Chicken Soup for the Soul Entertainment, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Chicken Soup for the Soul Entertainment second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question-and-answer session, and to ask a question at that time, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jeff Matejka. Thank you, and please go ahead, sir.

Thank you and welcome. With me on the call today are William J. Rohana, Chairman and Chief Executive Officer, and Chris Mitchell, Chief Financial Officer, to review the results of the 2020 second quarter as well as provide a business update. 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. Forward-looking statements include but are not limited to statements regarding expectations, intentions, and strategies regarding the future. Included in these risks are forward-looking statements based on management's current expectations and assumptions and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from projected results. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. Please refer to the cautionary text regarding forward-looking statements contained in the earnings release, which also applies to the content of this call. Additional risk disclosures can be found in the company's filings with the Securities and Exchange Commission. As a reminder, on May 14, 2019, Chicken Soup for the Soul Entertainment created a subsidiary with Sony Pictures Television, launching Crackle+. On today's call, management will make comments on certain gap-based and non-gap 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. The non-GAAP financial measure the company uses is adjusted EBITDA. Management believes that adjusted EBITDA provides useful information in that it excludes amounts that are not indicative of the company's core operating results and ongoing operations and provides a more consistent basis for comparison between periods. The earnings release contains a reconciliation with adjusted EBITDA to net income or loss, which is the most directly comparable GAAP measure. For further information regarding the company's historical financial performance, we refer you to our filings with the SEC, including our quarterly report on 410Q for the quarter ended June 30, 2020, which was filed today. I would now like to turn the call over to William Ruhena, Chairman and CEO. Bill, please go ahead.

Thanks, Jeff. Hello, everybody, and thank you for joining us. Despite the very difficult times we're all living in, we actually had a very good quarter, and we are seeing growing momentum as we move into the second half of the year. Our results met or exceeded expectations with net revenue of $13.5 million and adjusted EBITDA of $2.7 million. In fact, for the six months ended June 30th, our adjusted EBITDA is up over 10 times, compared to last year. I'll dive deeper into the drivers of our performance in a minute, but I'd like to start with a high level perspective. Q2 marked the one year anniversary of the Crackle Plus joint venture. While no ambitious endeavor ever goes exactly according to plan, our experience with Crackle Plus has been pretty close to that. Over the past 12 months, we've been executing on a deliberate strategy to position the company as a differentiated leader in the AVOD network space with a competitively advantaged business model. The first two pieces of that strategy underpin the results we're reporting today, and the next three pieces are just getting underway. Our first step after forming the JV with Sony was to consolidate a large and highly unprofitable expense structure. Once we had the operations under control, our second step was to establish a low-cost programming strategy focused on high-margin originals and exclusives that we produce through partnerships or acquire through screen media. Today's results reflect the success of the actions we've executed over the past year. In Q2, We generated an average of more than 38 million video streams per month on Crackle and Popcorn Flicks. And behind that stat is an important trend. Original and exclusive content comprised over 17.5% of the total streaming hours during the quarter, up once again, and this time from last quarter, up from 15%, and up from zero a year ago. Performance was driven by continuing demand for hits, including Going From Broke, which was released last fall and was recently greenlit for Season 2, and On Point, a series released earlier this year. We've rapidly established Crackle Plus as the leading AVOD platform when it comes to original and exclusive programming, and we have grown our audience approximately 40% since we introduced such programming in October of 2019. All of this translated into 6.6 million of gross revenue for online networks in Q2, or 5.4 million net of the elimination of 1.2 million of intercompany revenue that we pay to our distribution and production business. To provide you with a bit more color, online networks revenue reflected the weaker advertising environment in April and May, which began to strengthen towards the end of the quarter. As weather improved and less people were streaming, viewership trends fluctuated in Q2, but recent trends indicate that they are returning to above pre-pandemic levels. I'll also remind you, if you're comparing online network revenues to prior periods, they're impacted not only by the recent ad environment, but also by the fact that Crackle received approximately $6 million of very low-margin PlayStation View revenue every quarter until PlayStation View was shut down in January of this year. Distribution and production revenue was $8.5 million, reflecting that business's growing rev share from content airing on Crackle, as well as strong demand for TVOD content in a current television environment largely devoid of fresh entertainment. Distribution and production revenue was up over 65% compared to our first quarter, and up nearly four times the same period a year ago. Popular originals during the quarter included Robert the Bruce and Blood and Money. Looking ahead, we believe we will continue benefiting from the strong TVOD environment. Just after the quarter's end, on July 3rd, we released The Outpost, a new exclusive movie distributed by us on TVOD and in other media through our deal with Millennium Media. I'm excited to note that The Outpost was the number one movie in America for much of the month of July. It will be a big contributor to Q3 results, is not reflected in today's report, and the long tail effect of this release will surely benefit our online networks business as the movie makes its way to crackle where we will see higher margin flow through. Given the current strength in TVOD, We may decide to move up the release of certain other titles, such as our Willy's Wonderland title and action horror film starring Nicolas Cage. And the momentum is set to continue for our distribution and production business. Earlier this month, our