UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2019
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o | 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: 000-54389
GENIUS BRANDS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada | 20-4118216 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
Beverly Hills, California | ||
(Address of principal executive offices) | (Zip Code) |
310-273-4222
(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 |
Common Stock, par value $0.001 per share | GNUS | The Nasdaq Capital Market |
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer | ☐ | Accelerated filer | ||
☐ | ||||
Non-accelerated filer | ☒ | Smaller reporting company☒ | ||
Emerging growth companyo
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 7(a)(2)(B)13(a) of the SecuritiesExchange Act.o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
TheIndicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,432,718 shares of the registrant’s common stock, par value $0.001 per share, were outstanding as of November 13, 2017 was 7,610,794.
May 14, 2019.
GENIUS BRANDS INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2017March 31, 2019
2 |
PART I - FINANCIAL INFORMATION
Genius Brands International, Inc.
Condensed Consolidated Balance Sheets
As of September 30, 2017March 31, 2019, and December 31, 20162018
September 30, 2017 | December 31, 2016 | March 31, 2019 | December 31, 2018 | |||||||||||||
(Unaudited) | (unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and Cash Equivalents | $ | 2,247,402 | $ | 1,887,921 | $ | 3,629,268 | $ | 2,684,483 | ||||||||
Restricted Cash | 1,000,000 | 1,000,000 | 401,086 | 400,543 | ||||||||||||
Accounts Receivable, net | 130,179 | 122,910 | 1,660,557 | 2,160,296 | ||||||||||||
Other Receivables | 160,545 | – | ||||||||||||||
Other Receivable | 46,422 | 20,902 | ||||||||||||||
Inventory, net | 18,502 | 6,562 | 15,538 | 15,816 | ||||||||||||
Prepaid and Other Assets | 433,272 | 359,395 | 514,256 | 297,542 | ||||||||||||
Total Current Assets | 3,989,900 | 3,376,788 | 6,267,127 | 5,579,582 | ||||||||||||
Property and Equipment, net | 86,295 | 90,461 | 70,332 | 75,634 | ||||||||||||
Other Receivables | 96,327 | – | ||||||||||||||
Right Of Use Assets, net | 1,976,704 | – | ||||||||||||||
Film and Television Costs, net | 4,232,632 | 2,260,964 | 8,397,435 | 8,166,131 | ||||||||||||
Lease Deposits | 392,523 | 325,000 | ||||||||||||||
Intangible Assets, net | 1,801,878 | 1,845,650 | 80,215 | 89,988 | ||||||||||||
Goodwill | 10,365,805 | 10,365,805 | 10,365,806 | 10,365,806 | ||||||||||||
Total Assets | $ | 20,572,837 | $ | 17,939,668 | $ | 27,550,142 | $ | 24,602,141 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts Payable | $ | 336,122 | $ | 648,638 | $ | 526,184 | $ | 694,740 | ||||||||
Accrued Expenses | 225,178 | 249,482 | 266,918 | 52,865 | ||||||||||||
Participations Payable | 674,154 | 669,380 | ||||||||||||||
Deferred Revenue | 489,394 | 410,662 | 1,851,858 | 874,503 | ||||||||||||
Senior Secured Convertible Notes, net | 4,500,000 | 1,831,847 | ||||||||||||||
Lease Liability | 377,678 | – | ||||||||||||||
Due To Related Parties | 449,322 | 346,759 | ||||||||||||||
Accrued Salaries and Wages | 151,150 | 132,827 | 298,531 | 137,825 | ||||||||||||
Disputed Trade Payable | 925,000 | 925,000 | ||||||||||||||
Service Advance | – | 1,489,583 | ||||||||||||||
Total Current Liabilities | 2,126,844 | 3,856,192 | 8,944,645 | 4,607,919 | ||||||||||||
Long Term Liabilities: | ||||||||||||||||
Deferred Revenue | 4,583,455 | 2,695,946 | 2,635,121 | 4,051,253 | ||||||||||||
Production Facility | 3,495,524 | 1,332,004 | ||||||||||||||
Lease Liability | 1,645,036 | – | ||||||||||||||
Production Facility, net | 2,632,826 | 2,178,198 | ||||||||||||||
Disputed Trade Payable | 925,000 | 925,000 | ||||||||||||||
Total Liabilities | 10,205,823 | 7,884,142 | 16,782,628 | 11,762,370 | ||||||||||||
Commitments & Contingencies (Note 13) | ||||||||||||||||
Stockholders’ Equity | ||||||||||||||||
Preferred Stock, $0.001 par value, 10,000,000 shares authorized; 3,605 and 4,895 shares issued and outstanding, respectively | 4 | 5 | ||||||||||||||
Common Stock, $0.001 par value, 233,333,334 shares authorized; 5,938,103 and 4,010,649 shares issued and outstanding, respectively | 5,939 | 4,011 | ||||||||||||||
Common Stock to Be Issued | 24 | 24 | ||||||||||||||
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, respectively; 2,120 and 2,120 shares issued and outstanding, respectively | 2 | 2 | ||||||||||||||
Common Stock, $0.001 par value, 233,333,334 shares authorized, respectively; 10,432,718 and 9,457,859 shares issued and outstanding, respectively | 10,433 | 9,458 | ||||||||||||||
Additional Paid in Capital | 50,741,109 | 46,697,005 | 66,798,711 | 63,537,915 | ||||||||||||
Accumulated Deficit | (40,374,944 | ) | (36,642,761 | ) | (56,036,514 | ) | (50,702,486 | ) | ||||||||
Accumulated Other Comprehensive Loss | (5,118 | ) | (2,758 | ) | ||||||||||||
Total Stockholders’ Equity | 10,367,014 | 10,055,526 | ||||||||||||||
Accumulated Other Comprehensive Income (Loss) | (5,118 | ) | (5,118 | ) | ||||||||||||
Total Equity | 10,767,514 | 12,839,771 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 20,572,837 | $ | 17,939,668 | $ | 27,550,142 | $ | 24,602,141 |
The accompanying notes are an integral part of these financial statements.
3 |
Genius Brands International, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2019 and March 31, 2018
(unaudited)
Three Months Ended | ||||||||
March 31, 2019 | March 31, 2018 | |||||||
Revenues: | ||||||||
Licensing & Royalties | $ | 350,186 | $ | 3,754 | ||||
Television & Home Entertainment | 850,107 | 66,812 | ||||||
Advertising Sales | 20,160 | 22,009 | ||||||
Product Sales | 478 | 638 | ||||||
Total Revenues | 1,220,931 | 93,213 | ||||||
Operating Expenses: | ||||||||
Marketing and Sales | 81,471 | 60,980 | ||||||
Direct Operating Costs | 740,055 | (26,749 | ) | |||||
General and Administrative | 1,649,520 | 1,322,452 | ||||||
Total Operating Expenses | 2,471,046 | 1,356,683 | ||||||
Loss from Operations | (1,250,115 | ) | (1,263,470 | ) | ||||
Other Income (Expense): | ||||||||
Other Income | 8,760 | 279 | ||||||
Loss on Debt Extinguishment | (3,352,155 | ) | – | |||||
Sub-Lease Income | 115,230 | – | ||||||
Interest Expense | (529,202 | ) | (273 | ) | ||||
Net Other (Expense) Income | (3,757,367 | ) | 6 | |||||
Loss Before Income Tax Expense | (5,007,482 | ) | (1,263,464 | ) | ||||
Income Tax Expense | – | – | ||||||
Net Loss | (5,007,482 | ) | (1,263,464 | ) | ||||
Beneficial Conversion Feature on Preferred Stock | (322,240 | ) | – | |||||
Net Loss Applicable to Common Shareholders | $ | (5,329,722 | ) | $ | (1,263,464 | ) | ||
Net Loss per Common Share (Basic And Diluted) | $ | (0.54 | ) | $ | (0.18 | ) | ||
Weighted Average Shares Outstanding (Basic and Diluted) | 9,903,088 | 6,856,517 |
The accompanying notes are an integral part of these financial statements.
4 |
Genius Brands International, Inc.
Condensed Consolidated Statements of Comprehensive Income
Three months ended March 31, 2019 and March 31, 2018
(unaudited)
Three Months Ended | ||||||||
March 31, 2019 | March 31, 2018 | |||||||
Net Loss | $ | (5,007,482 | ) | $ | (1,263,464 | ) | ||
Beneficial Conversion Feature on Preferred Stock | (322,240 | ) | – | |||||
Other Comprehensive Income (Loss), Net of Tax: | – | – | ||||||
Comprehensive Net Loss to Common Shareholders | $ | (5,329,722 | ) | $ | (1,263,464 | ) |
The accompanying notes are an integral part of these financial statements.
5 |
Genius Brands International, Inc.
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 2019 and Three Months Ended March 31, 2018
(unaudited)
Common Stock | Preferred | Stock | Additional Paid-In | Accumulated | Other Comprehensive | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||
Balance, December 31, 2018 | 9,457,859 | $ | 9,458 | 2,120 | $ | 2 | $ | 63,537,915 | $ | (50,702,486 | ) | $ | (5,118 | ) | $ | 12,839,771 | ||||||||||||||||
Cumulative effect of adoption ASC 842 | – | – | – | – | – | (4,306 | ) | – | (4,306 | ) | ||||||||||||||||||||||
Warrants issued as part of Debt Extinguishment | – | – | – | – | 1,287,962 | – | – | 1,287,962 | ||||||||||||||||||||||||
Beneficial Conversion Feature resulting from Debt Extinguishment | – | – | – | – | (213,700 | ) | – | – | (213,700 | ) | ||||||||||||||||||||||
Proceeds from Securities Purchase Agreement, Net | 945,894 | 946 | – | – | 1,756,606 | – | – | 1,757,552 | ||||||||||||||||||||||||
Issuance of Common Stock for Services | 28,965 | 29 | – | – | 71,939 | – | – | 71,968 | ||||||||||||||||||||||||
Share Based Compensation | – | – | – | – | 35,749 | – | – | 35,749 | ||||||||||||||||||||||||
Value of Beneficial Conversion Feature | – | – | – | – | 322,240 | (322,240 | ) | – | – | |||||||||||||||||||||||
Net Loss | – | – | – | – | – | (5,007,482 | ) | – | (5,007,482 | ) | ||||||||||||||||||||||
Balance, March 31, 2019 | 10,432,718 | $ | 10,433 | 2,120 | $ | 2 | $ | 66,798,711 | $ | (56,036,514 | ) | $ | (5,118 | ) | $ | 10,767,514 | ||||||||||||||||
Balance, December 31, 2017 | 7,610,794 | $ | 7,611 | 3,530 | $ | 4 | $ | 56,588,846 | $ | (41,551,497 | ) | $ | (5,118 | ) | $ | 15,039,846 | ||||||||||||||||
Issuance Of Common Stock In Registered Direct Offering, net | 592,000 | 592 | – | – | 1,595,749 | – | – | 1,596,341 | ||||||||||||||||||||||||
Share Based Compensation | – | – | – | – | 47,852 | – | – | 47,852 | ||||||||||||||||||||||||
Retained Earnings Adjustment (ASC 606) | – | – | – | – | – | 173,112 | – | 173,112 | ||||||||||||||||||||||||
Net Loss | – | – | – | – | – | (1,263,464 | ) | – | (1,263,464 | ) | ||||||||||||||||||||||
Balance, March 31, 2018 | 8,202,794 | $ | 8,203 | 3,530 | $ | 4 | $ | 58,232,447 | $ | (42,641,849 | ) | $ | (5,118 | ) | $ | 15,593,687 |
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Condensed Consolidated Statements of OperationsCash Flows
Three months ended March 31, 2019 and Nine Months Ended September 30, 2017 and 2016March 31, 2018
(Unaudited)(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Licensing & Royalties | $ | 94,430 | $ | 85,660 | $ | 365,993 | $ | 347,128 | ||||||||
Television & Home Entertainment | 155,003 | 34,826 | 263,142 | 285,433 | ||||||||||||
Advertising Sales | 7,008 | – | 13,027 | – | ||||||||||||
Product Sales | 60 | – | 8,561 | 16,150 | ||||||||||||
Total Revenues | 256,501 | 120,486 | 650,723 | 648,711 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Marketing and Sales | 86,715 | 220,627 | 361,761 | 686,577 | ||||||||||||
Direct Operating Costs | 186,226 | 44,220 | 254,243 | 252,688 | ||||||||||||
General and Administrative | 1,150,147 | 1,389,360 | 3,772,643 | 4,325,703 | ||||||||||||
Total Operating Expenses | 1,423,088 | 1,654,207 | 4,388,647 | 5,264,968 | ||||||||||||
Loss from Operations | (1,166,587 | ) | (1,533,721 | ) | (3,737,924 | ) | (4,616,257 | ) | ||||||||
Other Income (Expense): | ||||||||||||||||
Other Income | 2,975 | 3,238 | 8,568 | 3,298 | ||||||||||||
Interest Expense | (794 | ) | (417 | ) | (2,827 | ) | (2,570 | ) | ||||||||
Interest Expense - Related Parties | – | – | – | (6,141 | ) | |||||||||||
Gain on Distribution Contracts | – | – | – | 258,103 | ||||||||||||
Net Other Income (Expense) | 2,181 | 2,821 | 5,741 | 252,690 | ||||||||||||
Loss before Income Tax Expense | (1,164,406 | ) | (1,530,900 | ) | (3,732,183 | ) | (4,363,567 | ) | ||||||||
Income Tax Expense | – | – | – | – | ||||||||||||
Net Loss Applicable to Common Shareholders | $ | (1,164,406 | ) | $ | (1,530,900 | ) | $ | (3,732,183 | ) | $ | (4,363,567 | ) | ||||
Net Loss per Common Share (Basic And Diluted) | $ | (0.20 | ) | $ | (0.38 | ) | $ | (0.67 | ) | $ | (1.12 | ) | ||||
Weighted Average Shares Outstanding (Basic and Diluted) | 5,923,838 | 3,988,626 | 5,591,492 | 3,889,108 |
March 31, 2019 | March 31, 2018 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Loss | $ | (5,007,482 | ) | $ | (1,263,464 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
Amortization of Film and Television Costs | 429,183 | 26,738 | ||||||
Depreciation and Amortization Expense | 72,471 | 32,274 | ||||||
Accretion of Discount on Preferred Convertible Notes | 390,260 | – | ||||||
Bad Debt | – | 2,400 | ||||||
Stock Issued for Services | 71,968 | – | ||||||
Stock Compensation Expense | 35,749 | 47,852 | ||||||
Loss On Extinguished Debt | 3,352,155 | – | ||||||
Decrease (Increase) in Operating Assets: | ||||||||
Accounts Receivable, net | 499,739 | 1,139,019 | ||||||
Other Receivable | (25,520 | ) | 256,872 | |||||
Inventory, net | 278 | 536 | ||||||
Prepaid & Other Assets | (216,714 | ) | (49,474 | ) | ||||
Lease Deposits | (67,523 | ) | (358,103 | ) | ||||
Film and Television Costs, net | (660,486 | ) | (928,289 | ) | ||||
Increase (Decrease) in Operating Liabilities: | ||||||||
Accounts Payable | (168,556 | ) | (91,877 | ) | ||||
Accrued Salaries & Wages | 160,706 | 5,678 | ||||||
Deferred Revenue | (438,777 | ) | 59,607 | |||||
Participations Payable | 4,774 | – | ||||||
Due To Related Parties | 102,563 | – | ||||||
Accrued Expenses | 251,972 | (93,876 | ) | |||||
Net Cash Used in Operating Activities | (1,213,240 | ) | (1,214,107 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Investment in Intangible Assets, net | – | (21,358 | ) | |||||
Investment in Property & Equipment, net | (4,423 | ) | (2,314 | ) | ||||
Net Cash Used in Investing Activities | (4,423 | ) | (23,672 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Lease liability | (49,189 | ) | – | |||||
Proceeds from Sale of Common Stock, Net | 1,757,552 | 1,596,340 | ||||||
Borrowing (Repayment) of Production Facility, Net | 454,628 | (1,633,323 | ) | |||||
Net Cash Provided by (Used In) Financing Activities | 2,162,991 | (36,983 | ) | |||||
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | 945,328 | (1,274,762 | ) | |||||
Beginning Cash, Cash Equivalents, and Restricted Cash | 3,085,026 | 7,498,072 | ||||||
Ending Cash, Cash Equivalents, and Restricted Cash | $ | 4,030,354 | $ | 6,223,310 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash Paid for Interest | $ | 110,486 | $ | – | ||||
Schedule of Non-Cash Financing and Investing Activities | ||||||||
Issuance of Common Stock for services rendered | $ | – | $ | 780,000 | ||||
Beneficial Conversion Feature | $ | 322,240 | $ | – |
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Consolidated Statements of Comprehensive Loss
Three and Nine Months Ended September 30, 2017 and 2016
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Net Loss Applicable to Common Shareholders | $ | (1,164,406 | ) | $ | (1,530,900 | ) | $ | (3,732,183 | ) | $ | (4,363,567 | ) | ||||
Other Comprehensive Loss, Net of Tax: | ||||||||||||||||
Unrealized Loss on Foreign Currency Translation | – | (6 | ) | (2,360 | ) | (839 | ) | |||||||||
Other Comprehensive Loss, Net of Tax: | – | (6 | ) | (2,360 | ) | (839 | ) | |||||||||
Comprehensive Loss | $ | (1,164,406 | ) | $ | (1,530,906 | ) | $ | (3,734,543 | ) | $ | (4,364,406 | ) |
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2017 and 2016
(Unaudited)
September 30, 2017 | September 30, 2016 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Loss | $ | (3,732,183 | ) | $ | (4,363,567 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
Amortization of Film and Television Costs | 37,935 | 158,168 | ||||||
Depreciation Expense | 51,527 | 49,637 | ||||||
Amortization Expense | 43,771 | 57,763 | ||||||
Imputed Interest Expense | – | 6,141 | ||||||
Stock Issued for Services | 130,000 | 39,000 | ||||||
Stock Compensation Expense | 514,108 | 1,236,880 | ||||||
