Notes to the Consolidated Financial Statements

December 31, 2016

Nature of Business

Screen Media Ventures, LLC (the "company") is a limited liability company formed in Delaware on May 28, 1999. The company acquires, markets, promotes and distributes feature length motion picture film rights to television broadcast stations, networks and other parties throughout the United States and in other countries around the world. The company also distributes films in DVD formats to the retail and rental markets, releases films theatrically throughout the United States and distributes films into various digital delivery systems and video on demand (“VOD”) platforms.

Basis of Accounting

The financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America and accordingly reflect all significant receivables, payables and other assets and liabilities.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Screen Media Ventures, LLC, and its wholly owned subsidiaries Screen Media Films, LLC, 757 Film Acquisition, LLC, Digital Media Enterprises, LLC, Popcornflix.com, LLC and Media Value Productions, LLC. All material intercompany balances and transactions have been eliminated in the consolidation.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash on deposit, certificates of deposit, money market accounts, and investment grade commercial paper that are readily convertible into cash and purchased with original maturities of three months or less.

Accounts Receivable

Accounts receivable are initially recorded at the amount the company expects to collect upon sale and are subsequently stated net of allowances for uncollectible accounts and video returns. The allowance for uncollectible accounts represents estimated losses resulting from the inability of customers to make the required payments. When determining the allowance, the company takes several factors into consideration including the overall composition of accounts receivable aging, historical collection experience, current trends, the type of customer and its day-to-day knowledge of specific customers.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

Estimated losses resulting from uncollectible accounts are reported as bad debt expense in the consolidated statements of operations and members’ deficiency.

Inventory

Inventory consists of DVD films held for resale to wholesale and retail customers. Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method for all inventories. Market value is based on net realizable value. When the net realizable value falls below its cost, a provision for write-downs is recorded.

Fixed Assets

The company capitalizes all expenditures for property, plant and equipment in excess of $1,000 at cost. When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts and the remaining gain or loss is recognized in the consolidated statement of operations for the period. The cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets.

Depreciation for leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Deferred Financing Costs

Deferred financing costs of $220,995 are included as a reduction to the revolving credit facility liability. The amounts are being amortized over the remaining term of the loan. Accumulated amortization as of December 31, 2016 was $5,065,054. Amortization expense of $155,776 was included as a component of interest expense.

Intangible Assets

The company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value if an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

Should the sum of the expected future net cash flows be less than the carrying value of asset being valuated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

Revenue Recognition

Film Revenue

The company generally licenses multi-film packages to its customers. Revenues from multi-film sales are allocated per title and recognized upon initial availability for exploitation by customers. Revenues from digital distribution and VOD platforms are recorded when revenue is reported by their respective platforms. The amounts of unrecognized revenues, prior to the initial availability of certain films was approximately $1.7 million as of December 31, 2016.

Video Revenue

Sales of DVD units are generally recorded upon their shipment to customers and provisions for future returns and other allowances are established based upon historical experience.

Operating Leases

The company has entered into operating lease agreements for its corporate office, some of which contain provisions for future rent increases or periods in which rent payments are reduced. In accordance with generally accepted accounting principles, the company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent, which is reflected as a separate line item in the accompanying balance sheet.

Upon signing the leases, the company received a tenant improvement allowance as a lease incentive. Tenant allowance represents landlord contributions to the construction costs of improving the related leased property.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

Total construction costs are capitalized as leasehold improvements, and the landlord construction allowance is recorded as a component of deferred rent which is amortized as a reduction of rent expense over the term lease.

Advertising Costs

The company has an obligation to make reimbursements for the advertising costs for its theatrically released titles. The amount for 2016 was approximately $891,000. These costs are capitalized as part of the film library acquisition costs and are amortized as such. Advertising expenditures for DVD releases are expensed when incurred, which is typically upon the release of the title. The amount for 2016 was approximately $6,000.

Income Taxes

Pursuant to Section 701 of the Internal Revenue Code, the company is treated as a partnership for federal and state income tax purposes with all income tax liabilities and/or benefits passed through to the members. As such, no recognition of federal or state income taxes has been provided for in the accompanying financial statements. Provisions have been made for applicable local income taxes. An uncertain tax position taken by the member is not an uncertain position of the company.

A tax position must meet a minimum probability threshold before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

The company is subject to taxation in various jurisdictions. The company is subject to examination by U.S. federal, state and local authorities for the years 2013 through 2016.

