UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 000-55029
THE CHOSEN, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 82-3246222 |
(State or other jurisdiction of | (I.R.S. Employer |
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4 S 2600 W, Suite 5 | 84737 |
(Address of principal executive offices) | (Zip Code) |
(435) 767-1338
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | N/A | N/A |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☑ | Smaller reporting company | ☑ |
| | Emerging growth company | ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
At November 14, 2023, 6,950,000 shares of the registrant’s Series A Common Stock, $0.001 par value per share, were issued and outstanding and 5,595,015 shares of the registrant’s Series B Common Stock, $0.001 par value per share, were issued and outstanding.
Table of Contents
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CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q (THIS “QUARTERLY REPORT”) MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE THIS FILING, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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Part I - Financial Information
Item 1. Financial Statements
The Chosen, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
| | | | | | |
|
| As of | ||||
| | September 30, 2023 |
| December 31, 2022 | ||
|
| | (Unaudited) |
| |
|
Assets |
| |
|
| |
|
Cash | | $ | 95,290 | | $ | 124,790 |
Accounts receivable, net of allowances of $1,682 and $0 at September 30, 2023 and December 31, 2022, respectively | |
| 3,214 | |
| 8,983 |
Inventory | |
| 10,179 | |
| 6,110 |
Prepaid assets | |
| 6,714 | |
| 754 |
Other current assets | |
| 1,243 | |
| 864 |
Total current assets | |
| 116,640 | |
| 141,501 |
Property and equipment, net | |
| 34,350 | |
| 34,426 |
Film costs, net | |
| 63,813 | |
| 33,276 |
Other assets | |
| 1,258 | |
| 1,042 |
Total assets | | $ | 216,061 | | $ | 210,245 |
Liabilities and Equity | |
| | |
|
|
Accounts payable | | $ | 2,656 | | $ | 5,549 |
Accrued expenses and other current liabilities | |
| 9,423 | |
| 12,827 |
Current portion of long-term debt and lease liabilities | |
| 2,572 | |
| 2,463 |
Total current liabilities | |
| 14,651 | |
| 20,839 |
Long-term debt and lease liabilities, net | |
| 142,844 | |
| 143,377 |
Other noncurrent liabilities | |
| 4,453 | |
| 2,571 |
Deferred tax liability, net | |
| 6,394 | |
| 5,104 |
Total liabilities | |
| 168,342 | |
| 171,891 |
Commitments and contingencies | |
| — | |
| — |
Series A Preferred Stock, $0.001 par value; 120% dividend preference; 8,000 shares authorized; 0 and 4,341 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | |
| — | |
| 5 |
Series A Common Stock, $0.001 par value; 10,900 shares authorized; 6,950 issued and outstanding at September 30, 2023 and December 31, 2022, respectively | |
| 7 | |
| 7 |
Series B Common Stock, $0.001 par value; 25,000 shares authorized; 5,595 and 1,254 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | |
| 6 | |
| 1 |
Additional paid-in capital | |
| 10,237 | |
| 10,237 |
Retained earnings | |
| 26,373 | |
| 18,004 |
Noncontrolling interest | |
| 11,096 | |
| 10,100 |
Total equity | |
| 47,719 | |
| 38,354 |
Total liabilities and equity | | $ | 216,061 | | $ | 210,245 |
See accompanying notes to the condensed consolidated financial statements.
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The Chosen, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
| | | | | | | | | | | | |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 | ||||
Revenues |
| |
|
| |
|
| |
|
| |
|
Licensed content and merchandise revenues | | $ | 8,508 | | $ | 5,262 | | $ | 36,971 | | $ | 13,195 |
Contribution revenues | |
| 5,978 | |
| — | | | 28,963 | | | — |
Total revenues | |
| 14,486 | |
| 5,262 | | | 65,934 | | | 13,195 |
| | | | | | | | | | | | |
Cost of revenues | |
| 4,279 | |
| 301 | | | 14,317 | | | 950 |
Advertising | |
| 3,775 | |
| 705 | | | 7,961 | | | 1,031 |
Amortization of film costs | |
| 2,608 | |
| 667 | | | 11,284 | | | 2,056 |
Depreciation and amortization | |
| 2,192 | |
| 1,237 | | | 6,569 | | | 1,333 |
General and administrative | |
| 7,846 | |
| 2,317 | | | 21,218 | | | 6,532 |
Net operating income (loss) | |
| (6,214) | |
| 35 | | | 4,585 | | | 1,293 |
Interest income | | | 676 | | | 1 | | | 2,172 | | | 1 |
Interest expense | |
| (369) | |
| (2) | | | (1,100) | | | (2) |
Other income (expense) | |
| (46) | |
| — | | | (25) | | | — |
Net income (loss) before income taxes | |
| (5,953) | |
| 34 | | | 5,632 | | | 1,292 |
Benefit (provision) for income taxes | |
| 1,851 | |
| (210) | | | (1,290) | | | (545) |
Net income (loss) | |
| (4,102) | |
| (176) | | | 4,342 | | | 747 |
Net loss attributable to noncontrolling interest | |
| 1,406 | |
| 712 | | | 4,027 | | | 804 |
Net income (loss) attributable to The Chosen, Inc. | | $ | (2,696) | | $ | 536 | | $ | 8,369 | | $ | 1,551 |
Less: | |
| | |
| | | | | | | |
Contractual preferred distributions to participating securities | |
| — | |
| 536 | | | — | | | 1,551 |
Income allocated to participating securities | |
| — | |
| — | | | — | | | — |
Net income (loss) attributable to Common Stock/Common Units | | $ | (2,696) | | $ | — | | $ | 8,369 | | $ | — |
Earnings (loss) per Common Stock/Common Units, basic and diluted(1) | | $ | (0.21) | | $ | — | | $ | 0.67 | | $ | — |
Weighted average Common Stock/Common Units outstanding, basic and diluted(1) | |
| 12,545 | |
| 7,190 | | | 12,545 | | | 7,190 |
(1) | Represents earnings (loss) per share and weighted average issued and outstanding Series A Common Stock and Series B Common Stock for the period after the change in share structure as result of the Company’s conversion on November 29, 2022 (see Note 3 and Note 6). |
See accompanying notes to the condensed consolidated financial statements.
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The Chosen, Inc.