Gain on Distribution Contracts | – | (258,103 | ) | |||||
Loss on Impairment of Assets | – | 1,850 | ||||||
Decrease (Increase) in Operating Assets: | ||||||||
Accounts Receivable | (9,626 | ) | 220,285 | |||||
Other Receivables | (256,872 | ) | – | |||||
Inventory | (11,940 | ) | 518 | |||||
Prepaid Expenses & Other Assets | (73,877 | ) | (253,678 | ) | ||||
Film and Television Costs, Net | (1,880,811 | ) | (754,770 | ) | ||||
Increase (Decrease) in Operating Liabilities: | ||||||||
Accounts Payable | (312,516 | ) | 66,247 | |||||
Accrued Expenses | (24,304 | ) | (274,042 | ) | ||||
Deferred Revenue | 476,655 | 2,159,120 | ||||||
Accrued Salaries and Wages | 18,323 | 23,223 | ||||||
Net Cash Used in Operating Activities | (5,029,810 | ) | (1,885,328 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Investment in Intangible Assets | – | (5,650 | ) | |||||
Purchase of Fixed Assets | (47,361 | ) | (1,542 | ) | ||||
Net Cash Used in Investing Activities | (47,361 | ) | (7,192 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from Warrant Exchange, Net | 3,401,924 | – | ||||||
Proceeds from Exercise of Warrants | – | 110,000 | ||||||
Proceeds from Production Facility, Net | 2,034,728 | 237,567 | ||||||
Net Cash Provided by Financing Activities | 5,436,652 | 347,567 | ||||||
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | 359,481 | (1,544,953 | ) | |||||
Beginning Cash, Cash Equivalents, and Restricted Cash | 2,887,921 | 5,187,620 | ||||||
Ending Cash, Cash Equivalents, and Restricted Cash | $ | 3,247,402 | $ | 3,642,667 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash Paid for Interest | $ | 2,827 | $ | 1,450 | ||||
Schedule of Non-Cash Financing and Investing Activities | ||||||||
Issuance of Common Stock in Relation to Sony Transaction | $ | 1,489,583 | $ | – | ||||
Issuance of Common Stock in Satisfaction of Short Term Advances | $ | – | $ | 410,535 |
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Notes to Condensed Financial Statements
September 30, 2017March 31, 2019 (unaudited)
Note 1: Organization and Business
Organization and Nature of Business
Genius Brands International, Inc. (“we”, “us”, “our”,we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates and licenses multimedia content. Led by industry veterans, the Company distributes itswe distribute our content in all formats as well as a broad range of consumer products based on itsour characters. In the children's media sector, the Company’sour portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment includingentertainment. New intellectual property titles include the award-winningpreschool property Rainbow Rangers, which debuted in November 2018 on Nickelodeon and preschool property Llama Llama, which debuted on Netflix in January 2018 and was renewed by Netflix for a second season. Our library titles include the award winning Baby Genius,; new preschool propertyRainbow Rangers; preschool property debuting on NetflixLlama Llama; tween music-driven brandSpacePop; adventure comedyThomas Edison's Secret Lab® available on public broadcast stations and the Company’s Kid Genius Carton Channel on Comcast's Xfinity on Demand, Roku, AppleTV, and Amazon Prime; Warren Buffett'sSecret Millionaires Club, created with and starring iconic investor Warren Buffett. The CompanyBuffett which is distributed across our Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and Zumo as well as Connected TV. We are also co-producingdeveloping an all-new adult-themed animated series,Stan Lee's Cosmic CrusadersSuperhero Kindergarten, with Stan Lee's Pow! Entertainment andThe Hollywood Reporter. Entertainment.
In addition, the Company actswe act as licensing agent for certain brands,Penguin Young Readers, a division of Penguin Random House LLC who owns or controls the underlying rights toLlama Llama, leveraging itsour existing licensing infrastructure to expand these brandsthis brand into new product categories, new retailers, and new territories. These includeLlama Llama and Celessence Technologies.
The Company commenced operations in January 2006, assuming all the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement between the Company and Genius Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “Baby Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under those titles. In October 2011, the Company (i) changed its domicile toreincorporated in Nevada from California, and (ii) changed its name to Genius Brands International, Inc. from Pacific Entertainment Corporation (the “Reincorporation”). In connection with the Reincorporation, the Company changed its trading symbol from “PENT” to “GNUS”.“GNUS.”
On November 15,In 2013, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limited liability company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“Acquisition Sub”). Upon closing of the transactions, contemplated under the Merger Agreement (the “Merger”), which occurred concurrently with entering into the Merger Agreement, the Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of A Squared.
On November 4, 2016, the Company filed a certificate to change its Articles of Incorporation to effect a reverse split on a one-for-three basis (the “2016 Reverse Split”). The 2016 Reverse Split became effective on November 9, 2016. All common stock (“Common Stock”) share and per share information in this Quarterly Report on Form 10-Q (“Form 10-Q”), including the accompanying consolidated financial statements and notes thereto, have been adjusted to reflect retrospective application of the 2016 Reverse Split, unless otherwise indicated.
Liquidity
Historically, the Company has incurred net losses. For the three months ended September 30, 2017March 31, 2019 and 2016,March 31, 2018, the Company reported net losses of $1,164,406$5,007,482 and $1,530,900, respectively. For the nine months ended September 30, 2017 and 2016, the Company reported net losses of $3,732,183 and $4,363,567,$1,263,464, respectively. The Company reported net cash used in operating activities of $5,029,810$1,213,240 and $1,885,328$1,214,107 for the ninethree months ended September 30, 2017March 31, 2019, and 2016,March 31, 2018, respectively. As of September 30, 2017,March 31, 2019, the Company had an accumulated deficit of $40,374,944$56,036,514 and total stockholders’ equity of $10,367,014.$10,767,514. At September 30, 2017,March 31, 2019, the Company had current assets of $3,989,900,$6,267,127, including cash, cash equivalents, and restricted cash of $3,247,402$4,030,354 and current liabilities of $2,126,844, including certain trade payables of $925,000 to which the Company disputes the claim.$8,944,645. The Company had negative working capital of $1,863,056$2,677,518 as of September 30, 2017,March 31, 2019, compared to a working capital deficit of $479,404$971,663 as of December 31, 2016.2018.
On February 19, 2019, the Company entered into a securities purchase agreement with a certain accredited investor pursuant to which we sold 945,894 shares of common stock and warrants to purchase up to 945,894 shares of our common stock, or the registered warrants, to such investor (the “February 2019 Offering”). The Company received $1,757,552 of net proceeds from this offering. Each share of common stock was accompanied by a registered warrant to purchase one share of common stock at an exercise price of $2.12. Each share of common stock and accompanying registered warrant were sold at a combined purchase price of $2.12. The shares of common stock and registered warrants were purchased together and were issued separately and were immediately separable upon issuance. In a concurrent private placement, we also sold to the purchaser in the February 2019 Offering, unregistered warrants to purchase up to an additional 945,894 shares of our common stock.
DuringAmendment, Waiver and Consent
In connection with the first quarter of 2017, the Company completed two key transactions that enhanced cashFebruary 2019 Offering and working capital balances:
Subsequent to the end of the period, on October 3, 2017, the Company sold, in a registered direct offering, 1,647,691 shares of Common Stock at an offering price of $3.90 per share and, in a concurrent private placement, we entered into an amendment, waiver and consent agreement, or the “Amendment, Waiver and Consent Agreement,” with certain holders of our 10% Secured Convertible Notes due August 20, 2019, which were issued pursuant a securities purchase agreement, dated August 17, 2018, by and among the Company and the purchasers identified on the signature pages thereto, or the notes purchase agreement. Pursuant to the Amendment, Waiver and Consent Agreement, such holders agreed to amend the notes purchase agreement, waive any applicable rights and remedies under the notes purchase agreement, and consent to the February 2019 Offering and concurrent private placement. In consideration for such Amendment, Waiver and Consent Agreement, we agreed to issue all holders of our 10% Secured Convertible Notes due August 20, 2019 warrants to purchase up to an aggregate of 1,647,691amount 1,800,000 shares of Commonour comment stock. Such warrants have an exercise price of $2.55 per share, will become exercisable commencing six months and one day from the date of issuance and will expire five (5) years from the date of issuance.
Series A Convertible Preferred Stock for gross proceedsPrice Adjustment
As a result of approximately $6,425,995 before deductingthis offering, the placement agent fee and related offering expenses (See Note 15).conversion price of our outstanding Series A Convertible Preferred Stock was adjusted to $2.12.
While the Company believes that its anticipated cash balances and working capital combined with its production facility and deal pipeline will be sufficient to fund operations for the next twelve months, there can be no assurance that cash flows from operations will continue to improve in the near future. If the Company is unable to attain profitable operations and attain positive operating cash flows, it may need to (i) seek additional funding, (ii) scale back its development or production plans, or (iii) reduce certain operations.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 20172019 and 20162018 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared andLLC, Llama Productions LLC and Rainbow Rangers Productions LLC, as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-company balances and transactions have been eliminated in consolidation.
Business Combination
On November 15, 2013, the Company entered into a Merger Agreement with A Squared, the Parent Member, and the Acquisition Sub. Upon closing of the Merger, which occurred concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of A Squared.
The financial statements have been prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 Business Combinations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these condensed consolidated financial statements to conform to current period classifications.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of March 31, 2019, Restricted Cash includes $1,000,000 that the Company deposited intototaled $401,086. As of December 31, 2018, Restricted Cash totaled $400,543. Restricted Cash represents funds held in a cash account to be used solely to produce its seriesfor the production ofLlama Llama as a condition of its loan agreement with Bank Leumi USA.
Allowance for Doubtful Accounts
Accounts receivable are presented on the balance sheets net of estimated uncollectible amounts. The Company assesses its accounts receivable balances on a quarterly basis to determine collectability and records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses based on historical experience and future expectations. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company had an allowance for doubtful accounts of $110,658 at$0 for both September 30, 2017March 31, 2019 and December 31, 2016.2018.
Inventories
Inventories are stated at the lower of average cost or marketnet realizable value and consist of finished goods such as DVDs, CDs and other products. A reserve for slow-moving and obsolete inventory is established for all inventory deemed potentially non-saleable by management in the period in which it is determined to be potentially non-saleable. The current inventory is considered properly valued and saleable. The Company concluded that there was an appropriate reserve for slow moving and obsolete inventory of $26,097 at both September 30, 2017March 31, 2019 and December 31, 2016.2018.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add to the value of the assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property and equipment are reflected in the statement of operations.
Right of Use Leased Assets
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which allows for an additional optional transition method where comparative periods presented in the financial statements in the period of adoption will not be restated and instead those periods will be presented under existing guidance in accordance with ASC 840, Leases. Management used this optional transition method. As of January 1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.
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March 31, 2019 | ||||
Right Of Use Asset | ||||
Office Lease Asset | $ | 2,141,373 | ||
Printer Lease Asset | 12,374 | |||
Right Of Use Asset, gross | 2,153,747 | |||
Less Accumulated Amortization | ||||
Office Lease Accumulated Amortization | 171,553 | |||
Printer Lease Accumulated Amortization | 5,490 | |||
Accumulated Amortization | 177,043 | |||
Right Of Use Asset, Net | $ | 1,976,704 |
During the three months ended March 31, 2019, the Company recorded amortization expense of $52,973.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets in future periods.
Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. In accordance with FASB ASC 350 Intangible Assets, the costs of new product development and significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Debt and Attached Equity-Linked Instruments
The Company measures issued debt on an amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or the straight-line method when the latter does not lead to materially different results.
The Company accounts for the proceeds from the issuance of convertible notes payable in accordance with FASB ASC 470-20 Debt with Conversion and Other Options. Pursuant to FASB ASC 470-20, the intrinsic value of the embedded conversion feature (beneficial conversion interest), which is in the money on the commitment date is included in the discount to debt and amortized to interest expense over the term of the note agreement. When the conversion option is not separated, the Company accounts for the entire convertible instrument including debt and the conversion feature as a liability.
The Company analyzes freestanding equity-linked instruments including warrants attached to debt to conclude whether the instrument meets the definition of the derivative and whether it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to Company’s stock, it is classified as an asset or liability recorded at fair value. If the instrument considered indexed to Company’s stock, the Company analyzes additional equity classification requirements per ASC 815-40 Contract’s in Entity’s Own Equity. When the requirements are met the instrument is recorded as part of the Company’s equity, initially measured based on its relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.
