Chicken Soup for the Soul Entertainment, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Chicken Soup for the Soul Entertainment third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Taylor Cratchit, please go ahead.

Thank you, operator, and welcome. With me today on the call are William J. Ruhanna, Chairman and Chief Executive Officer, and Chris Mitchell, Chief Financial Officer, to review the results of the 2020 third 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 the 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 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. The non-GAAP financial measure the company uses is adjusted EBITDA. Management believes that adjusted EBITDA provides useful information and 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 of adjusted EBITDA to net income or loss, which is the most directly comparable gap 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 Form 10-Q for the quarter, and to September 30, 2020, which was filed today. I would now like to turn the call over to William Ruhanna, Chairman and CEO. Bill, please go ahead.

Thanks, Taylor, and thank you all for joining us. We posted strong results in the third quarter, led by growing momentum in our online networks business and exceptional distribution of information. distribution and production performance, which was led by our number one TVOT hit, The Outpost. Q3 exceeded our expectations on the top and bottom line and showed strong sequential growth over our second quarter results. Gross revenue totaled approximately $20 million and net revenue, $19.4 million, was up 43% sequentially. Adjusted EBITDA increased 56% sequentially to approximately $4.2 million. Our results reflect steady, methodical execution of our strategy since acquiring Crackle in May 2019. Since gaining control of the operations 18 months ago, we fixed the cost structure, ramped up our ad sales efforts, and delivered more original and exclusive content further differentiating Crackle in the emerging AVOD industry and increasing profit margins. We have also steadily built up our distribution and production pipeline and our content library, which now holds over 10,800 movies and 22,000 television episodes. With momentum in the business in Q3, we began turning our attention to increasing awareness of the content on the Crackle Plus networks, in order to grow our audience. Overall, we are very pleased with the trajectory of the business. I think it's worth highlighting that year-to-date we have generated $8.9 million in adjusted EBITDA compared to $103,000 in adjusted EBITDA through September of 2019. This tremendous growth is a direct result of our strategy to increase the mix of original and exclusive content on our network and our distribution and production success. And we think there is more to come. Before diving into results, I probably should quickly update you on the status of our relationship with Sony Pictures Television. As we noted in the press release we issued just before our call, We agreed to extend by 30 days the deadline for Sony to make its option election related to its ownership in Crackle Plus. We extended the option as discussions continue on ways we and Sony might collaborate more closely. The new deadline is December 14th, and we look forward to updating you on or before that date. Looking more closely at our results, starting with online networks, Gross revenue of approximately $8 million was up 22% sequentially. Net of the elimination of $1.3 million of intercompany revenue that we pay to our distribution and production business, we had $6.7 million in net revenue, up 24% sequentially. Please keep in mind when comparing this year with last year that our performance in Q3 2019 included approximately 6.2 million in low-margin revenue from PSVU, which is no longer in operation. So when you factor out the PSVU contribution, our online networks business is up slightly on a year-over-year basis and growing and has a stronger margin profile. Viewership trends have remained steady coming off the pandemic. We saw a peak in March and April, And in Q3, we generated more than 155 million video streams on Crackle and Popcorn Flicks, slightly more than the 151 million in Q2, which included COVID-driven overperformance in April. Original and exclusive content on our networks comprised over 16% of average monthly streaming hours in Q3, up from just 2% a year ago. Our latest Crackle original series, Spides, which premiered on Crackle on September 17th, drove over 1 million streams in the first two weeks. This was our number one scripted series on Crackle and is on track to be the most successful scripted series in Crackle's history. Spides is set in modern-day Berlin and stars Game of Thrones alumnus, Roosevelt Laurenti Sellers. This series follows the success of other Crackle originals like Going From Broke, which has generated nearly 17 million views since its release in October 2019, and On Point, which has generated over 15 million views since its release in February of 2020. We also saw success with several of our Crackle exclusives, including Corporate Animals, a dark comedy starring Demi Moore and Ed Helms, Metrosexual, an Australian sitcom that gives you a peek behind the doctor's curtain of a small local sexual health clinic, and Blue Iguana with Sam Rockwell and Ben Schwartz. The advertising environment has also become a bright spot. As we move through the third quarter, we sold an increasingly high percentage of our inventory. With our premium original and exclusive content resonating with our viewers and advertisers, our CPMs are improving, including by as much as double for certain orders due to the continuing increase in demand for AVOD and the unique demographics we bring to advertisers. We've also seen larger existing advertisers significantly increasing their 2021 campaigns. Major new advertisers are also appearing on our networks for the first time and our upfront registrations have increased by over two times. From an industry perspective, we've seen a return of broader spending across industries, categories, and verticals. We believe a number of advertisers are beginning to transition greater portions of their budgets to our AVOD due to overall viewership growth and due to the greater spending flexibility OTTs like Crackle Plus provide versus the packaged offers often required by some of our competitors. It is now our goal to focus on accelerating the growth of our audience across the Crackle Plus networks. So how are we doing that? In a few key ways. First, we are actively launching Crackle and PopcornFlix linear and AVOD offerings