UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20212022
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☐ | 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: 001-37950000-54389
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.) | |
190 N. Canon Dr., 4th Floor
Beverly Hills, CA90210
(Address of principal executive offices and zip code)
310-273-4222
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)____________________________
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
IndicateAs of November 14, 2022, the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:registrant had 300,967,436 shares of common stock, $0.001 par value $0.001 per share, were outstanding as of November 12, 2021.outstanding.
GENIUS BRANDS INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 20212022
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Genius Brands International, Inc.
Condensed Consolidated Balance Sheets
As of September 30, 2021,(in thousands, except share and December 31, 2020per share data)
| ASSETS | September 30, 2021 | December 31, 2020 | ||||||
| (unaudited) | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | 4,884,149 | $ | 100,456,324 | ||||
| Investment in Marketable Securities (amortized cost of $125,692,272) | 125,340,336 | 0 | ||||||
| Accounts Receivable, net | 4,911,773 | 1,731,373 | ||||||
| Other Receivable | 643,687 | 0 | ||||||
| Prepaid Expenses and Other Assets | 7,266,226 | 6,378,392 | ||||||
| Total Current Assets | 143,046,171 | 108,566,089 | ||||||
| Property and Equipment, net | 399,214 | 95,828 | ||||||
| Right of Use Assets, net | 2,221,287 | 1,972,364 | ||||||
| Film and Television Costs, net | 16,293,040 | 11,828,494 | ||||||
| Lease Deposits | 78,739 | 43,001 | ||||||
| Investment in ChizComm | 0 | 300,798 | ||||||
| Investment in Stan Lee Universe, LLC | 2,000,000 | 1,000,000 | ||||||
| Intangible Assets, net | 9,310,300 | 28,694 | ||||||
| Goodwill | 19,976,832 | 10,365,806 | ||||||
| Total Assets | $ | 193,325,583 | $ | 134,201,074 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 4,604,829 | $ | 785,526 | ||||
| Accrued Expenses | 155,327 | 408,459 | ||||||
| Participations Payable | 3,947,945 | 3,160,016 | ||||||
| Deferred Revenue | 365,548 | 684,129 | ||||||
| Notes Payable | 28,249 | 0 | ||||||
| Payroll Protection Program | 0 | 366,267 | ||||||
| Warrant Derivative Liability | 1,094,023 | 1,197,068 | ||||||
| Lease Liability | 568,407 | 146,099 | ||||||
| Due to Related Party | 230,931 | 2,420 | ||||||
| Accrued Salaries and Wages | 612,040 | 428,922 | ||||||
| Total Current Liabilities | 11,607,299 | 7,178,906 | ||||||
| Long Term Liabilities: | ||||||||
| Deferred Revenue | 3,573,291 | 3,748,248 | ||||||
| Lease Liability | 1,945,079 | 2,052,530 | ||||||
| Production Facility, net | 0 | 1,099,713 | ||||||
| Contingent Earn Out | 7,210,000 | 0 | ||||||
| Notes Payable | 87,946 | 0 | ||||||
| Disputed Trade Payable | 925,000 | 925,000 | ||||||
| Total Liabilities | 25,348,615 | 15,004,397 | ||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2021 and December 31, 2020 | 0 | 0 | ||||||
| Common Stock, $ par value, shares authorized and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 300,792 | 258,439 | ||||||
| Additional Paid in Capital | 730,477,723 | 588,500,680 | ||||||
| Accumulated Deficit | (562,464,295 | ) | (469,557,324 | ) | ||||
| Accumulated Other Comprehensive Loss | (337,252 | ) | (5,118 | ) | ||||
| Total Stockholders' Equity | 167,976,968 | 119,196,677 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 193,325,583 | $ | 134,201,074 | ||||
| September 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | 7,093 | $ | 2,058 | ||||
| Restricted Cash | – | 8,002 | ||||||
| Investments in Marketable Securities (amortized cost of $97,530) | 89,873 | 112,523 | ||||||
| Accounts Receivable, net | 9,327 | 7,632 | ||||||
| Tax Credits Receivable | 26,350 | – | ||||||
| Notes & Accounts Receivable from Related Party | 2,695 | 1,276 | ||||||
| Other Receivable | 3,077 | 969 | ||||||
| Prepaid Expenses and Other Assets | 5,143 | 3,725 | ||||||
| Total Current Assets | 143,558 | 136,185 | ||||||
| Noncurrent Assets: | ||||||||
| Property and Equipment, net | 2,380 | 449 | ||||||
| Operating Lease Right of Use Assets, net | 8,639 | 2,785 | ||||||
| Finance Lease Right of Use Assets, net | 2,183 | – | ||||||
| Film and Television Costs, net | 14,982 | 2,940 | ||||||
| Investment in Your Family Entertainment AG | 12,480 | 6,695 | ||||||
| Intangible Assets, net | 33,774 | 9,733 | ||||||
| Goodwill | 35,748 | 15,227 | ||||||
| Other Assets | 247 | 69 | ||||||
| Total Assets | $ | 253,991 | $ | 174,083 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 4,855 | $ | 7,192 | ||||
| Participations Payable | 3,243 | 2,438 | ||||||
| Accrued Expenses | 1,793 | 535 | ||||||
| Accrued Salaries and Wages | 2,492 | 799 | ||||||
| Deferred Revenue | 10,794 | 432 | ||||||
| Margin Loan | 62,372 | 6,392 | ||||||
| Production Facilities, net | 19,283 | – | ||||||
| Bank Indebtedness | 2,092 | – | ||||||
| Operating Lease Liability | 1,071 | 664 | ||||||
| Finance Lease Liability | 1,795 | – | ||||||
| Warrant Liability | 421 | 855 | ||||||
| Due to Related Party | 37 | 63 | ||||||
| Other Current Liabilities | 932 | 1,761 | ||||||
| Total Current Liabilities | 111,180 | 21,131 | ||||||
| Noncurrent Liabilities: | ||||||||
| Deferred Revenue | 3,369 | 3,492 | ||||||
| Operating Lease Liability | 7,935 | 2,460 | ||||||
| Finance Lease Liability | 687 | – | ||||||
| Contingent Earn Out | 1,345 | 1,340 | ||||||
| Other Noncurrent Liabilities | 1,017 | 1,007 | ||||||
| Total Liabilities | 125,533 | 29,430 | ||||||
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2021 and September 30, 2020
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Licensing & Royalties | $ | 90,660 | $ | 199,572 | $ | 1,497,277 | $ | 565,696 | ||||||||
| Media Advisory & Advertising Services | 1,181,792 | 0 | 2,906,504 | 0 | ||||||||||||
| Television & Home Entertainment | 520,691 | 31,375 | 672,120 | 409,837 | ||||||||||||
| Advertising Sales | 76,901 | 42,715 | 199,464 | 191,728 | ||||||||||||
| Product Sales | 1,405 | 330 | 2,551 | 2,149 | ||||||||||||
| Total Revenues | 1,871,449 | 273,992 | 5,277,916 | 1,169,410 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Marketing and Sales | 1,187,754 | 364,869 | 3,330,915 | 606,125 | ||||||||||||
| Direct Operating Costs | 634,082 | 219,451 | 2,151,848 | 886,972 | ||||||||||||
| General and Administrative | 9,884,073 | 3,042,178 | 23,932,322 | 7,173,594 | ||||||||||||
| Total Operating Expenses | 11,705,909 | 3,626,498 | 29,415,085 | 8,666,691 | ||||||||||||
| Loss from Operations | (9,834,460 | ) | (3,352,506 | ) | (24,137,169 | ) | (7,497,281 | ) | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Interest Income | 182,589 | 69,699 | 314,473 | 98,039 | ||||||||||||
| Loss on Lease Termination | 0 | (342,060 | ) | 0 | (342,060 | ) | ||||||||||
| Realized Loss on Marketable Securities | (24,779 | ) | 0 | (24,779 | ) | 0 | ||||||||||
| Gain (Loss) on Foreign Exchange | 5,467 | 0 | (4,450 | ) | 0 | |||||||||||
| Warrant Incentive Expense | 0 | 0 | (69,138,527 | ) | 0 | |||||||||||
| Warrant Revaluation Gain (Loss) | 419,860 | 1,556,574 | 103,046 | (210,672,085 | ) | |||||||||||
| Conversion Option Revaluation Expense | 0 | 0 | 0 | (171,835,729 | ) | |||||||||||
| Sub-Lease Income | 0 | 78,277 | 0 | 316,762 | ||||||||||||
| Interest Expense | (2,057 | ) | (17,193 | ) | (19,565 | ) | (1,168,801 | ) | ||||||||
| Net Other Income (Expense) | 581,080 | 1,345,297 | (68,769,802 | ) | (383,603,874 | ) | ||||||||||
| Loss Before Income Tax Expense | (9,253,380 | ) | (2,007,209 | ) | (92,906,971 | ) | (391,101,155 | ) | ||||||||
| Income Tax Expense | 0 | 0 | 0 | 0 | ||||||||||||
| Net Loss Applicable to Common Shareholders | $ | (9,253,380 | ) | $ | (2,007,209 | ) | $ | (92,906,971 | ) | $ | (391,101,155 | ) | ||||
| Net Loss per Common Share (Basic and Diluted) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.31 | ) | $ | (3.63 | ) | ||||
| Weighted Average Shares Outstanding (Basic and Diluted) | 300,321,658 | 218,991,119 | 296,001,742 | 107,786,940 | ||||||||||||
| Commitments and contingent liabilities (Note 21) | – | – | ||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock Series A, $ par value, shares authorized, shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | – | – | ||||||
| Preferred Stock Series B, $ par value, share authorized, share issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | – | – | ||||||
| Common Stock, $ par value, shares authorized and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 318 | 303 | ||||||
| Additional Paid in Capital | 762,633 | 739,495 | ||||||
| Treasury Stock, and shares of common stock as of September 30, 2022 and December 31, 2021, respectively, at cost | (3 | ) | – | |||||
| Accumulated Deficit | (624,936 | ) | (595,848 | ) | ||||
| Accumulated Other Comprehensive Loss | (11,417 | ) | (1,221 | ) | ||||
| Total Genius Brands International, Inc. Stockholders' Equity | 126,595 | 142,729 | ||||||
| Non-Controlling Interests in Consolidated Subsidiaries | 1,863 | 1,924 | ||||||
| Total Stockholders' Equity | 128,458 | 144,653 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 253,991 | $ | 174,083 |
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended | Nine months Ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Production Services | $ | 9,095 | $ | – | $ | 19,113 | $ | – | ||||||||
| Content Distribution | 9,106 | 599 | 18,049 | 874 | ||||||||||||
| Licensing & Royalties | 280 | 91 | 2,816 | 1,497 | ||||||||||||
| Media Advisory & Advertising Services | 1,198 | 1,182 | 3,266 | 2,907 | ||||||||||||
| Total Revenues | 19,679 | 1,872 | 43,244 | 5,278 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Marketing and Sales | 880 | 1,188 | 2,012 | 3,331 | ||||||||||||
| Direct Operating Costs | 13,875 | 634 | 28,865 | 2,152 | ||||||||||||
| General and Administrative | 10,363 | 9,884 | 36,327 | 23,932 | ||||||||||||
| Total Operating Expenses | 25,118 | 11,706 | 67,204 | 29,415 | ||||||||||||
| Loss from Operations | (5,439 | ) | (9,834 | ) | (23,960 | ) | (24,137 | ) | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Interest Expense | (782 | ) | (2 | ) | (1,256 | ) | (20 | ) | ||||||||
| Other Income (Expense), Net | (5,020 | ) | 583 | (2,733 | ) | (68,750 | ) | |||||||||
| Net Other Income (Expense) | (5,802 | ) | 581 | (3,989 | ) | (68,770 | ) | |||||||||
| Loss Before Income Tax Expense | (11,241 | ) | (9,253 | ) | (27,949 | ) | (92,907 | ) | ||||||||
| Provision for Tax Expense | – | – | – | – | ||||||||||||
| Net Loss | (11,241 | ) | (9,253 | ) | (27,949 | ) | (92,907 | ) | ||||||||
| Net Loss (Income) Attributable to Non-Controlling Interests | 23 | – | (1,139 | ) | – | |||||||||||
| Net Loss Attributable to Genius Brands International, Inc. | $ | (11,218 | ) | $ | (9,253 | ) | $ | (29,088 | ) | $ | (92,907 | ) | ||||
| Net Loss per Share (Basic) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.31 | ) | ||||
| Net Loss per Share (Diluted) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.31 | ) | ||||
| Weighted Average Shares Outstanding (Basic) | 317,282,770 | 300,321,658 | 312,243,439 | 296,001,742 | ||||||||||||
| Weighted Average Shares Outstanding (Diluted) | 317,282,770 | 300,321,658 | 312,243,439 | 296,001,742 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
| 5 |
Genius Brands International, Inc.
