Q3 2020 Chicken Soup for The Soul Entertainment Inc Earnings Call

November 12, 2020

Thank you.

Yes.

Well.

[music].

Good afternoon, ladies and gentlemen, and welcome to that you can see.

So entertainment third quarter 2020 earnings call.

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, discount.

This call is being recorded I would now like to turn the conference over to your host Mr. Kayla Cratchit. Please go ahead.

Thank you operator and welcome.

Me today on the call or William J., with Hannah 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 and 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.

Print 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 the content.

Of this call.

Additional risks disclosures can be found in the Companys filings with the securities and.

An exchange Commission.

As a reminder, on May 14th 2019 chicken soup for the Salt 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.

Combine company that includes crackers.

On actual results for the relevant periods prior to the closing date as if the acquisition occurred on January Onest 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.

Selling 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 mostly with 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 form 10-Q for the quarter ended September 32020, which was filed today.

I would now like to turn the call over to William Hannah Chairman and CEO Bill. Please go ahead.

Thanks Taylor good App.

We posted strong results in the third.

Things were led by growing momentum in our online networks business and exceptional distribution and production performance, which was led by our number one antibody at the out the outpost.

Q3 exceeded our expectations on the top and bottom line and showed strong sequential.

Natural growth over our second quarter results.

Gross revenue totaled approximately $20 million and net revenue 19.4 million.

It was up 43% sequentially.

Adjusted EBITDA increased 56% sequentially to approximately.

Core point $2 million.

Our results reflect steady methodical execution of our strategy since acquiring practical in May 2019.

Since gaining control of the operations 18 months ago, we fix the cost structure ramped up our AD sales efforts and delivered more.

Our original and exclusive content.

Further differentiating crackle in the emerging Avon industry, and increasing profit margins we.

We have also steadily built up our distribution and production pipeline and our content Library, which now holds over 10800 movies and 20.

2000 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.

Think it's worth high.

Highlighting that year to date, we have generated $8.9 million and adjusted EBITDA.

Compared to $103000 in adjusted EBITDA in 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.

A press release, we issued just before our call we.

We agreed to extend by 30 days the deadline for Saudi to make its option election related to its ownership in crackled Green Crackled plus.

We extended the option as discussions continue on ways, we and Sony My collaborate more closely.

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.

At $1.3 million of intercompany revenue that we paid 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, Inc.

The new added approximately $6.2 million in low margin revenue from PS view, which is no longer an operation.

So when you factor out the PS Vue 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 flex slightly more than the $151 million in Q2, two which included cobot driven over.

Over performance in April.

Original and exclusive content on our networks comprised over 16%.

The average monthly streaming hours in Q3 up from just 2% a year ago.

Our latest Crackle original series Spider, which premier.

It on crack on September 17 drove.

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 crackles history.

Spider is set in Mardan modern day, Berlin and stars game of Thrones alumnus.

Me Rosabella Rensi 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 2020.

We also saw success with several of our crackle exclusives, including corporate animals, Dark comedy starring Demi Moore and Ed Helms.

Metrosexual and Australian sitcom that gives you a peek behind the doctors curtain of a small local sexual health clinic can.

And Blue GLONASS.

With Sam Rockwell embedded shorts.

The advertising environment has also become a bright spot.

As we move through the third quarter, we sold it increasingly high percentage of our inventory.

With our premium original and exclusive content resignation with our viewers and advertisers are seat.

EMS are proving including by as much as.

Double for certain orders due to the continuing increase in demand for Avon.

And the unique demographics, we bring to advertisers.

We've also seen larger existing advertisers significantly increasing their 2021.

Pains.

Major new advertisers are also appear.

Excuse me I'm hearing 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 cattle categories and verticals.

Can we believe a number of advertisers are beginning to transition great greater port portions of their budgets to our Avon due to overall viewership growth.

And due to the greater spending flexibility otcs like crackle plus provide versus the package offers.

Often required by some of our competitors.

Hi.

It is now our goal to focus on growing on accelerating the growth of our audience across the crackled plus networks.

So how are we doing that.

