(Full
mailing address of principal executive offices)
(833)
924-6736
(Issuer’s
telephone number, including area code)
C:
Item 1. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
This Semi-Annual Report on Form 1-SA of The Chosen, LLC, a Utah
limited liability company, referred to herein as “we”,
“us,”“our” or “the Company”,
contains certain forward-looking statements that are subject to
various risks and uncertainties. Forward-looking statements are
generally identifiable by use of forward-looking terminology such
as “may”“will,”“should,”“potential,”“intend,”“expect,”“outlook,”“seek,”“anticipate,”“estimate,”“approximately,”“believe,”“could,”“project,”“predict,”
or other similar words or expressions. Forward-looking statements
are based on certain assumptions, discuss future expectations,
describe future plans and strategies, contain financial and
operating projections or state other forward-looking information.
Our ability to predict results or the actual effect of future
events, actions, plans or strategies is inherently uncertain.
Although we believe that the expectations reflected in our
forward-looking statements are based on reasonable assumptions, our
actual results and performance could differ materially from those
set forth or anticipated in our forward-looking statements. Factors
that could have a material adverse effect on our forward-looking
statements and upon our business, results of operations, financial
condition, funds derived from operations, cash available for
dividends or distribution, cash flows, liquidity and prospects
include, but are not limited to, the factors referenced in our
offering circular dated June 15, 2018 filed pursuant to Rule
253(g)(2) (the “Final Offering Circular”) under the
caption “RISK
FACTORS” and which are incorporated herein by
reference.
When considering forward-looking statements, you should keep in
mind the risk factors and other cautionary statements in this
report. Readers are cautioned not to place undue reliance on any of
these forward-looking statements, which reflect our views as of the
date of this report. The matters summarized below and elsewhere in
this report could cause our actual results and performance to
differ materially from those set forth or anticipated in
forward-looking statements. Accordingly, we cannot guarantee future
results or performance. Furthermore, except as required by law, we
are under no duty to, and we do not intend to, update any of our
forward-looking statements after the date of this report, whether
as a result of new information, future events or
otherwise.
General
The
Chosen is the first-ever multi-season TV series about the life of
Christ and those He touched. The Company produces, markets and
distributes the series to a worldwide market. Their large
faith-based audience has risen to the call to help fund and support
the project as devoted fans and investors, contributing to The
Chosen’s success.
The
Company has successfully released Season 1 and has commenced the
pre-production phase for the first four episodes of Season 2 in
anticipation of additional funding to continue to produce the
series. During the interim period of January 1, 2020 through June30, 2020, there were significant changes in liquidity of the
Company as, after the Thanksgiving 2019 release of episodes 5-8 of
Season 1, the Series has seen significant increases in sales. Along
with the digital and physical sales of Season 1, the Company
successfully launched a line of merchandise that is sold
exclusively through an online 3rd party platform. The
funds generated from both the Season 1 and merchandise sales were
used to cover significant marketing expenses related to the
promotion of the Series and pre-production costs of episodes 1-4 of
Season 2. The remaining funds are expected to be sufficient to
begin production of the first four episodes of Season
2.
Revenue
produced by Season 1 through the Exclusive Video-on-demand and
Subscription video-on-demand license agreement with VidAngel, Inc.
was approx. $6,830,000 through June 30, 2020. There were also
T-shirt sales revenues of approx. $1,341,000.
Expenses
Additional
pre-production costs of Season 2, consisting mainly of script
writing, through June 30, 2020, were $225,000. Film costs are
capitalized and amortized over a period of time in proportion to
ultimate revenue production. Amortization of the Season 1 film
costs through June 30, 2020 was $2,189,906. Operating expenses for
the six-month period ended June 30, 2020 were $3,504,958, primarily
attributable to the amortization of film costs, $872,202 in
advertising and marketing, $173,752 in legal and professional fees,
$241,387 in royalties, and $18,236 in meals and entertainment
reimbursements and other traveling expenses.
Additionally, there
were merchandise costs of goods sold of $688,910 through June 30,2020.
11,193,300
preferred class A units were issued as of June 30, 2019 with net
proceeds of $10,036,832. No new units were issued through June 30,2020. This issuance provided the funds necessary to finalize the
production of the entirety of Season 1.