Condensed Consolidated Statements of Comprehensive Loss
Three and Nine Months Ended September 30, 2021 and September 30, 2020(in thousands)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Net Loss | $ | (9,253,380 | ) | $ | (2,007,209 | ) | $ | (92,906,971 | ) | $ | (391,101,155 | ) | ||||
| Net Unrealized Loss on Marketable Securities (1) | (219,188 | ) | 0 | (376,715 | ) | 0 | ||||||||||
| Net Realized Loss on Marketable Securities Included in Earnings | 24,779 | – | 24,779 | – | ||||||||||||
| Foreign Currency Translation Adjustment | (91,253 | ) | 0 | 19,802 | 0 | |||||||||||
| Comprehensive Net Loss | $ | (9,539,042 | ) | $ | (2,007,209 | ) | $ | (93,239,105 | ) | $ | (391,101,155 | ) | ||||
| Three Months Ended | Nine months Ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Net Loss | $ | (11,241 | ) | $ | (9,253 | ) | $ | (27,949 | ) | $ | (92,907 | ) | ||||
| Other Comprehensive Income (Loss): | ||||||||||||||||
| Change in Unrealized Losses on Marketable Securities | (1,967 | ) | (219 | ) | (6,562 | ) | (377 | ) | ||||||||
| Realized Losses on Marketable Securities Reclassified from AOCI into Earnings | 37 | 25 | 160 | 25 | ||||||||||||
| Foreign Currency Translation Adjustment | (2,354 | ) | (91 | ) | (3,794 | ) | 20 | |||||||||
| Total Other Comprehensive Loss | (4,284 | ) | (285 | ) | (10,196 | ) | (332 | ) | ||||||||
| Total Comprehensive Net Loss | (15,525 | ) | (9,538 | ) | (38,145 | ) | (93,239 | ) | ||||||||
| Less: Comprehensive Income (Loss) Attributable to Non-Controlling Interests | 23 | – | (1,139 | ) | – | |||||||||||
| Total Comprehensive Net Loss Attributable to Genius Brands International, Inc. | $ | (15,502 | ) | $ | (9,538 | ) | $ | (39,284 | ) | $ | (93,239 | ) | ||||
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Condensed Consolidated Statements of Stockholders' Equity
Three and Nine Months Ended September 30, 2021 and September 30, 2020(in thousands, except share data)
(unaudited)
| Common Stock | Preferred Stock | Additional Paid-In | Treasury Stock | Accumulated | Accumulated Other Comprehensive | Non- Controlling | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Loss | Interest | Total | ||||||||||||||||||||||||||
| Balance, December 31, 2021 | 303,379,122 | $ | 303 | – | $ | – | $ | 739,495 | – | $ | – | $ | (595,848 | ) | $ | (1,221 | ) | $ | 1,924 | $ | 144,653 | |||||||||||||||
| – | – | |||||||||||||||||||||||||||||||||||
| Issuance of Common Stock for Services | 386,196 | – | – | – | 311 | – | – | – | – | – | 311 | |||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units | 603,648 | 1 | – | – | (1 | ) | – | – | – | – | – | – | ||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 4,491 | – | – | – | – | – | 4,491 | |||||||||||||||||||||||||
| Other Comprehensive Loss | – | – | – | – | – | – | – | – | (3,384 | ) | – | (3,384 | ) | |||||||||||||||||||||||
| Net Loss | – | – | – | – | – | – | – | (4,531 | ) | – | (31 | ) | (4,562 | ) | ||||||||||||||||||||||
| Balance, March 31, 2022 | 304,368,966 | $ | 304 | – | $ | – | $ | 744,296 | – | $ | – | $ | (600,379 | ) | $ | (4,605 | ) | $ | 1,893 | $ | 141,509 | |||||||||||||||
| Shares Issued for Wow Acquisition | 11,057,085 | 11 | 1 | – | 11,543 | – | – | – | – | – | 11,554 | |||||||||||||||||||||||||
| Fair Value of Replacement Options Related to Wow Acquisition | – | – | – | – | 1,213 | – | – | – | – | – | 1,213 | |||||||||||||||||||||||||
| Issuance of Common Stock for Services | 736,667 | 1 | – | – | 441 | – | – | – | – | – | 442 | |||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units | 1,072,398 | 1 | – | – | (1 | ) | – | – | – | – | – | – | ||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 4,245 | – | – | – | – | – | 4,245 | |||||||||||||||||||||||||
| Other Comprehensive Loss | – | – | – | – | – | – | – | – | (2,528 | ) | – | (2,528 | ) | |||||||||||||||||||||||
| Distributions to Non-Controlling Interests | – | – | – | – | – | – | – | – | – | (1,200 | ) | (1,200 | ) | |||||||||||||||||||||||
| Net (Loss) Income | – | – | – | – | – | – | – | (13,341 | ) | – | 1,193 | (12,148 | ) | |||||||||||||||||||||||
| Balance, June 30, 2022 | 317,235,116 | $ | 317 | 1 | $ | – | $ | 761,737 | – | $ | – | $ | (613,720 | ) | $ | (7,133 | ) | $ | 1,886 | $ | 143,087 | |||||||||||||||
| – | – | |||||||||||||||||||||||||||||||||||
| Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes | 862,159 | 1 | – | – | (1 | ) | (6,993 | ) | (3 | ) | – | – | – | (3 | ) | |||||||||||||||||||||
| Purchase of Treasury Stock Not Yet Settled | – | – | – | – | (285 | ) | – | – | – | – | – | (285 | ) | |||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 1,182 | – | – | – | – | – | 1,182 | |||||||||||||||||||||||||
| Other Comprehensive Loss | – | – | – | – | – | – | – | – | (4,284 | ) | – | (4,284 | ) | |||||||||||||||||||||||
| Net Loss | – | – | – | – | – | – | – | (11,216 | ) | – | (23 | ) | (11,239 | ) | ||||||||||||||||||||||
| Balance, September 30, 2022 | 318,097,275 | $ | 318 | 1 | $ | – | $ | 762,633 | (6,993 | ) | $ | (3 | ) | $ | (624,936 | ) | $ | (11,417 | ) | $ | 1,863 | $ | 128,458 | |||||||||||||
| Common Stock | Preferred Stock | Additional Paid-In | Accumulated | Other Comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||
| Balance, December 31, 2020 | 258,438,514 | $ | 258,439 | – | $ | – | $ | 588,500,680 | $ | (469,557,324 | ) | $ | (5,118 | ) | $ | 119,196,677 | ||||||||||||||||
| Shares Issued for ChizComm acquisition | 1,980,658 | 1,981 | – | – | 3,525,046 | – | – | 3,527,027 | ||||||||||||||||||||||||
| Proceeds From Warrant Exchange, net | 39,740,500 | 39,740 | – | – | 57,224,916 | – | – | 57,264,656 | ||||||||||||||||||||||||
| Issuance of Common Stock for Services | 161,986 | 162 | – | – | 240,838 | – | – | 241,000 | ||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 2,573,148 | – | – | 2,573,148 | ||||||||||||||||||||||||
| Warrant Incentive | – | – | – | – | 69,138,527 | – | – | 69,138,527 | ||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | – | – | – | – | – | – | (275 | ) | (275 | ) | ||||||||||||||||||||||
| Net Loss | – | – | – | – | – | (76,258,943 | ) | – | (76,258,943 | ) | ||||||||||||||||||||||
| Balance, March 31, 2021 | 300,321,658 | $ | 300,322 | – | $ | – | $ | 721,203,155 | $ | (545,816,267 | ) | $ | (5,393 | ) | $ | 175,681,817 | ||||||||||||||||
| Issuance of Common Stock for Services | 469,677 | 470 | – | – | 727,530 | – | – | 728,000 | ||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 2,994,172 | – | – | 2,994,172 | ||||||||||||||||||||||||
| Unrealized Loss on Marketable Securities (1) | – | – | – | – | – | – | (157,527 | ) | (157,527 | ) | ||||||||||||||||||||||
| Foreign Currency Translation Adjustment | – | – | – | – | – | – | 111,330 | 111,330 | ||||||||||||||||||||||||
| Net Loss | – | – | – | – | – | (7,394,648 | ) | – | (7,394,648 | ) | ||||||||||||||||||||||
| Balance, June 30, 2021 | 300,791,335 | $ | 300,792 | – | $ | – | $ | 724,924,857 | $ | (553,210,915 | ) | $ | (51,590 | ) | $ | 171,963,144 | ||||||||||||||||
| Share Based Compensation | – | – | – | – | 5,552,866 | – | – | 5,552,866 | ||||||||||||||||||||||||
| Unrealized Loss on Marketable Securities | – | – | – | – | – | – | (194,409 | ) | (194,409 | ) | ||||||||||||||||||||||
| Foreign Currency Translation Adjustment | – | – | – | – | – | – | (91,253 | ) | (91,253 | ) | ||||||||||||||||||||||
| Net Loss | – | – | – | – | – | (9,253,380 | ) | – | (9,253,380 | ) | ||||||||||||||||||||||
| Balance, September 30, 2021 | 300,791,335 | $ | 300,792 | – | – | $ | 730,477,723 | $ | (562,464,295 | ) | $ | (337,252 | ) | $ | 167,976,968 | |||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid-In | Accumulated | Other Comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||
| Balance, December 31, 2019 | 21,877,724 | $ | 21,878 | 1,097 | $ | 1 | $ | 75,117,076 | $ | (66,047,135 | ) | $ | (5,118 | ) | $ | 9,086,702 | ||||||||||||||||
| Value of Preferred Stock Conversion | 3,171,428 | 3,172 | (667 | ) | (1 | ) | (3,171 | ) | – | – | – | |||||||||||||||||||||
| Proceeds from Securities Purchase Agreement, Net | 4,000,000 | 4,000 | – | – | 911,296 | – | – | 915,296 | ||||||||||||||||||||||||
| Proceeds From Warrant Exchange, net | 500,000 | 500 | – | – | 169,500 | – | – | 170,000 | ||||||||||||||||||||||||
| Issuance of Common Stock for Services | 43,077 | 43 | – | – | 27,957 | – | – | 28,000 | ||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 23,814 | – | – | 23,814 | ||||||||||||||||||||||||
| Net Loss | – | – | – | – | – | (5,835,944 | ) | – | (5,835,944 | ) | ||||||||||||||||||||||
| Balance, March 31, 2020 | 29,592,229 | $ | 29,593 | 430 | $ | – | $ | 76,246,472 | $ | (71,883,079 | ) | $ | (5,118 | ) | $ | 4,387,868 | ||||||||||||||||
| Proceeds from Securities Purchase Agreement, Net | 47,500,000 | 47,500 | – | – | 43,792,875 | – | – | 43,840,375 | ||||||||||||||||||||||||
| Issuance of Common Stock for Services | 49,610 | 50 | – | – | 190,950 | – | – | 191,000 | ||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 328,497 | – | – | 328,497 | ||||||||||||||||||||||||
| Value of Preferred Stock Conversion | 1,571,430 | 1,571 | (330 | ) | – | (1,571 | ) | – | – | – | ||||||||||||||||||||||
| Derivative Liability Adjustment | – | – | – | – | 171,835,729 | – | – | 171,835,729 | ||||||||||||||||||||||||
| Note Conversion | 65,476,190 | 65,476 | – | – | (120,662 | ) | – | – | (55,186 | ) | ||||||||||||||||||||||