When required, the Company also considers the bifurcation guidance for embedded derivatives per FASB ASC 815-15 Embedded Derivatives.
Film and Television Costs
The Company capitalizes production costs for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.
The Company capitalizes production costs for films produced in accordance with FASB ASC 926-20 Entertainment-FilmsEntertainment - Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates its capitalized production costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.
Additionally, for both episodic series and films, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
On January 1, 2018, the Company adopted the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, (Topic 605).
Accordingly, on January 1, 2018 the Company recorded a cumulative effect adjustment to beginning accumulated deficit in the amount of $173,112. The impact to our financial statements for the three months ended March 31, 2018 resulting from the adoption of Topic 606 as of January 1, 2018 was a reduction of revenue in the amount $68,184 and a corresponding reduction in costs in the amount of $10,099 from the amounts reported. The amounts prior to adoption were not recognized pursuant to Topic 606 and would have been reported pursuant to Topic 605.
The Company recognizeshas identified the following six material and distinct performance obligations:
· | License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability to be played or aired. Functional intellectual property derives a substantial portion of its utility from its significant standalone functionality.) |
· | License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs associated with its animated content.) |
· | Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.) |
· | Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.) |
· | Fixed fee advertising revenue generated from the Genius Brands Network |
· | Variable fee advertising revenue generated from the Genius Brands Network |
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As a result of the change, beginning January 1, 2018, the Company began recognizing revenue related to licensed rights to exploit functional IP in accordance with FASB ASC 926-605 Entertainment-Films - Revenue Recognition. Accordingly,two ways. For minimum guarantees, the Company recognizes fixed revenue when (i) persuasive evidenceupon delivery of a salecontent and the start of the license period. For functional IP contracts with a customer exists, (ii)variable component, the filmCompany estimates revenue such that it is complete andprobable there will not be a material reversal of revenue in future periods. Revenue under these types of contracts was previously recognized when royalty statements were received. The Company began recognizing revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has been delivered ora different recognition pattern from functional IP, the valuation method is available for delivery, (iii)substantially the license periodsame, depending on the nature of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale, (iv) the arrangement fee is fixed or determinable, and (v) collection of the arrangement fee is reasonably assured.
The Company’s licensing and royalty revenue represents revenue generated from license agreements that are held in conjunction with third parties that are responsible for collecting fees due and remitting to the Company its share after expenses. Revenue from licensed products is recognized when realized or realizable based on royalty reporting received from licensees. Licensing income the Company recognizes as an agent is in accordance with FASB ASC 605-45 Revenue Recognition - Principal Agent. Accordingly, the Company’s revenue is its gross billings to its customers less the amounts it pays to suppliers for their products and services.license.
The Company sells advertising on its Kid Genius Cartoon Channelchannel in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under FASB ASC 605606 are met. For impressions served, the Company delivers a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM per impression. Impressions served are reported to the Company on a monthly basis, and revenue is reported in the month the impressions are served.
The Company recognizes revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer as required by FASB ASC 605 Revenue Recognition.buyer.
Direct Operating Costs
Direct operating costs include costs of our product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which we are obligated to share net profits of the properties on which they have rendered services.
Share-Based Compensation
As required by FASB ASC 718 - Stock Compensation, the Company recognizes an expense related to the fair value of our share-based compensation awards, including stock options, using the Black-Scholes calculation as of the date of grant. The Company has elected to use the graded attribution method for awards which are in-substance, multiple awards based on the vesting schedule.
Earnings Per Share
Basic earnings (loss) per common share (“EPS”) is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of Common Stockcommon stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of Common Stockcommon stock outstanding, plus the assumed exercise of all dilutive securities using the treasury stock or “as converted” method, as appropriate. During periods of net loss, all Common Stockcommon stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.
Income Taxes
Deferred income tax assets and liabilities are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred tax assets and records a valuation allowance that reduces the deferred tax assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized.
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Concentration of Risk
The Company’s cash is maintained at two financial institutions and from time to time the balances for this account exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of March 31, 2019, the Company had three accounts with a combined uninsured balance of $3,169,283. As of December 31, 2018, the Company had three accounts with a combined uninsured balance of $2,183,875.
For the three months ended March 31, 2019, the Company had two customers whose total revenue each exceeded 10% of the total consolidated revenue. Those customers accounted for 78% of the total revenue and represented 28% of accounts receivable. For fiscal year 2018, the Company had one customer who accounted for 98% of accounts receivable balance as of December 31, 2018.
Fair value of financial instruments
The carrying amounts of cash, receivables, accounts payable, and accrued liabilities approximate fair value due to the short-term maturity of the instruments. The carrying amount of the Production Loan Facility approximates fair value since the debt carries a variable interest rate that is tied to either the current Prime or LIBOR rates plus an applicable spread.
We previously adopted FASB ASC 820 as of January 1, 2008, for financial instruments measured at fair value on a recurring basis. FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.
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. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
· | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; | |
· | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
· | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
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Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards (e.g. insurance contracts). This ASU will supersede all revenue recognition requirements in Topic 605, Revenue Recognition, and industry-specific guidance throughout the industry topics of the codification. The guidance's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity will identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied (either over time or at a point in time). The ASU further states that an entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, which approved a one-year deferral of the effective date of the ASU from the original effective date of annual reporting periods beginning after December 15, 2016, to annual reporting periods (including interim reporting periods) beginning after December 15, 2017, with an option for early adoption of the standard on the original effective date. Additionally, in March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” that amended the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 805): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016, EITF Meeting,” which rescinded from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements. The FASB also issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which clarified guidance on assessment of collectability, presentation of sale taxes, measurement of noncash consideration, and certain transition matters. In the second and third quarters, the Company initiated and executed a project to evaluate the impact of these changes, which included a review of existing contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to the Company’s existing accounting policies, to identify differences. The Company is currently evaluating the potential impact on the its internal controls to identify any necessary changes. The standard can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. The Company plans to implement these standards effective January 1, 2018 based on the modified retrospective method, but may opt for the full retrospective method depending on the final outcome of our evaluation. The Company believes that it is following an appropriate timeline to allow for proper adoption on the implementation date of January 1, 2018 and will continue to monitor new customer contracts through the remainder of 2017.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We have prospectively adopted ASU 2016-18. The impact to our consolidated financial position, results of operations and cash flows is minimal.
In January 2017, the FASB issued Accounting StandardsUpdate 2017-04, “Simplifyingthe Test for Goodwill Impairment”,Impairment,” which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted.We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In MayJuly 2017, the FASB issued Accounting Standard Update 2017-09, “Compensation—Stock Compensation: ScopeASU No. 2017-11 addressing, among other matters, accounting for certain financial instruments. One of Modification Accounting”the amendments in this guidance intended to reduce the complexity associated with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the Board determined that a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. ASU 2017-11 is effective for public business entities for fiscal year beginning after December 15, 2018. The Company adopted ASU 2017-11 on January 1, 2019. The adoption of ASU 2017-11 did not have a material impact on the Company’s financial statements or cash flows.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value vesting conditions or classification (equity or liability)measurement disclosure requirements of theASC 820. The update removes some disclosures, modifies others, and adds some new awarddisclosure requirements. The amendments in this ASU are different from the original award immediately before the original award is modified. The standard is effective for all entities for fiscal years, and interim period within those fiscal years, beginning January 1, 2018,after December 15, 2019 with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-05 and expands the scope of ASC 718 to include all share-based payment arranges related to the acquisition of goods and services from both nonemployees and employee. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASC 2018-07 is effective for all entities for fiscal year beginning after December 15, 2018, and interim periods within that fiscal year. The Company adopted ASU No. 2018-07 on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements or cash flows.
In March 2019, the FASB issued ASU No. 2019-02, Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters Intangibles-Goodwill and Other (Subtopic 920-350). The update aligns the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization. The amendments also require that an entity reassess estimates of the use of a film in a film group and account for any changes prospectively. The amendments in this update require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries/transactions or special circumstances,industries and are not expected to have a material effect on our financial position, results of operations, or cash flows.
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Note 3: Property and Equipment, Net
The Company has property and equipment as follows as of September 30, 2017March 31, 2019 and December 31, 2016:2018:
September 30, 2017 | December 31, 2016 | March 31, 2019 | December 31, 2018 | |||||||||||||
Furniture and Equipment | $ | 12,385 | $ | 12,385 | $ | 13,873 | $ | 12,385 | ||||||||
Computer Equipment | 90,015 | 42,654 | 138,883 | 138,883 | ||||||||||||
Leasehold Improvements | 176,903 | 176,903 | 2,935 | – | ||||||||||||
Software | 15,737 | 15,737 | 15,737 | 15,737 | ||||||||||||
Property and Equipment, Gross | 295,040 | 247,679 | 171,428 | 167,005 | ||||||||||||
Less Accumulated Depreciation | (208,745 | ) | (157,218 | ) | (101,096 | ) | (91,371 | ) | ||||||||
Property and Equipment, Net | $ | 86,295 | $ | 90,461 | $ | 70,332 | $ | 75,634 |
During the three months ended September 30, 2017March 31, 2019 and 2016,2018, the Company recorded depreciation expense of $17,661$9,725 and $16,574,$19,275, respectively. During the nine months ended September 30, 2017 and 2016, the Company recorded depreciation expense of $51,527 and $49,637, respectively.
Note 4: Film and Television Costs, Net
As of September 30, 2017,March 31, 2019, the Company had net Film and Television Costs of $4,232,632$8,397,435, compared to $2,260,964$8,166,131 at December 31, 2016.2018. The increase relates primarily to the production and development ofSpacePop, Llama Llama,Rainbow Rangers season 1 andRainbow RangersLlama Llama season 2 offset by the amortization of film costs associated with the revenue recognized forThomas Edison’s Secret Lab,SpacePop and Llama Llama season 1,andSpacePop.Rainbow Rangers season 1.
During the three months ended September 30, 2017March 31, 2019 and 2016,2018, the Company recorded Film and Television Cost amortization expense of $29,849$429,183 and $23,011, respectively. During the nine months ended September 30, 2017, and 2016, the Company recorded Film and Television Cost amortization expense of $37,935 and $158,168,$26,738, respectively.
The following table highlights the activity in Film and Television Costs as of September 30, 2017March 31, 2019, and December 31, 2016:2018:
Total | �� | Total | ||||||
Film and Television Costs, Net as of December 31, 2015 | $ | 1,003,546 | ||||||
Film and Television Costs, Net as of December 31, 2017 | $ | 2,777,088 | ||||||
Cumulative Effect of Adoption of ASC 606 | (219,472 | ) | ||||||
Additions to Film and Television Costs | 1,390,450 | 6,644,728 | ||||||
Capitalized Interest | 34,756 | 43,510 | ||||||
Film Amortization Expense | (167,788 | ) | (1,079,723 | ) | ||||
Film and Television Costs, Net as of December 31, 2016 | 2,260,964 | |||||||
Film and Television Costs, Net as of December 31, 2018 | 8,166,131 | |||||||
Additions to Film and Television Costs | 1,880,811 | 590,452 | ||||||
Capitalized Interest | 128,792 | 70,035 | ||||||
Film Amortization Expense | (37,935 | ) | (429,183 | ) | ||||
Film and Television Costs, Net as of September 30, 2017 | $ | 4,232,632 | ||||||
Film and Television Costs, Net as of March 31, 2019 | $ | 8,397,435 |
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Note 5: Goodwill and Intangible Assets, Net
Goodwill
In connection with the Merger in 2013, the Company recognized $10,365,805$10,365,806 in Goodwill, representing the excess of the fair value of the consideration for the Merger over net identifiable assets acquired. Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization but is subject to annual review to determine if certain events warrant impairment to the Goodwill asset. Through September 30, 2017,March 31, 2019, the Company has not recognized any impairment to Goodwill.
Intangible Assets, Net
The Company had the following intangible assets as of September 30, 2017March 31, 2019, and December 31, 2016:2018:
September 30, 2017 | December 31, 2016 | |||||||
Identifiable Artistic-Related Assets (a) | $ | 1,740,000 | $ | 1,740,000 | ||||
Trademarks (b) | 129,831 | 129,831 | ||||||
Product Masters (b) | 64,676 | 64,676 | ||||||
Other Intangible Assets (b) | 185,020 | 185,020 | ||||||
Intangible Assets, Gross | 2,119,527 | 2,119,527 | ||||||
Less Accumulated Amortization (c) | (317,649 | ) | (273,877 | ) | ||||
Intangible Assets, Net | $ | 1,801,878 | $ | 1,845,650 |
March 31, 2019 | December 31, 2018 | |||||||
Trademarks (a) | $ | 129,831 | $ | 129,831 | ||||
Product Masters (a) | 64,676 | 64,676 | ||||||
Other Intangible Assets (a) | 272,528 | 272,529 | ||||||
Intangible Assets, Gross | 467,035 | 467,036 | ||||||
Less Accumulated Amortization (b) | (386,820 | ) | (377,048 | ) | ||||
Intangible Assets, Net | $ | 80,215 | $ | 89,988 |
(a) | ||
Pursuant to FASB ASC 350-30-35, the Company reviews these intangible assets periodically to determine if the value should be retired or impaired due to recent events. Through | ||
During the three months ended |
Expected future intangible asset amortization as of September 30, 2017March 31, 2019 is as follows:
Fiscal Year: | ||||||
2017 (three months) | $ | 11,752 | ||||
2018 | 26,119 | |||||
2019 | 9,236 | |||||
2020 | 8,655 | |||||
2021 | 2,059 | |||||
Remaining | 4,057 | |||||
Total | $ | 61,878 |
Fiscal Year: | ||||
2020 | $ | 28,632 | ||
2021 | 37,835 | |||
2022 | 9,698 | |||
2023 | 1,861 | |||
2024 | 1,465 | |||
Remaining | 724 | |||
Total | $ | 80,215 |
Note 6: Deferred Revenue
As of September 30, 2017March 31, 2019, and December 31, 2016,2018, the Company had total short term and long term deferred revenue of $5,072,849$4,486,979 and $3,106,608,$4,925,756 respectively. Deferred revenue includes both (i) variable fee contracts with licensees and customers in which the Company had collected advances and minimum guarantees against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these contracts when all revenue recognition criteria have been met. Included in the deferred revenue balance as of March 31, 2019 and December 31, 20162018 is the $2,000,000 advance against future royalty that Sony paid to the Company in the first quarter of 2016. Included in the deferred revenue balance as of September 30, 2017 is the $2,000,000 advance against future royalties that Sony paid to the Company in the first quarter of 2016 as well as the remaining portion of the $1,489,583 attributable to the expansion of distribution rights acquired by Sony through the January 2017 Sony Transactions.