In a few key ways first we are actively launching crackle and popcorn flicks linear and Eva.

Vod 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.

Half a million new monthly viewers to our networks over the first year post launch.

Our audience strap 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 employees, including our important strategic move into smart Tvs.

We view smart Tvs as the highest growth area of Avon viewership, that's why in the third quarter, we partnered with Vizio. The number one American based TV brands to add a crackle branded button on two and a half million.

As 2020 line 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 has the strategy. We began implementing late last year has.

It really started to take hold.

Of course in Q3, we had a major left from the Smash TV hit the outpost.

Which was released at the beginning of July.

At the beginning of the quarter.

The outpost as a military thriller that follows a tiny unit of us soldiers in Afghanistan.

Then as they battle the Taliban.

Yes post 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 a return to number one on I tunes.

Again in September nearly 12 weeks after its initial release.

Its film illustrates that our low risk content distribution strategy can occasionally produce outsized returns.

As Ken our low risk production strategy as evidenced by going from broke and on point.

Another major highlight for the distribution and.

One segment into in Q3 was the new film acquisition facility formed by screen media and great coin ventures and Breakpoint media.

This facility initial initially funded a $10.2 million allows us to acquire higher profile movies, and TV series and 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 cruise.

Just to reset we.

We had originally planned to Bruce five titles during 2020.

Willie's Wonderland trigger point Safe Haven.

Slasher and going from broke too.

We did complete Willie's Wonderland, which features Nicholas cage battling possessed animatronic mine.

Monsters in an amusement park now those are words I never expected say in my life. So let me say to begin battling possessed animatronic monsters at an amusement park.

Trigger point to the action film featuring a retired special operative who worked in the dock is shadows of the U.S. government is nearing.

Completion, and 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 venue starting Judith light to know Wiley.

And the operative starring Craig T. Nelson from landmark these are from landmark.

And a second Ashton Kutcher series.

During Additionally, we are excited about the recent announcement of our new production co venture with brand Star.

Landstar brings a large selling organization and its roster of over 500 brand integration partners, which significantly expands our sales capability to sponsors.

We've.

This is a great opportunity as our company's share 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 PS few early in the year, which created a challenge to revenue growth.

So 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.

Since our monthly gross revenue in Crackle class 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.

What 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 fore sight Library acquisition that we completed in late.

2019.

In short while the pandemic remains highly unpredictable our business has surpassed pre coded levels and delivered record third quarter adjusted EBITDA.

Absent a significant return to the economic disruption from the Panda.

Right, 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.

Mcwhirter Unity, we saw for this company.

The goals for our current business simply stated our 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 and grow.

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 lay by channels, including an a plus channel and a chicken soup for the sole 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 are excited about what's to come.

We want to thank our viewers our partners are in.

Investors for their support.

And I, especially like to express my gratitude to our employees.

We need to step up in these very challenging times for all of us.

Ill turn it over to Chris.

Thanks Bill.

I will focus on review of.

Our financial results and balance sheet, and then turn to the financial developments and updates.

We reported gross revenue of $20 million in the third quarter compared to $13.9 million in the second quarter of 2020, an increase of 44% compared to $17 million in the year ago period or nearly 18% drop.

Europe or go figure includes $6.2 million in gross quarterly revenue from Sony's Playstation Vue service, which wouldn't shuttered at the beginning of this year.

Excluding this revenue third quarter gross revenue would have increased 85% year over year.

Net revenue was $19.4 million up nearly 40.

4% sequentially and 15% on a year over year basis.

These results reflect solid performance across both businesses.

Our adjusted EBITDA set a third quarter record at 4.2 million right.

Representing the sequential quarterly increase of 56% and a reversal.

From an adjusted EBITDA loss of $400000 in the year ago period.

Drivers of our adjusted EBITDA performance include a rebound in advertising revenue in our online networks business and strong growth in our distribution and production business.

Our online networks business or crackle plus.

Unrated.

$8 million in gross revenue in Q3, 2020 compared to $6.7 million in the second quarter for sequential growth of 21%.

Year ago online networks gross revenue was $14.3 million.