| Warrant Exercise | 74,666,711 | 74,667 | – | – | 8,159,358 | (1,840,384 | ) | – | 6,393,641 | |||||||||||||||||||||||
| Warrant Revaluation | – | – | – | – | 219,034,621 | – | – | 219,034,621 | ||||||||||||||||||||||||
| Warrants Issued for Services | – | – | – | – | 519,513 | – | – | 519,513 | ||||||||||||||||||||||||
| Net Loss | – | – | – | – | – | (383,258,002 | ) | – | (383,258,002 | ) | ||||||||||||||||||||||
| Balance, June 30, 2020 | 218,856,170 | $ | 218,857 | 100 | $ | – | $ | 519,985,782 | $ | (456,981,465 | ) | $ | (5,118 | ) | $ | 63,218,056 | ||||||||||||||||
| Issuance of Common Stock for Services | 157,060 | 157 | – | – | 131,344 | – | – | 131,501 | ||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 411,825 | – | – | 411,825 | ||||||||||||||||||||||||
| Warrant Exercise | 16,670 | 16 | – | – | 54,995 | – | – | 55,011 | ||||||||||||||||||||||||
| Warrants Issued for Services | – | – | – | – | 1,327,646 | – | – | 1,327,646 | ||||||||||||||||||||||||
| Net Loss | – | – | – | – | – | (2,007,209 | ) | – | (2,007,209 | ) | ||||||||||||||||||||||
| Balance, September 30, 2020 | 219,029,900 | $ | 219,030 | 100 | $ | (0 | ) | 521,911,592 | $ | (458,988,674 | ) | $ | (5,118 | ) | $ | 63,136,830 | ||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid-In | Treasury Stock | Accumulated | Accumulated Other Comprehensive | Non- Controlling | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Loss | Interest | Total | ||||||||||||||||||||||||||
| Balance, December 31, 2020 | 258,438,514 | $ | 258 | – | $ | – | $ | 588,501 | – | $ | – | $ | (469,557 | ) | $ | (5 | ) | $ | – | $ | 119,197 | |||||||||||||||
| Shares Issued for ChizComm acquisition | 1,980,658 | 2 | – | – | 3,525 | – | – | – | – | – | 3,527 | |||||||||||||||||||||||||
| Proceeds From Warrant Exchange, net | 39,740,500 | 40 | – | – | 57,225 | – | – | – | – | – | 57,265 | |||||||||||||||||||||||||
| Issuance of Common Stock for Services | 161,986 | – | – | – | 241 | – | – | – | – | – | 241 | |||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 2,573 | – | – | – | – | – | 2,573 | |||||||||||||||||||||||||
| Warrant Incentive | – | – | – | – | 69,138 | – | – | – | – | – | 69,138 | |||||||||||||||||||||||||
| Net Loss | – | – | – | – | – | – | – | (76,259 | ) | – | – | (76,259 | ) | |||||||||||||||||||||||
| Balance, March 31, 2021 | 300,321,658 | $ | 300 | – | $ | – | $ | 721,203 | – | $ | – | $ | (545,816 | ) | $ | (5 | ) | $ | – | $ | 175,682 | |||||||||||||||
| Issuance of Common Stock for Services | 469,677 | 1 | – | – | 728 | – | – | – | – | – | 729 | |||||||||||||||||||||||||
| Share Based Compensation | – | – | – | – | 2,994 | – | – | – | – | – | 2,994 | |||||||||||||||||||||||||
| Other Comprehensive Loss | – | – | – | – | – | – | – | – | (47 | ) | – | (47 | ) | |||||||||||||||||||||||
| Net Loss | – | – | – | – | – | – | – | (7,395 | ) | – | – | (7,395 | ) | |||||||||||||||||||||||
| Balance, June 30, 2021 | 300,791,335 | $ | 301 | – | $ | – | $ | 724,925 | – | $ | – | $ | (553,211 | ) | $ | (52 | ) | $ | – | $ | 171,963 | |||||||||||||||
| Share Based Compensation | – | – | – | – | 5,553 | – | – | – | – | – | 5,553 | |||||||||||||||||||||||||
| Other Comprehensive Loss | – | – | – | – | – | – | – | – | (285 | ) | – | (285 | ) | |||||||||||||||||||||||
| Net Loss | – | – | – | – | – | – | – | (9,253 | ) | – | – | (9,253 | ) | |||||||||||||||||||||||
| Balance, September 30, 2021 | 300,791,335 | $ | 301 | – | $ | – | $ | 730,478 | – | $ | – | $ | (562,464 | ) | $ | (337 | ) | $ | – | $ | 167,978 | |||||||||||||||
(1) Prior quarter amounts have been revised to correct
The accompanying notes are an error in previously issuedintegral part of these financial statements. See Note 2 of the Notes to unaudited
| 8 |
Genius Brands International, Inc.
Condensed Consolidated Financial Statements for further information.of Cash Flows
Nine Months Ended September 30, 2022 and September 30, 2021
(in thousands)
(unaudited)
| September 30, 2022 | September 30, 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | (27,949 | ) | $ | (92,907 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
| Amortization of Film and Television Costs | 5,100 | 1,073 | ||||||
| Depreciation and Amortization of Property, Equipment & Intangible Assets | 1,857 | 426 | ||||||
| Amortization of Right of Use Asset | 1,345 | 202 | ||||||
| Share Based Compensation Expense | 9,918 | 11,120 | ||||||
| Amortization of Premium on Marketable Securities | 807 | 334 | ||||||
| Loss on Revaluation of Equity Investment in Your Family Entertainment AG | 1,170 | – | ||||||
| Loss on Foreign Currency Transactions | 2,584 | – | ||||||
| Gain on Warrant Revaluation | (434 | ) | (103 | ) | ||||
| Interest Incurred on Debt | 1,190 | – | ||||||
| Realized Loss on Marketable Securities | 160 | 25 | ||||||
| Warrant Incentive Expense | – | 69,139 | ||||||
| Stock Issued for Services | 312 | 41 | ||||||
| Other | 73 | (78 | ) | |||||
| Decrease (Increase) in Operating Assets: | ||||||||
| Accounts Receivable, net | 5,942 | 3,047 | ||||||
| Other Receivables | 272 | (179 | ) | |||||
| Tax Credits Earned (less capitalized) | (8,166 | ) | – | |||||
| Tax Credits Received | 3,874 | – | ||||||
| Film and Television Costs, net | (7,388 | ) | (4,810 | ) | ||||
| Prepaid Expenses & Other Assets | (326 | ) | (654 | ) | ||||
| Increase (Decrease) in Operating Liabilities: | ||||||||
| Accounts Payable | (3,828 | ) | (2,886 | ) | ||||
| Accrued Salaries & Wages | 215 | 183 | ||||||
| Accrued Expenses | (1,057 | ) | (325 | ) | ||||
| Accrued Production Costs | (1,654 | ) | – | |||||
| Participations Payable | (498 | ) | 788 | |||||
| Deferred Revenue | (6,472 | ) | (494 | ) | ||||
| Lease Liability | (365 | ) | (136 | ) | ||||
| Due to Related Party | (25 | ) | 229 | |||||
| Other Liabilities | 506 | – | ||||||
| Net Cash Used in Operating Activities | (22,837 | ) | (15,965 | ) | ||||
| 9 |
| Cash Flows from Investing Activities: | ||||||||
| Cash Payment for Wow, net of Cash Acquired | (37,311 | ) | – | |||||
| Cash Payment for Equity Investment in YFE | (9,540 | ) | – | |||||
| Cash Payment for Ameba, net of Cash Acquired | (3,893 | ) | – | |||||
| Cash Payment for ChizComm, net of cash acquired | – | (7,789 | ) | |||||
| Investment in Stan Lee Universe, LLC | – | (1,000 | ) | |||||
| Investment in Marketable Securities | – | (305,387 | ) | |||||
| Note Receivable from Related Party | (1,419 | ) | – | |||||
| Proceeds from Principal Collections on Marketable Securities | 6,445 | 1,762 | ||||||
| Proceeds from Sales of Marketable Securities | 8,836 | 177,110 | ||||||
| Purchase of Property & Equipment | (459 | ) | (209 | ) | ||||
| Investment in Intangible Assets | (21 | ) | (9 | ) | ||||
| Net Cash Used in Investing Activities | (37,362 | ) | (135,522 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Margin Loan | 63,165 | – | ||||||
| Repayments of Margin Loan | (7,802 | ) | – | |||||
| Proceeds from Production Facilities | 7,455 | – | ||||||
| Repayments of Production Facilities | (3,984 | ) | (1,100 | ) | ||||
| (Repayment)/Proceeds from Bank Indebtedness | 760 | – | ||||||
| Finance Lease Payments | (920 | ) | – | |||||
| Distributions to Noncontrolling Interests | (1,200 | ) | – | |||||
| Debt Issuance Costs | (33 | ) | – | |||||
| (Repayment)/Proceeds from Note Payable | (19 | ) | 116 | |||||
| Shares Withheld for Taxes on Vested Restricted Shares | (3 | ) | – | |||||
| Repayment of Payroll Protection Program | – | (366 | ) | |||||
| Proceeds from Warrant Exchange, net | – | 57,265 | ||||||
| Net Cash Provided by Financing Activities | 57,419 | 55,915 | ||||||
| Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | (187 | ) | – | |||||
| Net Increase/(Decrease) in Cash, Cash Equivalents and Restricted Cash | (2,967 | ) | (95,572 | ) | ||||
| Beginning Cash, Cash Equivalents and Restricted Cash | 10,060 | 100,456 | ||||||
| Ending Cash, Cash Equivalents and Restricted Cash | $ | 7,093 | $ | 4,884 | ||||
| Schedule of Non-Cash Financing and Investing Activities | ||||||||
| Shares issued for Wow Acquisition | $ | 11,554 | $ | – | ||||
| FV of Replacement Options Granted Related to Wow Acquisition | $ | 1,213 | $ | – | ||||
| Liability for Treasury Stock Not Yet Settled | $ | 285 | ||||||
| Shares issued for ChizComm acquisition | $ | – | $ | 3,527 | ||||
| Liability for Acquisition Earnout Shares | $ | – | $ | 7,210 | ||||
| Issuance of Common Stock for Services | $ | – | $ | 728 |
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2021 and September 30, 2020
(unaudited)
| September 30, 2021 | September 30, 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | (92,906,971 | ) | $ | (391,101,155 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
| Amortization of Film and Television Costs | 1,073,154 | 395,073 | ||||||
| Depreciation and Amortization Expense | 425,891 | 379,047 | ||||||
| Right of Use Asset Amortization | 202,020 | 0 | ||||||
| Amortization of Premium on Marketable Securities | 333,716 | 0 | ||||||
| Accretion of Discount on Secured Convertible Notes | 0 | (7,288 | ) | |||||
| Bad Debt | (76,078 | ) | 92,659 | |||||
| Stock Issued for Services | 41,000 | 350,501 | ||||||
| Share Based Compensation Expense | 11,120,187 | 764,137 | ||||||
| Warrant Revaluation (Gain) Loss | (103,046 | ) | 210,672,085 | |||||
| Loss on Lease Termination | 0 | 342,060 | ||||||
| Conversion Option Revaluation Expense | 0 | 171,835,729 | ||||||
