Thank you, operator, and welcome. With me today on the call are William J.

Rouhana, 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.

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 and production performance, which was led by our number one TVOD 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.

Thanks, Bill. I will focus on review of our financial results and balance sheet and then turn to some 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 at 44%, compared to $17 million in the year ago period or nearly 18% growth. The year ago figure includes $6.2 million in gross quarterly revenue from Sony's Playstation Vue service, which was 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 44% 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 as $4.2 million, representing the sequential quarterly increase of 56% and a reversal from an adjusted EBITDA loss of $400,000 in the year ago period.

Drivers of our adjusted EBITDA performance include a rebound in advertising revenue and our online networks business and strong growth in our distribution and production business. Our online networks business or Crackle Plus generated $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 PS Vue and including the intercompany revenue share payments, the third quarter online networks gross revenue would 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-COVID levels on a monthly basis.

Q3 gross revenue for online networks included $1.3 million in 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, per 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, an increase of 56% and $2.7 million in the year ago period an increase of more than 5 times. This included the intercompany revenue share payments I just spoke about, which continued to grow as we flow through more payments related to original and exclusive content provided to Crackle Plus.

Gross profit for the third quarter 2020 was $4.5 million or 23% of net revenue compared to $587,000 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 networks revenue growths. We also saw a nice lift in Q3 from the strong performance of the Outpost, as well as Last Full Measure, Blood and Money, Black Water: Abyss and Robert the Bruce.

Notably, as you add back the non-cash film library amortization expense, gross profit would have been $12.5 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 2020 and $9.6 million in a year ago period.

Given the rebound and performance in the third quarter, we increased performance-based compensation expense and began to increase marketing expenditures, which resulted in elevated SG&A beyond normal levels. Our adjusted EBITDA in 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 $0.4 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 Crackle in the third quarter, as those expenses wound down in the second quarter of 2020 as expected. Our operating cash flow year-to-date was approximately negative $13.8 million compared to negative $16 million as of September 30, 2019.

This result was primarily driven by significant investments in our film library and its significant reduction in longer-term contractual accounts payable in the third quarter, which improved the company's working capital position. We have invested $20.4 million in film library acquisitions year-to-date, consistent with our strategy to increase the amount of owned content on our networks, in addition to driving more revenue in our distribution and production business.

And it approximately doubled the level of investment through the first nine months of last year. Albeit double the investment, we nearly quintupled the revenue from our distribution and production business year-over-year and the value of that investment should extend well into the future.

In 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 a working capital in the third quarter. We intend to increase the size of our Great Point Media facility over time.

Looking at our balance sheet and liquidity position as of September 30, 2020, 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 and $6.2 million in the year ago period. Accounts receivable health is favorable with customers paying 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 principle 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 in senior unsecured notes and $2.5 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, enhancing our working capital position and financial flexibility.

And we believe we're in position to drive a strong conclusion to the year with bright growth prospects in 2021. Thank you for joining.

I'll now turn the call back over to Bill. William Rouhana Okay, operator, we'll take questions.

Great. Thanks.

Good afternoon. Bill, nice momentum you're seeing here.

I just want to touch on two things you talked on in your prepared remarks. First on the CPM side, you made it very clear that you guys were holding price to different tactic.

And now you're talking about CPM is doubling on certain orders. Obviously, there is been mix shifted connected TV.

I'm just curious how much of that is, I think open programmatic to 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 advertisings in the audience growth side, look, I really want to get a little bit better sense 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 to the extent that Quibi couldn’t make it work, Roku has obviously taken bunch of share.

I'm just curious how you see the landscape in terms of where you guys attack to continue the nice audience growth you've seen. Thanks.

Okay. Thanks Dan.

So first, on the advertising CPM side of the world. The one surprising thing that has happened since we saw our big competitors acquired by major media companies 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 then competitors. It turns out that if you're a major media company with a broadcast network or a cable network and an OTT network, you try to stuff down the throat of advertisers that combined package of stuff that they may or may not want.

And if they just want OTT and they only want it on a premium basis, there really isn't any place to go anymore, but us. And I'm seeing increasingly that, that is a part of the reason Dan, that we're able to really improve pricing.

I think that's going to go on for a bit, I don't expect the big media companies to stop trying to stuff people with a package of things that they – some of which they want and some of which they don't. And I certainly don't expect advertisers to give up trying to buy what they really want to buy.

So that is – that was an unexpected result of having our competitors purchased, and it's fascinating to me. We have a scarcer resource, which is a pure OTT ability to buy advertising.

And there is no question, the demand in our space is growing very dramatically and has been ignited by the change in viewership that came from the pandemic. So that's the first one.

The growth in viewership question, as I said in my prepared remarks, not only are we increasing our distribution platforms and every time we put one of these up, we see 300,000, 400,000 in the case of Plex now over 500,000 monthly viewers added to our viewership. And if you start multiplying that by the 15 plus new platforms that we're going to be launching 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 a pretty aggressive marketing campaign on the smart TV platforms and on Amazon Fire. On the smart TVs, we've gone there because that's where the growth is.

The growth is all coming in smart TVs now, people don't want to have to buy an Amazon Fire stick or a Roku stick, if they pull out of the box a TV that's capable of being a smart television. So we're pushing there, the VIZIO button was a good example of a strategy that I think will really bear fruit.

There is 2.5 million remotes in next year that are going to be unpacked with our Crackle brand on it. And that will make it easy for people to get to us.

Should they add a dramatic number of new viewers to us, but also we're finding that with Amazon, we're able to really significantly measure and effectively market to new viewers. And that has really been very helpful.

So we are hitting many days, all time high ad impressions right now, as we speak. And then it’s one of the reasons I said, – well, that's obviously be driven by viewers, but that's one of the reasons I said in my prepared remarks that November and December look like there will be all time record months for us.

So…

That's super helpful. I just wanted to follow-up on that last thought.

Obviously, we had the vaccine news, hopefully it works on Monday and clearly COVID is not going away. Just kind of your thoughts on going into 2021, how much do we – is the streaming shift sustained?

What do you guys think 2021 kind of looks like from a viewership perspective?

Yes. So I think there is 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 COVID or not COVID environment, people are going to watch television on their – with their 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 of – now I see more repeats of ads on broadcast television they do on our own networks. So I'm feeling better and better about the quality of what we do.

So I think streaming is here to stay. 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 set things up for 2021 – for 2020 in distribution and production. And 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 Crackle Plus and the online networks business is set up to grow very meaningfully, not just through the new platforms, not just through the marketing, but also by the additional channels of 8 Plus and Chicken Soup for the Soul. There's a lot of stuff in place now to make 2021 an amazing year for us.

Perfect. Thanks Bill.

Appreciate all the color. And nice printed momentum.

Thanks, Dan.

Great. Thank you.

So first I had a statement and I had a question and then after you answered my question, I have a follow-up question. So the statement is, congratulations, congratulations, congratulations.

All right. So my first question is Bill I’m going to ask you the same question I asked Roku on Roku's earnings call.

Can you talk about the advancements you're seeing in the AVOD sector? What we're noticing is Amazon is taking more seriously, including its own AVOD efforts IMDb TV, Amazon even mentioned IMDb TV on its earnings call, and by the way, we've seen Amazon advertising on Crackle.

And then we've also seen more legacy linear TV advertisers warmly embracing AVOD beyond Geico and progressive. And 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.

Your perspective on the advancements you're seeing in AVOD. So it's clear to me that AVOD, I used the word maturing and Roku and they hated maturing.

So it's clear to me that AVOD is becoming more prevalent, you're seeing more linear TV advertisers doing it. So I wanted your vantage point, not mine.

Well, you know what, you're one of the few people I know who watch it pretty much every single AVOD network and then report on how many advertisers you see, who they are, how often they repeat themselves, et cetera. So you have as good a perspective as anyone, but I can tell you from our viewpoint, AVOD is here to stay, AVOD 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 2 times what we had last year, that's not an insignificant fact, but also we have new advertisers, major new advertisers. I would say in those up-fronts, we're seeing about half of those advertisers are brand new major advertisers.

So I think, whatever resistance there may have been to this new thing called AVOD, it's over, and the question in my mind really is how fast does the flow continue? And we've got way more demand than we can really service, which is one of the reasons why we didn't take a lot of political ads in the third quarter and instead focused on people who would still be customers of ours, when there wasn't an election.

So this is – the demand is very real for advertisers and 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 monetize your proprietary film content, such as the Outpost?

Okay. So as you know, when we either produce or acquire programming, our primary goal is that to have that programming available for ourselves for our own networks with little or no net investment.

Well, as it turns out, we not only 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 Outpost domestically, we released it on TVOD, whereas we've mentioned it was the number one movie. We released it in DVD where it's been a huge bed up in Walmart, and one of the top performers on Redbox, which by the way is still a very vibrant distribution channel for us.

And then we added its 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 us many, many, many dollars.

In other ways, it will only be available for our own AVOD networks. And it will be in high demand because if you take the aggregate of all of those viewers who were on TVOD, who saw it in DVD and who will have seen it on Netflix, the vast majority of human beings will still not have seen 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 in television with Going From Broke and On Point. And it's worked pretty much consistently, Tom, with every acquisition we've made and absolutely consistently with all the productions.

So I see this as a great model, we've been able to replicate it, and it's moving along, it just keeps moving along at a great pace.

Right. Thanks for taking my questions.

Thank you.

Thanks guys for taking my question. Obviously, a great job on the 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 as that moves over to the Crackle Plus networks?

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 way back in October of last year, and now there's been a couple of months for the last year there’s – now there's a couple of dozen.

Over the next year, there'll 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 profitable content will grow as a – will create a critical mass of its own on our networks.

And so we will have a greater and greater percentage of it generating the ad impressions, which already they generate 17% of ad impressions when it's only two dozen shows out of 7,000 or 8,000 movies. And I don't know, how many episodes of television we have on our networks today.

So this 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 low – it has a low – these programs have a lower cost of revenue.

And this will – you'll 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 asked my second question in 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 and exclusive programming to get to or any timeframe and when you expect it to get there?

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

You guys probably heard me say, grow viewers and reduce the cost of content being our two primary goals in an overarching way next year. And when we said reduce the cost of content, that we're really two subtexts to that.

One was the one we just discussed of growing original and exclusive content on a continuous basis because that will drive greater EBITDA, greater gross profit. But the second thing was more owned content in the things that are on our network.

And today, of those 10,809 movies, I mentioned and 22,000 episodes of television, only 1,400 of those are owned by us. The rest are revenue share contracts with over 110 producers.

But we intend to and 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 in – that exclusive content, which we will make our own networks, our own libraries exclusive as well as the two or three every month that we put up will help us grow that percentage chase and faster than people realize.

And that will be 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 gross profit. So I didn't answer your question about a goal because I'm really not sure what the right goal is and the right tempo is, and it's somewhat driven by the opportunity to acquire meaningful libraries, but we're quite close on a couple now.

And so I think we should 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 Bill.

Appreciate it.

Thanks Jason.

Hey, congratulations on quarter. Could you remind us of what Sony's choices are, at least initially their choices, with regards to the Crackle thing?

Sure. They have two choices, Jon.

One is to maintain a 49% common equity interest in our subsidiary, which is called Crackle Plus, which holds our online networks or to own $40 million of the preferred stock that we have at Chicken Soup for the Soul Entertainment, it's got the symbol, CSSEP, it's a publicly-trading preferred, which as you recall, is a perpetual preferred that is not, can never be forced to be redeemed. It's equivalent of equity.

And those are their two choices as per our agreement. That's what the two choices are as per our agreement.

The preferred pays 10% basically, right?

Yes, nine and three quarters – 10%...

So if they take the math. Okay.

So if they take the $40 million, they'd get basically $4 million a year in…

Correct.

Okay. And if they take the 49%, then who knows what they get, right.

They get 49% of the profits of that joint venture.

Okay.

Obviously, we haven't gotten either of those choices made as of two days from now, which is when they were required to do it.

Okay. Thank you for that.

My last question is, could you go over, I think I might have missed this in the prepared remarks, could you go over the jump in SG&A expenses this quarter, kind of it was pretty big sequential jump. And I think there were some reasons for that, but I think I missed them as you were talking.

Yes. Chris actually did that – explain that.

Now I'll let him answer this question.

Okay, thank you.

Sure. The biggest driver of the increase in SG&A 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 think as a percentage of net revenue, I think that's about a seven point increase.

We would not expect SG&A to stay at these levels. We also had some unusually high professional fees, a lot of which was related to financing activities, that's probably not a three points worth.

So, from a margin perspective, like no 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 it for me.

Thanks Jon. Okay.

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

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

Maybe just, you touched on the VIZIO remote, kind of the Smart TV opportunity. Can you just give us a high level idea of that market size and the current penetration there?

Well, so VIZIO, they put out, I've not really – I know how many televisions they put out, but I'm pretty sure I'm not – I shouldn't be sharing that with you, per year. But we are going to be on roughly two and a half million of the remotes in the – 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 are you trying to get at, Mike?

So I can be more helpful.

I guess, just the current, I don't know the number off the top of my head, but the number of TVs out there that are Smart TVs and how many people have either downloaded the app or it's on their out of the box?

Well, look, the Smart TV, the point of the VIZIO button for us is that the apps pre-downloaded and you're able to get to it with just one click. And as far as the number of TVs 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 with the Microsoft, Sony, doing their console – gaming console upgrades this year.

Is that an opportunity there to get further viewership or?

Yes. I mean, we have – we're on both those platforms and I think they've been enhanced to be better, more video-friendly for sure.

And I think they're likely to be good platforms, but I don’t think that they're as significant for our AVOD business as Smart TVs are. I think that's where you're going to see the vast majority of the growth in viewership, over the next little bit of time, because it's just easy for consumers and the primary reason people buy Smart TVs is to watch television.

Whereas the primary reason they buy the game platforms is really to play games, so we are on them, but I don't view them as consequential as I do the smart televisions.

Got it. That's helpful.

All right. Well, that's it, for tonight.

We're – thank you for joining us. And I guess, we'll be back next quarter.