Without the impact of Sony Vue, and including intercompany revenue share.

Share payments third quarter online networks gross revenue will be approximately flat with the prior year.

For perspective, our advertising business is now more fully recovering from the impacts of the pandemic and our online networks revenue is now tracking above pre tepid levels on a monthly basis.

Q3 gross revenue for online networks included $1.3 million and intercompany revenue share payments to our distribution and production business.

Which are eliminated in our consolidated net revenue.

Net of the intercompany revenue share payments online networks generated $6.7 million in revenue.

In the third quarter of 2020 compared to $5.4 million in the second quarter of 2024 sequential growth of 24%.

Distribution and production generated gross revenue of $13.3 million in Q3 compared to $8.5 million in the prior quarter.

Ann Inc.

Increase of 56%.

And $2.7 million in the year ago period, an increase of more than five times.

This included the intercompany revenue share payments I, just spoke about which continued to grow as we flow through more payments related to our original and exclusive content provided to graco plus.

Gross profit for the third quarter, 2020 was 4.5 million or 23% of net revenue compared to 587000 in the second quarter or 4% of net revenue.

And $3.2 million or 19% of net revenue for the year ago period.

Gross margin improvement reflected.

Increased mix of original and exclusive content on crackle, plus which has higher margins and lower cost and the benefits of fixed cost absorption as online net plus revenue growth.

We also saw a nice lift in Q3 from the strong performance of the outposts as well as last full measure.

Blood money.

Blackwater bits and Robert the Bruce, notably as you add back the noncash film Library amortization expense gross profit would have been 12, and a half million or 64% of total net revenue as compared to $4.5 million or 21% of total net revenue.

In the year ago period.

Operating loss for the third quarter, 2020 was $11.3 million compared to an operating loss of $13.1 million in the second quarter 2000 $29.6 million in the year ago period.

Given the rebound in performance in the third quarter we.

Priest performance based compensation expense and began to increase marketing expenditures, which resulted in elevated SDMA beyond normal levels.

Our adjusted EBITDA for the third quarter was 22% of net revenue at $4.2 million compared to $2.7 million last.

Quarter or 56% sequential growth.

And an adjusted EBITDA loss of zero point $4 million in the same period last year.

I would note that there were no transitional expense add backs to EBITDA related to the acquisition of crack will in the third quarter as those expenses.

In wound down in the second quarter of 2020 has expected.

Our operating cash flow year to date was approximately negative $13.8 million compared to negative $16 million as of September 32019.

This result was primarily driven by significant and.

Presents in our film library, and its significant reduction and longer term contractual accounts payable in the third quarter.

Which improved the company's working capital position.

We've invested $20.4 million in film Library acquisitions year to date consistent with our strategy to increase the amount of owned content on.

By networks in addition to driving more revenue in our distribution and production business.

That is approximately double the level of investment through the first nine months of last year.

Probably double the investment we nearly quintupled the revenue from our distribution production business year over year and the value of having best.

So that should extend well into the future.

During the third quarter, we closed on a 10.2 million film acquisition facility with Great point media.

Thereby significantly reducing or eliminating the need to fund film acquisition activities out of working capital in the third quarter.

We intend to increase the size of our Greg.

Point media facility over time.

Looking at our balance sheet and liquidity position as of September 32020.

The company had cash and cash equivalents of $9.2 million.

Compared to $4.7 million at the end of the second quarter of 2020.

$6.2 million can be a year ago period.

Accounts receivable health is favorable with customers pain sooner on average than in the second quarter.

You will recall that we used a portion of the proceeds from our July public bond offering to repay the full $13.3 million principal outstanding under our prior bank loan agreement.

Eliminating all principal.

Amortization payments over the coming years, and freeing up capital for further growth.

In addition, the company paid off $2.5 million of the LSG credit facility.

At the end of the quarter, we had $22.1 million and senior unsecured notes and two and a half million funded under our LSG credit facility.

Looking ahead, we have a lot of momentum heading into the end of the year.

While the pandemic will continue to pose near term uncertainty.

We are controlling what we can control.

In executing our business strategy, and enhancing our working capital position and financial flexibility and.