| Debt Discount in Excess of the Principal | 0 | 1,031,852 | ||||||
| Warrant Incentive Expense | 69,138,527 | 0 | ||||||
| Realized Loss on Marketable Securities | 24,779 | 0 | ||||||
| Decrease (Increase) in Operating Assets: | ||||||||
| Accounts Receivable, net | 3,046,597 | 1,608,314 | ||||||
| Other Receivable | (179,026 | ) | 0 | |||||
| Inventory, net | 0 | 9,277 | ||||||
| Prepaid Expenses & Other Assets | (631,240 | ) | (55,750 | ) | ||||
| Lease Deposits | (23,348 | ) | 325,000 | |||||
| Film and Television Costs, net | (4,809,700 | ) | (1,789,000 | ) | ||||
| Increase (Decrease) in Operating Liabilities: | ||||||||
| Accounts Payable | (2,886,249 | ) | (458,974 | ) | ||||
| Accrued Salaries & Wages | 183,118 | 111,961 | ||||||
| Deferred Revenue | (493,538 | ) | 197,054 | |||||
| Participations Payable | 787,929 | 381,212 | ||||||
| Lease Liability | (136,085 | ) | (159,247 | ) | ||||
| Due to Related Party | 228,511 | (432,864 | ) | |||||
| Accrued Expenses | (325,499 | ) | 32,491 | |||||
| Net Cash Used in Operating Activities | (15,965,351 | ) | (5,475,826 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Investment in Stan Lee Universe, LLC | (1,000,000 | ) | (500,000 | ) | ||||
| Cash Payment for ChizComm, net of cash acquired | (7,788,877 | ) | 0 | |||||
| Investment in Marketable Securities | (305,387,221 | ) | 0 | |||||
| Proceeds from Principal Collections on Marketable Securities | 1,762,148 | 0 | ||||||
| Proceeds from Sales of Marketable Securities | 177,109,646 | 0 | ||||||
| Investment in Intangible Assets, net | (8,200 | ) | (22,500 | ) | ||||
| Investment in Property & Equipment | (209,191 | ) | (32,426 | ) | ||||
| Net Cash Used in Investing Activities | (135,521,695 | ) | (554,926 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Sale of Securities Purchase Agreement, net | 0 | 44,755,671 | ||||||
| Proceeds From Warrant Exchange | 57,264,656 | 5,874,329 | ||||||
| Proceeds from Senior Secured Convertible Notes, net | 0 | 6,098,000 | ||||||
| (Repayment)/Proceeds from Payroll Protection Program | (366,267 | ) | 366,267 | |||||
| Collection Of Investor Notes | 0 | 3,600,000 | ||||||
| Repayment of Secured Convertible Notes | 0 | (2,866,664 | ) | |||||
| Proceeds from Notes Payable | 116,195 | 0 | ||||||
| Note Conversion Costs | 0 | (55,186 | ) | |||||
| Repayment of Production Facility, net | (1,099,713 | ) | (1,585,220 | ) | ||||
| Net Cash Provided by Financing Activities | 55,914,871 | 56,187,197 | ||||||
| Net (Decrease)/Increase in Cash and Cash Equivalents | (95,572,175 | ) | 50,156,445 | |||||
| Beginning Cash and Cash Equivalents | 100,456,324 | 305,121 | ||||||
| Ending Cash and Cash Equivalents | $ | 4,884,149 | $ | 50,461,566 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash Paid for Interest | $ | 15,565 | $ | 468,468 | ||||
Schedule of Non-Cash Financing and Investing Activities | ||||||||
| Issuance of common stock for services | $ | 728,000 | $ | 0 | ||||
| Shares issued for ChizComm acquisition | $ | 3,527,027 | $ | 0 | ||||
| Liability for Acquisition Earnout Shares | $ | 7,210,000 | $ | 0 | ||||
| Senior Convertible notes were converted into shares of Common Stock, warrants were exercised on a cashless basis resulting in the issuance of shares of Common Stock | $ | 0 | $ | 13,750,000 | ||||
| Warrant Derivative Liability | $ | 0 | $ | 10,229,852 | ||||
The accompanying notes are an integral part of these financial statements.
Genius Brands International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021 2022
(unaudited)
Note 1: Organization and Business
Organization and Nature of Business
Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a publicly traded (NASDAQ:GNUS) global content and brand management company that creates, produces, licenses, and licensesbroadcasts timeless and educational, multimedia content.animated content for children. Led by experienced industry personnel, we distribute ourthe Company distributes its content in all formats as well asprimarily on streaming platforms and television and licenses its properties for a broad range of consumer products based on ourthe Company’s characters. The Company is a leading “work for hire” producer for many of the streaming outlets and IP holders. In the children'schildren’s media sector, ourthe Company’s portfolio features “content with a purpose” for toddlers to tweens, which providesproviding enrichment as well as entertainment. New intellectual property titles include Stan Lee’s Superhero Kindergarten producedThe Company’s programs, along with Stan Lee’s Pow! Entertainment, and Oak Productions. Arnold Schwarzenegger lends his voice as the lead and is also an Executive Producer on the series. Another new offering is KC Pop Quiz, a live action game show featuring kids as contestants. The show is hosted by Casey Simpson, a prominent influencer and former Nickelodeon star. Both KC Pop Quiz and Superhero Kindergartenthose programs it acquires and/or licenses, are being broadcast in the United States on the Company’s wholly-owned distribution outlet, advertisement supported video on demand (“AVOD”) service, Kartoon Channel!. Other newer series include, the preschool property Rainbow Rangers, which debuted in November 2018and its subscription video on Nickelodeondemand (“SVOD”) distribution outlets, Kartoon Channel! Kidaverse, and which was renewed for a second seasonAmeba TV. These streaming services are available on Apple TV, Apple iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Zumo, Pluto, Samsung Smart TVs, LG Smart TVs, as well as YouTube, among other popular platforms. The Company’s in-house owned and preschool propertyproduced shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama which debuted on Netflixstarring Jennifer Garner, Rainbow Rangers, KC Pop Quiz, and the upcoming Shaq’s Garage starring Shaquille O’Neal, scheduled to debut in January 2018 and was renewed by Netflix for a second season.the fourth quarter of 2022. The Company’s library titles include the award-winning Baby Genius, adventure comedy Thomas Edison'sEdison’s Secret Lab®Lab®, and Warren Buffett’s Secret Millionaires Club, created with and starring iconic investor Warren Buffett, which is distributed acrossBuffett.
The Company also licenses its programs to other services worldwide, in addition to the operation of its own channels, including but not limited to Netflix, HBO Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.
Through the Company’s Genius Brands Networkrecent investment in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Slingthe Frankfurt Exchange (RTV-Frankfurt), it has gained access to one of the largest animation catalogues in Europe with over 3,000 titles, and Zumo, as well as Connected TV. In July 2020, the Company entered into a binding term sheet with POW, Inc. (“POW!”) inglobal distribution network, which currently covers over 60 territories worldwide and, which the Company agreed to formis currently in process of rebranding as Kartoon Channel! Worldwide.
The Company also recently acquired WOW Unlimited Media Inc. (“Wow”), and through that acquisition, established an entityaffiliate relationship with POW! to exploit certain rightsMainframe Studios, which is one of the largest animation producers in intellectual property created bythe world. In addition, Wow owns Frederator Networks Inc. (“Frederator”) and its Channel Frederator Network, the largest animation focused multi-channel network on YouTube, with over 2,500 content creators and currently averages over 1 billion views per month.
The Company owns a select amount of valuable IP, including among them a controlling interest in Stan Lee as well asUniverse (“SLU”), through which it controls the name, likeness, signature, and likeness of Stan Lee. The entity is called “Stan Lee Universe, LLC.” POW!all consumer product and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021. This agreement enables the Company to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensingIP rights to Stan Lee and over 100 original(the “Stan Lee Assets”). The Company plans to launch a Stan Lee creations, from which Genius Brands plansCentennial program of merchandise set to develop and license multiple properties each year. coincide with Stan Lee’s 100th birthday on December 28, 2022.
The Company isalso owns Beacon Media, the largest media buying service for children in production on a new animated series starring Shaquille O’Neal called Shaq’s Garage.North America. Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka, Moose Toys, and JAKKS Pacific.
In addition, the Company acts as licensing agentrecently acquired the Canadian company Ameba TV (“Ameba”), which distributes a profitable SVOD channel for Penguin Young Readers, a division of Penguin Random House LLC which owns or controlskids and is now expected to become the underlying rights to Llama Llama, leveraging the Company’s existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.
The Company commenced operations in 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 2011, the Company reincorporated in Nevada and changed its name to Genius Brands International, Inc. (the “Reincorporation”). In connection with the Reincorporation, the Company changed its trading symbol to “GNUS.”
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 closingbackbone of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiarynewly launched SVOD channel of the Company.