on new platforms and expect to have 15 more offerings available by the end of the year. For perspective, these new platforms provide access to approximately 45 million additional monthly viewers in the aggregate, and we expect each platform will add as much as a half a million new monthly viewers to our networks over the first year post-launch. Our audience growth strategy also includes strategic public relations and social media and ramping up paid marketing on services like Amazon Fire, Samsung, Vizio, and LG, including our important strategic move into smart TVs. We view smart TVs as the highest growth area of AVOD viewership. That's why in the third quarter, we partnered with Vizio, the number one American-based TV brand, to add a crackle-branded button on 2.5 million 2021 Vizio TV remotes. Turning to our distribution and production business, we posted very strong results. Revenue totaled $13.3 million, up from just $2.7 million a year ago, as the strategy we began implementing late last year has really started to take hold. Of course, in Q3, we had a major lift from the smash TV hit, The Outpost, which was released at the beginning of July, at the beginning of the quarter. The Outpost is a military thriller that follows a tiny unit of U.S. soldiers in Afghanistan as they battle the Taliban. The Outpost ended up being the number one movie in America for much of the month of July and continued to perform strongly through the summer, so much so that it returned to number one on iTunes again in September, nearly 12 weeks after its initial release. This film illustrates that our low-risk content distribution strategy can occasionally produce outsized returns, as can our low-risk production strategy, as evidenced by Going From Broke and On Point. Another major highlight for the distribution and production segment in Q3 was the new film acquisition facility formed by Screen Media and Great Point Media. This facility, initially funded at $10.2 million, allows us to acquire higher-profile movies and TV series in higher volume with greater efficiency and eliminates the need to use our working capital to grow this activity. Over the last couple of months, the entertainment industry has carefully resumed production activity, and it's good to be back to work, albeit with a strong focus on safety for cast and crews. Just to reset, we had originally planned to produce five titles during 2020, Willy's Wonderland, Trigger Point, Safe Haven, Slasher, and Going from Broke 2. We did complete Willy's Wonderland, which features Nicolas Cage battling possessed animatronic monsters in an amusement park. Now, those are words I never expected to say in my life, so let me say them again. battling possessed animatronic monsters in an amusement park. Trigger Point, an action film featuring a retired special operative who worked in the darkest shadows of the U.S. government, is nearing completion on principal photography as I speak, and the production of Slasher has just commenced. The remaining two productions are scheduled to begin in January and February of the new year. On top of this, we are also moving forward with a full production schedule of five to seven additional titles for 2021, barring further pandemic-related interruptions. These include the series Shadows in the Vineyard, starring Judith Light and Noah Wiley, and The Operative, starring Craig T. Nelson from Landmark. These are from Landmark. And a second Ashton Kutcher series. Additionally, we are excited about the recent announcement of our new production co-venture with Brandstar. Brandstar brings a large selling organization and its roster of over 500 brand integration partners, which significantly expands our sales capability to sponsors. We see this as a great opportunity as our company shares so many synergies and we offer services that complement each other on several levels. Before wrapping, I want to take a step back and provide some perspective on where we are today, how we got here, and where we believe we are going. We entered 2020 on an upward trajectory and posted a strong first quarter before shelter-in-place rules went into effect. Keep in mind, we also lost our largest air rep partner, PSU, early in the year, which created a challenge to revenue growth, though the margin impact was de minimis. The arrival of the pandemic drove huge early viewership but also created tremendous ad market challenges that disrupted our financial momentum. In April, we saw what turned out to be the bottom for the Crackle Plus monthly revenue. However, we have recovered nicely. Based on our October performance, our monthly gross revenue in Crackle Plus increased 83% from the low point, and we are now expecting November and December to be record months. At the same time, we've grown our distribution and production more than 500% year over year. The Outpost was a big driver in Q3, but we anticipate similarly strong performance in Q4 that is broadly based and will include for the first time meaningful revenue from international sales derived from the films we acquired after the Foresight Library acquisition that we completed in late 2019. In short, while the pandemic remains highly unpredictable, our business has surpassed pre-COVID levels and delivered record third-quartered adjusted EBITDA. Absent a significant return to the economic disruption from the pandemic, we are going to end 2020 on a very strong note, and we will enter 2021 at an order of magnitude higher performance run rate. We're excited to be at this point where the foundations we started laying 18 months ago are delivering results and validating the opportunity we saw for this company. The goals for our current business simply stated are to drive viewership up and the cost of content down, both of which should serve to drive attractive adjusted EBITDA. As we close out the year, we are also now fully in growth mode and we feel ready to expand further. We continue to evaluate a variety of growth opportunities that could accelerate our strategy. These include exploring new ABAI channels, including an A-plus channel and a Chicken Soup for the Soul channel, as well as other strategic moves. Our debt is not due for five years. We have no bank covenants. We have increased financial flexibility. We have improving cash flow. We have the working capital we need to execute our plan. We're excited about what's to come. We want to thank our viewers, our partners, our investors for their support, and I'd especially like to express my gratitude to our employees who continue to step up in these very challenging times for all of us. I'll turn it over to Chris.