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Note 7: Accrued Liabilities – Current
As of September 30, 2017March 31, 2019, and December 31, 2016,2018, the Company hadhas the following current accrued liabilities:
September 30, 2017 | December 31, 2016 | |||||||
Accrued Salaries and Wages (a) | $ | 151,150 | $ | 132,827 | ||||
Disputed Trade Payables (b) | 925,000 | 925,000 | ||||||
Services Advance - Current Portion (c) | – | 1,489,583 | ||||||
Other Accrued Expenses | 225,178 | 249,482 | ||||||
Total Accrued Liabilities - Current | $ | 1,301,328 | $ | 2,796,892 |
March 31, 2019 | December 31, 2018 | |||||||
Other Accrued Expenses (a) | $ | 266,918 | $ | 52,865 | ||||
Accrued Salaries and Wages (b) | 298,531 | 137,825 | ||||||
Total Accrued Liabilities – Current | $ | 565,449 | $ | 190,690 |
(a) | Represents accrued interest, insurance liability and lease deposit on sub-lease. | |
(b) | Represents accrued salaries and wages and accrued vacation payable to employees for 2019 and accrued vacation payable to employees in 2018 |
Note 8: Secured Convertible Notes
On August 17, 2018, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors (the “Investors”), pursuant to which the Company agreed to sell (i) an aggregate principal amount of $4.50 million in secured convertible notes, convertible into shares of our common stock, at a conversion price of $2.50 per share (the “Secured Convertible Notes”) and (ii) warrants to purchase 1,800,000 shares of our common stock at an exercise price of $3.00 per share (the “Warrants,” and, together with the Secured Convertible Notes, the “Securities”). We received approximately $4,500,000 in gross proceeds from the Offering.
The Secured Convertible Notes are our senior secured obligations and are secured by certain tangible and intangible property of the Company as described in the Purchase Agreement. Unless earlier converted or redeemed, the Secured Convertible Notes will mature on August 20, 2019. The Secured Convertible Notes bear interest at a rate of 10% per annum and are convertible at any time until a Secured Convertible Note is no longer outstanding, in whole or in part, at the option of the holders into shares of common stock at a conversion price of $2.50 per share. The Secured Convertible Notes have a beneficial ownership limitation such that none of the Investors have the right to convert any portion of their Secured Convertible Notes if the Investor (together with its affiliates or any other persons acting together as a group with the Investor) would beneficially own in excess of 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of our common stock issuable upon conversion of such Secured Convertible Notes. In addition, the Secured Convertible Notes provide for a conversion cap such that we may not issue any shares of our common stock upon conversion of Secured Convertible Notes which would exceed the aggregate number of shares of our common stock we could issue upon conversion of the Secured Convertible Notes without breaching our obligations, if any, under Nasdaq Stock Market LLC rules and regulations.
Interest under the Secured Convertible Notes is payable in arrears beginning on September 1, 2018 and thereafter on each of December 1, 2018, March 1, 2019, June 1, 2019 and at maturity when all amounts outstanding under the Secured Convertible Notes become due and payable. Subject to certain equity conditions, we may force a conversion of the debt into equity. We may redeem the Secured Convertible Notes at any time prior to maturity. If we do not meet such equity conditions at maturity, we are obligated to repay in cash one-sixth of the then outstanding principal amount of the Secured Convertible Notes each month for the six months following the date of maturity, with the first such payment due on the date of maturity, followed by payments each month thereafter.
The Secured Convertible Notes contain certain negative covenants, including prohibitions on the incurrence of indebtedness or liens. The Secured Convertible Notes also contain standard and customary events of default including, but not limited to, failure to make payments when due, failure to observe or perform covenants or agreements contained in the Secured Convertible Notes or the bankruptcy or insolvency of the Company or any of our subsidiaries. The Company was in compliance with these covenants as of March 31, 2019.
On the date of issuance, the Secured Convertible Notes were convertible into common stock at $2.50 per share, or at a conversion price below the closing market price of $2.55. This “discount” is considered a beneficial conversion feature for accounting purposes. The allocation of carrying basis between the Warrants issued and the Secured Convertible Notes was determined based on relative fair value. The discount of the initial conversion price from market related to the beneficial conversion feature of the debt was $1,561,111, and such amount was recorded as a reduction of debt and increase in additional paid-in capital. The discount will be amortized as additional interest over the term of the loan. The Warrants entitle the holders to purchase 1,800,000 shares of common stock. The Warrants were not exercisable until after six months from the date of issuance and expire five and half years from the date of issuance. The Warrants have an exercise price of $3.00 per share. In the event of a “Fundamental Transaction” (as defined in the Warrants), the Investors have the right to receive the value of the Warrants as determined in accordance with the Black Scholes option pricing model. The Warrants are considered indexes to the Company’s own stock pursuant to ASC 815-40. The Warrants also met the additional equity classification requirements and accordingly are accounted for as part of the Company’s equity. During the three months ended March 31, 2019, the Company recognized $390,260 of discount amortization which is included in interest expense. In conjunction with the February 2019 Offering and concurrent private placement, we entered into an amendment, waiver and consent agreement, or the “Amendment, Waiver and Consent Agreement,” with certain holders of our 10% Secured Convertible Notes due August 20, 2019, which were issued pursuant a securities purchase agreement, dated August 17, 2018, by and among the Company and the purchasers identified on the signature pages thereto, or the notes purchase agreement. Pursuant to the Amendment, Waiver and Consent Agreement, such holders agreed to amend the notes purchase agreement, waive any applicable rights and remedies under the notes purchase agreement, and consent to the February 2019 Offering and concurrent private placement. In consideration for such Amendment, Waiver and Consent Agreement, we agreed to issue such holders warrants to purchase up to an aggregate amount 1,800,000 shares of our common stock. Such warrants have an exercise price of $2.55 per share, will become exercisable commencing six months and one day from the date of issuance and will expire five (5) years from the date of issuance. The issuance of the warrants resulted in a modification of debt in accordance with ASC 470 and is characterized as an extinguishment of debt in accordance with ASC-470-50-40. In accordance with ASC-470-50-40-2 the Company derecognized the existing debt as if it was extinguished and recorded the new debt, with the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt, $2,064,193 being recorded as a loss on the extinguishment of debt. In addition, the warrants were accounted for as equity instruments in accordance with ASC 815-40 and valued using the Black Scholes option pricing model. The fair value of $1,287,962 was recorded as part of the loss on extinguishment of debt.
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Note 8:9: Production Loan Facility
On August 8, 2016, Llama Productions closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”) with Bank Leumi USA to produce its animated seriesLlama Llama, (the “Series”) which is configured as fifteen half-hour episodes comprised of thirty 11-minute11 minute programs anticipated to bethat were delivered to Netflix in the fourth quarter offall 2017. The Facility is secured by the license fees the Company will receive from Netflix for the delivery of the Series as well as the Company’s copyright in the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1% or one, three, or six-month LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, the Company deposited $1,000,000 into a cash account to be used solely to produce the Series. Additionally, the Facility contains certain standard affirmative and negative non-financial covenants such as maintaining certain levels of production insurance and providing standard financial reports. As of September 30, 2017,March 31, 2019, the Company was in compliance with these covenants.
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On September 28, 2018, Llama Productions LLC, a California limited liability company (“Llama”) and a wholly-owned subsidiary of the Company, entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Bank Leumi USA (the “Lender”), pursuant to which the Lender agreed to make a secured loan in an aggregate amount not to exceed $4,231,989 to Llama (the “Loan”). The proceeds of the Loan will be used to pay the majority of the expenses of producing, completing and delivering two 22-minute episodes and sixteen 11- minute episodes of the second season of the animated series Llama Llama to be initially exhibited on Netflix.
To secure payment of the Loan, Llama has granted to the Lender a continuing security interest in and against, generally, all of its tangible and intangible assets, which includes all seasons of the Llama Llama animated series.
Under the Loan and Security Agreement, Llama can request revolving loan advances under (a) the Prime Rate Loan facility and (b) the LIBOR Loan facility, each as further described in the Loan and Security Agreement attached as an exhibit hereto. Prime Rate Loan advances shall bear interest, on the outstanding balance thereof, at a fluctuating per annum rate equal to 1.0% plus the Prime Rate (as such term is defined in the Loan and Security Agreement), provided that in no event shall the interest rate applicable to Prime Rate Loans be less than 4.0% per annum. LIBOR Loan advances shall bear interest, on the outstanding balance thereof, for the period commencing on the funding date and ending on the date which is one (1), three (3) or six (6) months thereafter, at a per annum rate equal to 3.25% plus the LIBOR determined for the applicable Interest Period (as such terms are defined in the Loan and Security Agreement), provided that in no event shall the interest rate applicable to LIBOR Loans be less than 3.25% per annum. The Maturity Date of the Prime Rate Loan facility and LIBOR Loan facility is March 31, 2021. Interest rates on advances under the Loan and Security Agreement were between 5.75% and 6.14% as of March 31, 2019.
In addition, on September 28, 2018, Llama and Lender entered into Amendment No. 2 to Loan and Security Agreement, effective as of August 27, 2018, by and between Llama and the Lender (the “Amendment”). Pursuant to the Amendment, the original Loan and Security Agreement, dated as of August 5, 2016 and amended as of November 7, 2017 (the “Original Loan and Security Agreement”), was amended to (i) reduce the loan commitment thereunder to $1,768,010, which is a reduction of $3,075,406 from the original loan commitment under the Original Loan and Security Agreement and (ii) include the Llama Llama season two obligations under the Loan and Security Agreement as obligations under the Original Loan and Security Agreement.
As of September 30, 2017,March 31, 2019, the Company had gross outstanding borrowing under the facility of $3,624,263$2,679,258 against which financing costs of $128,739$46,432 were applied resulting in net borrowings of $3,495,524.$2,632,826. As of December 31, 2016,2018, the Company had gross outstanding borrowingborrowings under the facility of $1,505,307$2,241,759 against which financing costs of $173,303$63,561 were applied resulting in net borrowings of $1,332,004.$2,178,198.
Note 10: Disputed Trade Payable
As part of the merger in 2013, the Company assumed certain liabilities from a previous member of A Squared which has claimed certain liabilities totaling $925,000. The Company disputes the basis for this liability. As of December 31, 2017, the Company believes that the statute of limitations applicable to the assertion of any legal claim relating to the collection of these liabilities has expired and therefore believes this liability is not owed.
Note 9:11: Stockholders’ Equity
Common Stock
As of September 30, 2017,March 31, 2019, the total number of authorized shares of Common Stockcommon stock was 233,333,334.
On October 29, 2015,January 8, 2018, the Company entered into securities purchase agreements with certain accredited investors pursuantthe January 2018 Private Placement. Pursuant to whicha Securities Purchase Agreement, the Company sold an aggregate of 1,443,362issued to the Investors approximately 592,000 shares of its Common Stock, par value $0.001common stock at a per share price of $3.00 and warrants to purchase up to an aggregate of 1,443,362approximately 592,000 shares of Common Stock (the “Original Warrants”)common stock. The warrants were immediately exercisable, will be exercisable for a purchaseperiod of five years from the closing date and have an exercise price of $3.00 per share and the associated warrants for gross proceeds to the Company of $4,330,000 (“2015 Private Placement”).share. The closing of the 2015 Private Placementsale of these securities under the Securities Purchase Agreement occurred on November 3, 2015. Stock offering costs were $502,218. (See Note 11 for additional information about these warrants.)January 10, 2018.
On October 6, 2016, the Board of Directors of the Company authorized a reverse stock split in preparation for the Company’s anticipated uplisting on the NASDAQ Capital Market.
On November 4, 2016, the Company filed a certificate of change to the Company’s Articles of Incorporation with the Secretary of State of the State of Nevada to effect a one-for-three reverse stock split of the Company’s issued and outstanding Common Stock. As a result of the 2016 Reverse Split, every three shares of the Company’s issued and outstanding Common Stock were automatically combined and reclassified into one share of the Company’s Common Stock. The 2016 Reverse Split affected all issued and outstanding shares of Common Stock, as well as Common Stock underlying stock options and warrants outstanding. No fractional shares were issued in connection with the 2016 Reverse Split. Stockholders who would otherwise have held a fractional share of Common Stock received an increase to their Common Stock as the Common Stock was rounded up to a full share. The total number of authorized shares of Common Stock was reduced from 700,000,000 to 233,333,334 in conjunction with the 2016 Reverse Split. The 2016 Reverse Split became effective on November 9, 2016. All disclosures of shares and per share data in these consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split for all periods presented.
On February 9, 2017,19, 2019, the Company entered into the Private Transactiona securities purchase agreement with a certain accredited investor pursuant to which we sold 945,894 shares of common stock and warrants to purchase up to 945,894 shares of our common stock, or the Agreement with certain holdersregistered warrants, to such investor (the “February 2019 Offering”). The Company received $1,757,552 in net proceeds from this offering. Each share of common stock was accompanied by a registered warrant to purchase one share of common stock at an exercise price of $2.12. Each share of common stock and accompanying registered warrant were sold at a combined purchase price of $2.12. The shares of common stock and registered warrants were purchased together and were issued separately and were immediately separable upon issuance. In a concurrent private placement, the Original Warrants. PursuantCompany also sold to the Agreement,purchaser in the holders of the Original Warrants and the Company agreed that such Original Warrant holders would exercise their Original Warrants in full, and the Company would issueFebruary 2019 Offering, warrants to each such holder new warrants. (See Note 11 for additional information about these warrants.) In association with the Private Transaction, the Company issued 1,171,689purchase up to 945,894 shares of Common Stock upon exercise of a portion ofour common stock, or the Original Warrants for which it received gross proceeds of $3,866,573 and recording offering costs of $464,649 for net proceeds of $3,401,924.private warrants.
As of September 30, 2017March 31, 2019, and December 31, 2016,2018, there were 5,938,10310,432,718 and 4,010,6499,457,859 shares of Common Stockcommon stock outstanding, respectively. Below are the changes to the Company’s Common Stock during the nine months ended September 30, 2017:
Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001 per share. The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our Board of Directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
As of September 30, 2017both March 31, 2019 and December 31, 2016,2018, there were 3,605 and 4,8952,120 shares of Series A Convertible Preferred Stock outstanding, respectively.outstanding.
On May 12, 2014, the Board of Directors authorized the designation of a class of preferred stock as “Series A Convertible Preferred Stock”.Stock.” On May 14, 2014, the Company filed the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible Preferred Stock with the Secretary of State of the State of Nevada.
Each share of the Series A Convertible Preferred Stock is convertible into shares of the Company’s Common Stock,common stock, par value $0.001 per share, based on a conversion calculation equal to the Base Amount divided by the conversion price. The Base Amount is defined as the sum of (i) the aggregate stated value of the Series A Convertible Preferred Stock to be converted and (ii) all unpaid dividends thereon. The stated value of each share of the Series A Convertible Preferred Stock is $1,000 and the initial conversion price is $6.00 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. Additionally, in the event the Company issues shares of its Common Stockcommon stock or Common Stockcommon stock equivalents at a per share price that is lower than the conversion price then in effect, the conversion price shall be adjusted to such lower price, subject to certain exceptions. The Company is prohibited from effecting a conversion of the Series A Convertible Preferred Stock to the extent that as a result of such conversion, the investor would beneficially own more than 9.99% in the aggregate of the issued and outstanding shares of the Company’s Common Stock,common stock, calculated immediately after giving effect to the issuance of shares of Common Stockcommon stock upon conversion of the Series A Convertible Preferred Stock. The shares of Series A Convertible Preferred Stock possess no voting rights.