And we believe we are in position to drive a strong conclusion.

For the year with bright growth prospects in 2021.

Thank you for joining.

Ill now turn the call back over to Bill.

Okay, operator, we'll take questions.

Thank you ladies and gentlemen, if you have a question at this time Please press star.

The number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

We have our first question coming from the line of Dan Kurnos with benchmark. Your line is open.

Great. Thanks, Good afternoon, Bill nice momentum in.

You are seeing here I just want to touch on two things you talked on in your prepared remarks first on the Cpms side you made it very clear that you guys are holding price so different tactic and now you're talking about.

Doubling on certain orders, obviously, there has been mix shifted connected TV I'm just curious.

Yes, how much of that is you know I think open programmatic turn the corner in September.

And sort of underlying market versus just you guys, increasing sort of premium content and getting a better look now and then on the advertising on the in the audience.

So side look we you know I really want to get a little bit better sense for if there is any more color you can give on strategy. There do you need to invest in other channels, obviously, you've done a great job on distribution.

But you know to the extent that quickly couldn't make it work.

Rokos, obviously taken a bunch.

Yes, you share I'm just curious how you see the landscape in terms of where you guys attack to continue.

The nice audience growth you're seeing thanks.

Okay. Thanks, Dan.

So first on the advertising CPM side of the world.

[music].

The.

There is the one surprising thing that that has happened since we saw our big competitors.

Acquired by major media companies.

He has been that our cpms have been going up.

And I say it that way because you may recall when we originally when I talked about this in the past I would say.

Well I'm not sure what it means now that we've got all of these big competitors owning our.

Owning arc are then competitors.

Turns out that if you're a major media company with a broadcast network or cable network NMTC network.

You try to stuff down the throat of advertisers a combined package of stuff.

That they may or may not want.

And if they just want OTI tea and they only want it on a premium basis.

There really isn't any place to go anymore, but us.

And I and I'm seeing increasingly that that is a part of the reason Dan that were able to.

Really.

Improved pricing I think thats going to go on for a bit I don't expect the big media companies to stop trying this stuff people with without a package of things that base some of which they want some which they don't.

And I, certainly don't expect advertisers to give up trying to buy what they really want to buy.

So.

And that is that is that was an unexpected result of having our competitors purchase and it's it's it's fascinating to me.

We have a we have a scarcer and scarcer resource, which is a pure OTI ability to buy advertising and there is no question that demand in ours.

Space is growing very dramatically it has been.

Ignited by the by the change in viewership that came from the pandemic.

So thats the first one.

The growth in viewership question.

As I said in the.

In the in my prepared remarks.

Now.

Only are we increasing our distribution platforms and every time, we put one of these up we see three.

800, 400 in the case of flex now over 500000 monthly viewers.

Added to our our two.

So our viewership and if you start multiplying that by the 15 plus new plants.

Forms that we're going to be launching here over them between now and the end of the year that number starts adding up.

So not only are we seeing that working but we're also we've also started up pretty aggressive.

Marketing campaign on the smart TV platforms and on Amazon fire.

On the smart Tvs, we've gotten there because that's where the growth is the growth is all coming in smart Tvs now.

People don't have the buyout of an Amazon fire stick or a row acoustic if they pull out of the box sets a TV that's capable of being.

Being a smart television so.

So we are pushing their vizio button was a good example of a strategy that I think will really bear fruit theres, two and a half million remotes that next year that are going to be on packed with our crackled brand on it and that will make it easy for people to get to us should add a dramatic number of new viewers to us.

It also we are finding that with Amazon, we're able to really significantly measure and effectively market to new viewers and that.

That has really been very helpful. So we are hitting.

Many days all time high AD impressions right now.

As we speak.

And that's one of the reasons I said, well, that's obviously driven by viewers, but thats one of the reasons I said in my prepared remarks that no.

Remember in December it looked like there will be all time record months for us so.

That's that's super helpful. I, just want to just wanted to follow up on that last thought obviously we.

We had the vaccine news hopefully it works.