●
Pre-production,
including scripts, were expended for episodes 1-4 of Season 2 of
approximately $610,000.
●
As
of June 30, 2020, the cash funds available to the Company, along
with expected future revenues, were expected to be sufficient to
cover the majority of the production and post-production costs
expected to be incurred in producing episodes 1-4 of Season
2.
●
An
additional offering under Regulation A was filed September 3, 2020,
for the additional $20,000,001 that is needed to complete the
production of seasons 2 and 3.
●
Revenues
from Season 1 are expected to be used for operations and to
advertise and market the digital and physical sales of Season
1.
Plan of Operations
Our
plan of operations, including material expenditures, over the 2020
fiscal year, is currently focused on the development and production
of episodes 1-4 of Season 2 of the Series and the continued
marketing of Season 1, of which the final four episodes were
released Thanksgiving 2019. From January to September 2020, the
Company is focused on the development of Season 2 with production
of episodes 1-4 expected to begin October 2020. Production is not
expected to be completed until January 2021. As of June 30, 2020,
the direct costs associated with the pre-production of Season 2 is
approximately $610,000 and the Company is expected to incur
additional expenses of approximately $11 million through the end of
production and post production of the entirety of Season 2. The
expected release date of Episodes 1-4 of Season 2 is expected to be
late spring 2021 and the Company expects to incur approximately
$500,000 to $1 million for marketing, publicity and promotion of
the Series through the first six months of 2021.
3
Trend Information
To
date, revenues for 2020 have been ahead of management’s
anticipations. It appears that the stay-at-home orders that existed
this spring during the 2019 pandemic have influenced revenues.
Other than the above mentioned, we have not identified any known
trends, uncertainties, demands, commitments or events involving our
business that are reasonably likely to have a material effect on
our revenues, income from continuing operations, profitability,
liquidity or capital resources, or that would cause the reported
financial information in this report to not be indicative of future
operating results or financial condition.
Item 2. Other Information
None
Item 3. Financial Statements
Index to Financial Statements
Interim
consolidated financial statements for the six-month periods ended
June 30, 2020 (unaudited)
Interim
Consolidated Balance Sheets
5
Interim
Consolidated Statements of Income
6
Interim
Consolidated Statements of Members’ Equity
7
Interim
Consolidated Statements of Cash Flow
8
Notes
to Interim Consolidated Financial Statements
The
accompanying financial statements have been prepared by the
Company, without audit, and reflect all adjustments that are, in
the opinion of management, necessary for a fair statement of the
results for the periods presented. The financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim
financial reporting. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and
regulations. It is the opinion of management that the financial
statements reflect all adjustments necessary for a fair
presentation of the financial position, results of operations, and
cash flows for the periods presented. The results of operations for
the six months ended June 30, 2020 and 2019 are not indicative of
the results expected for the entire fiscal year.
Organization
The
Chosen, LLC, a Utah limited liability company, is an independent
television and film production company formed on October 24, 2017
solely to develop and produce an episodic television series
entitled “The Chosen.” 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.
Consolidation
The
consolidated financial statements include the accounts of The
Chosen, LLC, and its wholly owned subsidiary The Chosen Texas, LLC.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates. Key management estimates include the
estimated ultimate revenues of the series for the amortization of
film costs, valuation allowances for net deferred income tax
assets, and valuation of stock-based compensation.
Concentrations of Credit Risk
The
Company maintains its cash in bank deposit accounts which, at
times, exceed federally insured limits. As of June 30, 2020 and
December 31, 2019, the bank balance exceeded the federally insured
limit by $2,475,153 and $380,325, respectively.
A major
customer is considered to be one that comprises more than 10% of
the Company’s accounts receivable or annual revenues. For the
six-months ended June 30, 2020 and 2019, 83.5% and 100%,
respectively, of the Company’s revenues related to one
customer – VidAngel, Inc. (VidAngel). As of June 30, 2020 and
December 31, 2019, 100% of the Company’s accounts receivable
related to VidAngel.