On May 14, 2014, wethe Company entered into securities purchase agreements with certain accredited investors pursuant to which we sold an aggregate of 6,000 shares of our then newly designated Series A Convertible Preferred Stock at a price of $1,000 per share for gross proceeds to us of $6,000,000. Related to the sale, we incurred offering costs of $620,085 resulting in net proceeds of $5,379,915. The transaction closed on May 15, 2014.
As the conversion price of the Series A Convertible Preferred Stock on a converted basis was below the market price of the Common Stockcommon shares on the closing date, this resulted in a beneficial conversion feature recorded as an “imputed” dividend of $2,010,000. In addition, during the fourth quarter of 2015, in connection with the 2015 Private Placement in which the Company’s Common Stockcommon stock was sold at $3.00 per share, the conversion price of the Series A Convertible Preferred Stock decreased to $3.00. This decrease resulted in an additional beneficial conversion feature of $3,383,850 recognized as of the time of the 2015 Private Placement.
Note 10: Stock Options
On December 29, 2008,August 17, 2018, in connection with the Company adoptedSecurities Purchase Agreement in which the 2008 Stock Option Plan (the “Plan”), which provides for the issuance of qualified and non-qualified stock options to officers, directors, employees and other qualified persons. The Plan is administered by the Board of Directors of the Company or a committee appointed by the Board of Directors. The number ofSecured Convertible Notes are convertible into shares of the Company’s Common Stock initially reserved for issuance undercommon stock at $2.50 per share. As a result, the Plan was 36,667. On September 2, 2011, the stockholders holding a majorityconversion price of the Company’s outstanding CommonSeries A Convertible Preferred Stock adopteddecreased to $2.50. This decrease resulted in a beneficial conversion feature of $353,333 which was recognized on August 17, 2018.
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On February 19, 2019, the Company entered into a Securities Purchase Agreement with a certain accredited investor pursuant to which we sold 945,894 shares of common stock and warrants to purchase up to 945,894 shares of our common stock at 2.12 per share. As a result, the conversion price of the Series A Convertible Preferred Stock decreased to $2.12. This decrease resulted in a beneficial conversion feature of $322,240 which was recognized February 19, 2019.
In the future, issuance of common stock or the grant of any rights to purchase our common stock or other securities convertible into our common stock for a per share price less than the then existing conversion price of the Series A Convertible Preferred Stock would result in an amendmentadjustment to the Company’s 2008then current conversion price of the Series A Convertible Preferred Stock. This reduction would give rise to a beneficial conversion feature recorded as an “imputed” dividend.
Note 12: Stock Option Plan to increase the number of shares of Common Stock issuable under the plan to 166,667.Options
On September 18, 2015, the Company adopted the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The 2015 Plan was approved by our stockholders in September 2015. The 2015 Plan as approved by the stockholders authorized the issuance up to an aggregate of 150,000 shares of Common Stock.common stock. On December 14, 2015, the Board of Directors voted to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 1,293,334 from 150,000 shares to 1,443,334 shares. The increase in shares available for issuance under the 2015 Plan was approved by stockholders on February 3, 2016. On May 18, 2017, the Board of Directors voted to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 223,333 shares from 1,443,334 shares to an aggregate of 1,666,6671,667,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by the stockholders on July 25, 2017. On September 6, 2018, the Board of Directors voted to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 500,000 shares from 1,667,667 shares to an aggregate of 2,167,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by the Company’s stockholders on October 2, 2018.
The following table summarizes the changes in the Company’s stock option plan during the ninethree months ended September 30, 2017:March 31, 2019:
Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | Weighted Average Exercise Price per Share | Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | Weighted Average Exercise Price per Share | |||||||||||||||||||||||||||||||
Balance at December 31, 2016 | 1,373,554 | $ | 2.82 - 12.00 | 3.99 years | $ | 280,642 | $ | 8.14 | ||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 1,259,415 | $ | 2.09 - 12.00 | 2.50 years | $ | – | $ | 7.39 | ||||||||||||||||||||||||||||||||
Options Granted | – | 81,000 | $ | 1.99 | 3.0 years | $ | - | $ | 1.99 | |||||||||||||||||||||||||||||||
Options Exercised | – | – | ||||||||||||||||||||||||||||||||||||||
Options Cancelled | 70,339 | – | ||||||||||||||||||||||||||||||||||||||
Options Expired | – | – | ||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | 1,303,215 | $ | 2.82 - 12.00 | 3.24 years | $ | 127,860 | $ | 8.11 | ||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 1,340,415 | $ | 1.99 - 12.00 | 2.19 years | $ | – | $ | 7.14 | ||||||||||||||||||||||||||||||||
Exercisable December 31, 2016 | 452,535 | $ | 2.82 - 6.00 | 3.95 years | $ | 263,375 | $ | 5.29 | ||||||||||||||||||||||||||||||||
Exercisable September 30, 2017 | 466,700 | $ | 2.82 - 6.00 | 3.23 years | $ | 127,860 | $ | 5.33 | ||||||||||||||||||||||||||||||||
Exercisable December 31, 2018 | 1,070,869 | $ | 2.70 - 9.00 | 2.96 years | $ | – | $ | 7.44 | ||||||||||||||||||||||||||||||||
Exercisable March 31, 2019 | 1,145,965 | $ | 2.82 - 9.00 | 1.81 years | $ | – | $ | 8.01 |
During the yearthree months ended DecemberMarch 31, 2015,2019, the Company granted options to purchase 1,407,77581,000 shares of Common Stockcommon stock to certain officers directors, employees, and consultants.employees. These stock options generally vest between one and three years, while a portion vested upon grant.on December 31, 2019. The fair value of these options was determined to be $2,402,460$117,797 using the Black-Scholes option pricing model based on the following assumptions:
Exercise Price | $ |
Dividend Yield | 0% |
Volatility | |
Risk-free interest rate | |
Expected life of options |
During the three and nine months ended September 30, 2016, the Company recognized share-based compensation expense of $358,919 and $1,236,880, respectively. During the first quarter of 2016, the Company recognized $220,564 of true-up expenses from prior periods which reflected certain revisions meant to (i) align with the graded vesting of the majority of the options granted in 2015, (ii) make adjustments in certain accounting estimates utilized in the Black-Scholes model, and (iii) reflect the accurate number of options granted in 2015. The Company has assessed these adjustments individually and in aggregate and considers them immaterial to the current and prior periods.
During the three and nine months ended September 30, 2017,March 31, 2019, the Company recognized $108,476 and $514,108, respectively,$35,749 in share-based compensation expense. The unvested share-based compensation as of September 30, 2017March 31, 2019 was $278,819$315,102, which will be recognized through the second quarter of 20192021 assuming the underlying grants are not cancelled or forfeited.
Note 11:13: Warrants
The Company has warrants outstanding to purchase up to 1,766,6989,591,177 and 1,651,698 at September 30, 20175,899,389 shares as of March 31, 2019 and December 31, 2016,2018, respectively.
In connection with the sale of the Company’s Series A Convertible Preferred Stock in May 2014, Chardan Capital Markets LLC (“Chardan”) acted as sole placement agent in consideration for which it received a cash fee of $535,000 and a warrant to purchase up to 100,002 shares of the Company’s Common Stock.common stock. These warrants are exercisable immediately, have an exercise price of $6.00 per share, and have a five-year term.
In connection with the 2015 Private Placement, the Company issued to accredited investors the Original Warrants to purchase up to an aggregate of 1,443,362 shares of Common Stockcommon stock for a purchase price of $3.00 per share. The Original Warrants are exercisable into shares of Common Stockcommon stock for a period of five (5) years from issuance at an initial exercise price of $3.30 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. The Original Warrants are exercisable immediately. The Company is prohibited from effecting an exercise of the warrants to the extent that as a result of such exercise, the holder would beneficially own more than 4.99% (subject to increase up to 9.99% upon 61 days’ notice) in the aggregate of the issued and outstanding shares of Common Stock,common stock, calculated immediately after giving effect to the issuance of shares of Common Stockcommon stock upon exercise of the warrant.
In connection with the 2015 Private Placement, Chardan acted as sole placement agent in consideration for which it received a cash fee of $300,000 and a warrant to purchase up to 141,668 shares of the Company’s Common Stock.common stock. These warrants are exercisable immediately, have an exercise price of $3.60 per share, and have a five-year term.
On February 9, 2017, the Company entered into the Private Transaction pursuant to the Warrant Exercise Agreement with certain holders of the Original Warrants. Pursuant to the Warrant Exercise Agreement, the holders of the Original Warrants and the Company agreed that such Original Warrant holders would exercise their Original Warrants in full, and the Company would issue to each such holder new warrants, with the new warrants being identical to the Original Warrants except that the termination date of such new warrants is February 10, 2022 (the “Reload Warrants”). In addition, depending on the number of Original Warrants exercised by all holders of the Original Warrants, the Company also agreed to issue to the holders another new warrant, identical to the Original Warrant except that the exercise price of such warrant is $5.30 and such warrant is not exercisable until August 10, 2017 (the “Market Price Warrants” and together with the Reload Warrants, the “New Warrants”).
The Company received gross proceeds of $3,866,573 from the exercise of the Original Warrants and issued Reload Warrants to purchase an aggregate of 799,991 shares of the Company’s Common Stockcommon stock and Market Price Warrants to purchase an aggregate of 371,699 shares of the Company’s Common Stock.common stock. In association with the Private Transaction, the Company recorded warrant exchange expense of $1,402,174 representing the difference in the fair market value of the Original Warrants and the New Warrants, as an adjustment to additional paid-inpaid - capital.
Chardan acted as financial advisor on the Private Transaction in consideration for which Chardan received $363,617 and was issuedChardan and its designees were New Warrants for 115,000 shares of the Company’s Common Stock.common stock.
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On October 3, 2017, the Company sold, in a registered direct offering, 1,647,691 shares of common stock at an offering price of $3.90 per share and, in a concurrent private placement, warrants to purchase an aggregate of 1,647,691 shares of common stock for gross proceeds of approximately $6,425,995 before deducting the placement agent fee and related offering expenses.
On January 10, 2018, the Company issued warrants for 592,000 shares of the Company’s common stock in connection with the January 2018 Private Placement. The warrants were issued to the parties who purchased the Company’s common stock, as well as to Chardan and its designees who acted as placement agents of the deal. The warrants expire in five years and were exercisable immediately at an exercise price of $3.00 per share.
On August 17, 2018, the Company issued warrants for 1,800,000 shares of the Company’s common stock in conjunction with the August 17, 2018 Securities Purchase Agreement. The warrants were issued to the parties who purchased the Company’s Secured Convertible Notes. The Warrants are not exercisable until after six months from the date of issuance and expire five and half years from the date of issuance. The Warrants have an exercise price of $3.00 per share. In the event of a “Fundamental Transaction” (as defined in the Warrants), the Investors have the right to receive the value of the Warrants as determined in accordance with the Black Scholes option pricing model. The Warrants are considered indexed to the Company’s own stock pursuant to ASC 815-40. The Warrants also met additional equity classification requirements and accordingly are accounted for as part of Company’s equity.
On February 19, 2019, the Company entered into a securities purchase agreement with a certain accredited investor pursuant to which we sold 945,894 shares of common stock and warrants to purchase up to 945,894 shares of our common stock, or the registered warrants, to such investor (the “February 2019 Offering”). The Company received $1,757,552 in net proceeds from this offering. Each share of common stock was accompanied by a registered warrant to purchase one share of common stock at an exercise price of $2.12. Each share of common stock and accompanying registered warrant were sold at a combined purchase price of $2.12. The shares of common stock and registered warrants were purchased together and were issued separately and were immediately separable upon issuance. In a concurrent private placement, the Company also sold to the purchaser in the February 2019 Offering, warrants to purchase up to 945,894 shares of our common stock, or the private warrants.
In connection with the February 2019 Offering and concurrent private placement, we entered into an amendment, waiver and consent agreement, or the “Amendment, Waiver and Consent Agreement,” with certain holders of our 10% Secured Convertible Notes due August 20, 2019, which were issued pursuant a securities purchase agreement, dated August 17, 2018, by and among the Company and the purchasers identified on the signature pages thereto, or the notes purchase agreement. Pursuant to the Amendment, Waiver and Consent Agreement, such holders agreed to amend the notes purchase agreement, waive any applicable rights and remedies under the notes purchase agreement, and consent to the February 2019 Offering and concurrent private placement. In consideration for such Amendment, Waiver and Consent Agreement, we agreed to issue such holders warrants to purchase up to an aggregate amount 1,800,000 shares of our comment stock. Such warrants have an exercise price of $2.55 per share, will become exercisable commencing six months and one day from the date of issuance and will expire five (5) years from the date of issuance.
The allocation of carrying basis between the Warrants issued and the Secured Convertible Notes was determined based on relative valuation. The carrying basis attributable to the Warrants to acquire common stock was $1,287,962 and was calculated using the Black-Scholes option pricing model.
The following table summarizes the changes in the Company’s outstanding warrants during the ninethree months ended September 30, 2017:March 31, 2019:
Warrants Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | Aggregate Intrinsic Value | ||||||||||||||||
Balance at December 31, 2016 | 1,651,698 | $ | 3.30 - 6.00 | 3.75 years | $ | 3.49 | $ | 3,301,913 | ||||||||||||
Warrants Granted | 1,286,690 | 3.30 - 5.30 | – | – | ؘ– | |||||||||||||||
Warrants Exercised | 1,171,690 | 3.30 | – | – | – | |||||||||||||||
Warrants Expired | – | |||||||||||||||||||
Balance at September 30, 2017 | 1,766,698 | $ | 3.30 - 6.00 | 3.94 years | $ | 4.03 | $ | 925,097 | ||||||||||||
Exercisable December 31, 2016 | 1,651,698 | $ | 3.30 - 6.00 | 3.75 years | $ | 3.49 | $ | 3,301,913 | ||||||||||||
Exercisable September 30, 2017 | 1,766,698 | $ | 3.30 - 6.00 | 3.94 years | $ | 4.03 | $ | 925,097 |
Warrants Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | Aggregate Intrinsic Value | ||||||||||||||||
Balance at December 31, 2018 | 5,899,389 | $ | 3.30 – 6.00 | 3.74 years | $ | 3.35 | $ | – | ||||||||||||
Warrants Granted | 3,691,788 | $ | 2.12 – 3.00 | 4.89 years | 3.00 | – | ||||||||||||||
Warrants Exercised | – | – | – | – | – | |||||||||||||||
Warrants Expired | – | – | – | – | – | |||||||||||||||
Balance at March 31, 2019 | 9,591,177 | $ | 2.12 – 6.00 | 4.03 years | $ | 3.08 | $ | – | ||||||||||||
Exercisable December 31, 2018 | 5,899,389 | $ | 3.30 – 6.00 | 3.74 years | $ | 3.53 | $ | – | ||||||||||||
Exercisable March 31, 2019 | 6,845,283 | $ | 2.12 – 6.00 | 3.68 years | $ | 3.34 | $ | – |
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Note 12:14: Income Taxes
The Company accounts for income taxes in accordance with ASCAccounting Standards Codification Topic 740 Income Taxes (“Topic 740”), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.
ASCTopic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.