Condensed Consolidated Statements of Equity
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Members’ Equity | | Stockholders’ Equity | | | | | | | | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A | | Series A | | Series B | | Series A | | Additional | | | | Non | | | |||||||||
| | Common | | Preferred Units | | Common Stock | | Common Stock | | Preferred Stock | | Paid-In | | Retained | | controlling | | Total | |||||||||
Three Months Ended September 30, 2023 |
| Units |
| Units |
| Amount | | Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| earnings |
| Interest |
| Equity | |
Balance as of June 30, 2023 | | — | | — | | — |
| 6,950 | | 7 | | 5,595 | | 6 | | — | | — | | 10,237 | | 29,069 | | | 7,589 | | 46,908 |
Contributions from noncontrolling interest | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | 4,913 | | 4,913 |
Net income (loss) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (2,696) |
| | (1,406) |
| (4,102) |
Balance as of September 30, 2023 |
| — |
| — |
| — |
| 6,950 |
| 7 |
| 5,595 |
| 6 |
| — |
| — |
| 10,237 |
| 26,373 |
| $ | 11,096 |
| 47,719 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2022 |
| — |
| — |
| — |
| 6,950 |
| 7 |
| 1,254 |
| 1 |
| 4,341 |
| 5 |
| 10,237 |
| 18,004 |
| | 10,100 |
| 38,354 |
Conversion to Series B Common Stock |
| — |
| — |
| — |
| — |
| — |
| 4,341 |
| 5 |
| (4,341) |
| (5) |
| — |
| — |
| | — |
| — |
Contributions from noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | 5,023 |
| 5,023 |
Net income (loss) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 8,369 |
| | (4,027) |
| 4,342 |
Balance as of September 30, 2023 |
| — |
| — |
| — |
| 6,950 |
| 7 |
| 5,595 |
| 6 |
| — |
| — |
| 10,237 |
| 26,373 |
| $ | 11,096 |
| 47,719 |
See accompanying notes to the condensed consolidated financial statements.
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The Chosen, Inc.
Condensed Consolidated Statements of Equity
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Members’ Equity | | Stockholders’ Equity | | | | | | | | | | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A | | Series A | | Series B | | Series A | | Additional | | | | Non | | | ||||||||||
| | Common | | Preferred Units | | Common Stock | | Common Stock | | Preferred Stock | | Paid-In | | Retained | | controlling | | Total | ||||||||||
Three Months Ended September 30, 2022 |
| Units |
| Units |
| Amount | | Shares | | Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| earnings |
| Interest |
| Equity | ||
Balance as of June 30, 2022 | | 14,380 | | 11,190 | | 11,190 |
| — | | $ | — | | — | | — | | — | | — | | (940) | | 33,230 | | | 5,974 | | 49,454 |
Contributions from noncontrolling interest | | — | | — | | — | | — | | | — | | — | | — | | — | | — | | — | | — | | | 536 | | 536 |
Net income (loss) |
| — |
| — | | — |
| — | |
| — |
| — |
| — |
| — |
| — |
| — | | 536 | | | (712) | | (176) |
Balance as of September 30, 2022 |
| 14,380 |
| 11,190 | | 11,190 |
| — | | $ | — |
| — |
| — |
| — |
| — |
| (940) | | 33,766 | | $ | 5,798 | | 49,814 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2021 |
| 14,380 |
| 11,190 | | 11,190 |
| — | | $ | — |
| — |
| — |
| — |
| — |
| (940) | | 32,215 | | | 1,914 | | 44,379 |
Contributions from noncontrolling interest |
| — |
| — | | — |
| — | |
| — |
| — |
| — |
| — |
| — |
| — | | — | | | 4,688 | | 4,688 |
Net income (loss) |
| — |
| — | | — |
| — | |
| — |
| — |
| — |
| — |
| — |
| — | | 1,551 | | | (804) | | 747 |
Balance as of September 30, 2022 |
| 14,380 |
| 11,190 | | 11,190 |
| — | | $ | — |
| — |
| — |
| — |
| — |
| (940) | | 33,766 | | $ | 5,798 | | 49,814 |
See accompanying notes to the condensed consolidated financial statements.
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The Chosen, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities | | | | | | |
Net income (loss) |
| $ | 4,342 |
| $ | 747 |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | |
Depreciation and amortization expense | | | 6,569 | | | 1,333 |
Amortization of film costs | | | 11,284 | | | 2,056 |
Deferred income tax provision | | | 1,290 | | | 820 |
Amortization of debt issuance costs | | | 101 | | | — |
Non-cash lease expense | | | 48 | | | 4 |
Allowance for doubtful accounts | | | 1,682 | | | — |
Gain/loss on sale of assets | | | 39 | | | — |
Changes in operating assets and liabilities: | | | | | | |
(Increase) decrease in accounts receivable | | | 3,962 | | | 8,178 |
(Increase) decrease in inventory | | | (2,699) | | | (179) |
(Increase) decrease in prepaids and other current assets | | | (6,139) | | | 781 |
(Increase) decrease in film costs | | | (39,628) | | | (27,044) |
Increase (decrease) in accounts payable | | | (3,922) | | | (985) |
Increase (decrease) in accrued expenses and other current liabilities | | | 4,028 | | | 463 |
Increase (decrease) in other noncurrent liabilities | | | 1,882 | | | — |
Net cash flows provided by (used in) operating activities | | | (17,161) | | | (13,826) |
Cash flows from investing activities | | | | | | |
Acquisition of property & equipment | | | (6,677) | | | (21,748) |
Acquisition of trademark | | | (3) | | | (61) |
Proceeds from sale of property & equipment | | | 184 | | | — |
Net cash flows provided by (used in) investing activities | | | (6,496) | | | (21,809) |
Cash flows from financing activities | | | | | | |
Contributions from noncontrolling interest member | | | 5,023 | | | 6,630 |
Proceeds from issuance of debt | | | — | | | 15,000 |
Principal paid on finance lease | | | (12) | | | (7) |
Principal paid on debt | | | (437) | | | — |
Dividends paid | | | (10,417) | | | — |
Net cash flows provided by (used in) financing activities | | | (5,843) | | | 21,623 |
Net change in cash | | | (29,500) | | | (14,012) |
Cash, beginning of period | | | 124,790 | | | 15,932 |
Cash, end of period |
| $ | 95,290 |
| $ | 1,920 |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest | | $ | 1,100 | | $ | 2 |
Purchase of property and equipment with accounts payable | | | 22 | | | 2,600 |
Accounts payable and accrued expenses and other current liabilities related to film costs, net |
| | 2,422 |
| | — |
See accompanying notes to the condensed consolidated financial statements.
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The Chosen, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
The Chosen, Inc., a Delaware corporation, is an independent television and film production company, which was created to develop and produce an episodic television series entitled The Chosen (the “Series”). The Series is based on the gospels of the Bible and tells the story of the life of Jesus Christ primarily through the perspectives of those who met him throughout his life.
The condensed consolidated financial statements of The Chosen, Inc., its wholly owned subsidiaries, and its variable controlling interest in Impossible Math, LLC (collectively the “Company”), have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and are consistent in all material respects with those applied in the Company’s Annual Report for the year ended December 31, 2022 included in the Company’s amended registration statement on Form 10 filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 23, 2023 (as amended, the “Form 10”). The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the amortization of content assets and the recognition and measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.
The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form 10. Interim results are not necessarily indicative of the results for a full year.
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report for the year ended December 31, 2022.
Revision of Previously Issued Financial Statements
In connection with the preparation of the Company’s condensed consolidated financial statements, certain prior period adjustments in previously issued interim financial statements were identified. The prior period misstatement related to estimates for and recognition of accrued compensation costs and capitalization of film costs as of and for the three months ended June 30, 2023. The Company evaluated the errors, both qualitatively and quantitatively, and concluded that the corrections did not have a material impact on, nor require amendment of, any previously issued financial statements.
