Midway through the summer of 2017, Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) went public, and since then it has had a rocky history. A $50 million stock-for-stock acquisition of Redbox was completed by the Cos Cob, Connecticut-based company last year. This resulted in the creation of a company with three advertising-supported video-on-demand streaming services and a network of about 34,000 DVD rental kiosks spread out across the US. The company has amassed a sizable collection of unique content and produces, acquires, and distributes its motion pictures.

Its performance hasn’t exactly been outstanding, though. It competes in a sector that is essentially controlled and dominated by bigger companies like Disney (NYSE:DIS), Netflix (NASDAQ:NFLX), and Amazon (NASDAQ:AMZN). Although there will always be room for niche and smaller businesses, Chicken Soup’s success over the past few years as measured by its commons has been far from stellar.

Prior to the pandemic, when trading boomed and eventually crashed, the company’s share price was largely flat. Over the past year, Chicken Soup stock has fallen by 48%. With the rising Fed funds rates driving the price of high-risk growth companies to all-time lows, short interest is still rather high at 8.56%. However, Redbox went public on the strength of the early pandemic-era SPAC phenomena, whose eventual termination, controversy, and legacy definitely increased the implicit risk for Chicken Soup.

Revenue Increases But Net Income and Cash Flow Are Worse

In addition to purchasing Redbox, Chicken Soup took on $325 million in debt. This would result in its net debt being $450.7 million as of the conclusion of the third quarter of its most the recent fiscal year 2022. In addition, the amount of interest paid on a quarterly basis would increase from $2 million in the second quarter to $7.7 million. It’s vital to note that this is expected to skyrocket starting in fiscal 2025 because the acquisition agreement stipulated that the Redbox debt be serviced as interest only for 2.5 years after closing.

The company announced revenue of $72.4 million, above consensus projections by $5.69 million and increasing by 148.8% over the same period last year. From $4.9 million in the same period last year, adjusted EBITDA increased by 97% to $9.6 million this quarter. As certain films transition from exclusive theatrical release windows to DVDs and streaming platforms, the Redbox company benefits from a healthy box office slate. Due to the fact that 2023 will have the most packed post-pandemic annual movie slate, Chicken Soup anticipates that the business will expand at a healthy rate.

With negative cash flows from operations of $28.4 million, up from $6.8 million in the prior quarter, the net loss increased from $16.7 million to $20.1 million. However, the company confronts a challenging near-term future with cash and equivalents finishing the fourth quarter at $32.2 million, down from $66.9 million in the year-ago quarter. As they move towards a fiscal 2022 sales run rate of $500 million with $100 million to $150 million in adjusted EBITDA, management claimed they had access to several sources of funding.

A Possibility About The Series A Preferreds

The yield on cost for Chicken Soup’s 9.75% Series A Cumulative Perpetual Preferred Stock (NASDAQ:CSSEP) is 12.34%. It pays a set $2.44 yearly coupon. Also, this voucher is sent out in monthly halves. Finding preferreds from a non-REIT that pays out on a monthly basis is uncommon.

Because Series A is perpetual, holders will continue to receive income distributions after the redemption date of June 27, 2023. With this financing in 2018, when the Fed funds rate was between 1.75% and 2.0%, less than half its present level, it is improbable that the firm would be able to finance the redemption of Series A at its redemption date.

Its yield to call is 42.9% as they are now selling at $19.77, a 20.9% discount to par. This is high and represents a particular mix of risks combined with a macroeconomic environment that has swiftly come to be known for high uncertainty and the lingering threat of a recession, despite optimistic predictions for positive US GDP growth this year.

At the end of the third quarter, there were 3,698,318 Series A shares still outstanding. At a $92.46 million redemption price, this would be far too expensive for the current balance sheet to handle, and it would also be in conflict with the Series A investors’ $2.4 million per quarter ($9.6 million annually) dividend payment. This is a very risky investment because there is no dividend coverage and the company does not have free cash flows from operations. The bulls on preferreds are wagering that the underlying operations will continue to operate as going concerns indefinitely. Importantly, the financial situation of Chicken Soup is unstable, and the preferred shares have been discounted to account for this risk. Unless I see several more positive Redbox growth quarters, I won’t be taking a position in Chicken Soup stock.

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