At the adoption date of January 1, 2008, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of September 30, 2017March 31, 2019, and December 31, 2016,2018, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and in the state of California and Massachusetts. The Company is currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
Note 13: Commitments15: Commitment and Contingencies
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The Company has various contractual obligations,standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. For practically all leases, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which are recorded as liabilitiesallows for an additional optional transition method where comparative periods presented in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts are not recognized as liabilities in our consolidatedthe financial statements but are required to be disclosed in the footnotesperiod of adoption will not be restated and instead those periods will be presented under existing guidance in accordance with ASC 840, Leases. Management will use this optional transition method. As of January 1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.
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As of March 31, 2019, weighted-average lease term for operating leases equals to the financial statements. For example,81 months. Weighted-average discount rate equals to 11%.
On February 6, 2018, the Company is contractually committedentered into an operating lease for 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to make certain minimuma 91-month lease paymentsthat commenced on May 25, 2018. We will pay rent of $364,130 annually, subject to annual escalations of 3.5%.
On December 28, 2018, the Company entered into a lease for 5,765 square feet of general office space at 8383 Wilshire Blvd., Suite 412, Beverly Hills, CA 90211 pursuant to a 6-month lease that commenced January 28, 2019. We will pay rent of $24,501 monthly.
Effective January 21, 2019, the Company entered into a sublease for the use6,969 square feet of property under itsgeneral office space located at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to an 83-month sublease that commenced on February 4, 2019, 2019. The subtenant will pay us rent of $422,321 annually, subject to annual escalations of 3.5%.
On January 30, 2019, we entered into an operating lease. lease for 5,838 square feet of general office space at 190 Cannon Drive, Suite 400, Beverly Hills, CA 90210 pursuant to a 96-month lease that is scheduled to commence on August 1, 2019. We will pay rent of $392,316 annually, subject to annual escalations of 3.5%.
In addition, the Company has contractual commitments for employment agreements of certain employees.
During the first quarter of 2015, the Company entered into an agreement for new office space to which it relocated its operations upon the expiration of its prior lease. Effective May 1, 2015, the Company began leasing approximately 3,251 square feet of general office space at 301 North Canon Drive, Suite 305, Beverly Hills, California 90210 pursuant to a 35-month sub-lease that commenced on May 1, 2015. The Company will pay $136,542 annually subject to annual escalations of 3%.
Rental expenses incurred for operating leases during the three months ended September 30, 2017March 31, 2019 and 2016March 31, 2018 were $35,862$144,793 and $34,818,$35,160, respectively. Rental expenses incurred for operating leases duringDuring the ninethree months ended September 30, 2017 and 2016 were $71,022 and $69,825, respectively.March 31, 2019, we received sub-lease income of $115,230.
The following is a schedule of future minimum contractual obligations as of September 30, 2017,March 31, 2019, under the Company’s operating leases and employment agreements:
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | |||||||||||||||||||
Operating Leases | $ | 36,214 | $ | 36,214 | $ | – | $ | – | $ | – | $ | – | ||||||||||||
Employment Contracts | 258,360 | 580,413 | – | – | – | – | ||||||||||||||||||
Total | $ | 294,574 | $ | 616,627 | $ | – | $ | – | $ | – | $ | – |
In addition to employment agreements and operating leases, in the normal course of its business, the Company enters into various agreements associated with its individual properties. Some of these agreements call for the potential future payment of royalties or “profit” participations for either (i) the use of third party intellectual property, such as the case withStan Lee and the Mighty 7 andLlama Llama among others, in which the Company is obligated to share net profits with the underlying rights holders on a certain basis as defined in the respective agreements or (ii) services rendered by animation studios, post-production studios, writers, directors, musicians or other creative talent for which the Company is obligated to share with these service providers a portion of the net profits of the properties on which they have rendered services, as defined in each respective agreement. Other agreements contain options to acquire rights to intellectual property and would require payment to the rights holders contingent upon the Company securing minimum production, broadcast, or other financing commitments from third parties.
2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
Operating Leases | $ | 387,190 | $ | 399,852 | $ | 411,425 | $ | 425,825 | $ | 440,729 | $ | 498,270 | $ | 2,563,291 | ||||||||||||||
Employment Contracts | 393,595 | 322,950 | 322,950 | 282,581 | – | – | 1,322,076 | |||||||||||||||||||||
Total | $ | 780,785 | $ | 722,802 | $ | 734,375 | $ | 708,406 | $ | 440,729 | $ | 498,270 | $ | 3,885,367 |
Note 14:16: Related Party Transactions
On April 21, 2016, the Company entered into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward, the Company’s Chief Executive Officer. The Company entered into a customary merchandise license agreement with AHAA for the use of characters and logos related to Warren Buffett’sSecret Millionaires Club andStan Lee’s Mighty 7 in connection with certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry, and the Company earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. DuringNo amounts were earned during the three months ended September 30, 2017March 31, 2019 and 2016, the Company earned $0 and $247 in royalties from2018, under this agreement, respectively. During the nine months ended September 30, 2017 and 2016, the Company earned $0 and $247 in royalties from this agreement, respectively.agreement.
On October 1, 2016, Llama Productions LLC entered into an animation production services agreement with Mr. Heyward for services as a producer for which he is to receive $186,000 through the course of production of the Company’s animated seriesLlama Llama. From October 1, 2016 through December 31, 2017, Mr. Heyward has been paid $186,000.
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On August 31, 2018 Llama Productions LLC entered into an animation production services agreement with Mr. Heyward for services as a producer for which he is to receive $124,000 through the course of production of the Company’s animated seriesLlama Llama. Season 2. As of March 31, 2019, Mr. Heyward was paid $37,331 and is owed $32,285, which is included in the Due To Related Parties line item on our consolidated balance sheet.
Pursuant to his employment agreement dated November 16, 2018, Mr. Heyward is entitled to an Executive Producer fee of $12,400 per half hour episode for each episode he provides services as an executive producer. The first identified series under this employment agreement isRainbow Rangers.As of March 31, 2019, twenty-six half hours had been delivered and accordingly Mr. Heyward is owed $322,400, which is included in the Due To Related Parties line item on our consolidated balance sheet.
On July 25, 2016, the Company entered into a consulting agreement with Foothill Entertainment, Inc. (“Foothill”), an entity whose Chairman is Gregory Payne, our corporate secretary. The Company has engaged Foothill Entertainment, Inc. for a term of six months to assist in the distribution and commercial exploitation of its audiovisual content as well as for the preparation and attendance on behalf of the Company at the MIPJR and MIPCOM markets in Cannes. The agreement continues on a month-to-month basis following the initial term. Foothill receives $12,500 per month for these services. Subsequent to the end of the period, the consulting agreement with Foothill was terminated effective January 31, 2018.
On October 1, 2016, Llama Productions LLCAs of December 31, 2017, Gregory B. Payne, individually and via his ownership position in Foothill, owed to the Company $5,558 for expenditures made during the fourth quarter of 2017 related to the Brand Licensing Europe (“BLE”) and MIPCOM tradeshows. In addition, during the fourth quarter of 2017, Foothill acted as an agent on the Company’s behalf in licensing certain of our animated programs to certain broadcast networks for which Foothill owed to the Company $7,517 in license fees to be paid by the broadcaster to Foothill. Subsequent to the end of the period, the Company received a payment of $7,517 from Foothill as satisfaction of the open licensing invoice. Additionally, on February 28, 2018, Mr. Payne and the Company entered into an animation production services agreement withwhereby, among other things, Mr. HeywardPayne was entitled to be reimbursed for services as a producer for which he is100% of his expenses incurred at the BLE and MIPCOM tradeshows resulting in the Company owing $827 to receive $186,000 through the courseMr. Payne. As of production of the Company’s animated seriesLlama Llama. From October 1, 2016 through September 30, 2017,December 31, 2018, no amounts are due to or from Mr. Heyward has been paid $120,000.Payne or Foothill.
Note 15:17: Subsequent Events
Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred from September 30, 2017March 31, 2019 through the date of issuance of these financial statements. During this period, we did not have any significant subsequent events, except as disclosed below:
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three and nine months ended September 30, 2017March 31, 2019 and 2016.2018. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on March 31, 2017,April 1, 2019 and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward-lookingforward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire.
Overview
The management’s discussion and analysis is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
Our Business
Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates and licenses multimedia content. Led by proven industry veterans,leaders, we distribute our content in all formats as well as a broad range of consumer products based on itsour characters. In the children’schildren's media sector, our portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment includingentertainment. New intellectual property titles include the award-winningBaby Genius;new preschool propertyRainbow Rangers; preschool property debutingRainbow Rangers, which debuted in November 2018 on NetflixNickelodeon and preschool property Llama Llama; tween music-driven brandSpacePop;Llama; which debuted on Netflix in January 2018 and was renewed by Netflix for a second season. Our library titles include the award winning Baby Genius, adventure comedyThomas Edison's Secret Lab®, available on public broadcast stations and our Kid Genius Cartoon Channel on Comcast's Xfinity on Demand and Roku; Warren Buffett'sSecret Millionaires Club, created with and starring iconic investor Warren Buffett.Buffett which is distributed across our Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and Zumo as well as Connected TV. We are also co-producingdeveloping an all-new adult-themed animated series,Stan Lee's Cosmic Crusaders,Superhero Kindergarten with Stan Lee's Pow! Entertainment andThe Hollywood Reporter.Entertainment.
In addition, we act as licensing agent for certain brands,Penguin Young Readers, a division of Penguin Random House LLC who owns or controls the underlying rights to Llama Llama, leveraging our existing licensing infrastructure to expand these brandsthis brand into new product categories, new retailers, and new territories. These includeLlama Llamaand Celessence Technologies.
Recent Developments
In April 2015, we partnered with Comcast to launch the new Kid Genius Cartoon Channel on Xfinity on Demand. With Xfinity, Kid Genius Cartoon Channel is currently in over 22 million homes. In November 2016, we partnered with a leading kids’ app distributor adding Over-The-Top (“OTT”) distribution expanding the channel onto platforms such as Roku, Apple TV, Amazon Fire and Google thus reaching an additional 40 million homes. Our plans are to continue this roll-out through the end of 2017 by adding additional reach with the goal of being in over 80 million homes.
Recent Financings
Secured Convertible Notes
On August 17, 2018, the Company entered into a securities purchase agreement (the “August 2018 Purchase Agreement”) with certain investors, pursuant to which the Company agreed to sell (i) an aggregate principal amount of $4.50 million in secured convertible notes, convertible into shares of our common stock, at an initial conversion price of $2.50 per share (the “Secured Convertible Notes”) and (ii) warrants to purchase 1,800,000 shares of our common stock at an exercise price of $3.00 per share. We received $4,186,054 in net proceeds from the offering.
The Secured Convertible Notes are our senior secured obligations and are secured by certain tangible and intangible property of the Company as described in the Purchase Agreement. Unless earlier converted or redeemed, the Secured Convertible Notes will mature on August 20, 2019. The Secured Convertible Notes bear interest at a rate of 10% per annum and are convertible at any time until a Secured Convertible Note is no longer outstanding, in whole or in part, at the option of the holders into shares of common stock at a conversion price of $2.50 per share. The Secured Convertible Notes have a beneficial ownership limitation such that none of the Investors have the right to convert any portion of their Secured Convertible Notes if the Investor (together with its affiliates or any other persons acting together as a group with the Investor) would beneficially own in excess of 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of our common stock issuable upon conversion of such Secured Convertible Notes. In addition, the Secured Convertible Notes provide for a conversion cap such that we may not issue any shares of our common stock upon conversion of Secured Convertible Notes which would exceed the aggregate number of shares of our common stock we could issue upon conversion of the Secured Convertible Notes without breaching our obligations, if any, under Nasdaq Stock Market LLC rules and regulations.
Interest under the Secured Convertible Notes is payable in arrears beginning on September 1, 2018 and thereafter on each of December 1, 2018, March 1, 2019, June 1, 2019 and at maturity when all amounts outstanding under the Secured Convertible Notes become due and payable. Subject to certain equity conditions, we may force a conversion of the debt into equity. We may redeem the Secured Convertible Notes at any time prior to maturity. If we do not meet such equity conditions at maturity, we are obligated to repay in cash one-sixth of the then outstanding principal amount of the Secured Convertible Notes each month for the six months following the date of maturity, with the first such payment due on the date of maturity, followed by payments each month thereafter.Production Loans
On September 28, 2018, Llama Productions LLC, a California limited liability company (“Llama”) a wholly-owned subsidiary of the Company, entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Bank Leumi USA (the “Lender”), pursuant to which the Lender agreed to make a secured loan in an aggregate amount not to exceed $4,231,989 to Llama (the “Loan”). The proceeds of the Loan were or will be used to pay the majority of the expenses of producing, completing and delivering two 22-minute episodes and sixteen 11-minute episodes of the second season of the animated series Llama Llama to be initially exhibited on Netflix.
In addition, on September 2017, we announced that we had partnered with Amazon Prime28, 2018, Llama and Lender entered into Amendment No. 2 to launch Kid Genius Cartoon Channel Plus, a subscription video on demand channel availableLoan and Security Agreement, effective as of August 27, 2018, by and between Llama and the Lender (the “Amendment”). Pursuant to the approximately 80 million subscribersAmendment, the original Loan and Security Agreement, dated as of August 5, 2016 and amended as of November 7, 2017 (the “Original Loan and Security Agreement”), was amended to Amazon(i) reduce the loan commitment thereunder to $1,768,010, which is a reduction of $3,075,406 from the original loan commitment under the Original Loan and Security Agreement and (ii) include the Llama Llama season two obligations under the Loan and Security Agreement as obligations under the Original Loan and Security Agreement.
The Maturity Date of the Prime Rate Loan facility and LIBOR Loan facility is March 31, 2021.
February 2019 Sale of Common Stock and Warrants
On February 19, 2019, the Company entered into a securities purchase agreement with a certain accredited investor pursuant to which we sold 945,894 shares of common stock and warrants to purchase up to 945,894 shares of our common stock, or the registered warrants, to such investor (the “February 2019 Offering”). The Company received $1,757,552 of net proceeds from this offering. Each share of common stock was accompanied by a registered warrant to purchase one share of common stock at an exercise price of $2.12. Each share of common stock and accompanying registered warrant were sold at a combined purchase price of $2.12. The shares of common stock and registered warrants were purchased together and were issued separately and were immediately separable upon issuance. In a concurrent private placement, we also sold to the purchaser in the February 2019 Offering, unregistered warrants to purchase up to an additional 945,894 shares of our common stock.
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Amendment, Waiver and Consent
In connection with the February 2019 Offering and concurrent private placement, we entered into an amendment, waiver and consent agreement, or the “Amendment, Waiver and Consent Agreement,” with certain holders of our Secured Convertible Notes. Pursuant to the Amendment, Waiver and Consent Agreement, such holders agreed to amend the August 2018 Purchase Agreement, waive any applicable rights and remedies thereunder, and consent to the February 2019 Offering and concurrent private placement. In consideration for $3.99such Amendment, Waiver and Consent Agreement, we agreed to issue all holders of our Secured Convertible Notes warrants to purchase up to an aggregate amount 1,800,000 shares of our common stock. Such warrants have an exercise price of $2.55 per month.share, will become exercisable commencing six months and one day from the date of issuance and will expire five (5) years from the date of issuance.