The correction of this misstatement resulted in an increase to Film costs, net of $1,790 thousand, and an increase to Accrued expenses and other current liabilities of $399 thousand in the Condensed Consolidated Balance Sheets as of June 30, 2023, a decrease to Cost of revenues of $1,391 thousand in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and an increase to Retained earnings of $1,391 thousand in the Condensed Consolidated Balance Sheets as of June 30, 2023 and in the Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2023. This correction increased Net income (loss) by $1,391 thousand and increased Earnings (loss) per Common Stock/Common Units, basic and diluted by $0.11 for the three and six months ended June 30, 2023. The Company retrospectively corrected the misstatements and revised the Condensed Consolidated Balance Sheets as of June 30, 2023 and the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Equity as of and for the three and six months ended June 30, 2023. There is no impact to Cash flows provided by (used in) operating, investing, or financing activities in the in the Condensed Consolidated Statements of Cash Flow.
Accounts Receivable
Accounts receivable are carried at the original invoice amount less an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Even though management determines the allowance for doubtful accounts by
- 8 -
identifying accounts and using historical experience applied to an aging of accounts, the Company remains committed to pursuing the balances. Recoveries of receivables previously written off are recorded when received. The Company does not charge interest on past due balances or require collateral on its accounts receivable. As of September 30, 2023 and December 31, 2022, the allowance for doubtful accounts was $1,682 and $0, respectively. As of September 30, 2023 the Company recognized a reserve of $1,639 thousand for accounts receivables from Angel Studios, Inc. (“Angel Studios”) due to the Company’s delivery of a Notice of Termination, effective on October 20, 2023, of the Content License Agreement between Angel Studios and the Company. Although the Company reserved for the Angel Studios Receivable, the Company intends to continue to pursue collection. Refer to Note 10 - Subsequent Events for further information.
Internal-Use Software
The Company capitalizes costs incurred to develop or obtain internal-use software and website development costs during the application development stage. Capitalization of software development costs occurs after the preliminary project stage is complete, management authorizes the project, it is probable that the project will be completed, and the software will be used for the function intended. The Company expenses costs incurred for training, data conversion, and maintenance, and in the post-implementation stage. A subsequent addition, modification or upgrade to internal-use software is capitalized only to the extent that it enables the software to perform a task it previously could not perform. The internal-use software is included in Software under Property and equipment, net in the Condensed Consolidated Balance Sheets once the software development is completed. The internal-use software is included in Construction in process under Property and equipment, net in the Condensed Consolidated Balance Sheets when the software is still in development. The Company amortizes internal-use software over its estimated useful life on a straight-line basis.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts which, at times, exceed federally insured limits. As of September 30, 2023 and December 31, 2022, the bank balance exceeded the federally insured limit by $15,491 thousand and $124,293 thousand, respectively.
A major customer is considered to be one that comprises more than 10% of the Company’s accounts receivable or annual revenues. During the three months and nine months ended September 30, 2023, 56.6% and 73.6%, respectively, of the Company’s revenues were collectively with major customers: Lions Gate Television, Inc. (“Lions Gate”),Angel Studios and the Come and See Foundation, Inc. (“CAS”). During the three months and nine months ended September 30, 2022, 95.4% and 94.3%, respectively, of the Company’s revenues were with Angel Studios. As of September 30, 2023, 50.6% of the Company’s accounts receivable was due from Lions Gate. As of December 31, 2022, 92.0% of the Company’s accounts receivable was due from Angel Studios, and CAS.
Note 2 - Revenue Recognition
The Company primarily earns its revenue from licensing its intellectual property rights related to the Series. Licensed content revenues are primarily earned from royalties based on (i) existing and emerging digital home entertainment platforms, including but not limited to Netflix, Hulu, and most VOD streaming platforms, as well as (ii) physical media, including DVD and Blu-ray Discs, (iii) linear television, (iv) theatrical distribution of certain episodes or other content (v) books, and (vi) merchandise. Additionally, merchandise revenue is generated from online store and wholesale sales of The Chosen merchandise.
The Company also generates revenues from funds received under a non-reciprocal agreement with CAS for donation proceeds received by CAS through The Chosen App to be used in furtherance of the charitable purposes of CAS, which include the production of the Series. Contributions received from voluntary donations pursuant to the agreement with CAS are reported as Contribution revenues in the Consolidated Statements of Operations in accordance with ASC Topic 958, Not-for-Profit Entities, being a core source of revenue from the Series and used to market, produce and distribute the Series.
- 9 -
The following table presents the Company’s revenue disaggregated by licensed content and merchandise revenues as well as contribution revenues (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Licensed content | | $ | 4,814 | | $ | 4,908 | | $ | 18,084 | | $ | 12,841 |
Merchandise | |
| 3,694 | |
| 354 | |
| 18,887 | |
| 354 |
Licensed content and merchandise revenues | | $ | 8,508 | | $ | 5,262 | | $ | 36,971 | | $ | 13,195 |
Contribution revenues | |
| 5,978 | |
| — | |
| 28,963 | |
| — |
Revenues | | $ | 14,486 | | $ | 5,262 | | $ | 65,934 | | $ | 13,195 |
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of the Company’s right to bill and receive consideration and that right is conditioned upon something other than the passage of time. The Company did not have any contract assets as of September 30, 2023 and December 31,2022.
Contract liabilities are recorded when consideration is received from a customer prior to fully satisfying a performance obligation in a contract. The Company’s contract liabilities consist of deferred revenue for cash received related to licensed content arrangements under which a payment has been received and the content has not yet been made available to the customer and cash received related to merchandise arrangements under which a payment has been received and the order is unfulfilled. These contract liabilities will be recognized as revenues when control of the related product or service is transferred to the customer.
The following table presents contract liabilities included on the Condensed Consolidated Balance Sheets (in thousands):
| | | | | | |
| | As of | ||||
| | September 30, | | December 31, | ||
| | 2023 | | 2022 | ||
Accrued expenses and other current liabilities |
| $ | 1,277 |
| $ | 165 |
Other noncurrent liabilities (1) | |
| 1,928 | |
| 2,571 |
Total | | $ | 3,205 | | $ | 2,736 |
(1) | This amount reflects the cash payment received from the CAS transaction for performance obligations that were not satisfied as of September 30, 2023. |
Revenue recognized during the three and nine months ended September 30, 2023, from amounts included in total contract liabilities as of December 31, 2022, was $0 and $165 thousand, respectively. There was no revenue recognized from amounts included in total contract liabilities for three and nine months ended September 30, 2022.
Note 3 – Earnings (loss) per share
Earnings (loss) per share (“EPS”) is calculated using the two-class method, which requires the allocation of earnings to each class of common stock outstanding and to participating securities with rights to earnings that would otherwise have been available to common stockholders. Except with respect to the number of votes per share, Series A Common Stock and Series B Common Stock have the same rights and preferences, including equal rights to participation in the dividends and other distributions of the Company (see Note 6). Accordingly, basic and diluted earnings per share is the same for both classes and EPS for the three months and nine months ended September 30, 2023 have been presented as a single class of common stock.