Revenue Recognition
The
Company generates revenue from 1) licensing agreements with
VidAngel relating to the streaming of the Company’s
intellectual property via digital media – Video-on-Demand
(VOD) and Subscription Video-on-
Demand
(SVOD), 2) physical media sales, 3) combination of physical media
and digital media, 4) merchandise sales, and 5) ad share revenue.
The Company recognizes revenue when a
customer obtains control of promised products or services. The
amount of revenue recognized reflects the consideration that the
Company expects to be entitled to receive in exchange for these
products or services. To achieve the core principle of Topic 606,
the Company applies the following five steps:
9
The Chosen, LLC
Notes to Interim Consolidated Financial Statements
(unaudited)
2) Identify
the performance obligations in the contract
3) Determine
the transaction price
4) Allocate
the transaction price to performance obligations in the
contract
5) Recognize
revenue when or as the Company satisfies a performance
obligation
Digital Media (VOD and SVOD)
Digital media revenue stems from licensing agreements with
VidAngel, wherein VidAngel streams the Company’s intellectual
property. The license is not distinct from the streaming services,
and the arrangement represents a sale or usage-based royalty with
the license representing the predominant item to which the royalty
relates. The VOD sales and SVOD usage revenues are determined
according to the licensing agreement based on hours viewed by
VidAngel’s customers during each quarter of the year.
VidAngel provides the Company quarterly royalty reports detailing
the sales or usage-based royalties, which amounts VidAngel remits
to the Company. The Company recognizes revenue based on these
royalty reports, which represents when the sales or usage occurred
and the satisfaction of the performance obligation to the end
customer. During the six-months ended June 30, 2020, and June 30,2019, the digital media revenue was substantially all related to
the first television season of The Chosen. As VidAngel is primarily responsible to fulfil
the performance obligation and sets the pricing, the Company
recognizes revenue on a net basis, which represents the royalty
amounts the Company receives from VidAngel.
Physical Media
The Company sells Blu-Ray discs and DVD’s and Devotional
Books to end users. The Company
does not own or maintain the physical media inventory. The
inventory is owned by VidAngel, and VidAngel fulfills the sales.
Revenue is recognized when the end customer receives and pays for
the physical media. VidAngel remits a portion of the sales amount
to the Company. The Company recognizes revenue on a net
basis.
Combination of physical media and digital media
The
Company sells Blu-Ray discs and DVD’s to end users in a
combination pack with digital media. The Company does not own or
maintain the physical media inventory. As noted in the description
of physical media above, the inventory is owned by VidAngel, and
VidAngel fulfills the sales. As noted in the description above of
digital media, digital media stems from licensing agreements with
VidAngel, wherein VidAngel streams the Company’s intellectual
property. The Company recognizes revenue on a net
basis.
Merchandise revenue
The
Company sells The Chosen
merchandise – mainly T-shirts. Revenue is recognized when the
customer receives and pays for the merchandise. The Company does
not own or maintain the merchandise inventory. However, when the
goods ship from the third party to the customer, the Company has
risk-of-loss, and is responsible for goods in transit. The Company
manages an online store through a third-party application and
orders are drop shipped to end customers using the third-party
platform. The Companycontracts with a third-party supplier that is
responsible for fulfilling the sales. The third-party supplier
invoices the Company for inventory sold and fulfillment services;
all of the cost of goods sold is related to the third-party
supplier costs. The Company recognizes revenue and respective
expenses on a gross basis. Revenue is disaggregated from contracts
with customers by goods or services as we believe it best depicts
how the nature, amount, timing and uncertainty of our revenue and
cash flows are affected by economic factors.
10
The Chosen, LLC
Notes to Interim Consolidated Financial Statements
(unaudited)
The
Company has monetized their YouTube and Facebook marketing videos
allowing the Company to share in revenue from advertisements shown
before, during or alongside the uploaded clip. Revenue is
recognized when the ad share payment is received from the various
social media platforms.
The
following table presents the Company’s revenue disaggregated
by the previously mentioned performance obligations for the
six-months ended June 30, 2020 and 2019. As a note, part of 2019,
sales were not divided into physical vs. digital media. The $199 is
a carry over before we separated the two.
Costs
incurred in the direct production of video content are capitalized
and stated at the lower of the unamortized costs or net realizable
value. The Company periodically evaluates the net realizable value
of content by considering expected future revenue generation.
Capitalized film costs as of June 30, 2020 and December 31, 2019
were $8,545,330 and $8,318,066, respectively. Of the capitalized
film costs, the amount that represents episodes that are not
released as of June 30, 2020 and December 31, 2019 was $272,499 and
$47,499, respectively. The Company has determined no impairment
existed during the periods presented.
The
Company amortizes film costs in proportion to the recognition of
the related revenue from each episodic production block.
Amortization expense for film costs for the six-months ended June30, 2020 and 2019, was $2,189,906 and $41,316,
respectively.
Income Taxes
The
Company is a Utah limited liability company which has elected to be
taxed as a C-Corporation. Under this structure, the Company is
liable for the income taxes on the Company’s income or loss
at the Federal and State levels. Its members are also liable for
income taxes on any distributions (dividends) received by the
Company.
We
account for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method,
we determine deferred tax assets and liabilities on the basis of
the differences between the financial statement and tax bases of
assets and liabilities by using enacted tax rates in effect for the
year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment
date.
11
The Chosen, LLC
Notes to Interim Consolidated Financial Statements (unaudited),
Continued
We
recognize deferred tax assets to the extent that we believe that
these assets are more likely than not to be realized. In making
such a determination, we consider all available positive and
negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income,
tax-planning strategies, and results of recent operations. If we
determine that we would be able to realize our deferred tax assets
in the future in excess of their net recorded amount, we would make
an adjustment to the deferred tax asset valuation allowance, which
would reduce the provision for income taxes.
The
deferred tax assets (liabilities) as of June 30, 2020, and December31, 2019, is comprised of the following components:
6/30/2020
12/31/2019
Deferred income tax
benefit
$30,854
$283,352
Current income
taxes
(100)
(100)
$30,754
$283,252
Significant
components of the Company’s deferred income tax assets
(liabilities) are as follows:
6/30/2020
12/31/2019
Film
costs
$(1,508,096)
$(2,077,472)
Net operating loss
carryforwards
1,534,189
2,356,163
Other
4,661
4,661
Valuation
allowance
-
-
$30,754
$283,352
The
Company has concluded that there are no significant uncertain tax
position requiring disclosure, and there are no material amounts of
unrecognized tax benefits.
Advertising
Advertising
costs are expensed as incurred. Advertising expenses for the
six-months ended June 30, 2020 and 2019 totaled $872,202 and
$280,740, respectively.
Equity-Based Compensation
The
Company entered into an agreement with a member of management to
grant an ownership interest of common units in the Company’s
parent company for services performed for The Chosen, LLC. The
value of $20,000 on the grant date was based on the amount paid in
cash by other members for an ownership interest of common units in
the Company (the parent company’s sole asset is the Company).
The equity grant vests upon the release of the first season of The
Chosen. The expense associated with the equity grant was being
recognized ratably through the expected release date with $12,727
recognized for the year ended December 31, 2019. The company
asserted breach of contract during 2019, has not granted the
membership interest, and has not recognized the remaining $7,273,
pending resolution of the matter.
12
The Chosen, LLC
Notes to Interim Consolidated Financial Statements (unaudited),
Continued
Subsequent
events have been considered through September 15, 2020, the
issuance date of the financial statements, to evaluate their effect
on the fair presentation with the following event
noted.
The
Company filed additional offering statement under Regulation A for
the issuance of Class B preferred with the Securities Exchange
Commission by the Company on September 3, 2020, for a maximum
offering amount of $20,000,001 (File #: 024-11312). The Class B
preferred units are non-voting. If and when distributions are
declared, distributions are first made to the holders of the Class
A and Class B Units until 120% and 110%, respectively, of $1 per
Unit has been distributed to the holders in proportion to their
interest. Thereafter, distributions are made to the holders of the
common units in proportion to their interest.
Commitments and Contingencies
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.
Exclusivity Agreement
In
2018, the Company entered into an exclusive video-on-demand and
subscription licensing agreement with VidAngel, for distribution of
the Company’s television series. This agreement was amended
in November
2019.
Consulting and Coordination Agreement
On
August 11, 2020, the Company entered into a consulting and
coordination agreement with VidAngel to which VidAngel will provide
the following services to the Company in exchange for a fee of
$300,000 payable within 30 days of the launch of the website
through which the anticipated Offering, disclosed in the subsequent
events note, will be conducted by the Company: (i) providing
Company with the technology necessary to facilitate the Offering;
(kk) assist in the reconciliation and accounting of all funds
received and shares issued for the Offering; (iii) video recording,
editing, and marketing related consultation; and (vi) assisting
Company with such other matters as may be agreed upon.
Employee Agreements
The
Company has entered into employment agreements with members of
management and certain contractors. The terms of the agreements
vary but include one or more of the following provisions:
stipulated base salary, profit sharing, royalties, retention
bonuses, vacation benefits, and severance.
Preferred Units
The
Company’s Class A Preferred Units (Units) are non-voting. If
and when distributions are declared, distributions are first made
to the holders of the Units until 120% of $1 per Unit has been
distributed to the holders in proportion to their interest.
Thereafter, distributions are made to the holders of the common
units in proportion to their interest.
13
The Chosen, LLC
Notes to Interim Consolidated Financial Statements (unaudited),
Continued
During
2019, the Company entered into agreements with a member of the
Company as a Director and Writer. Under the agreements, the Company
paid the member $138,000 to direct and write, the last four
episodes of The
Chosen
Series, season 1. The Company continued to engage the member as a
writer for the second season and paid the member $16,000 during
2019 on this contract. The Company will pay the remaining $23,000
during 2020 for the rest of the writer contract along with an
additional $64,500 related to writing and pre-production work on
season 2. The member also received payment from the Company for
advertising through the member’s digital media channels,
totaling $21,000 for the year.
During
2019, the Company engaged an advertising agency, which is wholly
owned by one of the members of the Company’s parent company.
During the 2019, the Company paid the advertising agency $40,000
and through June 30, 2020, the Company paid the agency
$32,340.
On May4, 2020, the Company entered into an agreement with a member of the
Company to write two devotional books based on the Series. The
member and the member’s spouse each received $3,000 for the
writing and, in the future, will receive a 1/3 share each of 12.5%
of the revenue from the book sales made by VidAngel and received by
the Company. As of June 30, 2020, the accrual for the residual
payment for the member and the member’s spouse was $7,486
each.
An
entity owned by a member assigned to the Company all of its rights,
title and interest in and to the film entitled The Shepherd. The Company paid $100,000
in exchange for all rights in and to The Shepherd. The Shepherd served as the underlying
source material upon which the Series is loosely based. The member
is the sole owner of the related entity. The Assignment and
Assumption Agreement between the related entity and the Company is
filed as an exhibit to the offering statement filed in 2018 (File
#: 024-10814).
Amendment to the
Certificate of Registration of the Issuer, incorporated by
reference to Exhibit (2)(b) to the Company’s form 1-A/A filed
on May 25, 2018.
Amended and
Restated Operating Agreement dated March 6, 2018, incorporated by
reference to Exhibit 2(c) to the Company’s Form 1-A/A filed
on May 25, 2018.
Exclusive
Video-On-Demand and Subscription Video-On-Demand Licensing
Agreement by and between The Chosen, LLC and VidAngel, Inc.,
incorporated by reference to Exhibit 6(a) to the Company’s
Form 1-K filed on June 12, 2020.
Consulting
and Coordination Agreement dated August 11, 2020 by and between the
Company and VidAngel, Inc., incorporated by referenced to Exhibit
6(e) to the Company’s Form 1-A filed on September 3,2020.
Employment
Agreement dated July 12, 2020 by and between the Company and Colin
McLeod, incorporated by referenced to Exhibit 6(f) to the
Company’s Form 1-A filed on September 3, 2020.
Employment
Agreement dated July 15, 2020 by and between the Company and Adam
Swerdlow, incorporated by referenced to Exhibit 6(g) to the
Company’s Form 1-A filed on September 3, 2020.
Employment
Agreement dated August 1, 2020 by and between the Company and
Dallas Jenkins, incorporated by referenced to Exhibit 6(i) to the
Company’s Form 1-A filed on September 3, 2020.
15
SIGNATURES
Pursuant to the
requirements of Regulation A, the issue had duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