On Monday, and clearly Cove is not going away just kind of your thoughts on you know going into 21, how much do we just this is a streaming shift sustain what do you guys think you know 21 kind of looks like.

Like from a viewership perspective.

Yes, so I think theres no doubt streaming is here to stay.

All that happened was we had a step increase in viewership that would have been a straight line up to the right, but instead, we got it in a big step and then we had a little settling down as people.

Went out over the summer.

And decided they couldn't stand being in their house anymore and viewership is growing again.

As we see people being staying at home, but whether there is a co bid or not covert environment people are going to watch television on there with the streaming platforms, they've gotten used to them they like the choice.

We're all getting better we being the streamers at providing a higher quality experience, we're getting better at the way, we insert ads and the number now I see more repeats of ads on broadcast television they do on our own networks, So I'm I'm, feeling better and better about the quality of what we do.

So I think stream is here.

You say 2021.

It should be a very meaningful breakout year for us Dan with the combination of all the things we've already set in motion I feel about 2021 on the crackle plus side the way I felt about 2020 in the distribution and production side, we we set things up for.

For your 2021 for 2020 and distribution and production you guys see the impact of that with or without the outpost, we were having an amazing year up 400% year over year.

Next year, Crackled, plus and that online networks business is set up to grow very meaningfully not just through the new Platte.

Platforms, not just through the marketing, but also by the additional channels of a plus.

And chicken soup for the Solei bought it.

It's there's a lot of stuff in place now to make.

2021 Mason year for us.

Perfect. Thanks, Bill appreciate all the color into nice at night.

For trends and momentum.

Thanks, Dan.

Yes, our next question coming from the line of Thomas Porting with D.A. Davidson. Your line is open.

Great. Thank you. So first I had a statement then I had a question and then after you answer my question I have a follow up question.

So the statement is congratulations congratulation congratulations.

Hi, My first question is on billing and asking the same question I asked Roko on brokers earnings call can you talk about the advancements you're seeing in the Avon sector. What we're noticing is Amazon thinking more seriously.

Including its own Avon efforts I am BD TV Amazon.

Amazon even mentioned I am TV TV on its earnings call and Oh by the way, we've seen as Amazon advertising on critical.

And then we've also seen more legacy linear TV advertisers warmly embracing a vod beyond geico and progressive.

So we see a plethora of interactive AD formats, including yours from Crackle. So that's my first question.

I'm not sure I heard the question in there Tom.

I wanted your perspective on the advance rates, you're seeing an Avon.

It's clear to me that Avon I used the word maturing and roecker into it.

Correct. So it's clear to me that Eva is becoming.

More prevalent.

You are seeing you know more linear TV advertisers doing it so.

So I wanted your vantage point not mine.

Well you know what you you're in one of the few people I know who.

The chart you pretty much every single Avon Network, and then report on how many advertisers say, who they are how often they repeat themselves et cetera. So.

You have as good a perspective as anyone else, but I can tell you from our from our viewpoint.

You know everybody is here to stay a vod is breaking out right now.

In a big way the advertisers have fully embraced it we.

I think I said in my prepared remarks that we have upfront registrations that are two times, what we had last year.

You know thats not an insignificant in fact.

But also we have new advertisers major new advertisers.

Let me say in those Upfronts were seeing about half of those advertisers are brand new major advertisers. So.

I think you know whatever resistance there may have been to this new thing called day, but it's over and the question in my mind really is how fast the flow.

Revenue and you know Weve got way more demand.

It really service, which is one of the reasons why we didnt take a lot of political ads in the third quarter.

Instead focused on people that would still be.

No.

Since customers of ours, when there wasn't on election so.

You.

This is the demand is very real for advertisers and it's it's it's very widespread.

Excellent. So then my follow up question is I wanted you to take this opportunity to remind investors of how you might monetize your proprietary film content such as the outpost.

Okay.

So.

As you know when we either.

Either produce or acquire programming. Our primary goal is to have that programming available for ourselves for our own networks with little or no net investment well.

Well as it turns out we not.

The only and end up quite often with little or no net investment.

We end up making a profit on the way to getting the content to our own networks and the outpost was a great example of that we took the outpost we took all rights to the outposts domestically we released.