All Series A Preferred Stock were previously reflected as converted into Class B Common Stock for basic EPS as of December 31, 2022 following the declaration of the Dividend to Series A Preferred Stockholders (See Note 6 and the Company’s Annual Report for the year ended December 31, 2022 included in the amended Form 10). Diluted weighted average common stock outstanding for the three and nine months ended September 30, 2022 does not include the effects of the conversion of the participating Series A Preferred
- 10 -
Stock as the inclusion of these instruments would have been anti-dilutive. As of September 30, 2023, the Company does not have any potentially dilutive instruments outstanding.
Note 4 – Balance Sheet Components
Inventory
As of September 30, 2023 and December 31, 2022, inventory consisted of the following (in thousands):
| | | | | | |
|
| As of | ||||
| | September 30, | | December 31, | ||
| | 2023 |
| 2022 | ||
Raw materials | | $ | 985 | | $ | 985 |
Finished goods | |
| 9,194 | |
| 5,125 |
Inventory | | $ | 10,179 | | $ | 6,110 |
Property and Equipment
Property and Equipment and accumulated depreciation consisted of the following:
| | | | | | | | |
|
| As of |
| | ||||
| | September 30, | | December 31, | | Estimated | ||
| | 2023 |
| 2022 |
| Useful Lives | ||
| | (in thousands) | | (in years) | ||||
Land | | $ | 90 | | $ | 90 | |
|
Buildings and improvements | |
| 37,100 | |
| 36,495 | | 4 – 30 |
Equipment | |
| 781 | |
| 290 | | 3 – 15 |
Furniture and fixtures | |
| 74 | |
| 16 | | 5 |
Vehicles | |
| 484 | |
| 758 | | 8 |
Construction in process | |
| 5,546 | |
| — | |
|
PPE, gross | |
| 44,075 | |
| 37,649 | |
|
Accumulated depreciation | |
| (9,725) | |
| (3,223) | |
|
PPE, net | | $ | 34,350 | | $ | 34,426 | |
|
No impairment of property and equipment was recorded during the three months and nine months ended September 30, 2023 and 2022.
Film Costs
The following table represents the components of film costs (in thousands):
| | | | | | |
| | As of | ||||
| | September 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Released and completed film costs | | $ | 47,612 | | $ | 47,362 |
Not released, in production film costs | |
| 43,591 | |
| 2,250 |
In development or preproduction film costs | |
| 989 | |
| 759 |
Film costs, gross | |
| 92,192 | |
| 50,371 |
Accumulated amortization | |
| (28,379) | |
| (17,095) |
Film costs, net of amortization | | $ | 63,813 | | $ | 33,276 |
Amortization expense for film costs during the three months ended September 30, 2023 and 2022 was $2,608 thousand and $667 thousand, respectively. Amortization expense for film costs during the nine months ended September 30, 2023 and 2022 was $11,284 thousand and $2,056 thousand, respectively.
- 11 -
The future aggregate amounts of amortization expense expected to be recognized over the next five years related to released and completed film costs as of September 30, 2023 are as follows (in thousands):
| | | |
Years Ending December 31: |
| Amount | |
Remainder of 2023 | | $ | 2,703 |
2024 | |
| 7,158 |
2025 | |
| 6,773 |
2026 | |
| 2,129 |
2027 | |
| 470 |
Total | | $ | 19,233 |
Leases
The Company has operating and finance leases for some of the Company’s operating and office facilities and vehicles. The leases expire at various dates through 2027 and provide for renewal options ranging from one month to four terms of ten-years. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.
The Company’s operating and finance right-of-use assets and lease liabilities consisted of the following (in thousands):
| | | | | | |
|
| September 30, 2023 |
| December 31, 2022 | ||
Right-of-use assets (1) |
| |
|
| |
|
Operating leases | | $ | 1,069 | | $ | 889 |
Finance leases | |
| — | |
| 86 |
Total right-of-use assets | | $ | 1,069 | | $ | 975 |
| | | | | | |
Short-term lease liabilities (2) | |
| | |
|
|
Operating leases | | $ | 336 | | $ | 533 |
Finance leases | |
| — | |
| 19 |
| | $ | 336 | | $ | 552 |
Long-term lease liabilities (3) | |
| | |
|
|
Operating leases | | $ | 534 | | $ | 338 |
Finance leases | |
| — | |
| 68 |
| | $ | 534 | | $ | 406 |
| | | | | | |
Total lease liabilities | | $ | 870 | | $ | 958 |
(1) | Included in Other assets in the Condensed Consolidated Balance Sheets. |
(2) | Included in Current portion of long-term debt and lease liabilities in the Condensed Consolidated Balance Sheets. |
(3) | Included in Long-term debt and lease liabilities in the Condensed Consolidated Balance Sheets. |
The components of lease costs consisted of the following (in thousands):
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
Lease costs |
| |
|
| |
|
| |
|
| |
|
Finance lease cost |
| |
|
| |
|
| |
|
| |
|
Amortization of right-of-use assets | | $ | 5 | | $ | 96 | | $ | 15 | | $ | 99 |
Interest on lease liabilities | |
| 1 | | | 9 | | | 3 | | | 10 |
Operating lease cost | |
| 201 | | | 504 | | | 562 | | | 567 |
Variable and short-term lease cost | |
| 1,710 | | | 517 | | | 2,524 | | | 834 |
Total lease cost | | $ | 1,917 | | $ | 1,126 | | $ | 3,104 | | $ | 1,510 |
- 12 -
Cash paid during the period for amounts included in the measurement of lease liabilities consisted of the following (in thousands):
| | | | | | |
|
| Nine Months Ended | ||||
| | September 30, | ||||
| | 2023 |
| 2022 | ||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
| |
|
Operating cash flows for finance leases | | $ | 3 | | $ | 9 |
Operating cash flows for operating leases | |
| 516 | | | 24 |
| | | | | | |
Right-of-use assets obtained in exchange for lease obligations: | |
| | | | |
Operating leases | | $ | 507 | | $ | 567 |
Finance leases | |
| — | | | 99 |
Supplemental balance sheet information related to leases consisted of the following (in thousands):
| | | | | |
|
| September 30, 2023 |
| December 31, 2022 |
|
Weighted average remaining lease term (in years): |
|
|
|
| |
Operating leases |
| 2.76 years |
| 2.44 years | |
Finance leases |
| — |
| 4.33 years | |
Weighted average discount rate: |
| |
| | |
Operating leases |
| 5.60 | % | 4.71 | % |
Finance leases |
| — | % | 4.26 | % |
Maturities of lease liabilities as of September 30, 2023 were as follows (in thousands):
| | | | | | |
|
| Operating Leases |
| Finance Leases | ||
Remainder of 2023 | | $ | 156 | | $ | — |
2024 | |
| 286 | | | — |
2025 | |
| 277 | | | — |
2026 | |
| 217 | | | — |
2027 | |
| — | | | — |
Thereafter | |
| — | | | — |
Total lease payments | |
| 936 | | | — |
Imputed interest | |
| (66) | | | — |
Total lease liability | | $ | 870 | | $ | — |
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | |
| | As of | ||||
| | September 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
| | | | | | |
Accrued participant royalties | | $ | 3,223 | | $ | 1,383 |
Accrued compensation | |
| 2,642 | |
| 273 |
Deferred revenues | |
| 1,277 | |
| 165 |
Accrued inventory purchases | | | 835 | | | — |
Credit card liabilities | |
| 853 | |
| — |
Dividends payable | |
| — | |
| 10,417 |
Other | |
| 593 | |
| 589 |
Accrued expenses and other current liabilities | | $ | 9,423 | | $ | 12,827 |
- 13 -
Note 5 - Debt
On November 29, 2022, the Company entered into a financing agreement with CAS with an aggregate principal of $145,500 thousand. This loan has no maturity date with no fixed repayment schedule and is non-interest bearing for the first seven years, after which the loan accrues interest at the then-current applicable federal rate. The Company is required to repay the loan quarterly, based on a specified percentage of 5% applied to the proceeds received from certain of the Company’s licensed content and merchandise revenues, which continues to be paid to CAS after the aggregate principal balance is repaid. The loan is recorded applying the effective interest method based on the expected repayments and estimated timing and amount due upon a potential liquidity event. This financing agreement was subsequently amended on October 31, 2023. Refer to Note 10 - Subsequent Events for further information.