As more fully discussed in Note 3, on February 1, 2021, the Company, through GBI Acquisition LLC, a New Jersey limited liability company, and 2811210 Ontario Inc.Kartoon Channel!, a company organized under the laws of the Province of Ontario, two wholly-owned subsidiaries of the Company, purchased the outstanding equity interests of ChizComm Ltd., a corporation organized in Canada, and ChizComm USA Corp., a New Jersey corporation.Kartoon Channel! Kidaverse.
The combination of the Company, its investment in YFE, its acquired companies Wow, Ameba and Beacon Media provide the Company with world class animation production studios, a catalogue representing thousands of hours of premium global content for children, a broadcast system for delivering that content and an in-house Consumer Products Licensing infrastructure to fully exploit the content.
Recent Investments
On January 13, 2022, the Company completed its acquisition of the issued and outstanding shares of Ameba and gained access to its kid-safe SVOD platform technology and 13,000 episodes of content. Refer to Note 3 for additional details.
On April 6, 2022, the Company completed its acquisition of Wow. On October 26, 2021, the Company’s wholly-owned subsidiary, 1326919 B.C. LTD., a corporation existing under the laws of the Province of British Columbia and Wow, entered into an Arrangement Agreement to effect a plan of arrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. The Company purchased 100% of Wow’s issued and outstanding shares for approximately $38.3 million in cash and shares of the Company’s common stock. Refer to Note 3 for additional details.
Following the initial equity investment in YFE during the fourth quarter of 2021, the Company participated in a mandatory tender offer for the remaining publicly traded shares held by YFE shareholders. Upon the expiration of the offer on February 14, 2022, the Company purchased an additional shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders were converted into shares of YFE common stock, 304,631 of which were purchased by the Company, at 2.00 EUROS per share or $0.6 million. On April 5, 2022, the Company exercised its subscription rights to purchase an additional shares of YFE’s common stock at 3.00 EUROS per share, or $2.7 million, increasing the number of YFE’s outstanding shares to . As of September 30, 2022, the Company’s ownership in YFE is 48.0%.
Liquidity
During the nine months ended September 30, 2021,2022, the Company’s cash, and cash equivalents and marketable security positions increasedrestricted cash decreased by $29,768,1613.0 million. CashThe decrease was primarily due to cash used in excessinvestment activities, inclusive of immediate requirements is investedthe Wow and Ameba acquisitions and the YFE investments, totaling $35.9 million, $24.2 million used for operational activities, offset by $57.4 million of financing from the margin loan, production facilities and bank indebtedness assumed in accordance with the Company’s investment policy, primarilyWow Acquisition.
As of September 30, 2022, the Company held marketable securities with a viewfair value of $89.9 million as available-for-sale, a decrease of $22.7 million as compared to December 31, 2021 primarily due to the Company selling $8.8 million of its held securities during the period, a decrease in fair value of $6.4 million recorded as an unrealized loss, additional prepayment proceeds of $6.4 million on principals for liquiditycertain mortgage-backed securities, a realized loss of $0.2 million and capital preservation. Accordingly,$0.8 million of continued amortization of premiums during the period. The available-for-sale securities consistingconsist principally of corporate and government debt securities and money market funds classified as cash equivalents are also available as a source of liquidity.
The Company borrowed an additional $63.2 million from its investment margin account during the nine months ended September 30, 2022 and repaid $7.8 million with cash received from sales and/or redemptions of its marketable securities. During the nine months ended September 30, 2021,2022, the borrowed amounts were used to finance the Company’s additional investments in YFE and the closing of the acquisitions of Ameba and Wow, in each case pledging certain of its marketable securities as collateral. During the three months ended September 30, 2022, the additional borrowings of $4.2 million related to quarterly operational costs. The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 0.65% with interest only payable monthly. The weighted average interest rate was 2.65% on an average margin loan balance of $61.2 million during the three months ended September 30, 2022. The weighted average interest rate was 1.54% on an average margin loan balance of $43.4 million during the nine months ended September 30, 2022. The Company incurred interest expense of $0.6 million during the nine months ended September 30, 2022. The investment margin account borrowings do notmature but are payable on demand as the custodian can issue a margin call at any time, therefore the margin loan is recorded as a current liability on the Company’s condensed consolidated balance sheets.
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Upon the acquisition of Wow, the Company purchased marketable securitiesassumed certain credit facilities (the “Facilities”) with a Canadian bank. The Facilities are comprised of: (i) a $5.0 million CAD ($3.9 million USD) revolving demand facility, (ii) an $8.0 million CAD ($6.2 million USD) equipment lease line, (iii) a treasury risk management facility of up to $128,277,5750.5 million, net CAD ($0.4 million USD) for foreign exchange forward contracts, and (iv) interim financing facilities for specific production titles. The Facilities are guaranteed by the Company and the security reflects substantially all of redemptions during the period.tangible and intangible assets of the Company and its subsidiary guarantors subject to permitted encumbrances, including a combination of federal and provincial tax credits, other government incentives, production service agreements, and license agreements. The Facilities are generally repayable on demand and are subject to customary affirmative and negative covenants, default provisions, representations and warranties and other terms and conditions. Refer to Note 14 for additional details.
Historically, the Company has incurred net losses. For the three months ended September 30, 20212022 and September 30, 2020,2021, the Company reported net losses of $9,253,380$11.2 million and $2,007,209,$9.3 million, respectively. For the nine months ended September 30, 20212022 and September 30, 2020,2021, the Company reported net losses of $92,906,971$29.1 million and $391,101,155,$92.9 million, respectively. The Company reported net cash used in operating activities of $15,965,351$22.8 million and $5,475,826$16.0 million for the nine months ended September 30, 20212022 and September 30, 2020,2021, respectively. As of September 30, 2021,2022, the Company had an accumulated deficit of $562,464,295$624.9 million and total stockholders’ equity of $167,976,968.$128.5 million. As of September 30, 2021,2022, the Company had current assets of $143,046,171,$143.6 million, including cash and cash equivalents of $4,884,149 and marketable securities of $125,340,336,$7.1 million and current liabilities of $11,607,299.$111.2 million. The Company had working capital of $131,438,87232.4 million as of September 30, 2021,2022, compared to working capital of $101,387,183115.1 million as of December 31, 2020.2021.
On January 28, 2021, the Company entered into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of the Company’s common stock at their original exercise price of $1.55 per share (the “Exercise”). The Company received approximately $61.6 million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent and received a cash fee of approximately $4,286,844. In consideration for the exercise of the Existing Warrants for cash, the exercising holders received new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”) at an exercise price of $2.37 per share, exercisable immediately, with an exercise period of five years from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends and other language typical for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock underlying the New Warrants is effective after six months). The Company was required to register the resale of the shares of common stock issuable upon exercise of the New Warrants.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 20202021 has been derived from audited statements. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“US GAAP”) for complete financial statements and should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed with the Securities and Exchange Commission on March 31, 2021.April 6, 2022.
The accompanying condensed consolidated financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to state fairly the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Loss, Statements of Stockholders' Equity, and Statements of Cash Flows for all periods presented.
Certain prior period amounts have been reclassified for consistency with the current period presentation. These relcassificationsreclassifications had no effect on the reported results of operations.
Correction of Error
During the third quarter of fiscal 2021, the Company discovered an error in the unaudited Condensed Consolidated Statements of Comprehensive Loss and Condensed Consolidated Statement of Stockholder’s Equity for the three months ended June 30, 2021. The reported line item for Net Unrealized Loss on Marketable Securities improperly included the amount of purchased and accrued interest. As a result of this error, Other Comprehensive Loss was overstated by $352,098 for the three and six months ended June 30, 2021. Net Unrealized Loss on Marketable Securities was previously reported as $(509,625) for the three months and six months ended June 30, 2021. The error did not have a material impact on prior period Condensed Consolidated Statement of Operations. Corrected amounts are included in the comparative periods presented in this Form 10-Q.
Segments
The Company determined its operating segments on the same basis that it assesses performance and makes operating decisions. The Company principally operates in two distinct business segments: the Content Production & Distribution Segment, which produces and distributes children’s content, and the Media Advisory & Advertising Services Segment, which provides media and advertising services. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company has identified its Chief Executive Officer as the CODM. The segments are organized around the products and services provided to customers and represent the Company’s reportable segments. Prior to the acquisition of ChizComm Ltd.the Beacon Media Group (formerly “ChizComm”), the Company’s operations were comprised of a single segment.
The accounting policies for each segment are the same as for the Company as a whole. Refer to Note 23 for additional information.
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Principles of Consolidation and Basis of Presentation
The accompanyingCompany’s condensed consolidated financial statements include the accounts of Genius Brands International, Inc., and its wholly-owned subsidiaries. The Company consolidates all majority-owned subsidiaries, A Squared Entertainment LLC, Llama Productions LLC, Rainbow Rangers Productions LLC, Superhero Kindergarten LLC, ChizComm Beacon Media LLC, ChizComm Ltd., Stan Lee Universe LLC, Shaq’s Garage Productions LLCinvestments in entities in which it has controlling influence and KCPQ Productions LLC.variable interest entities where the Company has been determined to be the primary beneficiary. Minority interests are recorded as non-controlling interests. Non-consolidated investments are accounted for using the equity method or the fair value option when the Company has the ability to significantly influence the operating decisions of the investee. When the Company does not have the ability to significantly influence the operating decisions of an investee, these equity securities are classified as either marketable investment securities or other investments and recorded at fair value with changes recognized within other Income (expense) on the consolidated statements of operations and comprehensive income (loss). All significant inter-company balancesintercompany accounts and transactions have been eliminated in consolidation.
Business Combinations
The condensed consolidated financial statements have been prepared using the acquisition method of accountingCompany accounts for transactions that are classified as business combinations in accordance with the Financial Accounting Standards BoardBoards’ (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). Once a business is acquired, the Company allocates the fair value of the purchase consideration to the tangible assets, liabilities, and ASC 810 intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. As required, preliminary fair values are determined upon acquisition, with the final determination of the fair values being completed within the one-year measurement period from the date of acquisition. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets requires that the Company use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. The Company estimates the fair value based upon assumptions management believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.
ConsolidationVariable Interest Entities
The Company holds an interest in Stan Lee University (“SLU”), an entity that is considered a variable interest entity (“VIE”). The variable interest relates to 50% ownership in the entity that is comprised of the Stan Lee Assets (as defined below) and that requires additional financial support from the Company to continue operations. The Company’s total net cash investment in SLU as of September 30, 2022, is $0.8 million. In addition, the Company has incurred $0.4 million of costs incurred for marketing and operational services. The Company is considered the primary beneficiary and is required to consolidate the VIE.
In evaluating whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and the Company’s decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.
In determining whether the Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, the Company evaluates all of its economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings (losses), subordination of the Company’s interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of the Company’s economic interests is a matter that requires the exercise of professional judgment. The Company continuously assesses whether it is the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in the Company consolidating its collaborators or partners.
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Use of Estimates
The preparation of financial statements in conformity with 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.
Foreign Currency
The Company considers the U.S. dollar to be its functional currency for its United States based operations. The Company considers the Canadian dollar to be its functional currency for its Canada based operation.operations. Accordingly, the financial information is translated from the Canadian dollar to the U.S. dollar for inclusion in the Company’s consolidated financial statements. Revenue and expenses are translated at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are included as a component of accumulated other comprehensive income (loss), net in stockholders’ equity.
