OVERVIEW

Chicken Soup for the Soul Entertainment, Inc.’s (CSSE) 4Q23 revenues declined 66% year-over-year (YoY) and 40% sequentially to USD 39m reflecting an escalating cascade of challenges the company faces resulting from its ongoing liquidity crisis. Adjusted EBITDA likewise declined by USD 41m YoY to negative USD 23m in the quarter. CSSE has been unable to secure sufficient working capital to fund its critical operations including the acquisition of revenue-generating content, particularly content for its Redbox kiosks that has led to a drastic underperformance relative to the initial underwriting of the acquisition. The company is now confronted with deteriorating creditor and vendor relationships (including with content providers) and termination/non-renewal notices from content suppliers and service providers, further impairing its ability to generate revenues. In March, CSSE received a delisting notice from Nasdaq that if not cured will lead to the near-term delisting of its common stock, preferred stock, and 9.5% unsecured notes. The company reiterated that substantial doubt exists regarding its ability to remain a going concern and that it will need to execute restructuring and/or strategic transactions to alleviate this doubt. If these efforts are unsuccessful, it will likely seek relief through bankruptcy in the near term.

In our 2Q23 report we assumed the primary mechanism to address its liquidity shortfall would be obtaining a USD 40m ABL facility secured by its large accounts receivable balance as allowed under its existing credit facility. While the company was able to arrange a lender for this facility, it was ultimately not approved by HPS Investment Partners (the primary lender under the revolver and term loan). Management was able to partially alleviate its liquidity deficit by factoring USD 47m of short-dated receivables for USD 40m in cash (but was unable to factor longer-dated receivables), issuing preferred equity, and through improvements to its cost structure and efficiency but it has been insufficient and has resulted in a total depletion in the company’s liquidity to zero as of 4Q23 (net of USD 3.3m of restricted cash).

We continue to believe it is in the interest of all stakeholders to maintain CSSE as a going concern, although the parties are clearly running out of time and the viability of the company declines with each passing day. CSSE has entered into a term sheet with HPS outlining the general terms of a forbearance agreement that would grant the company 60 days to pursue financing transactions including a USD 50m sublicense and a USD 125m agreement with a third party comprised of a USD 65m line of credit and a USD 60m equipment lease secured by Redbox assets (which in our view may include kiosks, inventory of DVDs and games, intellectual property, or other technology or real estate assets). If the transactions close, a portion of the net proceeds would initially be used to pay down the HPS credit facility and the forbearance period would be extended to 30 September 2024. CSSE would be required to further pay down the HPS credit facility during the extension period. If CSSE were to fulfill its required payments under the agreement and meet the specified combined cash and asset value threshold, all remaining debt under the credit facility would be considered fully paid off and the principal and interest owed to HPS would be significantly reduced. If CSSE were unable to make its payments or otherwise defaulted under the existing credit agreement, HPS would once again be able to exercise its rights under the credit agreement.

We assume the company will continue to factor short-dated receivables and otherwise advantageously manage working capital, suspend management fees to Chicken Soup for the Soul, LLC (CSS), and that it will forgo various other payments including its put option obligation and payments under its Great Point Media and Media Entertainment acquisition advances. The company suspended preferred dividends beginning with the payment due on 15 January 2024 which saves approximately USD 3.7m per quarter. We assume the negative feedback loop in the company’s operations and revenue declines will worsen until it is able to consummate the proposed restructuring transaction or seeks in-court restructuring and obtains DIP financing. Approximately 59% of the company’s accounts receivable balance is related to two counterparties and 43% of the total balance is attributable to international customers, which could add complexity and reduce recoveries.

FINANCIAL PERFORMANCE

CSSE reported 4Q23 results far below expectations, with 4Q23 revenue and EBITDA of USD 39m and negative USD 23m versus street estimates of USD 133m and USD 42m, respectively. As discussed, revenue and EBITDA deterioration are primarily due to the company’s liquidity issues which have led to defaults and contractual terminations with critical content and service providers that have severely impacted its ability to procure and monetize content. In particular, CSSE’s working capital shortfall impacted its ability to stock Redbox kiosks with new theatrical releases which has caused precipitous declines in retail volumes and revenue in its retail segment to decline 49% YoY and 20% sequentially to USD 22m. The core assumption underwriting the Redbox acquisition was that demand for kiosk rentals would return to one-third of pre-COVID 2019 levels, which the company consequently has not been able to achieve. Revenue in the VOD and Streaming segment has been similarly impacted and saw a decline to USD 16m, 50% lower than 2Q23 and 75% below 4Q22 levels. While Licensing segment revenues held up and only declined by around 5% from 2Q23 to 3Q23, revenues in the segment cratered in 4Q23 by 93% sequentially to USD 1m.

VALUATION

CSSE is currently trading at a NTME EV/Revenue multiple of 4.7x which is higher than the peer average of 1.2x, but this is a function of the continued collapse in CSSE’s revenues while our calculation of enterprise value uses face values and thus doesn’t account for the fair market value of the entire capital structure (only equity capitalization). Using the fair market value of the unsecured notes and preferred equity along with our estimates of pricing for the HPS credit facility and MUFG facility, CSSE is currently trading at a 1.3x EV/Revenue multiple (in line with peers). CSSE suffers from a highly leveraged and unsustainable capital structure, execution/integration risk associated with the Redbox acquisition, and persistent negative operating and free cash flow. CSSE’s leverage is severely elevated relative to peers. We expect leverage will continue to deteriorate over the NTM and that CSSE will require significant restructuring to remain a going concern.

For our base case valuation, we use NTME revenue of USD 157m and an EV/revenue multiple of 1.0x-1.25x. This multiple is in line with the peer average and CSSE’s current multiple. This valuation waterfall does not include any assumptions for what the company’s capital structure may look like if it succeeds in executing the proposed restructuring transaction. Under this scenario the HPS revolver and term loan receive a 30%-38% recovery, and the unsecured obligations and series A preferred stock receive no recovery and implied equity valuation is zero.

The preferreds are currently trading at 0.4 (par value 25), the unsecured notes are trading at 3.7 (par value 25; trading at 14.8 if rebased to 100 par value), and the equity is trading at USD 0.15 with a market cap of USD 5m. These prices generally reflect market expectations that CSSE’s capital structure and business model are unsustainable and require significant restructuring. As discussed in our 1Q23 credit report, we believed the pricing on the unsecured notes (par value then vs. 3.7 now) was potentially dislocated relative to the credit risk of the company and our expectation of potential recoveries of unsecured creditors. The price has declined by over 85% since our report. The unsecured notes are baby bonds that were largely marketed to and held by retail investors, and thus their market price may not represent an efficient view of valuation or implied default risk.

OVERVIEW

Chicken Soup for the Soul Entertainment, Inc. (CSSE) is a Cos Cob, Connecticut-based producer and distributor of television and streaming content to value-conscious consumers.