In addition, upon the occurrence of certain events, the Company’s repayment of the outstanding principal balance may be accelerated or be declared immediately due. Such events include voluntary or involuntary bankruptcy, change of control, corporate arrangement, or other customary events of default. The loan is secured by the intellectual property rights owned by the Company, whereby CAS receives a first-priority continuing senior security interest.
The following table presents debt on the Condensed Consolidated Balance Sheets (in thousands):
| | | | | | |
| | As of | ||||
| | September 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Long-term debt (1) | | $ | 142,897 | | $ | 143,659 |
Current portion of long-term debt (2) | |
| 2,236 | |
| 1,911 |
Total long-term debt | | $ | 145,133 | | $ | 145,570 |
(1) | Included in Long-term debt and lease liabilities, net in the Condensed Consolidated Balance Sheets. |
(2) | Included in Current portion of long-term debt and lease liabilities in the Condensed Consolidated Balance Sheets. |
Long-term debt is net of unamortized debt issuance costs of $587 thousand and $688 thousand as of September 30, 2023 and December 31, 2022, respectively.
Note 6 - Equity
A dividend of $2.40 for each outstanding share of Series A Preferred Stock totaling $13,428 was declared on November 30, 2022, and the Company initiated the payment to stockholders on December 2, 2022. Upon receipt of payment of the dividend, each share of Series A Preferred Stock is converted into one share of Series B Common Stock. As of December 31, 2022, 1,254,391 shares of Series A Preferred Stock had been converted into Series B Common Stock. In March 2023, the Company paid the remaining dividend to holders of Series A Preferred Stock $10,417 thousand or $2.40 to all remaining Series A Preferred Stockholders. As such, all Series A Preferred Stock have been converted to Series B Common Stock and as of September 30, 2023.
Each share of Series A Common Stock is entitled to ten votes per share, and each share of Series B Common Stock is entitled to one vote per share. Except with respect to the number of votes per share, Series A Common Stock and Series B Common Stock have the same rights and preferences, including equal rights to participation in the dividends and other distributions of the Company.
Note 7 - Income Taxes
| | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | ||||||||
| | September 30, | | | September 30, | | ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Deferred provision (benefit) for income tax | | $ | (1,850) | | $ | 207 | | | $ | 1,290 | | $ | 820 | |
Current income taxes | | | (1) | | | 3 | | | | — | | | (275) | |
Provision (benefit) for income taxes | | $ | (1,851) | | $ | 210 | | | $ | 1,290 | | $ | 545 | |
Effective tax rate | |
| 31 | % |
| 618 | % | |
| 23 | % |
| 42 | % |
- 14 -
The effective tax rates for the three months and nine months ended September 30, 2023 and 2022 differed from the federal statutory rate primarily due to the impact from the net loss attributable to noncontrolling interest (“NCI”).
The decrease in the effective tax rate of 587% for the three months ended September 30, 2023 as compared to 2022 was primarily due to the impact from the net loss attributable to NCI of $694 thousand. The decrease in the effective tax rate of 19% for the nine months ended September 30, 2023 as compared to 2022 was primarily due to the impact from the net loss attributable to NCI of $3,223 thousand.
Note 8 - Related Party Transactions
In 2018, the Company entered into an exclusive VOD and subscription licensing agreement with Angel Studios, which was a member of the Company, for distribution of the Company’s television series. This agreement was amended in November 2019 and September 2020 to refine certain terms (collectively, the “2018 Angel Studios License Agreement”). On October 18, 2022, the Company entered into a new agreement with Angel Studios which replaced the 2018 Angel Studios License Agreement and grants Angel Studios the right to a limited, non-exclusive and non-sublicensable license to distribute the Company’s television series solely on the Angel App. Any existing sublicensing rights that were granted to Angel Studios under the 2018 Angel Studios License Agreement shall be set to expire, and all rights thereafter shall be exclusively retained by the Company. In October 2022 the Company repurchased the Common Units previously held by Angel Studios and is no longer considered a related party.
The Company recognized revenue from transactions with related parties of $0 thousand and $5,071 thousand during the three months ended September 30, 2023 and 2022, respectively. The Company recognized revenue from transactions with related parties of $0 thousand and $12,488 thousand during the nine months ended September 30, 2023, and 2022, respectively. As of September 30, 2023 and December 31, 2022 there were no related party receivable balances.
Note 9 - Commitments and Contingencies
Commitments
Under the Company’s current license agreement with Angel Studios, the Company is required to remit payments to Angel Studios, in perpetuity, based on a specified percentage of certain of the Company’s revenues derived from the Series.
Refer to Note 4 Balance Sheet Components – Leases and Note 5 Debt for information related to the Company’s contractual commitments for leasing and financing arrangements.
Litigation
The Company is involved in legal proceedings from time to time arising in the normal course of business. Management, after consultation with legal counsel, believes that the outcome of these proceedings will not have a material impact on the Company’s financial position, results of operations, or liquidity. For further information on legal proceedings involving the Company, refer to Part II, Item 1 Legal Proceedings.
- 15 -
Note 10 - Subsequent Events
Management has evaluated events and transactions for potential recognition or disclosure through November 14, 2023, the date the consolidated financial statements were available to be issued.