Foreign exchange transaction gains and losses are included in other income (expense), net in the condensed consolidated statements of operations.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of September 30, 2021,2022 and December 31, 2020,2021, the Company had cash and cash equivalents of $4,884,1497.1 million and $100,456,3242.1 million, respectively. During
Tax Credits Receivable
The Federal and certain Provincial governments in Canada provide programs that are designed to assist film and television production in the threeform of refundable tax credits or other incentives.
Estimated amounts receivable in respect of refundable tax credits are recorded as an offset to the related production operating cost, or to investment in film and television programming when the conditions for eligibility of production assistance based on the government’s criteria are met, the qualifying expenditures are made and there is reasonable assurance of realization. Determination of when and if the conditions of eligibility have been met is based on management’s judgment, and the amount recognized is based on management’s estimates of qualifying expenditures. The ultimate collection of previously recorded estimates is subject to ordinary course audits from the Canada Revenue Agency (“CRA”) and Provincial agencies. Changes in administrative policies by the CRA or subsequent review of eligibility documentation may impact the collectability of these estimates. The Company continuously reviews the results of these audits to determine if any circumstances arise that in management’s judgment would result in a previously recognized amount to be considered no longer collectible.
The Company classifies the tax credits receivable as current based on their normal operating cycle. Government assistance, in the form of refundable tax credits, is relied upon as a key component of production financing. These amounts are claimed from the CRA through the submission of income tax returns and can take up to 18 to 24 months endedfrom the date of the first tax credit dollar being earned to being received. As this financing is fundamental to the Company’s ability to produce animated productions and generate revenue in the normal course of business, the normal operating cycle for such assets is considered to be a 12-to-24-month period, or the time it takes for the CRA to assess and refund the tax credits earned.
As of September 30, 2021,2022, the Company transferredhad recorded $2,600,00026.4 million of cash deposits fromin current tax credit receivables related to Wow’s film and television productions on its investment account to money market funds, classified as cash equivalents on thecondensed consolidated balance sheets.sheet. The Company does not have an allowance on tax credits receivable as of September 30, 2022, based on historical experience and future expectations.
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Marketable Debt Securities
The Company purchases high quality, investment grade securities from diverse issuers. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, the Company classifies its investments in marketable securities as “available-for-sale” and records these investments at fair value. The securities are available to support current operations and, accordingly, the Company classifies the investments as current assets without regard to their contractual maturity.
Unrealized gains or losses on available-for-sale securities for which the Company expects to fully recover the amortized cost basis are recognized in accumulated other comprehensive (loss) income, a component of stockholders’ equity. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized as a loss in the condensed consolidated statements of operations.
The Company reports accrued interest receivable separately from the available-for-sale securities and has elected not to measure an allowance for credit losses for accrued interest receivables. Uncollectible accrued interest is written off when the Company determines that no additional interest payments will be received. ApproximatelyClassified within Other Receivables on the condensed consolidated balance sheets, approximately $514,0990.4 million in interest income was receivable as of September 30, 2021, classified within Other Receivables on the condensed consolidated balance sheets.2022 and December 31, 2021.
Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums accounted for by the level yield method with no pre-payment anticipated.
Equity-Method Investments
When the Company does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.
In general, the Company accounts for investments acquired at fair value. See Note 5 for further information about the Company’s investment in YFE’s equity securities accounted for under the fair value option.
Allowance for Doubtful Accounts
Accounts receivable are presented on the balance sheets net of estimated uncollectible amounts. The carrying amounts of trade accounts receivable and unbilled accounts receivable represents the maximum credit risk exposure of these assets. The Company assessesevaluates its accounts receivable balances on a quarterly basis to determine collectability based on an assessment of past events, current economic conditions, and forecasts of future events. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses based on historical experience and future expectations.losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful.
The Company had an allowancelimits its exposure to this credit risk through a credit approval process and credit monitoring procedures. In addition, Wow’s contracts with customers usually require upfront and milestone payments throughout the production process. The Company’s customer base is mainly comprised of major Canadian, American, and worldwide studios, distributors, broadcasters, toy companies and AVOD and SVOD platforms that have been customers for doubtful accounts of $119,754 as of September 30, 2021 and $43,676 as of December 31, 2020.several years.
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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 seventen 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 consolidated statementstatements of operations.
Right of Use Leased Assets
Effective January 1, 2019, the Company adopted ASC 842, Leases, using the modified retrospective transition method applied at the effective date of the standard.
The Company determines at contract inception whether the arrangement is a lease based on its ability to control a physically distinct asset and determines the classification of the lease as either operating or finance.finance under FASB ASC 842, Leases (“ASC 842”). For all leases, the Company combines all components of the lease including related nonlease components as a single component. Operating leases are reflected as operating lease right of use (“ROU”) assets and operating lease liabilities and finance leases are reflected as finance lease ROU assets and finance lease liabilities in the consolidated balance sheets. The Company does not have any finance leases.
Operating leaseLease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company estimates the incremental borrowing rate to reflect the profile of collateralized borrowing over the expected term of the leases based on the information available at the later of the initial date of adoption, oron the lease commencement date.date or for leases existing upon the date of initial adoption of ASC 842, the date of adoption. The implicit rates within the Company’s existing finance leases are determinable and therefore used to determine the present value of finance lease payments.
The operating lease ROU asset also includes any lease payments made prior to lease commencement date and excludes lease incentives. Lease terms may include options to extend or terminate the lease when the Company is reasonably certain that it will exercise the option. Lease expense is recognized on a straight-line basis over the lease term in the consolidated statementstatements of operations. Lease incentives are recognized as a reduction to the lease expense on a straight-line basis over the underlying lease term.
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 amortized using the individual-film-forecast-computation method, whereby these costs are amortized, and participations costs are accrued based on the ratio of the current period’s revenues to management’s estimate of ultimate revenue expected to be recognized from each production.
Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of the Company’s business, some titles are more successful or less successful than anticipated. Management reviews its ultimate revenue for productions in development and cost estimates on a title-by-title basis, when an event or change in circumstances indicates that the fair value of the production may be less than its unamortized cost. This may result in a change in the rate of amortization of film costs and participations and/or a write-down of all or a portion of the unamortized costs of the film or television production to its estimated fair value.
These write-downs are included in amortization expense within Direct Operating Expenses on the Company’s condensed consolidated statements of operations. There were no events or changes in circumstances that would indicate a change in fair value of productions and therefore the Company has not recorded any impairment charges during the nine months ended September 30, 2022 or 2021.
The Company expenses all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes. Additionally, for episodic series, 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 episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
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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 acquisition 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, the Company may elect to perform a qualitative assessment to determine whether it is required to estimatemore likely than not that the fair market value of each of itsa reporting units,unit, of which the Company has two. Whiletwo, is less than its carrying value. If impairment is indicated in the Company may usequalitative assessment, or, if management elects to initially perform a varietyquantitative assessment of methods to estimategoodwill, the impairment test uses a one-step approach. The fair value for impairment testing,of a reporting unit is compared with its primary method is discounted cash flows. The Company estimates future cash flows and allocations of certain assets using estimates for future growth rates and judgment regardingcarrying amount, including goodwill. If the applicable discount rates. Changes to judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units,unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in anthe recognition of additional impairment if the Company determines that the fair values of goodwill or indefinite lived intangible assets in future periods.its reporting units have fallen below their carrying values.
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. 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 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 the Company’s stock, it is classified as an asset or liability recorded at fair value. If the instrument is considered indexed to the Company’s stock, the Company analyzes additional equity classification requirements per FASB 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 ASC 815-15, Embedded Derivatives.
Treasury stock
The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.
Film and TelevisionBorrowing Costs
The Company capitalizesBorrowing costs relate to the issuance of Wow’s interim production costs for episodic series produced in accordance with FASB ASC 926-20, Entertainment-Films - Other Assets - Film Costs. Accordingly,financing and are recorded as a reduction to the carrying amount of interim production financing and measured at amortized cost using the effective interest method. Borrowing costs are capitalized at actual cost and then charged against revenue based onrecognized as part of interest expense in the initial market revenue evidenced by a firm commitment over the periodcondensed consolidated statements of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenueoperations in the period in which they are incurred. Borrowing costs directly attributable to the acquisition or production of deliveryqualifying assets, which are assets that necessarily take a substantial period of the episodes.
Additionally, for episodic series, from time to get ready for their intended use or sale, are added to the cost of those assets, until such time the assets are substantially ready for their intended use or sale. Upon the acquisition of Wow, the Company develops additional content, improved animationrecorded $0.3 million and bonus songs/features for its existing content. After$0.6 million related to production financing during the initial release of the episodic series, the costs of significant improvement to existing products are capitalized while routinethree and periodic alterations to existing products are expensed as incurrednine months ended September 30, 2022, respectively.
Revenue Recognition
The Company accounts for revenue according to standard FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”).
Revenue is measured based on the consideration specified in a contract with a customer. Revenue is recognized when a customer obtains control of the products or services in a contract. Judgment is required in determining the timing of whether the transfer of control occurs at a point in time or over time and is discussed below. The Company evaluates each contract to identify separate performance obligations as a contract with a customer may have one or more performance obligations. Consideration in a contract with multiple performance obligations is allocated to the separate performance obligations based on their stand-alone selling prices. If a stand-alone selling price is not determinable, the Company estimates the stand-alone selling price using an adjusted market assessment approach. The Company’s main sources of revenue are derived from animation production services provided to third parties, the sale of licenses for the distribution of films and television programs, advertising revenues, and merchandising and licensing sales.
Gross versus Net Revenue Presentation
The Company evaluates individual arrangements with third parties to determine whether the Company acts as principal or agent under the terms. To the extent that the Company acts as the principal in an arrangement, revenues are reported on a gross basis, resulting in revenues and expenses being classified in their respective financial statement line items. To the extent that the Company acts as the agent in an arrangement, revenues are reported on a net basis, resulting in revenues being presented net of any expenses incurred in providing agency services. Determining whether the Company acts as principal or agent is based on an evaluation of which party has substantial risks and rewards of ownership under the terms of an arrangement. The most significant factors that the Company considers include identification of the primary obligor, as well as which party has credit risk, general and inventory risk and the latitude or ability in establishing prices.
The Company has identified the following seven material and distinct performance obligations:obligations.
| · | Provide animation production services. | |
| · | License rights to exploit Functional Intellectual Property (“ |
| 19 |
| · | License rights to exploit Symbolic Intellectual Property (“ | |
| · | Provide media and advertising services to clients. | |
| · | Fixed and variable fee advertising and subscription-based revenue generated from the Genius Brands Kartoon Channel! and the Frederator owned and operated YouTube channels. | |
| · | 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). |
Production Services
Animation Production Services
For revenue from animation production services, the customer controls the output throughout the production process. Each production is made to an individual customer’s specifications and if the contract is terminated by the customer, the Company is entitled to be reimbursed for any costs incurred to date, and for any prepaid commitments made, plus the agreed contractual mark-up. Revenue and the associated costs of such contracts are recognized over time on a percentage of completion basis - i.e. as the project is being produced, prior to it being delivered to the customer. The percentage-of-completion is calculated based upon the proportion of costs incurred cumulatively to total expected costs. Changes in revenue recognized as a result of adjustments to total expected costs are recognized in profit or loss on a prospective basis. Invoices related to these projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds milestone billings, the Company recognizes this difference as unbilled accounts receivable. Unbilled accounts receivable is transferred to accounts receivable when the Company has an unconditional right to consideration.