He said on T. Vod, whereas we've mentioned it was the number one movie.

We re leased in DVD, where it's been a huge that up and Wal Mart and one of the top performers I'd redbox, which by the way is still a very vibrant distribution channel for us.

And then we added.

It's exposure on Netflix and Netflix, which used to be the only a DVD provider and migrated to the online business. We all know it as.

Has also paid us a substantial sum for that and it will come back to us and end up on our own networks exclusively after having made.

To us many many many dollars in other ways will only be available for our own a BYOD networks and it will be in high it will be a high demand because if you take the aggregate of all of those viewers who are on t., but who started DVD and we will exceed it on Netflix the vast majority of the of human beings will still.

Still not saying it because it hasn't been on free TV, and that's where they will consume it and they will consume it only on our networks. So that is.

Really the magic of the model that we've created that is really working.

And as I said, a little earlier that same model has worked a couple of times and television with going from broke.

Okay and on point and.

And its worked pretty much consistently Tom with every.

Every acquisition, we've made and.

And.

Absolutely consistently with all the production so.

I see this as a great model, we've been able to replicate it.

And it's it's moving along and it just keeps moving.

Moving along at a great pace.

Great. Thanks for taking my question.

Thank you.

Yes, our next question coming from the line of Jason Kreyer with Craig Hallum. Your line is open.

Thanks, guys for taking my question.

Obviously, a great job on the sub production and distribution side of the business. Just wondering how should we think about that as a leading indicator for your online networks and when should that have a more prominent impact and that moves over to the crackle plus networks.

So it's.

Jason. Thank you, it's a continuous flow right every month, there are two or three new.

Produced or acquired programs that are exclusively on our networks and so it's kind of a growing phenomenon.

Whereas we started.

With two series of way back in October of last year and now there's been a couple of month for the last year.

Year, there so that was a couple of dozen.

Over the next year, there will be at least another couple of dozen to three dozen that we will add and so gradually over time. The original exclusive content that we have which is our most.

Operable content will grow as a.

Correct will create a critical mass of its own on our networks and so we will have a greater and greater percentage of it.

Of it generating the AD impressions, which already generate 17% of AD impressions when it's only two dozen.

Shows out of seven or 8000 movies and I don't know how many episodes of television we have on our networks. Today. So there's very small subset already outperforms, but as that subset continues to grow two or three every month from here on out it will grow further and further it will drive more and more adjusted EBITDA.

Because it will have a it has a lower these programs have a lower cost of revenue and this will you will see this just continuously building over the course of the next couple of years.

And that's really what we've been trying to do is create that critical mass of owned programming with a higher level of profitability.

And which is unique to our network so that people come to see stuff with us that they can't find other places.

Okay, you kind of already ask my second question. The first one there, but I'm going to ask it anyway just to close the loop.

Do you have a goal of where you expect that mix of original.

Thats because of programming to get to or any timeframe and when you expect it to get there.

That's a that's a very good question and it raises one of the other one or the other issues that we are very focused on for next.

Last year, you guys, probably heard me say grow viewers and reduce the cost of content being our two primary goals and an overarching way next year.

And when we said reduced the cost the content there were really two sub text to that one was the one we just discussed of growing original and exclusive content and I can.

Tenuous basis, because that will drive greater.

Greater ease.

EBITDA greater gross profit, but the second thing was more owned content in the things that are on our network and today of those 10809 movies I mentioned at 22000 episodes.

Television.

Only 1400 of those are owned by US the grass star revenue share contracts with over 110 producers.

We intend to end will purchase libraries.

From others.

In order.

To put those libraries onto our own networks, thereby eliminating the revenue share for an increasing percentage of our content.

So that will grow is that exclusive content, which we will make our own networks are owned our owned libraries exclusive as well as the.

The two were the two or three every month that we put up will help us grow that percentage, Jason faster than people realize.

And that will be some.

Combined with the original exclusive programs that come two or three a month the way in which we drive to a higher percentage of content that has a higher growth.