Angel Studios - The Company delivered to Angel Studios a Notice of Termination of the Content License Agreement, dated October 18, 2022, between Angel Studios and the Company (the “License Agreement”), due to Angel Studios’ previously noticed and uncured material breach, which the Company elected initially to hold in abeyance pending arbitration of such termination. Pursuant to the License Agreement, the Company grants Angel Studios a limited, non-exclusive license to, among other things, distribute the company’s television series, “The Chosen.” On October 15, 2023, the Company delivered to Angel Studios a second Notice of Termination of the License Agreement for material breach of contract for Angel Studios’ continued breach of the License Agreement due to, among other things, its impermissible use of the Company’s trademarks and copyrights, with such termination of the License Agreement to be effective on October 20, 2023. Accordingly, the September 30, 2023, Condensed Consolidated Balance Sheet includes an Allowance for Doubtful Accounts for receivables from Angel Studios of $1,639 thousand and related bad debt expense in general and administrative expenses of the Condensed Consolidated Statement of Operations.
Come and See Foundation, Inc. - On October 31, 2023, the Company entered into a Second Amendment to the Contribution Funding and Production Agreement with CAS. The Second Amendment, among other things, sets forth (1) certain payment terms as agreed between the Company and CAS, including, but not limited to, the interest on, and repayment obligations with respect to, amounts funded by CAS to the Company pursuant to the Contribution and Production Funding Agreement, (2) the payment terms for CAS’ non-profit rights in the Series, (3) cooperative terms with respect to certain tax matters, (4) a discontinuation of the right of CAS to receive a royalty from the Company with respect to certain commercial revenue generated by the Series, (5) a modification of certain defined liquidity events that would require a payment from the Company to CAS and (6) procedures to clarify the obligations of either party owed to the other on a go-forward basis with respect to producing, delivering and financing the Series. The Company is still evaluating the accounting impact of this agreement.
- 16 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements and Other Financial Information
For purposes of this discussion, the use of the words “we,” “us,” “Company,” or “our” refers to The Chosen, Inc. (f/k/a The Chosen, LLC) and its subsidiaries, except where the context otherwise requires.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s registration statement on Form 10 filed with the SEC on February 2, 2023 and amended on April 3, 2023 and May 23, 2023 (as amended, the “Form 10”), including the audited consolidated financial statements and the related notes included therein and the condensed consolidated interim financial statements and related notes included elsewhere in this Quarterly Report. Our historical results are not necessarily indicative of the results to be expected for any future period, and results for any interim period are not necessarily indicative of the results to be expected for the full year.
In addition to our condensed consolidated interim financial statements, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Cautionary Statement Concerning Forward-Looking Statements” and the “Risk Factors” set forth in Part II, Item 1A herein for a discussion of the uncertainties, risks and assumptions associated with these statements.
Results of Operations
Overview
The Company is an entertainment company, which develops, produces and licenses for distribution, domestically and internationally, an episodic television series entitled The Chosen (the “Series”). The Company collaborates with partners to market, source, curate and distribute the Series to targeted audiences through (i) existing and emerging digital home entertainment platforms, including but not limited to Netflix, Hulu, and most VOD streaming platforms, as well as (ii) physical media, including DVD and Blu-ray Discs, (iii) linear television, (iv) theatrical distribution of certain episodes or other content, (v) books, and (vi) merchandise.
The Company’s revenue model primarily includes royalties received from the licensing of The Chosen as well as online store and wholesale sales of The Chosen merchandise and contributions. Our marketing efforts include limited and strategically focused advertising campaigns through targeted social media campaigns.
- 17 -
Comparison of the Three Months and Nine Months Ended September 30, 2023 and September 30, 2022
The following summary of our consolidated results of operations should be read in conjunction with our audited consolidated financial statements, and related notes, included herein.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
|
| |
|
| | | Nine Months Ended |
|
| |
|
| | ||||||||
| | September 30, | | Change |
| | September 30, | | Change |
| ||||||||||||||
|
| 2023 | | 2022 |
| 2023 vs. 2022 |
|
| 2023 |
| 2022 |
| 2023 vs. 2022 |
| ||||||||||
| | (in thousands, except percentages) |
| | (in thousands, except percentages) |
| ||||||||||||||||||
Revenues: |
| |
|
| |
|
| |
|
|
|
| | |
|
| |
|
| |
|
|
|
|
Licensed content and merchandise revenues | | $ | 8,508 | | $ | 5,262 | | $ | 3,246 | | 62 | % | | $ | 36,971 | | $ | 13,195 | | $ | 23,776 | | 180 | % |
Contribution revenues | |
| 5,978 | |
| — | |
| 5,978 |
| 100 | % | |
| 28,963 | |
| — | |
| 28,963 |
| 100 | % |
Total revenues | |
| 14,486 | |
| 5,262 | |
| 9,224 |
| 175 | % | |
| 65,934 | |
| 13,195 | |
| 52,739 |
| 400 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | |
| 4,279 | |
| 301 | |
| 3,978 |
| 1,322 | % | |
| 14,317 | |
| 950 | |
| 13,367 |
| 1,407 | % |
Advertising | |
| 3,775 | |
| 705 | |
| 3,070 |
| 435 | % | |
| 7,961 | |
| 1,031 | |
| 6,930 |
| 672 | % |
Amortization of film costs | |
| 2,608 | |
| 667 | |
| 1,941 |
| 291 | % | |
| 11,284 | |
| 2,056 | |
| 9,228 |
| 449 | % |
Depreciation and amortization | |
| 2,192 | |
| 1,237 | |
| 955 |
| 77 | % | |
| 6,569 | |
| 1,333 | |
| 5,236 |
| 393 | % |
General and administrative | |
| 7,846 | |
| 2,317 | |
| 5,529 |
| 239 | % | |
| 21,218 | |
| 6,532 | |
| 14,686 |
| 225 | % |
Net operating income (loss) | |
| (6,214) | |
| 35 | |
| (6,249) |
| (17,854) | % | |
| 4,585 | |
| 1,293 | |
| 3,292 |
| 255 | % |
Interest income | | | 676 | | | 1 | | | 675 | | 100 | % | | | 2,172 | | | 1 | | | 2,171 | | 100 | % |
Interest expense | |
| (369) | |
| (2) | |
| (367) |
| 100 | % | |
| (1,100) | |
| (2) | |
| (1,098) |
| 100 | % |
Other income (expense) | |
| (46) | |
| — | |
| (46) |
| 100 | % | |
| (25) | |
| — | |
| (25) |
| 100 | % |
Net income (loss) before income taxes | |
| (5,953) | |
| 34 | |
| (5,987) |
| (17,609) | % | |
| 5,632 | |
| 1,292 | |
| 4,340 |
| 336 | % |
Benefit (provision) for income taxes | |
| 1,851 | |
| (210) | |
| 2,061 |
| 981 | % | |
| (1,290) | |
| (545) | |
| (745) |
| 137 | % |
Net income (loss) | | $ | (4,102) | | $ | (176) | | $ | (3,926) |
| 2,231 | % | | | 4,342 | | | 747 | | | 3,595 |
| 481 | % |
Licensed Content and Merchandise Revenues
Licensed content and merchandise revenues include payments received, principally via royalties, from our licensing agreements, and merchandise sales. Licensed content and merchandise revenues for the three months ended September 30, 2023 increased $3,246 thousand, or 62%, as compared to the three months ended September 30, 2022, primarily due to the Company’s shift from managing licensing, distribution, and merchandise sales through our licensing agreement with Angel Studios to managing these functions internally as of October 2022, the addition of new distribution channels, with an increase in merchandise sales of $3,340 thousand, partially offset by a decrease in revenues from licensed content of $94 thousand.