When the outcome of an arrangement cannot be estimated reliably, revenue is recognized only to the extent of the expenses incurred that are recoverable.
Content Distribution
Film and Television Licensing
The Company recognizes revenue related to licensed rights to exploit functional IP in two ways; for minimum guarantees, the Company recognizes fixed revenue upon delivery of content and the start of the license period and for functional IP contracts with a variable component, the Company estimates revenue such that it is probable there will not be a material reversal of revenue in future periods. The Company recognizes 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.
Invoices related to these projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds milestone billings, the Company recognizes this difference as unbilled accounts receivable. Unbilled accounts receivables are transferred to accounts receivable when the Company has an unconditional right to consideration.
Advertising revenues
The Company sells advertising and subscriptions on its Appwholly-owned AVOD service, Kartoon Channel!, and OTT based “Kartoonits SVOD distribution outlets, Kartoon Channel!” Kidaverse, and Ameba TV. Advertising sales are generated in the form of either flat rate promotions or advertising impressions served. For flat rate promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under FASB ASC 606 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. For subscription-based revenue, the Company recognizes revenue when a customer downloads the mobile device application and their credit card is charged.
Upon the acquisition of Wow, the Company generates advertising revenue from Frederator’s owned and operated YouTube channels as well as revenues generated from the operation of its multi-channel network on YouTube. Revenue is recognized when services are provided in accordance with the Company’s agreement with YouTube, the price is fixed or determinable, and collection of the related receivable is probable. Receivables are usually collectable within 30 days.
Licensing & Royalties
Merchandising and licensing
The Company enters into merchandising and licensing agreements that allow customers to produce merchandise utilizing certain of the Company’s intellectual property. For minimum guaranteed amounts that make up a contract, revenue is recognized over time, over the term of the license period commencing on the date at which the customer can use and benefit from the licensed content. Variable consideration in excess of non-refundable guaranteed amounts, such as royalties and other contractual payments are recognized as revenue when the amounts are known and become due provided collectability is reasonably assured. Invoices are issued based on the contractual terms of an agreement and are usually payable within 30-45 days.
Product Sales
The Company recognizes revenue related to product sales when the Company completes its performance obligation, which is when the goods are transferred to the buyer.
Media Advisory & Advertising Services
Media and Advertising Services
The Company provides media and advertising services to clients. Revenue is recognized when the services are performed. When the Company purchases advertising for clients on linear and across digital and streaming platforms and receives a commission, the commissions are recognized as revenue in the month the advertising is displayed.
The Company recognizes revenue related to product sales when the Company completes its performance obligation, which is when the goods are transferred to the buyer.
Direct Operating Costs
Direct operating costs include costs of the Company’s product sales, non-capitalizable film costs, film and television cost amortization expense, impairment expenses related to film and television costs, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which the Company is obligated to share net profits of the properties on which they have rendered services. Upon the acquisition of Wow, the Company also includes salaries and related service production employee costs as part of its direct operating costs.
| 21 |
The Company issues stock-based awards to employees and non-employees that are generally in the form of stock options or restricted stock units (“RSUs”). Share-based compensation cost is recorded for all options and awards of non-vestedunvested stock based on the grant-date fair value of the award.
The fair value of stock options is estimated at the date of grant using the Black-ScholesBlack-Scholes-Merton (“BSM”) option pricing model, which requires management to make assumptions with respect to the fair value on the grant date. The assumptions are as follows: (i) the expected term assumption of the award is based on the Company’s historical exercise and post-vesting behavior (ii) the expected volatility assumption is based on historical and implied volatilities of the Company’s common stock calculated based on a period of time generally commensurate with the expected term of the award; (iii) the risk-free interest rates are based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent expected term; (iv) and the expected dividend yields of the Company’s stock are based on history and expectations of future dividends payable. In the case of RSUs the fair value is calculated based on the Company’s underlying common stock on the date of grant.
The Company recognizes compensation expense over the requisite service period ratably, using the graded attribution method, which is in-substance, recognizing multiple awards based on the vesting schedule. The Company has elected to account for forfeitures when they occur. The Company issues authorized shares available for issuance under the Company’s 2015 Incentive Plan and the Company’s 2020 PlansIncentive Plan upon employees’ exercise of their stock options.
Basic earnings (loss) per share of common sharestock (“EPS”) is calculated by dividing net income (loss) applicable to common shareholdersstockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common shareholdersstockholders by the weighted average number of shares of common 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 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.
Concentration of Risk
The Company maintains its cash in bank deposit accounts which, at times, may exceed the Federal Deposit Insurance Corporation’s (“FDIC”) or the Canadian Deposit Insurance Corporation’s (“CDIC”) insured amount.amounts. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000$250,000 per account.account and deposits in banks in Canada are insured by the CDIC up to $100,000 CAD. As of September 30, 2021,2022, the Company had threefifteen accounts with an uninsured balance in bank deposit accounts of $1,907,9733.0 million. As of December 31, 2021, the Company had four accounts with an uninsured balance in bank deposit accounts of $1.1 million.
| 22 |
The Company has a managed account and a brokerage account with a financial institution. The managed account maintains ourthe Company’s investments in marketable securities of $125,340,33689.9 million and bank deposits held in a sweep program of $1,328,895112.5 million as of September 30, 2021.2022 and December 31, 2021, respectively. The brokerage account holds $2,600,000did not hold a material amount of the Company’s cash as of September 30, 2022 or December 31, 2021. Assets in the managed account and brokerage account are protected by the Securities Investor Protection Corporation (“SIPC”) up to $500,000 (with a limit of $250,000 for cash). In addition, the financial institution provides additional “excess of SIPC” coverage which insures up to $1 billion. As of September 30, 2022 and December 31, 2021, the Company has not had account balances held at this financial institution that exceedexceeded the insured balances.
The Company also has an account with a German bank that manages its foreign transactions with YFE. The cash balance as of September 30, 2022 held at the German institution was $2.7 million. Deposits in German banks are subject to a mandatory basic security amount up to $100,000 EURO. In addition, the institution is a member of the deposit protection fund for the German private banking industry that currently insures $5.5 million of each customer’s deposit account. As of September 30, 2022 and December 31, 2021, the Company has not had account balances held at this financial institution that exceeded the insured balances.
The Company’s investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. The Company’s policy limits the amount of credit exposure to any one security issue or issuer and the Company believes no significant concentration of credit risk exists with respect to these investments.
For the three months ended September 30, 2022, the Company had four customers, whose total revenue exceeded 10% of total consolidated revenue. These customers accounted for 83% of total revenue.
For the nine months ended September 30, 2022, the Company had four customers whose total revenue exceeded 10% of total consolidated revenue. These customers accounted for 74% of total revenue. As of September 30, 2022, the Company had two customers whose total accounts receivable exceeded 10% of total accounts receivable. These customers accounted for 28% of the total accounts receivable as of September 30, 2022.
For the three months ended September 30, 2021, the Company had one customer whose total revenue exceeded 10%10% of the total consolidated revenue. ThatThis customer accounted for 13% of the total revenue and 6% of accounts receivable. revenue.
For the nine months ended September 30, 2021, the Company had one customer, whose total revenue exceeded 10%10% of the total consolidated revenue. ThatThis customer accounted for 22% of the total revenue and 0% of accounts receivable.revenue. As of September 30, 2021, the Company had three customers whose accounts receivable exceeded 10%10% of total consolidated accounts receivable. Those customers accounted for 59% of accounts receivable.
ForThere is significant financial risk associated with a dependence upon a small number of customers. The Company periodically assesses the three months endedfinancial strength of these customers and establishes allowances for any anticipated bad debt. As of September 30, 2020,2022 and December 31, 2021, the Company had two customers whose total revenue exceeded 10%recorded an allowance for bad debt of the total consolidated revenue. Those customers accounted for $2487,710% of the total revenue and $1622,080% of accounts receivable. One other customer accounted for 70% of accounts receivable. For the nine months ended September 30, 2020, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 23% of the total revenue and 0% of accounts receivable. One other customer accounted for 70% of accounts receivable., respectively.
Fair value of financial instrumentsFinancial Instruments
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 820, Fair Value Measurement (“ASC 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(Level 1 measurements) and the lowest priority to unobservable inputs (level(Level 3 measurements). These tiers include:
| · | Level 1 - Observable inputs such as quoted prices for identical instruments in active markets; |
| · | Level 2 - 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 - 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. |
Financial instruments that are not measured at fair value on the condensed consolidated statements of operations are represented by cash, receivables, payables, accrued liabilities, bank indebtedness, the Company’s margin loan and interim production financing.
The carrying amounts of cash, restricted cash, receivables, accounts payable, andpayables, accrued liabilities, bank indebtedness and the Company’s margin loan approximate fair value due to the short-term nature of the instruments. The fair values of the Company’s liability-classified derivative warrants are revalued at the end of each reporting period determined using the BSM model (Level 2) with standard valuation inputs. Refer to Note 19 for additional details. The investment in YFE is also revalued at the end of each reporting period based on the trading price of YFE (Level 1). Refer to Note 5 for additional details. Upon acquisition of Wow, the Company assumed foreign currency forward contracts that are not traded in active markets. These are fair valued using observable forward exchange rates at the measurement dates and interest rates corresponding to the maturity of the instruments.contracts.
The fair values of the available-for-sale securities are generally based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I1 or Level II2 inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level II2 securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States Government securities, foreign government securities, and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or a variety of valuation techniques, incorporating inputs that are currently observable in the markets for similar securities.
The following table summarizes the marketable securities measured at fair value by level within the fair value hierarchy as of September 30, 2021: 2022 (in thousands):
| Schedule of marketable security measured at fair value | ||||||||||||||||||||||||
| Level 1 | Level 2 | Total Fair Value | Level 1 | Level 2 | Total Fair Value | |||||||||||||||||||
| Marketable investments: | ||||||||||||||||||||||||
| Corporate Bonds | $ | 0 | $ | 50,729,516 | $ | 50,729,516 | $ | 30,530 | $ | 11,324 | $ | 41,854 | ||||||||||||
| U.S. Treasury | 27,011,819 | 0 | 27,011,819 | 19,485 | – | 19,485 | ||||||||||||||||||
| Mortgage-Backed | – | 5,525 | 5,525 | |||||||||||||||||||||
| U.S. agency and government sponsored securities | 0 | 6,886,041 | 6,886,041 | – | 11,621 | 11,621 | ||||||||||||||||||
| U.S. states and municipalities | 0 | 15,488,378 | 15,488,378 | – | 10,830 | 10,830 | ||||||||||||||||||
| Asset-Backed | 0 | 24,226,129 | 24,226,129 | – | 558 | 558 | ||||||||||||||||||
| Commercial paper | 0 | 998,453 | 998,453 | |||||||||||||||||||||
| Total | $ | 27,011,819 | $ | 98,328,517 | $ | 125,340,336 | $ | 50,015 | $ | 39,858 | $ | 89,873 | ||||||||||||
Fair values were determined for each individual security in the investment portfolio. The Company’s marketable securities are considered to be available-for-sale investments as defined under FASB ASC 320, Investments – Debt and Equity Securities. There were no impairment charges recorded for the marketable securities. Refer to Note 4 for additional details. The fair values of the derivative warrants attached to the 2020 Convertible Notes were determined using the Black-Scholes-Merton model (Level 2) with standard valuation inputs. Refer to Note 19 for additional details. The fair value of the contingent earn-out liability was valued using Level 3 inputs. Refer to Note 36 for additional details.