other production company, Landmark Studio Group, announced it would be partnering with District 33 to develop and produce a new drama series, Shadows in the Vineyard, with award-winning actors Noah Wiley and Judith Light. Our other new landmark programming in the pipeline includes Flagrant, created by and starring Michael Rappaport, The Operative, starring Craig T. Nelson, Safe Haven, executive produced by James Seale and directed by Brad Turner, and Trigger Point, the first of a series of new action films we plan to release. Although all studios brought production to a complete standstill earlier this year, we are beginning to see activity again as some U.S. productions are beginning to open up in a bubble environment and some are being moved to places such as Canada, New Zealand, and Australia. With production activities beginning to restart across the industry, Landmark now expects to begin production on up to five movies and television series in the third and fourth quarters, including Safe Haven and Trigger Point, and plans to deliver two of those five titles this year. Additionally, our Chicken Soup for the Soul unscripted business has three new series set to begin production by year-end. Unlike a number of networks in the current environment, Crackle Plus is fully programmed with original and exclusive content through early 2021, including titles such as Portals, Grand Isle, and more. In fact, at the recent New Front presentations to the advertising community, we announced up to 200 hours of new and original and exclusive programming for Crackle+. This programming includes shows starring Nicolas Cage, Demi Moore, Tom Berringer, Angus McFadden, and more. In addition, our originals and exclusives deliver higher margin both when first aired and over their lifetime, due to our ownership of all or a portion of the content. And advertisers are asking to be associated with original and exclusive content on Crackle due to the attractive demos and unique programming. And because of that, we've seen success monetizing some of this programming at higher rates. Our ad booking trends in the early part of the second half are improving, and we're also starting to see political dollars coming in. At the new fronts, we also announced two new advertising offerings, including Freeview, which allows a customer to engage with an interactive campaign in exchange for no ads for the rest of an episode. And we're seeing good early interest and demand for this offering. So with our business model gaining steam, this brings me back to the deliberate strategy for CracklePlus and our next areas of focus. With the cost structure aligned and the programming strategy in place, the next step is to further invest in our technology platform to enable us to offer audiences and advertisers an even better experience. In fact, a key piece of groundwork was laid in Q2 when we purchased from Sony the near-complete next-generation tech platform they had been developing for streaming content. Under our ownership, we'll be accelerating completion of this iteration of our combined platform with plans to deploy it in 2021. The new platform will provide increased delivery speeds, increased business intelligence, significantly lower operating costs, and it will allow us to fully control our technology. Over the coming quarters, you will also see us focus on expanding distribution and marketing of our original and exclusive content in our networks to further grow our audience. On the former, last month we announced a major distribution expansion for Crackle+, adding Fubo, Plex, and Xfinity to our roster of distribution partners. Last night, we announced Philo, as an additional distribution partner, and we certainly expect to add others in the near future. These deals will increase accessibility of our Avon networks from the 25 services and devices we are on today, and set us up to launch the first Crackle and PopcornFlix linear channels. Finally, on the marketing front, we will be increasing our efforts to drive more viewers to our original and exclusive content through a four-pronged campaign. The first prong is the distribution expansion, which I just discussed. In addition to Fubo, Plex, Xfinity, and now Philo, we expect to add at least a half a dozen more of these relationships by the end of the year. For context on how this impacts viewership, with each new distribution platform addition, we typically see between 200 and 500,000 new monthly active visitors. Second, we have a broad-based impact from our recently launched promotional PR campaign, which is strengthening our visibility in weekly what to watch features and better highlighting our steady drumbeat of ad-supported new and original content. We also just began a meaningfully targeted marketing campaign that pays for itself by utilizing our growing user base to take on larger ad deals. Lastly, we've had great success in the past driving viewership to original content like Going From Broke through our social media presence, and we are now doubling down on that strategy with social being a key part of promotion for every original and exclusive title. These marketing efforts are consistent with our low-cost business model, and we believe they will help energize and drive viewership as we continue to grow. One last item before wrapping up and turning the mic over to Chris. During the last quarter, you saw us take steps to further improve our balance sheet and financial flexibility to move on the opportunities ahead. Our recent bond sale enabled us to replace our bank debt, improves our ability and flexibility to move quickly in a fast-moving marketplace. We've also recently sold $5 million of unregistered common stock in a private placement at a price slightly above the market to our financial partner in Landmark. further increasing our cash resources and strengthening our relationship with this very important partner. Wrapping up, we're entering the second half of 2020 with a bright outlook for both Crackle Plus and our distribution and production business. Assuming there are no significant disruptions to the ad spending recovery and to the resumption of production activity, we believe we are poised to deliver a significantly better second half of 2020 compared to the first half with strength continuing into 2021. Growth will be driven by our strong programming lineup, rapid growth in distribution and production, and the anticipated benefits of our marketing program for Crackle+. We have a clear execution path in building our AVOD networks and are embarking on the final steps in that path, accelerating development of our next-gen technology, and aggressively growing our audience through new distribution relationships and expanded marketing. Overall, we see increasing opportunities to build our business, both domestically and internationally, and we look forward to keeping you posted on our progress. Over to Chris.