The profit so I didn't answer your question about a goal because I'm really not sure what the right goal is in the right tempo is and it's somewhat driven by the opportunity to to acquire.

Meaningful libraries, but we're quite close on a couple now and.

So I think we should.

It would be able to do that at a pretty good pace.

And if that occurs then the percentage will grow more rapidly than if we just go to a month forever.

So.

I hope that helps you.

That helps thanks appreciate it.

Thanks, Jason.

Your next question coming from the line of Jon Hickman, We Ladenburg Your line is open.

Yes, congratulations on quarter.

Could you remind us of what Sony's choices are.

At least initially their choices.

Yeah with regards to the crowd.

Graco thing.

Sure.

They have two choices John.

One is to maintain a 49% common equity interest in our subsidiary, which is called Crackle, plus which holds our online network.

Or.

To own.

$40 million of the preferred stock that we have at chicken soup for the cell entertainment. It's got the symbol see SXCP, it's that publicly trading preferred.

Which as you recall is a perpetual preferred that is not can never be forced to be redeemed.

See equivalent of equity.

And those are there two choices as per our agreement.

That's what the two choices ours programs those are still doesn't for you. Thanks.

Yes, the preferred pays 10% basically right.

Nine intercourse, yeah, so ankur sadly.

Take the math.

Okay. So if they take the 40 million that get basically 4 million a year.

In correct.

Okay.

And if they take the 49%.

Then they knows what they get frankly, so okay, great and I guess I get 49%.

The profit of that joint venture. Okay. Obviously, obviously, we haven't gotten either of those choices made as of.

Tom days from now which is when they were required to do it.

So.

Right Okay.

Thank you for that.

My last question is could.

Could you go over it.

I think I might have missed this in the prepared remarks, but kids because over the jump in as to the expenses this quarter.

Kind of was pretty big sequential jump.

And I think there were some reasons for that but I I think I missed that.

As you were talking.

Yeah, I think Chris actually did the younger explained that now let him I'll, let him answer this question.

Okay, thank or really the biggest driver of the increase in its DNA was was compensation, we had 1.4 million increase year over year.

And that was really related to performance based compensation as we saw a strong rebound from the second quarter to the third quarter. So I.

I think as a as a percentage of net revenue I think thats about a seven point increase.

We would not expect destination to stay at these levels. We also had some.

It.

Unusually high.

Professional fees, a lot of which was related to financing activities.

Yeah, that's probably not a three points worth so.

From a.

Margin perspective, and a percentage of net sales perspective, this was an unusually high quarter.

And we would expect to return to more normalized levels going forward.

Okay.

Thank you so much my other questions were more than answered so.

Again congratulations.

Looks like the future looks pretty bright so that's.

That's it for me.

Hey, we're going to take one last question operator so.

Yes, our next question coming from the line of Mike Grondahl with Northland Securities. Your line is open.

Hi, This is Michael on for Mike, Thanks for taking our questions and congrats on the quarter.

Maybe just you touched on the vizio, a remote kinda smart TV opportunity can you just give us a high level idea of.

That market size and the current penetration there.

Well so vizio.

You know they put out.

I have not really I know, how many television aircraft, but I'm pretty sure I'm not sure I shouldn't be sharing that with you.

Our year, but.

We are going to be on a roughly two and a half million other remotes and.

Probably in the first half of next year.

That's not all the remotes they have but it's a good chunk of them.

What do you what are you trying to get at Mike. So I can be more helpful.

I guess just the current.

I don't know number off top my head, but the number of TV is out there.

That are smart Tvs and how many people have either download the app or that's on their home to the box.

Oh well.

The Smartid the point of the Vizio button for US is that the apps pre downloaded a year, you're able to get to it with just one click.

And as far as the number TV is out there I actually don't know but.

We'll be happy to look it up for you if you want.

Got it and then I guess, just sticking with hardware what's the.

Microsoft Sony doing there.

Ah Counsel gaming Council upgrades. This year is that an opportunity there to get a further viewership or.

Yes, I mean, we we have.

Both those plans.

Forms.

And I think.

You know there, there's they've been enhanced to be better Marvin.

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