Series A Convertible Preferred Stock Price Adjustment
As a result of this offering, the conversion price of our outstanding Series A Convertible Preferred Stock was adjusted to $2.12.
Results of Operations
Three Months Ended September 30, 2017 and 2016
Our summary results for the three months ended September 30, 2017March 31, 2019, and 2016March 31, 2018 are below.
Revenues
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Change | %Change | |||||||||||||
Licensing & Royalties | $ | 94,430 | $ | 85,660 | $ | 8,770 | 10% | |||||||||
Television & Home Entertainment | 155,003 | 34,826 | 120,177 | 345% | ||||||||||||
Advertising Sales | 7,008 | – | 7,008 | N/A | ||||||||||||
Product Sales | 60 | – | 60 | N/A | ||||||||||||
Total Revenue | $ | 256,501 | $ | 120,486 | $ | 136,015 | 113% | |||||||||
Licensing and royalty revenue includes items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent. During the three months ended September 30, 2017 compared to September 30, 2016, this category increased $8,770 or 10% primarily due to increases in revenues from ourSpacePop property.
Three Months Ended | ||||||||||||||||
March 31, 2019 | March 31, 2018 | Change | % Change | |||||||||||||
Television & Home Entertainment | $ | 850,107 | $ | 66,812 | $ | 783,295 | 1,172% | |||||||||
Licensing & Royalties | 350,186 | 3,754 | 346,432 | 9,228% | ||||||||||||
Advertising Sales | 20,160 | 22,009 | (1,849 | ) | -8% | |||||||||||
Product Sales | 478 | 638 | (160 | ) | -25% | |||||||||||
Total Revenue | $ | 1,220,931 | $ | 93,213 | $ | 1,127,718 | 1210% |
Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television, VOD, or SVOD in domestic and international markets and the sale of DVDs for home entertainment through our partners. Fluctuations in Television & Home Entertainment revenue occur period over period based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content to the customer. During the three months ended September 30, 2017March 31, 2019 compared to September 30, 2016,March 31, 2018, Television & Home Entertainment revenue increased $120,177$783,295, or 345%1,172%, primarily due to licensing activity relatedthe revenue generated from the delivery ofRainbow Rangers to the Viacom Media Network.
Licensing and royalty revenue include items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent. During the three months ended March 31, 2019 compared to March 31, 2018, this category increased $346,432, or 9,228%, primarily due to the revenue generated fromThomas Edison’s Secret LabRainbow RangersandSpacePopLlama Llamaproperties.
Advertising sales are generated on the Kid Genius Cartoon Channel in the form of either flat rate promotions or advertising impressions served. Advertising sales increaseddecreased by $7,008$1,849, or 8%, during the three months ended September 30, 2017 due to advertising impressions served, campaigns, and promotions with no similar activity in the prior period as we had not yet begun to monetize our growing base of homes served.
Product sales represent physical products in which we hold intellectual property rights such as trademarks and copyrights to the characters and which are manufactured and sold by us directly. During the three months ended September 30, 2017, product sales associated with Warren Buffett’sSecret Millionaire Clubincreased by $60March 31, 2019 compared to the three months ended September 30, 2016 due to a lack of similar product offerings in the prior period.
Expenses
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Change | % Change | |||||||||||||
Marketing and Sales | $ | 86,715 | $ | 220,627 | $ | (133,912 | ) | -61% | ||||||||
Direct Operating Costs | 186,226 | 44,220 | 142,006 | 321% | ||||||||||||
General and Administrative | 1,150,147 | 1,389,360 | (239,213 | ) | -17% | |||||||||||
Total Operating Expenses | $ | 1,423,088 | $ | 1,654,207 | $ | (231,119 | ) | -14% |
March 31, 2018.
Expenses
Three Months Ended | ||||||||||||||||
March 31, 2019 | March 31, 2018 | Change | % Change | |||||||||||||
Marketing and Sales | $ | 81,471 | $ | 60,980 | $ | 20,491 | 34% | |||||||||
Direct Operating Costs | 740,055 | (26,749 | ) | 766,804 | 2,867% | |||||||||||
General and Administrative | 1,649,520 | 1,322,452 | 327,068 | 25% | ||||||||||||
Interest Expense | 529,202 | 273 | 528,929 | 193,747% | ||||||||||||
Total Expenses | $ | 3,000,248 | $ | 1,356,956 | $ | 2,003,462 | 121% |
Marketing and sales expenses decreased $133,912increased $20,491, or 34%, for the three months ended September 30, 2017March 31, 2019 compared to the prior year periodMarch 31,2018 primarily due to increased promotional spendingan increase in the prior period relatedmarketing and advertising expenses to promote the launch ofSpacePopRainbow Rangers. property.
Direct operating costs include costs of our product sales, non-capitalizable filmunamortizable post-production costs, film and television cost amortization expense, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which we are obligated to share net profits of the properties on which they have rendered services. During the three months ended September 30, 2017,March 31, 2019, we recorded film and television cost amortization expense of $29,848$429,183 and participation expense of $11,996$289,333 compared to prior periodMarch 31, 2018 expenses of $23,011$26,738 and $0,$3,472, respectively. These increases are related to increased Television & Home Entertainment revenue related toThomas Edison’s Secret Lab andSpacePop in the current period compared to the prior period.The balance of the direct operating costs includes certain post production costs and content delivery expenses without comparable activity in the prior period.
General and administrative expenses consist primarily of salaries, employee benefits, share-based compensation related to stock options, insurance, rent, depreciation and amortization as well as other professional fees related to finance, accounting, legal and investor relations. General and administrative costs for three months ended September 30, 2017 decreased $239,213 compared to the same period in 2016. This change resulted primarily from decreases in share-based compensation expense of $250,443 offset by modest increases of $34,023 in salaries and wages.
Nine months Ended September 30, 2017 and 2016
Our summary results for the nine months ended September 30, 2017 and 2016 are below.
Revenues
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | Change | % Change | |||||||||||||
Licensing & Royalties | $ | 365,993 | $ | 347,128 | $ | 18,865 | 5% | |||||||||
Television & Home Entertainment | 263,142 | 285,433 | (22,291 | ) | -8% | |||||||||||
Advertising Sales | 13,027 | – | 13,027 | N/A | ||||||||||||
Product Sales | 8,561 | 16,150 | (7,589 | ) | -47% | |||||||||||
Total Revenue | $ | 650,723 | $ | 648,711 | $ | 2,012 | 0% |
Licensing and royalty revenue includes items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent. During the nine months ended September 30, 2017 compared to September 30, 2016, this category increased $18,865 or 5% primarily due to increases in revenues from ourSpacePop property.
Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television, VOD, or SVOD in domestic and international markets and the sale of DVDs for home entertainment through our partners. Fluctuations in Television & Home Entertainment revenue occur period over period based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content to the customer. During the nine months ended September 30, 2017 compared to September 30, 2016, Television & Home Entertainment revenue decreased $22,291 or 8%. During the nine months ended September 30, 2016, we recognized revenue from numerous licenses of ourThomas Edison’s Secret Lab Property. In the current period, there were fewer licenses ofThomas Edison’s Secret Lab offset by increased licensing activity related to ourSpacePop property.
Advertising sales are generated on the Kid Genius Cartoon Channel in the form of either flat rate promotions or advertising impressions served. Advertising sales increased by $13,027 during the nine months ended September 30, 2017 due to advertising impressions served campaigns, and promotions with no similar activity in the prior period as we had not yet begun to monetize our growing base of homes served.
Product sales represent physical products in which we hold intellectual property rights such as trademarks and copyrights to the characters and which are manufactured and sold by us directly. During the nine months ended September 30, 2017, product sales associated with Warren Buffett’sSecret Millionaire Clubdecreased by $7,589 (47%) compared to the nine months ended September 30, 2016 due to a different product offering and price point as compared to that period in the prior year.
Expenses
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | Change | % Change | |||||||||||||
Marketing and Sales | $ | 361,761 | $ | 686,577 | $ | (324,816 | ) | -47% | ||||||||
Direct Operating Costs | 254,243 | 252,688 | 1,555 | 1% | ||||||||||||
General and Administrative | 3,772,643 | 4,325,703 | (553,060 | ) | -13% | |||||||||||
Total Operating Expenses | $ | 4,388,647 | $ | 5,264,968 | $ | (876,321 | ) | -17% |
Marketing and sales expenses decreased $324,816 for the nine months ended September 30, 2017 compared to the prior year period primarily due to modest decreases in spending related to sponsorships and promotions during the quarter pursuant to ourSpacePop marketing plan as well as fees paid to a consultant for execution of a distribution contract in the prior period without similar activity in the current period.
Direct operating costs include costs of our product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which we are obligated to share net profits of the properties on which they have rendered services. The de minimus increases in direct operating costs in the nine monthsyear ended September 30, 2017March 31, 2019 compared to the prior periodyear reflect the related increases in total revenue overfilm amortization and participation expenses related to increased revenues from the same period.Rainbow Rangers property. The negative direct operating costs for the three months ended March 31, 2018 was due to a reduction in dubbing costs that were accrued as of December 31, 2017.
General and administrative expenses consist primarily of salaries, employee benefits, share-based compensation related to stock options, insurances, rent, depreciation and amortization as well as other professional fees related to finance, accounting, legal and investor relations. General and administrative costsexpenses for ninethree months ended September 30, 2017, decreased $553,060March 31, 2019 increased $327,068, or 25%, compared to the same period in 2016.2018. This change resulted from decreases in share-based compensation expense of $722,772 offset byincrease was primarily related to increases in professional fees of $117,449, salaries and wages of $40,375,related expenses and bad debtrent expense.
Interest expense of $16,730. Fluctuationsfor the three months ended March 31, 2019 increased $528,929, or 193,747%, compared to the same period in other general2018. This increase is due to the interest expense and administrative expenses comprise the balanceamortization of the variance.debt issue costs, the amortization of the debt discount related to the $4,500,000 of Senior Convertible Notes and interest charged on theLlama Llama Season 1production loan. Interest was capitalized into the costs of production in 2017 prior to the completion in December 2017.
Liquidity and Capital Resources
Working Capital
As of September 30, 2017,March 31, 2019, we had current assets of $3,989,900,$6,267,127, including cash, cash equivalents, and restricted cash of $3,247,402,$4,030,354, and current liabilities of $2,126,844, including certain trade payables of $925,000 of which we dispute the claim,$8,944,645, resulting in negative working capital of $1,863,056,$2,677,518, compared to a working capital deficit of $479,404$971,663 as of December 31, 2016.2018.
IncreasesDecreases in working capital were the result of two transactions:increases in the current portion of deferred revenue of $977,355 and an increase in the carrying value of the Senior Convertible Notes of $2,668,153
Credit Facility
On August 8, 2016, Llama Productions LLC, our wholly-owned subsidiary, closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”) with Bank Leumi USA to produce our animated seriesLlama Llama (the “Series”). The Series is configured as fifteen half-hour episodes comprisedComparison of thirty 11-minute programs anticipated to be delivered to Netflix in the fourth quarter of 2017. The Facility is secured by the license fees we will receive from NetflixCash Flows for the deliveryThree Months Ended March 31, 2019, and March 31, 2018
Our total cash, cash equivalents, and restricted cash was $4,030,354 and $6,223,310 at March 31, 2019, and 2018, respectively.
Comparison of the Series as well as our copyright in the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1% or one, three, or six-month LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, we deposited $1,000,000 into a cash account to be used solely for the production of the series.Cash Flows
Three Months Ended | ||||||||||||||||
March 31, 2019 | March 31, 2018 | $ Change | % Change | |||||||||||||
Cash used in operations | ($ | 1,213,240 | ) | ($ | 1,214,107 | ) | $ | 867 | 0% | |||||||
Cash used in investing activities | (4,423 | ) | (23,672 | ) | 19,249 | 81% | ||||||||||
Cash provided by financing activities | 2,162,991 | (36,983 | ) | 2,199,974 | 5,949% | |||||||||||
Increase (decrease) in cash | $ | 945,328 | ($ | 1,274,762 | ) | $ | 2,220,090 | 174% |
Comparison of Cash Flows for the Nine Months EndedSeptember30, 2017 and 2016
Our total cash, cash equivalents, and restricted cash were $3,247,402 and $3,642,667 at September 30, 2017 and 2016, respectively.
September 30, 2017 | September 30, 2016 | Change | ||||||||||
Cash used in operations | $ | (5,029,810 | ) | $ | (1,885,328 | ) | $ | (3,144,482 | ) | |||
Cash used in investing activities | (47,361 | ) | (7,192 | ) | (40,169 | ) | ||||||
Cash provided by financing activities | 5,436,652 | 347,567 | 5,089,085 | |||||||||
Increase (decrease) in cash | $ | 359,481 | $ | (1,544,953 | ) | $ | 1,904,434 |
During the ninethree months ended September 30, 2017,March 31, 2019, our primary sources of cash were the $3,866,573 in grossnet proceeds from the Private Transaction coupled withsale of shares for $1,757,552, the $2,034,728 in proceedscollection of $390,000 from theLlama LlamaRainbow Rangers production facility. During the comparable period in 2016, our primary source of cash was the $2,000,000 advance from the Sony Distribution Agreement. During both periods, these funds were primarily usedbroadcast agreement, and $168,352 royalties received related to fund operations including the continued investment in our film and television assets as well as marketing support for our brands.Psycho Bunny.
Operating Activities
Cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2019 was $5,029,810$1,213,240 as compared to cash used in operating activities of $1,885,328$1,214,107 during the prior period. The use of cash in the current period is based on the operating results discussed above as well as increases in film and television costs of $1,880,811 related to the development and production ofSpacePop, Llama Llama, andRainbow Rangers. The cash used in operating activities in the prior period resulted primarily from the $2,000,000 advance from the Sony Distribution Agreement offset by our operating results and increases in film and television costs of $754,770 related to the production ofSpacePop andLlama Llama.
Investing Activities
Cash used in investing activities for the ninethree months ended September 30, 2017March 31, 2019 was $47,361 for the enhancement of our information technology infrastructure$4,423 as compared to a use of $7,192 during the comparable period$23,672 for the developmentthree months ended March 31, 2018. Investing activities include the purchase of certainfurniture and equipment in 2019 and the purchase of furniture and equipment and intangible assets.assets in 2018.
Financing Activities
Cash generated fromprovided by financing activities for the ninethree months ended September 30, 2017March 31, 2019 was $5,436,652$2,162,991 as compared to $347,567 generated$36,983 cash used in the comparable period in 2016.2018. During the ninethree months ended September 30, 2017,March 31, 2019, the sources of cash generated from financing activities were the $3,866,573$1,757,522 in grossnet proceeds from the Private Transaction coupled withsale of securities under a Securities Purchase Agreement and net borrowings of $$454,628 under our production loans. During the $2,034,728three months ended March 31, 2018, the sources of cash generated from financing activities were the $1,596,340 in net proceeds from the sale of securities under a Securities Purchase Agreement offset by payments made on theLlama Llama production facility. During the nine months ended September 30, 2016, cash generated from financing activities included $100,000 from the exerciseloan of certain warrants outstanding as well as $237,567 in proceeds from theLlama Llama production facility.$1,633,323.