Use of Estimates

The preparation of the company’s financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

Significant estimates inherent in the preparation of the accompanying consolidated financial statements include management’s forecast of anticipated revenues from distributing the motion picture rights of its film library in order to evaluate its ultimate recoverability. Management periodically reviews such estimates, which determine the amortization of the film library and it is reasonably possible that management’s assessment of recoverability of individual films may change based on actual results and other factors.

Recent Accounting Pronouncement

In April 2015, the Financial Accounting Services Board (FASB) published Accounting Standards Update (ASU) No. 2015 03, which changes the presentation and disclosure of debt issuance costs in the financial statements by requiring these amounts to be presented as a direct deduction from the carrying amount of the related debt. Previous U.S. GAAP required debt issuance costs to be reported as an asset. The new guidance does not change the subsequent accounting for debt issuance costs and these amounts will continue to be amortized over the term of the related debt. However, amortization of debt issuance costs will now be required to be reported as a component of interest expense. The Company reclassified the debt issuance costs of $220,995 for the year ended 2016, as a contra-account to the revolving credit facility liability.

Accounts receivable are presented net of allowances for doubtful accounts and video returns of $438,104 at December 31, 2016.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

Film library represents the cost of acquiring film distribution rights and related acquisition and accrued participation costs. Film library is amortized using the individual-film-forecast-computation method. Film library is stated at the lower of unamortized cost or fair value. Amortization is based upon management’s best estimate of total future, or ultimate revenue. Amortization is adjusted when necessary to reflect increases or decreases in forecasted ultimate revenues. Ultimate revenues can include revenues for up to twenty years from the acquisition date for previously released films (ten years for a new release). The company generally acquires distribution rights covering periods of ten or more years.

Film library costs, consist of the following at December 31, 2016:

Amortization expense for the film library was $3,538,244 for the year ended December 31, 2016.

Website development costs are stated at historical cost and amortization is computed using the straight-line method over the estimated life over five years from the date of implementation.

Website development costs, consist of the following at December 31, 2016:

Amortization expense for the website development costs was $717,961 for the year ended 2016.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

Film library acquisition obligations represent liabilities incurred in connection with the acquisition of film libraries. Pursuant to the film distribution rights agreements, the company’s right to distribute films may revert to the licensor in the event that the company is unable to satisfy its remaining financial obligations with respect to the acquisition of those distribution rights.

The company has an available $13,950,000 revolving credit facility, with $13,668,735 outstanding as of December 31, 2016. Interest is payable on the revolving credit facility on the last day of each quarter and at the expiration of the LIBOR notes. The rate is the greater of 5% (4.5% if certain objectives are met) or applicable margin of 3.25% over Alternative Base Rate Loans (Prime), and 4.25% over London Interbank Offered Rate (LIBOR). Interest expense on the revolving credit facility for the year ended December 31, 2016 was $886,838.

The company also entered into an investment agreement which provides for convertible notes of $15,000,000 ($1,000,000 of which was purchased by the company’s president) secured with a subordinated interest to the revolving credit facility agreement, which expires on December 31, 2017. The notes and all unpaid interest bear an interest rate of 1.17%.

At the option of the company, interest shall either be paid in cash, or accrue to the extent not paid. Accrued interest payable as of December 31, 2016 (before the equity conversion mentioned below) is $11,981,637. Upon maturity of the notes, the holders may require the company to purchase, whether converted or not, either the Special Class A Common Units or pay their equivalent value if unconverted. Interest expense on the notes for the year ended December 31, 2016 was $317,174.

In the event of a sale transaction, an initial public offering or the refinancing of the revolving credit facility, in which the company realizes proceeds in excess of the revolving credit facility, the excess proceeds would be used to pay the principal balance plus accrued interest on the convertible notes.

On December 31, 2016, the company’s president exercised his option to convert his portion of the convertible notes, along with the applicable accrued interest, into his member’s capital account.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

This resulted in a reduction of the convertible notes to $14,000,000, and the balance of the accrued interest payable on these notes to $11,182,861 as of December 31, 2016.

All borrowings under the revolving credit facility and the convertible notes are collateralized by substantially all of the company’s assets.

On November 3, 2017 the company paid the sum of $4,905,355 in full satisfaction of all principal and interest owed for both the revolving credit facility and the note payable (see Note 13).

The company accrues for participation costs using the individual-film-forecast computation method, which accrues such costs in the same ratio that current period revenue bears to the remaining ultimate revenue as of the beginning of the year. These costs are capitalized and amortized as part of the film library.

The company’s membership interest consists of Class A Common Units.

In accordance with the company’s amended and restated operating agreement, the company is obligated to make annual distributions to the members at the rate of 45% of the company’s taxable income.

Holders of Class A Common Units are entitled to one vote for each unit held. They are not entitled to any distributions, except for tax reimbursement distributions, until the holders of the note payable and the revolving credit facility are repaid.

The company leases its office facilities under the terms of a non-cancelable operating lease agreement that expires on February 28, 2020. Minimum annual rental commitments under the lease are as follows:

Rent expense amounted to $351,596 for the year ended December 31, 2016.

Cash

At times, the company maintains cash balances in excess of the Federal Deposit Insurance Corporation’s insured limits. The company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash.

Revenue

The company provides programming to television stations located throughout the United States and other countries of the world. The company generated 14% of its revenue from foreign contracts for the year ended December 31, 2016. Contracts are entered into based upon an evaluation of a customer’s financial condition, and an advance payment is generally required.

In addition, the company’s DVD videos are sold to mass merchandisers throughout the United States. The sale, warehousing, distribution, billing and collection of certain video sales are facilitated through a third-party distributor.

This distributor accounted for approximately 9% of net revenue during the year ended December 31, 2016. Also, one of the company’s subscription VOD customers accounted for approximately 15% of net revenue during the year ended December 31, 2016.

Accounts receivable

The company performs ongoing credit evaluations of its customers but generally does not require collateral to support accounts receivable.

As of December 31, 2016, approximately 38% of the company’s total accounts receivable were due from foreign customers.

Screen Media Ventures, LLC and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016

The company is involved in certain disputes arising under the normal course of its business. In the opinion of management, the outcome of these matters will not have a material effect on the company’s financial position, cash flows or results of operations.

The company is contingently liable for a standby letter of credit in connection with its office lease agreement in the amount of $129,986 as of December 31, 2016.

The company has evaluated subsequent events through December 21, 2017, the date these financial statements were available to be issued. On November 3, 2017, the company entered into a business combination transaction by means of a merger, in which the Company became a wholly owned subsidiary in exchange for a payment of $5,522,855. The proceeds were used, in part, on the date of receipt by the company, to pay the sum of $4,905,355 in full satisfaction of all principal and interest owed by the company (see Note 7), and to pay certain transaction expenses and company liabilities as agreed by the company and the purchaser. There were no other material subsequent events that required recognition or additional disclosure in these financial statements.

Certain balances and amounts in the prior year financial statements have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported net income.

Notes to Consolidated Financial Statements

December 31, 2015 and 2014

Note 1 - Organization and description of business

Screen Media Ventures, LLC and Subsidiaries, a Limited Liability Company, and its wholly-owned subsidiaries, Screen Media Films, LLC, 757 Film Acquisition, LLC and Media Value Productions, LLC, acquire, market, promote and distribute feature length motion picture film rights to television broadcast stations, networks and other parties throughout the United States and in other countries of the world. In addition, the Company distributes films in DVD formats to the retail and rental markets, releases films theatrically throughout the United States and distributes films into various digital delivery systems and video on demand ("VOD") platforms.

Note 2 - Significant accounting policies

Principles of consolidation  

The accompanying consolidated financial statements include the accounts of Screen Media Ventures, LLC and its wholly-owned subsidiaries Screen Media Films, LLC, 757 Film Acquisition, LLC and Media Value Productions, LLC, herein referred to as the "Company". All significant inter-company transactions have been eliminated in consolidation.

Concentrations of risk  

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains its cash with high-credit quality financial institutions. At times, such amounts may exceed Federally insured limits. Concentrations of credit risk with respect to domestic trade receivables are limited due to the large number of customers comprising the Company's customer base, their dispersion across different geographic areas, and generally short payment terms. In addition, the Company closely monitors the extension of credit to its customers while maintaining allowances for potential credit losses, when estimable. On a periodic basis, the Company evaluates its trade accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit considerations. A portion of the Company's accounts receivable are with customers in foreign countries with volatile economies and, therefore, are riskier than domestic receivables. The Company's allowances address this risk.

The Company provides programming to television stations located throughout the United States and other countries of the world. The Company generated 18% and 17% of its revenue from foreign contracts for the years ended December 31, 2015 and 2014, respectively. Contracts are entered into based upon an evaluation of customers' financial condition, and generally some advance payment is required. The Company generally does not require collateral from its customers.

Credit losses are provided for in the consolidated financial statements and generally have been within management's expectations. Substantially all transactions with foreign customers are denominated in United States dollars.

In addition, the Company's DVD videos are sold to mass merchandisers throughout the United States. The sale, warehousing, distribution, billing and collection of certain video sales are facilitated through a third-party distributor. This distributor accounted for approximately 13% and 10% of net revenues during the years ended December 31, 2015 and 2014, respectively.

Screen Media Ventures, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2015 and 2014

Also, one of the Company's Subscription VOD customers accounted for approximately 11% of net revenues during the year ended December 31, 2015.

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 effect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include returns and allowances on DVD sales and management's forecasts of anticipated revenues from distributing the motion picture rights of its film library in order to evaluate its ultimate recoverability. Management periodically reviews such estimates, which determine the amortization of the film library and it is reasonably possible that management's assessment of recoverability of individual films may change based on actual results and other factors. The reserve for returns and allowances as of December 31, 2015 and 2014 was approximately $192,000 and $232,000, respectively.

Revenue recognition  

The Company generally licenses multi-film packages to its customers. Revenues from multi-film sales are allocated per title and recognized upon initial availability for exploitation by customers. These revenues are recorded as gross film revenue on the consolidated statement of operations and members' deficiency. The amounts of unrecognized revenues, prior to the initial availability of certain films, were approximately $2.2 million and $2.7 million, respectively, as of December 31, 2015 and 2014.

Revenues from digital distribution and VOD platforms are recorded when revenue is reported by their respective platforms and is recorded as a component of gross film revenue on the consolidated statement of operations and members' deficiency.

Sales of DVD units are generally recorded upon their shipment to customers and provisions for future returns and other allowances are established based upon historical experience. These revenues are recorded as gross video revenue on the consolidated statement of operations and members' deficiency.

Inventory

Inventory consists of DVD films held for resale to wholesale and retail customers. Inventory is stated at the lower of cost (first-in, first-out) or market. When the net realizable value falls below its cost, a provision for write-downs is recorded.

Website development costs  

Website development costs are stated at historical cost and amortization is computed on a straight-line basis over the estimated life of five years from the date of implementation.

Film library

Film library represents the cost of acquiring film distribution rights and related acquisition cost and accrued participation cost. Film library is amortized using the individual-film-forecast-computation method. Film library is stated at the lower of unamortized cost or fair value.

Screen Media Ventures, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2015 and 2014

Amortization is based upon management's best estimates of total future, or ultimate revenue. Amortization is adjusted when necessary to reflect increases or decreases in forecasted ultimate revenues. Ultimate revenues can include revenues for up to 20 years from the acquisition date for previously released films (10 years for a new release). The Company generally acquires film distribution rights covering periods of 10 or more years.

Film library acquisition obligations

Film library acquisition obligations represent liabilities incurred in connection with the acquisition of film libraries. Pursuant to the film distribution rights agreements, the Company's right to distribute films may revert to the licensor in the event that the Company is unable to satisfy its remaining financial obligations with respect to the acquisition of those distribution rights.

Deferred financing costs

Deferred financing costs are stated at cost, net of accumulated amortization. The deferred financing costs are amortized over the life of the related debt using the interest method over the term of the related debt.

Equipment and improvements

Equipment and improvements are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the related assets ranging from three to five years. Leasehold improvements are amortized by the straight-line basis over the lesser of the life of the improvement or the term of the lease.

Impairment of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment has occurred, the loss would be recognized during that period. The impairment loss is calculated as the difference between the asset carrying values and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. The Company does not believe that any material impairment currently exists related to its long-lived assets.

Income taxes

The Company has no unrecognized tax benefits at December 31, 2015 and 2014. The Company's Federal and state income tax returns prior to fiscal year 2012 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

Screen Media Ventures, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2015 and 2014

If applicable, the Company would recognize interest and penalties associated with tax matters as part of the income tax provision and include accrued interest and penalties with the related tax liability in the consolidated balance sheets.

The Company is treated as a partnership for income tax purposes. The Company is subject to New York City and various states' equivalent of the unincorporated business tax and certain foreign taxes. Accordingly, no provision for Federal income taxes or credits has been reflected in the accompanying consolidated financial statements.

Advertising costs

The Company recognizes advertising costs for its theatrically released titles in accordance with accounting principles generally accepted in the United States of America . The Company has an obligation to make reimbursements for these theatrical advertising costs. These costs are capitalized as part of the film library acquisition cost and are amortized as such.

The amounts for theatrical advertising costs were approximately $1,383,000 and $1,415,000, respectively, as of December 31, 2015 and 2014 and are included in the cost of the film library.

In the case of DVD releases, advertising costs are expensed when incurred, which is typically upon the release of the title. Advertising costs for the years ended December 31, 2015 and 2014 were approximately $10,000 and $49,000, respectively.

