show generates. For example, Going From Broke, the reason that we elected to put it on Crackle is when we looked at numbers, there's a good reason to believe we could generate a couple of million plus dollars of revenue from exhibiting it on our owned and operated networks, whereas we would not have gotten as much for that on a cable network.

So there are -- there is a point at which owning the content is, of course, advantageous. Right now, I think the ability to do these rev share deals is abundant. It's plentiful. We can do them. And they are the right way to go. So you asked another question lurking in there, which is really what's the value? What's going on in terms of the value of these streaming media properties? I noted that when CBS and Viacom made their announcement, and they said they weren't going to buy anything else, they specifically excepted from that statement streaming video and direct-to-consumer products. Because we are in the part of the industry that people absolutely need to figure out how to get into, and we're seeing that through the way which we've been approached by people since the date of the closing. So it's quite clear to me that we are in the right place. And exactly what that translates into strategically, I think, is a very interesting and open question.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [6]

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And then the question just originally on sort of your balance of preferred -- of owning versus licensing. Do you know how that kind of is? How you expect that to be right now in terms of a percentage? And then -- maybe it is unfair to ask, but since you kind of just opened the door to it, your willingness to implement either paywalls or gates. Do you need to still scale up significantly more to get there? Or do you have kind of a freemium plan laid out or ad-supported-to-pay channel?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [7]

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No. I think there is no freemium plan. I don't think we'll put up gates. I think we'll grow a real AVOD business as quickly as possible. That's to me the best use of our time, through these tuck-in acquisitions I've talked about before. The split of content -- I think it's going to be overwhelmingly rev share and library content for quite some time. That's one of the reasons I mentioned the 70-30 split on Netflix even today. I don't know about all of you, but I found that interesting. It wasn't intuitively obvious to me that 70% of the viewing on Netflix is still the old library stuff. So there is still -- there is a big appetite for that kind of content. We have access to tons of it, and I think that's the right way to build the business right now.

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Operator [8]

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And our next question comes from the line of Austin Moldow with Canaccord.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [9]

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I wanted to lead off with one kind of a two-parter about your ad sales strategy. If you can just sort of talk through with a few more specifics about how you view your ad sales between direct and programmatic? And sort of as a corollary to that, your eCM (sic) [eCPM] sounded pretty high, which is great. Wondering if you can give color on why you think it is so high.

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [10]

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Thanks for that question, Austin. That's a good one. We are overwhelmingly direct sales and what we call resellers. And language being a barrier to understanding in this particular business with people using different words to mean different things -- to mean the same thing, let me try to explain what I'm talking about. As I listed in my part of the presentation, we have direct selling relationships that go to the who's who of American corporations. But we also work very closely with companies that have major local sales forces to give them DMA-specific targeted viewers that they can advertise -- that they can sell advertisements to. And so we have 2 ways we do what you would call direct selling: ourselves and through very targeted local sales organizations. Some of these are the biggest companies in our industry who have a need for more local ad inventory. And because of that, we do almost no programmatic ad sales. That to me is a key differentiator between us, first our -- and others: our ability to do those local sales and, secondly, the fact that we -- between the local sales and the direct sales to major national companies, we have an ability to sell the vast majority of our inventory and more. That directly translates into the $19, just so you know. And we are not finding -- we're not trending down the way programmatic ad sales are trending.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [11]

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Got it. And as a follow up, do you then sort of push back on what the industry or the ad tech industry generally talks about with programmatic, of it being sort of more efficient, higher ROI, better targeting, and sort of the -- if you look out a long time, that's where the majority of ad sales is going to go?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [12]

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So I think there's a couple of different ideas lurking there. So let me parse the question. In terms of efficiency, when one -- there's a couple of things about efficiency. One is reaching the right customer, one is having an ease of ability to actually deliver your ads. So we do allow our direct sales customers to use programmatic delivery in order to not have them have additional head count in order to actually implement their ad buys with us. But the second part of the question, which is better targeting, which is the argument that the programmatic guys make, you can achieve in more than one way. And we have more than 26 million people who are registered users of our -- on our networks, which gives us information about those people that most -- I think I dare say none of our competitors actually have, except if they use programmatic ad type selling. So we've created an opportunity for ourselves to have a higher value customer through the registration of our customers. This is a relatively unique position we're in.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [13]

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Got it. And maybe a last question, if possible. What kind of information exactly are you talking about with your registered users? And do you view it as any kind of a friction point to require what sounds like maybe a more in-depth registration process?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [14]

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Yes. I think naturally enough, our apps have been downloaded 127 million times and only 26 million -- I say "only" -- only 26 million people have actually registered. So 1 out of 5 people are registering, not 4 out of 5. But nevertheless, 26 million registered users is larger than any of the viewer counts you've heard from anybody else in the industry. It's larger than Pluto, it's larger than Tubi, not larger than Roku, but it is a very large number. And so we have a built-in base there of people who have taken the time to register and around whom we can give better data. I am not going to tell you all the data that we have because I don't want anyone to know.

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Operator [15]

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And our next question comes from the line of Allen Klee with Maxim Group.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [16]

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First off, can you tell us how much of preferreds you had outstanding as of the end of the quarter?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [17]

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$30 million, roughly, Allen.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [18]

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Okay. And then how -- another question is more like theoretical, I guess. But within -- where you have libraries, where you have your movies and your TV shows, how do you think about the economics of the return you generate from that if you also factor in how much you feel you need to spend on new content for -- just as a cost of doing business?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [19]

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I'm not sure I really understand the question. So help me a little bit by...

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [20]

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I'm trying to understand see -- it can have good margins, but then if you -- like some -- like the streaming guys that are in a content war, none of them are making money because they are spending so much always on new content. And how do you say that -- how do you think about that or maybe how you're different than that?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [21]

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Okay. That helps. When I was talking about facilitating the creation of these production entities that I mentioned in our -- in the last part of my talk, what I was really talking about was trying to use the fact that we have access to AVOD revenue, which is something that's scarce for producers. Because if you're a producer today, where do you go to generate AVOD revenue? You're not going to go to Pluto because that's owned by CBS Viacom. You could go to Tubi and you can go to us. And really that's about as many good places as you have of any scale. Because every bit of revenue matters when you're making content, the fact that we are a gatekeeper to one of the key places that one can get a return and the fastest-growing portion of that -- of the possible return, areas of return -- makes us a critical place for people to get access to. That gives us an ability to become a distributor, vis-à-vis content rather than to have to pay the cost of it and to basically work off of other people's equity, in other words, get the benefit of the last guy in and the first guy out as financial people like to think about things.

That gives us very high returns because we're putting up a small percentage of the overall cost of content and getting a disproportionate share of the upside through our distribution fees and our use of the content on our networks. We didn't invent this. This is what major media companies have done for years and years and years. So we're just taking that approach. Rather than saying we're just going to make all this stuff and pay 100% of it, the way the streaming guys are doing right now, which -- I'm not entirely sure I understand why they are doing it, but they're doing it -- I see this as a better way to facilitate content, and by allying with major producers, and we'll tell you about these people in the future as we finalize these arrangements, we're going to be able to do both scripted and nonscripted programming in an advantageous economic way and have a very high return on it.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [22]

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Okay. My last question is, of the 5 TV series that you've talked about historically and that are in your 10-Q, do you expect all 5 of them to go into production and generate revenue in 2019?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [23]

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No. I don't expect all 5 of them deal into production in 2019. I really don't know yet what's going to go into production in 2019 because I am more focused on creating the ability to produce much greater amounts of content through these 2 vehicles I've been talking about. And I am saving some of the rights that we have and some of the information we have on the -- some of the relationships we have on the 13 series that we already have in development to try and put them into this new -- into the unscripted portion of these new companies.

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Operator [24]

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(Operator Instructions) Our next question comes from the line of Jon Hickman with Ladenburg.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [25]

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Can you hear me now?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [26]

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That's okay.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [27]

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I was just wondering if you could comment a little bit on -- so I know you have the preferred stock that you can use from time to time, but how do you -- like how are you feeling about your overall balance sheet at the moment, assuming you want to continue to do tuck-in acquisitions?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [28]

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Yes. I'm feeling good about by our overall balance sheet. As Chris pointed out, we've grown it considerably. The net worth is now over $113 million. And neither of us could resist pointing out that it was -- that our net worth is higher than our market cap. But our business now is cash flow positive. We are going to finish off this little bit of preferred that we have left to offer, and we're going to enter into our new bank agreement. I think both of those things will be done in the next week.

Between the combination of cash flow and those things, we're in pretty good shape for the foreseeable future. As far as the acquisitions go, most of the tuck-in acquisitions we're looking at, Jon, actually pay for themselves. And the primary reason for that is because we're buying guys who are getting $8 or $9 CPMs. Austin's comment earlier about $19 being a good number, I know why he said that, because we know that the programmatic number for some of the smaller guys can be $8 or $9. But if we buy $8 or $9 CPM businesses, move them onto our platform and get $19, you can see there is a lot of room for very profitable arbitrage there, which is immediately cash flow positive and which essentially can pay for itself.

So that's really the way we're -- the deals we're negotiating right now are structured. They are self-funded, and they are profitable from day 1 because of that arbitrage, among other things. And there are quite a few of those out there. The bigger ones -- if we want to do another big one like a Crackle, obviously, you know we'll be looking at those, but there we'll -- I mean we'll probably make life more complicated again because we're unlikely to that as a straightaway acquisition. We're much more likely to find a way to deliver value to somebody other than just money. I mean that's been our way of doing things, as you know.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [29]

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So could you -- just a couple of numbers. How many direct sales guys do you have on the ad side?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [30]

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20-plus.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [31]

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20-plus. And what's the overall employee count now with Crackle in there?

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William J. Rouhana, Chicken Soup for the Soul Entertainment, Inc. - Chairman & CEO [32]

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It's about 90 direct employees in entertainment. Thank you, all, for joining us today. Operator, I think as far as I can tell, we're done.

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Operator [33]

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Correct. Ladies and gentlemen, that wraps up the question-and-answer session. We'd like to thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.