Licensed content and merchandise revenues for the nine months ended September 30, 2023 increased $23,776 thousand, or 180%, as compared to the nine months ended September 30, 2022, primarily due to the Company’s shift from managing licensing, distribution, and merchandise sales through our licensing agreement with Angel Studios to managing these functions internally as of October 2022, the addition of new distribution channels, with an increase in merchandise sales of $18,533 thousand and an increase in Licensed content revenue of $5,243 thousand.
Contribution Revenues
Contribution revenues is comprised of contributions received under the agreement with the Come and See Foundation, Inc. (“CAS”) for donation proceeds received by CAS through The Chosen App. Such agreement requires that the Company utilize such donation receipts for the charitable purposes of CAS, which include the production of the Series. The Company did not receive any Contribution revenues for the three months or nine months ended September 30, 2022 as the agreement was entered into in November 2022.
- 18 -
Cost of Revenues
Cost of revenues primarily include the costs of products, third party expenses to fulfill merchandise sales orders, and participation and residual costs owed to writers, producers, actors and other film participants. Cost of revenues for the three months ended September 30, 2023 increased $3,978 thousand, or 1,322%, as compared to the three months ended September 30, 2022, primarily due to the Company’s shift from managing merchandise sales through our licensing agreement with Angel Studios to managing these functions internally as of October 2022, an increase in cost of sales related to merchandise of $2,519, and increased actor and residual costs of $1,736 as a result of the extended worldwide distribution of Seasons 1, 2, and 3.
Cost of revenues for the nine months ended September 30, 2023 increased $13,367 thousand, or 1,407%, as compared to the nine months ended September 30, 2022, primarily due to the Company’s shift from managing merchandise sales through our licensing agreement with Angel Studios to managing these functions internally as of October 2022, an increase in cost of sales related to merchandise of $10,769 and increased actor and residual costs of $2,281 as a result of the release of Season 3 across various platforms coupled with extended worldwide distribution of Seasons 1, 2, and 3.
Advertising
Advertising includes costs to promote the Series and primarily includes advertising on social and digital platforms. Advertising expense for the three months ended September 30, 2023 increased $3,070 thousand, or 435%, as compared to the three months ended September 30, 2022, which is mostly attributable to increased marketing costs related to the Company’s shift from managing the majority of our marketing through our licensing agreement with Angel Studios to managing these functions internally as of October 2022 as well as increased costs to promote Season 3, and extended worldwide distribution of Seasons 1, 2, and 3.
Advertising expense for the nine months ended September 30, 2023 increased $6,930 thousand, or 672%, as compared to the nine months ended September 30, 2022, which is mostly attributable to increased marketing costs related to the Company’s shift from managing the majority of our marketing through our licensing agreement with Angel Studios to managing these functions internally as of October 2022 as well as increased costs to promote episodes 4 – 8, including the Season 3 finale special released in theatres and extended worldwide distribution of Seasons 1, 2, and 3.
Amortization of Film Costs
Costs of producing the Series are amortized using the individual-film-forecast method, based on the ratio of the current period’s revenues to the Company’s estimated ultimate revenue.
Amortization of film costs for the three months ended September 30, 2023 increased $1,941 thousand, or 291%, as compared to the three months ended September 30, 2022, primarily due to the additional amortization of film costs as a result of the release of Season 3 in the fourth quarter of 2022 and first and second quarters of 2023.
Amortization of film costs for the nine months ended September 30, 2023 increased $9,228 thousand, or 449%, as compared to the nine months ended September 30, 2022, primarily due to the additional amortization of film costs as a result of the release of Season 3 in the fourth quarter of 2022 and first quarter of 2023 and an increase of revenues for Seasons 1, 2, and 3.
Depreciation and Amortization
Depreciation and amortization for the three months ended September 30, 2023 increased $955 thousand, or 77%, as compared to the three months ended September 30, 2022, primarily due to the Company’s increase in acquired property and equipment, the majority of which related to the permanent set and film campus placed in service during the third and fourth quarters of 2022 and the second quarter of 2023.
Depreciation and amortization for the nine months ended September 30, 2023 increased $5,236 thousand, or 393%, as compared to the nine months ended September 30, 2022, primarily due to the Company’s increase in acquired property and equipment the majority of which related to the permanent set and film campus placed in service during the third and fourth quarters of 2022 and the second quarter of 2023.
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General and Administrative
General and administrative expenses for the three months ended September 30, 2023 increased $5,529 thousand, or 239%, as compared to the three months ended September 30, 2022, primarily due to $2,367 thousand of increased payroll related expenses mostly attributable to increased headcount related to the Company’s shift from managing marketing, licensing/distribution and merchandising through our licensing agreement with Angel Studios to managing these functions internally as of October 2022. The Company also incurred additional legal, accounting and professional fees of $313 thousand, travel related expenses of $446 thousand, and office related expenses of $1,158 thousand.
General and administrative expenses for the nine months ended September 30, 2023 increased $14,686 thousand, or 225%, as compared to the nine months ended September 30, 2022, primarily due to $6,461 thousand of increased payroll related expenses mostly attributable to increased headcount related to the Company’s shift from managing marketing, licensing/distribution and merchandising through our licensing agreement with Angel Studios to managing these functions internally as of October 2022. The Company also incurred additional legal, accounting and professional fees of $3,797 thousand, travel related expenses of $702 thousand, and office related expenses of $1,947 thousand.
Income Taxes
Income tax provision for the three months ended September 30, 2023 decreased $2,061 thousand, or 981% as compared to the three months ended September 30, 2022, primarily due to the increase in the Company’s net income before provision for income taxes of $5,953.
Income tax provision for the nine months ended September 30, 2023 increased $745 thousand, or 137% as compared to the nine months ended September 30, 2022, primarily due to the increase in the Company’s net income before provision for income taxes of $5,632 thousand.
The effective tax rate for the three months ended September 30, 2023 decreased 587%, as compared to the three months ended September 30, 2022, primarily due to the impact from the net loss attributable to NCI of $694 thousand.
The effective tax rate for the nine months ended September 30, 2023 decreased 19%, as compared to the nine months ended September 30, 2022, primarily due to the impact from the net loss attributable to NCI of $3,223 thousand.
Liquidity and Capital Resource
Comparison of September 30, 2023 and December 31, 2022
| | | | | | | | | |
| | As of |
|
| | ||||
| | September 30, | | December 31, | | | | ||
|
| 2023 |
| 2022 |
| Change | |||
| | (in thousands) | |||||||
Cash | | $ | 95,290 | | $ | 124,790 | | $ | (29,500) |
Long-term debt | |
| 145,416 | |
| 145,840 | |
| (424) |
The Company’s primary sources of liquidity are from cash flows generated from operations and financing activities. As of September 30, 2023 and December 31, 2022, the Company had cash of $95,290 thousand and $124,790 thousand, respectively. As of September 30, 2023 and December 31, 2022, the Company had long-term debt of $145,416 thousand and $145,840, respectively.
The Company’s primary uses of cash generally relate to film costs. The decrease in cash of $29,500 thousand was primarily attributable to an increase of $39,628 thousand in film costs related to the production of Season 4, a payment of $10,417 thousand related to dividends and the acquisition of property and equipment of $6,677 thousand, partially offset by $20,356 thousand of net income, exclusive of non-cash items of $16,800.
The Company’s long-term debt relates to the agreement with CAS, whereby CAS provided $145,500 thousand for the Company’s use in the development, production, distribution and marketing of the Series and to provide the Company with operating
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and working capital. See the consolidated financial statements included in our Form 10, starting on page F-1 for further detail regarding the CAS transactions.
The Company believes its existing cash and expected cash flows from operations will be sufficient to meet our working capital, capital expenditures, and expected cash requirements from known contractual obligations for the next twelve months and beyond.
Comparison of the Nine Months Ended September 30, 2023 and 2022
Our cash flow activities were as follows for the periods presented:
| | | | | | | | | |
| | Nine Months Ended |
|
| | ||||
| | September 30, | | | | ||||
|
| 2023 |
| 2022 |
| Change | |||
| | (in thousands) | |||||||
Net cash flows provided by (used in) operating activities | | $ | (17,161) | | $ | (13,826) | | $ | (3,335) |
Net cash flows provided by (used in) investing activities | |
| (6,496) | |
| (21,809) | |
| 15,313 |
Net cash flows provided by (used in) financing activities | |
| (5,843) | |
| 21,623 | |
| (27,466) |
Operating activities
Net cash flows used in operating activities was $17,161 thousand and $13,826 thousand for the nine months ended September 30, 2023 and 2022, respectively. The increase of net cash flows used in operating activities of $3,335 thousand was primarily driven by the increase of $12,584 thousand in film costs, a decrease of $4,216 thousand in collections of accounts receivable and an increase of $6,920 thousand in prepaids and other current assets, partially offset by the increase of $20,356 thousand in net income, exclusive of non-cash items and the increased change of $3,565 in accrued expenses and other accrued liabilities.
Investing activities
Net cash flows used in investing activities was $6,496 thousand and $21,809 thousand for the nine months ended September 30, 2023 and 2022, respectively. The decrease of net cash flows used in investing activities of $15,313 thousand was primarily driven by the decrease in acquisition of property and equipment due to the substantial investments in and completion of the film campus in 2022.
Financing activities
Net cash flows used in financing activities of $5,843 thousand for the nine months ended September 30, 2023 primarily included contributions from noncontrolling interest member of $5,023 offset by dividend payments of $10,417 and principal payments on long-term debt of $437 thousand. The financing activities of $21,623 thousand for the nine months ended September 30, 2022 primarily related to contributions from noncontrolling interest member of $6,630 thousand.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to condensed consolidated Financial Statements in Item 1 of this Quarterly Report and in the Notes to Consolidated Financial Statements in our Form 10, describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates included in our Annual Report on our Form 10 for the year ended December 31, 2022.
Film Costs
Costs of producing the Series are amortized, and residual and participation costs are accrued, using the individual-film-forecast method, based on the ratio of the current period’s revenues to the Company’s estimated remaining ultimate revenue per each episodic
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block. The initial estimate of ultimate revenue includes estimates of revenues through various distribution channels such as international, home entertainment and other distribution platforms and are based on historical experience for past seasons. The Company regularly monitors the performance of each season, and evaluates whether impairment indicators are present (i.e., low ratings), and based upon our review, the Company revises the estimates as needed.
Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of our business, some seasons are more successful or less successful than anticipated. Management regularly reviews and revises, when necessary, its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or a write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value.
An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, lesser film amortization expense during a given period, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher film amortization expense during a given period.
The amortization of film costs is on an accelerated basis, as the Company typically expects more upfront viewing. On average, over 50% of the film costs related to our produced content is expected to be amortized within one year after its month of first availability. The Company reviews factors that may impact the amortization of film costs on a monthly basis, such as the increased demand for home entertainment as a result of the global pandemic in 2020, which accelerated the adoption of streaming services and technology by consumers. Our estimates related to these factors require considerable management judgment.
Off-Balance Sheet Arrangements
As of September 30, 2023 and December 31, 2022, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risks have been omitted as permitted under rules applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), we evaluated, under the supervision and with the participation of our management, including our President and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on the foregoing evaluation, our President and our Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level that we would meet our disclosure obligations.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) of the Exchange Act) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1. Legal Proceedings
From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. Other than as set forth below, we are currently not a party to any material legal proceeding.
As disclosed in the Company’s Current Reports on Form 8-K filed with the SEC on April 10, 2023 and October 19, 2023, respectively, the Company delivered to Angel Studios two separate Notices of Termination (the “Termination Notices”) of the License Agreement. The Company delivered the Termination Notices due to Angel Studios’ material breach of the License Agreement. Such termination was effective on October 20, 2023. See Note 10 of the Company’s interim condensed consolidated financial statements for additional information concerning the termination of the License Agreement.
Item 1A. Risk Factors
Other than as set forth below, there have been no material changes from the risk factors previously disclosed within Item 1A “Risk Factors” in the Form 10.
Our business could be adversely affected by labor strikes or other union job actions.
Any strike by, or lockout of, one or more of the unions that provide personnel essential to the production of films or television programs could delay or halt our ongoing production activities. Halts or delays, depending on the length of time and breadth of personnel impacted, could cause a delay or interruption in our release of new television programs (including, but not limited to, future episodes of the Series), which could have a material adverse effect on our business, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
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32.1 | | Certification of President pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | |
101.SCH | | Inline XBRL Schema Document |
| | |
101.CAL | | Inline XBRL Calculation Linkbase Document |
| | |
101.DEF | | Inline XBRL Definition Linkbase Document |
| | |
101.LAB | | Inline XBRL Label Linkbase Document |
| | |
101.PRE | | Inline XBRL Presentation Linkbase Document |
| | |
101.INS | | XBRL Instance Document |
| | |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). |
* | Filed herewith. |
** | Incorporated by reference to the Registrant’s Form 10 filed on February 2, 2023 and amended on April 3, 2023 and May 23, 2023. |
*** Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 31, 2023.
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SIGNATURES
Pursuant to the requires of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| THE CHOSEN, INC. | |
| | |
| | |
| By: | /s/ Bradley Pelo |
| | Name: Bradley Pelo |
| | Title: President |
| | |
| | |
| By: | /s/ JD Larsen |
| | Name: JD Larsen |
| | Title: Chief Financial Officer |
| | |
Date: November 14, 2023 | | |
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