Participation costs  

The Company accrues for participation costs using the individual-film-forecast computation method, which accrues such costs in the same ratio that current period revenue bears to remaining ultimate revenue as of the beginning of the current year. These costs are capitalized and amortized as part of the Film Library.

Deferred rent

The Company's lease agreement provides for scheduled rent increases during the lease term or for rental payments commencing at a date other than initial occupancy. Rent expense is recognized on a straight-line basis over the term of the respective lease. The Company received a tenant improvement allowance as a lease incentive. Tenant allowance represents landlord contributions to the construction costs of building out the related leased property. Total construction costs are capitalized as equipment and improvements and the landlord construction allowance is recorded as a lease incentive, a component of deferred rent, which is amortized as a reduction of rent expense over the lease term.

Subsequent events  

The Company has evaluated subsequent events through October 27, 2016, which is the date the consolidated financial statements were available to be issued.

Screen Media Ventures, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2015 and 2014

Note 3 - Going concern

As shown in the accompanying consolidated financial statements, the Company has a members' deficiency of $16,000,757 as of December 31, 2015 and, as of that date, the Company's current liabilities exceeded its current assets by $39,560,807. Those factors, as well as the uncertain conditions that the Company faces regarding its loan agreements (as discussed in Note 5), create an uncertainty about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on acceptance of the Company's financial plan by the Company's bank creditors, private investment fund and the Company's President. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 5 - Notes payable - revolving credit facility and investment agreement

In July 2004, the Company entered into certain Accounts Financing and Security Agreements with a bank group (the "Credit Agreement"), a private investment fund, and the Company's President (the "Investment Agreement").

The Credit Agreement as amended on January 27, 2014 (and from time to time as required) provides for a line of credit of up to $18,000,000 based on eligible collateral, as defined, and expires on April 29, 2016. On May 17, 2016, The Company executed a Forbearance Agreement with the bank group which expired on August 1, 2016 and has been subsequently renewed through October 31, 2016. The line of credit has been subsequently reduced per the provisions of the Forbearance Agreement and is currently $16,900,000 as of July 1, 2016 and will be further reduced to the amounts per the following schedule:

Interest is payable on this line of credit on the last day of each quarter and at the expiration of the LIBOR notes. The Company's interest rate is the greater of 5.00% (4.5% if certain objectives are met) or applicable margin of 3.25% over Alternate Base Rate Loans (Prime), and 4.25% over Eurodollar Loans (LIBOR). The balance outstanding at December 31, 2015 and 2014 is $16,100,823 and $15,584,137, respectively. For the years ended December 31, 2015 and 2014, the weighted average interest rate was 5.2% and 5.1%, respectively. Interest expense for the years ended December 31, 2015 and 2014 was $826,345 and $780,696, respectively.

Screen Media Ventures, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2015 and 2014

The Investment Agreement provides for long-term convertible notes of $15,000,000 ($1,000,000 of which was purchased by the Company's President) secured with a subordinated interest to the Credit Agreement, by eligible collateral, as defined, and expires on November 1, 2016. Effective January 1, 2012, the notes and all unpaid interest bear interest at 1.17% per annum. At the option of the Company, interest shall either be payable in cash, or accrue to the extent not paid. On January 2, 2014, the Investment Agreement was amended to provide for a reduction in indebtedness of $8,400,000 and the removal of the contingent interest provision as well as a change in the conversion provision that increased the amount of Special Class A Common Units to represent approximately 74% of the fully diluted ownership in the Company. Accrued interest payable as of December 2015 and 2014 is $11,664,463 and $11,351,865, respectively. Upon maturity of the notes, the holders may require the Company to purchase, whether converted or not, either the Special Class A Common Units or pay their equivalent value if unconverted. Interest expense for the years ended December 31, 2015 and 2014 was $312,599 and $308,934, respectively.

In the event of a sale transaction, an initial public offering or the refinancing of the revolving credit facility, in which the Company realizes proceeds in excess of the revolving credit facility, the excess proceeds would pay the principal balance plus accrued interest on the convertible notes.

Outstanding borrowings under the Credit and Investment Agreements are collateralized by substantially all of the Company's assets. Both the Credit Agreement and Investment Agreement contain certain restrictive covenants, which among other things, requires the Company to maintain specified maximum debt to EBITDA ratios and a minimum debt coverage ratio, both as defined.

Note 6 - Members' interest

The Company's membership interest consists of Class A Common Units.

In accordance with the Company's Amended and Restated Operating Agreement, the Company is obligated to make annual distributions to the members at the rate of 45% of the Company's taxable income.

Holders of Class A Common Units are entitled to one vote for each unit held. Holders of Class A Common Units are not entitled to any distributions, except for tax reimbursement distributions, until the holders of the note payable - convertible debt and notes payable - revolving credit facility are repaid.

Rent expense was approximately $423,000 and $438,000 for the years ended December 31, 2015 and 2014, respectively.

Note 8 - Contingencies

The Company is involved in certain disputes arising under the normal course of its business. In the opinion of management, the outcome of these matters will not have a material effect on the Company's consolidated financial position, cash flows or results of operations.

The Company is contingently liable for a standby letter of credit in connection with a certain lease agreement (see Note 7) in the amount of $129,986 as of December 31, 2015.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – The Company, Description of Business and Sale of the Company

Screen Media Ventures, LLC and Subsidiaries (the “Company”), is a limited liability company formed in Delaware on May 28, 1999. The Company acquires, markets, promotes and distributes feature length motion picture film rights to television broadcast stations, networks and other parties throughout the United States and in other countries around the world. The Company also distributes films in DVD formats to the retail and rental markets, releases films theatrically throughout the United States and distributes films into various digital delivery systems and video on demand (“VOD”) platforms.

As discussed in Note 9 – “Subsequent Events” , on November 3, 2017, Chicken Soup for the Soul Entertainment, Inc. (“CSS Entertainment”) entered into an Agreement and Plan of Merger with the Company, whereby CSS Entertainment acquired all of the outstanding equity ownership interests of the Company.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The condensed consolidated balance sheet as of December 31, 2016 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

The unaudited condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company at September 30, 2017, and the results of its operations for the nine months ended September 30, 2017 and 2016. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s audited financial statements for the years ended December 31, 2016, 2015 and 2014.

Going Concern

The accompanying condensed consolidated unaudited financial statements have been prepared assuming that the Company continues as a going concern. The Company’s independent auditors and their reports thereon, raised substantial doubt about its ability to continue as a going concern. This resulted primarily due to the Company’s inability to obtain extensions on their notes payable that were due on October 31, 2017, and the Company’s working capital deficit as of December 31, 2016. The condensed consolidated unaudited financial statements do not include any adjustments that may have resulted from the outcome of these uncertainties. However, as described in Note 9 – “Subsequent Events” , on November 3, 2017, CSS Entertainment acquired all of the outstanding equity ownership interests of the Company. Furthermore, as of the closing of the acquisition, the notes payable described above were terminated and security interests were released, and as a result, the Company had no indebtedness for borrowed money.

Screen Media Ventures, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include returns and allowances on DVD sales and management’s forecast of anticipated revenues from distributing the motion picture rights of its film library in order to evaluate its ultimate recoverability. Management periodically reviews such estimates, which determine the amortization of the film library and it is reasonably possible that management’s assessment of recoverability of individual films may change based on actual results and other factors. The reserve for returns and allowances related to DVD sales as of September 30, 2017 and 2016 was approximately $597,000 and $1,088,000, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less and consist primarily of money market funds. Such investments are stated at cost, which approximates fair value.

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting our own assumptions. These valuations require significant judgment and estimates.

At September 30, 2017 and December 31, 2016, the fair value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, accrued participation costs and film library acquisition obligations, approximated their carrying value due to the relatively short-term nature of these instruments.

Accounts Receivable

Accounts receivable are stated at the amounts management expects to collect. An allowance for doubtful accounts is recorded based on a combination of historical experience, aging analysis and information on specific accounts. Account balances are written off against the allowance after all means of collections have been exhausted and the potential for recovery is considered remote. Accounts are considered past due or delinquent based on contractual terms and how recently payments have been received. Estimated losses resulting from uncollectible accounts are reported as bad debt expense in the condensed consolidated statements of operations. At September 30, 2017 and December 31, 2016, an allowance for uncollectible accounts was approximately $414,000 and $438,000, respectively.

Screen Media Ventures, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

For the nine months ended September 30, 2017 and for the year ended December 31, 2016, the Company had $262,750 and $0, respectively, of accounts receivable write offs.

Inventory

Inventory consists of DVD films held for resale to wholesale and retail customers. Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method for all inventories. Market value is based on net realizable value. When the net realizable value falls below its cost, a provision for write-downs is recorded.

Fixed Assets

The company capitalizes all expenditures for property, plant and equipment in excess of $1,000 at cost. When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts and the remaining gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets.

Depreciation for leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Website development costs

Website development costs are stated at historical cost and amortization is computed on a straight-line basis over the estimated life of five years from the date of implementation.

Film library

Film library represents the cost of acquiring film distribution rights and related acquisition cost and accrued participation cost. Film library is amortized using the individual-film-forecast-computation method. Film library is stated at the lower of unamortized cost or fair value.

Amortization is based upon management’s best estimate of total future, or ultimate revenue. Amortization is adjusted when necessary to reflect increases or decreases in forecasted ultimate revenues. Ultimate revenues can include revenues for up to twenty years from the acquisition date for previously released films (ten years for a new release). The Company generally acquires distribution rights covering periods of ten or more years.

Film library acquisition obligations

Film library acquisition obligations represent liabilities incurred in connection with the acquisition of film libraries. Pursuant to the film distribution rights agreements, the company’s right to distribute films may revert to the licensor in the event that the company is unable to satisfy its remaining financial obligations with respect to the acquisition of those distribution rights.

Deferred financing costs

Deferred financing costs of $341,995 are included as a reduction to the revolving credit facility liability. The amounts are being amortized over the remaining term of the loan. Accumulated amortization as of September 30, 2017 and December 31, 2016 was $5,340,474 and $5,065,054, respectively. Amortization expense of $275,419 and $80,930 for the nine months ended September 30, 2017 and 2016, respectively, was included as a component of interest expense.

Screen Media Ventures, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Income Taxes

Pursuant to Section 701 of the Internal Revenue Code, the Company is treated as a partnership for federal and state income tax purposes with all income tax liabilities and/or benefits passed through to the members.

As such, no recognition of federal or state income taxes has been provided for in the accompanying financial statements. Provisions have been made for applicable local income taxes. An uncertain tax position taken by the member is not an uncertain position of the company.

A tax position must meet a minimum probability threshold before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

The Company is subject to taxation in various jurisdictions. The Company is subject to examination by U.S. federal, state and local authorities for the years 2013 through 2016.

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that a long-lived asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying value of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

Revenue Recognition

The Company generally licenses multi-film packages to its customers. Revenues from multi-film sales are allocated per title and recognized upon initial availability for exploitation by customers. Revenues from digital distribution and VOD platforms are recorded when revenue is reported by their respective platforms. The amounts of unrecognized revenues, prior to the initial availability of certain films, were approximately $1.1 million and $1.9 million as of September 30, 2017 and 2016, respectively.

Sales of DVD units are generally recorded upon their shipment to customers and provisions for future returns and allowances are established based upon historical experience.

Screen Media Ventures, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Deferred rent

The Company’s lease agreement provides for scheduled rent increases during the lease term or for rental payments commencing at a date other than initial occupancy. Rent expense is recognized on a straight-line basis over the term of the respective lease.

The Company received a tenant improvement allowance as a lease incentive. Tenant allowance represents landlord contributions to the construction costs of improving the related leased property. Total construction costs are capitalized as leasehold improvements, and the landlord construction allowance is recorded as a component of deferred rent which is amortized as a reduction of rent expense over the term lease.

Participation costs

The Company accrues for participation costs using the individual-film-forecast computation method, which accrues such costs in the same ratio that current period revenue bears to remaining ultimate revenue as of the beginning of the current year. These costs are capitalized and amortized as part of the film library.

Concentration of Credit Risk

The Company maintains cash balances at its bank. Accounts for each entity are insured by the Federal Deposit Insurance Corporation subject to certain limitations. At various times during the fiscal year, the Company’s cash in bank balances exceeded the federally insured limits. The uninsured balance at September 30, 2017 and December 31, 2016 was $47,969 and $0, respectively.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash in bank, revenue and accounts receivable. Concentrations of credit risk with respect to accounts receivable and revenue are significant due to the small number of customers comprising the Company’s customer base.

For the nine months ended September 30, 2017 and 2016, the Company generated 16% and 14%, respectively, of its revenue from foreign contracts. Contracts are entered into based upon an evaluation of customer’s financial condition, and generally some advance payment is required. Additionally, one of the Company’s subscription VOD customers accounted for approximately 9% and 16% of net revenues for the nine months ended September 30, 2017 and 2016, respectively.

For the nine months ended September 30, 2017, approximately 28% of the Company’s total accounts receivable were due from foreign customers.

Note 3 – Equipment and Improvements

Equipment and improvements, net of depreciation, consists of the following:

Depreciation expense was $72,110 for the nine months ended September 30, 2017 and $100,054 for the year ended December 31, 2016.

Amortization expense for the film library was $2,003,540 and $2,835,967 for the nine months ended September 30, 2017 and 2016, respectively.

Amortization expense for the website development costs was $417,150 and $535,750 for the nine months ended September 30, 2017 and 2016, respectively.