Capital Expenditures
As of September 30, 2017,March 31, 2019, we do not have any material commitments for capital expenditures.
Critical Accounting Policies
Our accounting policies are described in the notes to the financial statements. Below is a summary of the critical accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared and Llama Productions as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-company balances and transactions have been eliminated in consolidation.
Right of Use Leased Assets
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which allows for an additional optional transition method where comparative periods presented in the financial statements in the period of adoption will not be restated and instead those periods will be presented under existing guidance in accordance with ASC 840, Leases. Management used this optional transition method. As of January 1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,029,677, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. We complete the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets in future periods.
Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. In accordance with FASB ASC 350 Intangible Assets, the costs of new product development and significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Film and Television Costs
We capitalize production costs for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment over the period of commitment. We expense all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.
We capitalize production costs for films produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value of the film(s) delivered and recognized as revenue. We evaluate ourits capitalized production costs annually and limitlimits recorded amounts by ourtheir ability to recover such costs through expected future sales.
Additionally, for both episodic series and films, from time to time, we develop additional content, improved animation and bonus songs/features for ourits existing content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue RecognitionDebt and Attached Equity-Linked Instruments
We recognize revenueThe Company measures issued debt on an amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or the straight-line method when the latter does not lead to materially different results.
The Company accounts for the proceeds from the issuance of convertible notes payable in accordance with FASB ASC 926-605 Entertainment-Films - Revenue Recognition. Accordingly, we recognize revenue when (i) persuasive evidence of a sale470-20 Debt with a customer exists, (ii)Conversion and Other Options. Pursuant to FASB ASC 470-20, the film is complete and has been delivered or is available for delivery, (iii) the license periodintrinsic value of the arrangement has begunembedded conversion feature (beneficial conversion interest), which is in the money on the commitment date is included in the discount to debt and amortized to interest expense over the term of the note agreement. When the conversion option is not separated, the Company accounts for the entire convertible instrument including debt and the customer can begin its exploitation, exhibition, or sale, (iv)conversion feature as a liability.
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The Company analyzes freestanding equity-linked instruments including warrants attached to debt to conclude whether the arrangement fee is fixed or determinable, and (v) collectioninstrument meets the definition of the arrangement feederivative and whether it is reasonably assured.considered indexed to the Company’s own stock. If the instrument is not considered indexed to Company’s stock, it is classified as an asset or liability recorded at fair value. If the instrument considered indexed to Company’s stock, the Company analyzes additional equity classification requirements per ASC 815-40 Contract’s in Entity’s Own Equity. When the requirements are met the instrument is recorded as part of the Company’s equity, initially measured based on its relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.
Our licensing and royalty revenue represents revenue generated from license agreements that are held in conjunction with third parties that are responsibleWhen required, the Company also considers the bifurcation guidance for collecting fees due and remitting to us our share after expenses.embedded derivatives per FASB ASC 815-15 Embedded Derivatives.
Revenue Recognition
On January 1, 2018, we adopted the new accounting standard ASC 606 (Topic 606), Revenue from licensed products is recognized when realized or realizable based on royaltyContracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting received from licensees. Licensing income that we recognize as an agent isperiods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with FASBour historic accounting under ASC 605-45 Revenue Recognition - Principal Agent. 605, (Topic 605).
Accordingly, our revenue is our gross billingson January 1, 2018 we recorded a cumulative effect adjustment to beginning Accumulated Deficit in the amount of $173,112. The impact to our customers lessfinancial statements for the three months ended March 31, 2018 resulting from the adoption of Topic 606 as of January 1, 2018 was a reduction of revenue in the amount $68,184 and a corresponding reduction in costs in the amount of $10,099 from the amounts reported. The amounts prior to adoption were not recognized pursuant to Topic 606 and would have been reported pursuant to Topic 605.
Changes to the opening balances in prepaid and other assets, film and television costs, total assets, accrued expenses, deferred revenue and total liabilities resulting from the adoption of the new guidance were as follows (thousands):
December 31, 2017 | Impact of Adoption | January 1, 2018 | ||||||||||
Prepaid and Other Assets | $ | 265 | $ | (15 | ) | $ | 250 | |||||
Film and Television Costs, net | 2,777 | (219 | ) | 2,558 | ||||||||
Total assets | 27,713 | (234 | ) | 27,479 | ||||||||
Accrued Expenses | 1,718 | 2 | 1,720 | |||||||||
Deferred Revenue | 5,085 | (409 | ) | 4,676 | ||||||||
Total liabilities | 12,673 | (407 | ) | 12,266 |
We performed an analysis of our existing revenue contracts and completed our new revenue accounting policy documentation under the new standard. The Company has identified the following six material and distinct performance obligations:
· | License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual property that has significant standalone functionality such as the ability to be played or aired. Functional intellectual property derives a substantial portion of its utility from its significant standalone functionality.) |
· | License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs associated with its animated content.) |
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· | Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for our current contracts, it could become significant in the future.) |
· | Options on future seasons of content at fixed terms. (While this performance obligation is not significant for our current contracts, it could become significant in the future.) |
· | Fixed fee advertising revenue generated from the Genius Brands Network |
· | Variable fee advertising revenue generated from the Genius Brands Network |
As a result of the change, beginning January 1, 2018, we paybegan recognizing revenue related to suppliers for their productslicensed rights to exploit functional IP in two ways. For minimum guarantees, we will recognize fixed revenue upon delivery of content and services.the start of the license period. For functional IP contracts with a variable component, we will estimate revenue such that it is probable there will not be a material reversal of revenue in future periods. Revenue under these types of contracts was previously recognized when royalty statements were received. We began recognizing revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.
We sell advertising on our Kid Genius channel in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, we recognize revenue when all five revenue recognition criteria under FASB ASC 605606 are met. For impressions served, we deliver a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM per impression. Impressions served are reported to us on a monthly basis, and revenue is reported in the month the impressions are served.
We recognize revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer as required by FASB ASC 605 Revenue Recognition.buyer.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards (e.g. insurance contracts). This ASU will supersede all revenue recognition requirements in Topic 605, Revenue Recognition, and industry-specific guidance throughout the industry topics of the codification. The guidance's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity will identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied (either over time or at a point in time). The ASU further states that an entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, which approved a one-year deferral of the effective date of the ASU from the original effective date of annual reporting periods beginning after December 15, 2016, to annual reporting periods (including interim reporting periods) beginning after December 15, 2017, with an option for early adoption of the standard on the original effective date. Additionally, in March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, that amended the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 805): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016, EITF Meeting”, which rescinded from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements. The FASB also issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which clarified guidance on assessment of collectability, presentation of sale taxes, measurement of noncash consideration, and certain transition matters. In the second and third quarters, the Company initiated and executed a project to evaluate the impact of these changes, which included a review of existing contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to the Company’s existing accounting policies, to identify differences. The Company is currently evaluating the potential impact on the its internal controls to identify any necessary changes. The standard can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. The Company plans to implement these standards effective January 1, 2018 based on the modified retrospective method, but may opt for the full retrospective method depending on the final outcome of our evaluation. The Company believes that it is following an appropriate timeline to allow for proper adoption on the implementation date of January 1, 2018 and will continue to monitor new customer contracts through the remainder of 2017.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases”. The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We have prospectively adopted ASU 2016-18. The impact to our consolidated financial position, results of operations and cash flows is minimal.
In January 2017, the FASB issued Accounting StandardsUpdate 2017-04, “Simplifyingthe Test for Goodwill Impairment”,Impairment,” which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted.We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In MayJuly 2017, the FASB issued Accounting Standard Update 2017-09, “Compensation—Stock Compensation: ScopeASU No. 2017-11 addressing, among other matters, accounting for certain financial instruments. One of Modification Accounting”the amendments in this guidance intended to reduce the complexity associated with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the Board determined that a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. ASU 2017-11 is effective for public business entities for fiscal year beginning after December 15, 2018. The Company adopted ASU 2017-11 on January 1, 2019. The adoption of ASU 2017-11 did not have a material impact on the Company’s financial statements or cash flows.
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In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value vesting conditions or classification (equity or liability)measurement disclosure requirements of theASC 820. The update removes some disclosures, modifies others, and add some new awarddisclosure requirements. The amendments in this ASU are different from the original award immediately before the original award is modified. The standard is effective for all entities for fiscal years, and interim period within those fiscal years, beginning January 1, 2018,after December 15, 2019 with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-05 and expands the scope of ASC 718 to include all share-based payment arranges related to the acquisition of goods and services from both nonemployees and employee. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASC 2018-07 is effective for all entities for fiscal year beginning after December 15, 2018, and interim periods within that fiscal year. The Company adopted ASU No. 2018-07 on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements or cash flows.
In March 2019, the FASB issued ASU No. 2019-02, Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters Intangibles-Goodwill and Other (Subtopic 920-350). The update aligns the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization. The amendments also require that an entity reassess estimates of the use of a film in a film group and account for any changes prospectively. The amendments in this update require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries and are not expected to have a material effect on our financial position, results of operations, or cash flows.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures that are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures arewere not effective for the periodthree months ended September 30, 2017March 31, 2019 in ensuring that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.forms.
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In the course of our review of our consolidated financial results for the three months ended September 30, 2018, we identified a potential material weakness in our internal control over financial reporting related to our failure to adequately evaluate the accounting treatment for the warrants issued in conjunction with the convertible notes in a timely manner.
Management continues to review our internal control policy to ensure it can effectively implement controls to evaluate complex accounting issues. We replaced our Controller during the fourth quarter of 2018 and have taken further steps to appropriately and timely evaluate complex accounting issues, including the use of consultants.
Changes in Internal Control over Financial Reporting
ThereWe believe we took the necessary steps during the fourth quarter of 2018 to improve our internal control over financial reporting and as a result there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
As of September 30, 2017,March 31, 2019, there were no material pending legal proceedings to which we are a party or as to which any of its property is subject, and no such proceedings are known to us to be threatened or contemplated against us.
There have been no material changes to the Risk Factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 except as follows:2018.
We will need additional financing to continue our operations. If we are unable to obtain additional financing on acceptable terms, we will need to curtail or cease our development plans and operations.
As of September 30, 2017, we had approximately $3,247,402 of available cash, cash equivalents, and restricted cash. Additional funds may be required to fund operations which could be raised through the issuance of equity securities and/or debt financing. There being no assurance that any type of financing on terms acceptable to us will be available or otherwise occur. Debt financing must be repaid regardless of whether we generate revenues or cash flows from operations and may be secured by substantially all of our assets. Any equity financing or debt financing that requires the issuance of warrants or other equity securities to the lender would cause the percentage ownership by our current stockholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences or privileges senior to those of existing stockholders. Any equity financing at a price below the then current conversion price of our Series A Convertible Preferred Stock will result in an adjustment to the conversion ratio, applicable to such securities, resulting in the issuance of additional shares of our Common Stock upon the conversion of our Series A Convertible Preferred Stock, which would further dilute our other stockholders.
If we fail to honor our obligations under the terms of our third-party supplier or loan agreements, our business may be adversely affected.
On January 10, 2017, we entered into an amendment of our home entertainment Distribution Agreement with Sony pursuant to which, among other things, Sony agreed to pay $1,489,583 which was owed and payable by us to DADC for certain disk manufacturing and replication services, thereby terminating the agreement with DADC.
In connection with such transaction, we (i) granted Sony home entertainment rights in territories worldwide in addition to the United States and Canada and (ii) issued Sony 301,231 shares of our Common Stock at $4.945 per share, Sony’s exclusive territory for exercising its home entertainment distribution rights under the distribution agreement was extended from the United States and Canada to worldwide, and the amount of advances subject to recoupment by Sony out of royalty payments that would otherwise be due to us under the Distribution Agreement was increased by the amount of the payment to DADC. Future cash flow from the distributed products under the distribution agreement, if any, will be impacted by the additional recoupment obligation and additional rights granted. In connection with the above issuance of our shares, we entered into a subscription agreement with Sony, effective as of January 17, 2017.
Loss of key personnel may adversely affect our business.
Our success greatly depends on the performance of our executive management team, including Andy Heyward, our Chief Executive Officer. The loss of the services of any member of our core executive management team or other key persons could have a material adverse effect on our business, results of operations and financial condition. The employment agreement of Stone Newman, our former President of Global Consumer Products, Worldwide Content Sales and Marketing, expired on July 14, 2017 and was not renewed.
Our management team currently owns a substantial interest in our voting stock.
As of September 30, 2017, our management team and Board of Directors beneficially own or control (including conversions, options or warrants exercisable or convertible within 60 days) a combined 1,838,159, or 28.2%, of our shares currently outstanding (including conversions, options or warrants exercisable or convertible within 60 days). Sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our Common Stock. Additionally, management has the ability to control any proposals submitted to shareholders, including corporate actions and board changes which may not be in accordance with the votes of other shareholders.
Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.
Based on the number of shares outstanding as of September 30, 2017, our officers, directors and stockholders who hold at least 5% of our stock beneficially own a combined total of approximately 58.7% of our outstanding common stock, including shares of common stock subject to preferred shares, stock options, and warrants that are currently convertible or exercisable or will be convertible or exercisable within 60 days after October 1, 2017. If these officers, directors, and principal stockholders or a group of our principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring stockholder approval, including the election of directors and approval of mergers, business combinations or other significant transactions. The interests of one or more of these stockholders may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended September 30, 2017, the Company issued 35,000 shares of the Company’s Common Stock pursuant to the conversion of 105 shares of Series A Convertible Preferred Stock at a conversion price of $3.00.
During the three months ended September 30, 2017,On April 11, 2019, the Company issued 6,012 shares of Common Stockcommon stock valued at $4.99$1.92 per share to a consultantvendor for consulting services rendered.
The securities referenced above were issued solely to “accredited investors” in reliance onissuance of the exemptionshares of common stock was exempt from registration afforded bypursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There were no reportable events under this Item 3 during the three months ended September 30, 2017.March 31, 2019.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
The exhibits filed as a part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.
EXHIBIT INDEX
Exhibit No. | Description |
1.1 | Engagement Letter dated as of February 14, 2019, by and between Genius Brands International, Inc. and Chardan Capital Markets, LLC. (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 15, 2019). |
4.1 | Form of Registered Warrant (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 15, 2019). |
4.2 | Form of Private Warrant (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 15, 2019). |
4.3 | Form of Waiver Warrant (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 15, 2019). |
10.1 | Form of Securities Purchase Agreement, dated as of February 14, 2019, by and among Genius Brands International, Inc. and the Investor. |
Section 302 Certification of Chief Executive Officer. | |
Section 302 Certification of Chief Financial Officer. | |
Section 906 Certification of Chief Executive Officer. | |
Section 906 Certification of Chief Financial Officer. | |
XBRL Instance Document | |
XBRL Schema Document | |
XBRL Calculation Linkbase Document | |
XBRL Definition Linkbase Document | |
XBRL Label Linkbase Document | |
XBRL Presentation Linkbase Document |
* Filed herewith
** Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENIUS BRANDS INTERNATIONAL, INC. | ||
Date: | By: | /s/ Andy Heyward |
Andy Heyward Chief Executive Officer (Principal Executive Officer) | ||
Date: | By: | /s/ |
Robert L. Denton Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |