With its stock trading at 21 cents a share back on Dec. 22, down from a high of $41.39 reached in June 2021, Chicken Soup for the Soul quietly expressed in a very late third-quarter 10-Q filing to the SEC "substantial doubt" as to whether it can "continue as a going concern."
The filing -- and the small digital entertainment company's associated pessimism -- came after the Nasdaq issued a delisting warning to Chicken Soup for missing its November 10-Q filing deadline.
For investors, that Q3 filing contained little but bad news: Net losses swelled to $433.4 million vs. just $20.1 million a year prior. The increase was mostly the result of a one-time impairment charge related to Chicken Soup's May 2022 purchase of Redbox, during which Chicken Soup assumed $325 million in debt.
Excluding the impairment charge, the company reported an earnings before interest, taxes, depreciation and amortization (EBITDA) loss of around $7 million in Q3 vs. an EBITDA gain of about $9 million in the third quarter of 2022.
Total debt rose to $890.1 million during the third quarter, and the company's total asset value dropped 46% to $481.3 million.
Cash on hand had declined to $4.1 million vs. $18.7 million at the end of September 2022. Revenue was down 9.2% in the third quarter to $65.7 million. And despite a pledge to contain costs made back in August, operating expenses rose nearly 10% to $65.9 million.
Also read: Chicken Soup for the Soul Forms Sports Joint Venture With Fuel TV
Also in December, several indie producers stepped forward with legal complaints regarding alleged failed payments from Chicken Soup. Next TV confirmed that least one of those lawsuits ended in a settlement agreement.
Chicken Soup had no comment when we reached out to them by phone and email Tuesday morning. (It's stock was trading at around 20 cents a share at the time, up from a bottoming out of 16 cents a share last week.)
However, in its third-quarter 10-Q filing, the company did tie the issue of nonpayments to content makers to a delayed credit facility.
"While the Company was offered a loan facility by a reputable private lending fund on terms compliant with the credit facility, the new loan facility was not approved by the Company’s primary lender," the document explains. "Thus, as the flow of theatrical releases began to increase following Covid, the Company’s inability to secure the accounts receivable loan hampered its ability to pay for and secure new content, which began to strain relationships with the Company’s creditors, including content providers.
"As a result, the Company was unable to pay for all the movies that were offered to it by its providers, and as a result operating results failed to meet management’s expectations, particularly in Redbox’s kiosk rentals, resulting in insufficient cash flows and a significant working capital deficit hampering our ability to operate the business efficiently," Chicken Soup's SEC filing further explained. "The combination of these factors has resulted in asserted defaults and/or contractual terminations with critical content and service providers, impacting our ability to procure and monetize content efficiently across our distribution platforms."
This last part perhaps best expresses management's pessimism in regard to avoiding bankruptcy: "Due to the on-going impact of the above factors on our current and future results of operations, cash flows and financial condition, there is substantial doubt as to the ability of the Company to continue as a going concern."
Chicken Soup fatefully agreed to pay $50 million in stock and take on $325 million in debt when it acquired struggling DVD-rental kiosk operator Redbox in May 2022.
There was cause for concern last summer, when Chicken Soup reported doubled net losses for the second quarter of $43.7 million. At the time, company chairman and CEO William J. Rouhana Jr. announced the formation of a strategic review board committee whose intent was to raise $30 million in free cash flow.
Rouhana acquired inspirational self-help book brand Chicken Soup for the Soul in 2008, adding to it indie film and TV distribution company Screen Media Entertainment and ad-supported streamer Popcornflix in 2017. In 2019, Rouhana and Chicken Soup purchased streaming company Crackle from Sony Pictures Television.
In May 2022, Rouhana explained to Next TV contributor David Bloom his rational for acquiring bankrupt Redbox:
“They built their transactional video business, their PVOD business, their FAST TV business with 130 FAST channels,” he said. “That's a perfect fit for what we do with our multiple AVOD networks — Crackle, Chicken Soup for the Soul, PopcornFlix — with our content library with just over 8,000 movies and TV shows that we own and 24,000 television shows and14,000 films that we have AVOD rights to. (We have) a huge sales force that sells AVOD ads, they don't have what we do. We were going to spend tens of millions on the tech they've already developed, they were going to spend tens of millions on the tech we developed.”