Screen Media Ventures, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 6 – Revolving Credit Facility and Notes Payable

Revolving Credit Facility

The Company had an available $13,950,000 revolving credit facility with a bank, $13,587,745 of which was outstanding as of September 30, 2017. The Company has executed a forbearance agreement with the bank which was due to expire on October 31, 2017, such date extended to November 3, 2017 to allow for the sale of the Company. As of the closing of the acquisition, the revolving credit facility was terminated and security interests related thereto were released, and as a result, the Company had no indebtedness under the revolving credit facility (Note 9).

Interest was payable on the revolving credit facility on the last day of each quarter and at the expiration of the LIBOR notes. The rate was the greater of 5% (4.5% if certain objectives are met) or applicable margin of 3.25% over Alternative Base Rate Loans (Prime), and 4.25% over Eurodollar Loans (LIBOR). During the forbearance period, the Company’s option to borrow on LIBOR was eliminated.

Interest expense on the revolving credit facility for the nine months ended September 30, 2017 and 2016 was $727,130 and $680,952, respectively.

Notes Payable

The Company had also entered into an investment agreement which provided for convertible notes of $15,000,000 secured with a subordinated interest to the revolving credit facility agreement and was due to expire on December 31, 2017. The notes and all unpaid interest bore interest at a rate of 1.17%, and at the option of the Company, interest was to be paid in cash, or accrue to the extent not paid. Accrued interest payable as of September 30, 2017 and December 31, 2016 (before the equity conversion mentioned below) is $11,422,256 and $11,182,861, respectively. Upon maturity of the notes, the holders could have required the Company to purchase, whether converted or not, either Special Class A Common Units or pay their equivalent value if unconverted. As of the closing of the acquisition, the convertible notes were terminated and security interests related thereto were released, and as a result, the Company had no indebtedness with respect to the convertible notes (Note 9).

Interest expense on the notes for the nine months ended September 30, 2017 and 2016 was $239,395 and $237,447, respectively.

All borrowings under the revolving credit facility and the convertible notes were collateralized by substantially all of the Company’s assets, prior to the sale of the Company.

Note 7 – Members’ Capital

The Company’s membership interests consist of Class A Common Units. On November 3, 2017, CSS Entertainment acquired all of the outstanding equity ownership interests of the Company (Note 9).

In accordance with the Company’s amended and restated operating agreement, the Company was obligated to make annual distributions to the members at the rate of 45% of the Company’s taxable income.

Holders of Class A Common Units were entitled to one vote for each unit held. They were not entitled to any distributions, except for tax reimbursement distributions, until the holders of the notes payable and the revolving credit facility were repaid in full.

Screen Media Ventures, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 8 – Commitments and Contingencies

The Company leases its office facilities under the terms of a non-cancelable operating lease agreement that expires on February 28, 2020. Rent expense for the nine months ended September 30, 2017 and 2016 was $455,082 for each period. Future minimum lease payments under the operating lease agreement in excess of one year as of September 30, 2017 are as follows:

In the normal course of business, the Company is subject to various legal claims by third parties. The Company establishes accruals for litigation when those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, the Company does not establish accruals. As of September 30, 2017, the Company does not believe that its loss contingencies arising from pending litigation will have a material effect on the Company’s financial position, cash flows or results of operations.

Note 9 – Subsequent Events

On November 3, 2017, CSS Entertainment, a Delaware corporation and publicly-traded company, entered into an Agreement and Plan of Merger (the “Agreement”) with the Company and its wholly owned subsidiaries, whereby CSS Entertainment acquired all of the outstanding equity ownership interests of the Company for a total purchase price of $5,329,905. CSS Entertainment paid the purchase price using cash on hand and by issuing common stock warrants to purchase up to an aggregate of 50,000 shares of its Class A common stock at $12.00 per share to the former principal equity holder and chief executive officer of the Company (the “Former CEO”). Additionally, on January 2, 2018, CSS Entertainment issued 35,000 shares of its Class A common stock to the Former CEO.

Immediately prior to the execution of the Agreement, all subordinated indebtedness owed by the Company or any of its subsidiaries was transferred and assumed by an entity owned and controlled by the Former CEO of the Company, and all obligations owed by the Company with respect thereto were terminated, and the security interests related thereto were released. In addition, the majority of the purchase price paid pursuant to the Agreement was paid to the Company’s banks in full satisfaction of all principal and interest owed by the Company under all loans to such banks, As a result of the foregoing transactions, the Company, as of the closing of the Agreement, had no indebtedness for borrowed money.