The Company did not have any financialFinancial and nonfinancial assets and liabilities measured at fair value on a non-recurring basis are those that are adjusted to fair value when a significant event occurs and include the Company’s contingent earn-out liability, goodwill and film and television costs as of September 30, 20212022. There were no significant events that occurred or December 31, 2020.
Business Combinations
The Company allocatescircumstances that resulted in an adjustment to the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiablethose assets and liabilities is recorded as goodwill. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets requires thatmeasured on a non-recurring basis during the Company use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. The Company estimates the fair value based upon assumptions management believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.nine months ended September 30, 2022.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On NovemberOctober 16, 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses, Effective Dates approvingapproved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption is permitted for interim and annual reporting periods. The Company is currently evaluating the effect thatimpact of the adoption of ASU will have2016-13 on its consolidated financial statements and related disclosures.but does not expect that the adoption of this standard will have a material impact.
In August 2020,October 2021, the FASB issued ASU No. 2020-06,2021-08, Business Combinations (Topic 805): Accounting for Convertible InstrumentsContract Assets and Contract Liabilities from Contracts with Customers" (“ASU 2021-08”). The standard requires an acquirer in an Entity’s Own Equity.a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, “Revenue from Contracts with Customers,” as if it had originated the contracts. The update simplifies the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments. As part of the amendment, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. The FASB has eliminated the cash conversion and beneficial conversion feature models. The FASB has also modified accounting rules relating to application of the scope exception from derivative accounting. The amendments revise the guidance in ASC 815-40-25-10, to remove three out of seven conditions from the settlement guidance, referred to as additional equity classification requirements. Following the above amendments, more convertible debt instruments will be accounted for as a single liability measured at its amortized cost and more convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no features require bifurcation and recognition as derivatives. The amendments arestandard is effective for public business entities, excluding smaller reporting companies, forfiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, including smaller reporting companies the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.2022. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.permitted. The Company adopted this ASU during the second quarter of 2022 and has early adopted ASU No. 2020-06 starting January 1, 2021 on a modified retrospective basis. The impact to the Company’s consolidated financial position, results of operations and cash flows was not material as the Company does not have any convertible instruments outstanding asincorporated this guidance in its evaluation of the beginningaccounting for the acquisition of the fiscal year.Wow.
In May 2021, the FASB issued ASU No. 2021-04, Modification of Equity-Classified Written Call Options. The update requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. Under the amendments, an issuer should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The recognition of the modification depends on the nature of the transaction in which a warrant is modified, i.e., in connection with equity issuance, debt origination, debt modification, or other. For example, if a warrant is modified in connection with an equity issuance, the issuer should recognize the increase (and disregard any decrease) in the warrant’s fair value as an equity issuance cost, which should be charged against the gross proceeds of the offering. The amendments are effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. The amendment would be applied prospectively to modifications that occur after the date of initial application. The Company will apply the amendment during the interim periods of fiscal year 2022 to any prospective modifications.
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 the Company’s financial position, results of operations, or cash flows.
Note 3: Acquisition of ChizComm EntitiesAcquisitions
Ameba
On February 1, 2021,January 13, 2022, the Company through GBI Acquisition LLC,completed the acquisition of Ameba, pursuant to a New Jersey limited liability company,Stock Purchase Agreement (the “SPA”) by and 2811210 Ontario Inc.,between the Company and Tony Havelka, a company organized under the lawsresident of the Province of Ontario, two wholly-owned subsidiaries of the Company, closed its previously announced acquisition pursuant to a Purchase and Sale AgreementManitoba (the “Purchase Agreement”) with (i) Harold Aaron Chizick, (ii) Jennifer Mara Chizick, (iii) Wishing Thumbelina Inc. (“Wishing Thumbelina”“Seller”), and (iv) Harold Aaron Chizick and Jennifer Mara Chizick, the trustees of The Chizsix (2019) Family Trust for and on behalf of Harold Aaron Chizick, Jennifer Mara Chizick and Jay Mark Sonshine, trustees of The Chizsix (2019) Family Trust, (the “Trustees”) (each a “Seller” and, collectively, “Sellers”), pursuant toin which the Company acquired from the SellersSeller all of the issued and outstanding equity interests of ChizComm Ltd.Ameba. Concurrently, pursuant to an Asset Purchase Agreement (the “APA”) by and among the Company, the Seller and Tek Gear Inc., a corporation organized in Canada (“ChizComm Canada”owned by the Seller, the Company acquired from the Seller a proprietary software platform (the “Technology”), that powers the Ameba SVOD deliveries. The transactions contemplated by the SPA and ChizComm USA Corp., a New Jersey corporation (“ChizComm USA” and, together with ChizComm Canada, “ChizComm”) (the “ChizComm Acquisition”).the APA are referred to as the “Ameba Acquisition.”
The following table summarizes the fair value of the purchase price consideration paid to acquire ChizComm:
| Total purchase price consideration paid | ||||
| Amount | ||||
| Cash consideration at closing | $ | 8,500,000 | ||
| Equity consideration at closing | 3,527,027 | |||
| Fair value of Earn-Out shares | 7,210,000 | |||
| Total | $ | 19,237,027 | ||
Total considerationConsideration paid by the Company in the transaction at closing consisted of $8.53.8 million in cash, inclusive of $0.3 million for a net working capital adjustment (the “NWC Adjustment”) pursuant to the SPA and $0.3 million in cash and pursuant to the APA, for total consideration of $1,980,6584.1 million, or $3.9 million shares (the “Closing Shares”)net of the Company’s common stock with a value of approximately $3.5 million, both ascash acquired, excluding transaction costs and subject to certain purchase price adjustments. Of the Closing Shares, shares of common stock, with a value of approximately $ million, were deposited into an escrow account to cover potential post-closing indemnification obligations of Sellers under the Purchase Agreement. Additionally, the Purchase Agreement also provides for the issuance of additional shares of common stock with an aggregate value of up to $8.0 million that may be issued to the Sellers if certain EBITDA and performance levels are achieved within a four-year period commencing on the date of the Purchase Agreement (Earn-Out).
The ChizComm Acquisition was approved by the board of directors of each company. Transaction costs incurred relating to this acquisitionthe Ameba Acquisition, including legal and accounting, totaled $539,806,$0.1 million, which isare included in general and administrative expenses on the statementstatements of operations. The ChizComm Acquisition expandsagreement provided for an adjustment to the purchase price based on an adjusted net working capital (“NWC”) as defined in the agreement.
The Ameba acquisition facilitates the Company’s revenue streamsexpansion into mediaSVOD with its technology and advertising services.content essential to the launch of the ad-free subscription-based Kartoon Channel! Kidaverse platform. The acquisition provides immediate benefit recognized through the content available on the SVOD Ameba channel app, available for download on Amazon Fire TV, Roku, Xbox 360, Xumo, LG Smart TV, TiVo, VEWD, CINEMOOD and iOS and Android devices.
The Company has determined that the ChizCommAmeba Acquisition constitutes a business acquisition as defined by ASC 805, Business Combinations.805. Accordingly, the assets acquired, and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values and represent managements best estimate based on available data. Fair values are determined based on the requirements of ASC 820 Fair Measurements and Disclosures.represents managements best estimates.
The Earn-Out arrangement meetsfollowing table summarizes the liability classification criteria outlined in ASC 480, Distinguishing Liabilities from Equity,consideration paid, including the Net Working Capital Adjustment (in thousands):
| Total purchase price consideration paid | ||||
| Amount | ||||
| SPA cash consideration at closing | $ | 3,500 | ||
| APA cash consideration at closing | 300 | |||
| Net working capital adjustment | 269 | |||
| Total | $ | 4,069 | ||
The net working capital calculation was finalized as it is not indexed$268,657 and paid to the Company’s own sharesacquiree during the three months ended June 30, 2022, as determined by the Company and is classified as a liability inagreed upon by the accompanying balance sheet. Liability classified contingent consideration is measured initially at the fair value on the acquisition date and is remeasured at each reporting period. Subsequent differences between the estimated fair value of the Earn-Out recorded at the acquisition date and the remeasurement date will be reflected as a charge or credit, as applicable, in the statement of operations. acquiree.
As of September 30, 2021, there were no material changes to2022, the assumptions used onaccounting for the acquisition dateis preliminary, as the Company is finalizing its valuation and determination of the intangible assets. The Company has engaged a third-party valuation firm to valueassist with the contingent consideration, therefore no changepurchase price allocation, which will be completed in value was recorded.subsequent quarters.
The Company completed and finalized thepreliminary purchase price allocation duringis based upon an estimate of the three months ended June 30, 2021. The Company recordedfair value of the assets acquired and the liabilities assumed at their respective fair values. The following table summarizesby the final fair value of assets acquired and liabilities assumed: Company on January 13, 2022 as follows (in thousands):
| Assets acquired and liabilities assumed | ||||||||
| Cash | $ | 711,123 | $ | 176 | ||||
| Accounts Receivable | 6,150,919 | 238 | ||||||
| Prepaid Expenses | 56,594 | |||||||
| Lease Deposits | 12,390 | |||||||
| Fixed Assets | 147,689 | |||||||
| Prepaids Expenses | 25 | |||||||
| Trade Name | 3,430,000 | 23 | ||||||
| Customer Relationships | 6,140,000 | |||||||
| Non-Compete Agreements | 60,000 | |||||||
| Digital Network | 2,804 | |||||||
| Technology | 300 | |||||||
| Goodwill | 9,607,027 | 673 | ||||||
| Accounts Payable and Accrued Expenses | (7,006,350 | ) | (140 | ) | ||||
| Payroll Tax Liability | (72,365 | ) | ||||||
| Tax Liability | (30 | ) | ||||||
| Total Consideration | $ | 19,237,027 | $ | 4,069 | ||||
The identifiable intangible assets acquired of $9,630,0003.1 million was composedis comprised of $$2.8 million for the Digital Network, Ameba TV, with a remaining economic life of 3,430,00018 years, $23,000 for ChizComm’sAmeba’s trade name with an indefinite economical life, $6,140,000 for ChizComm’s customer base with a useful life of approximately 123 years and $60,000$0.3 million for ChizComm’s non-compete agreementsthe SVOD technology with an economica remaining useful life of approximately 3 years. The $0.7 million in goodwill arising from the acquisition consists largely of the synergies expected from the combined businesses, including the Company’s build-out of its technology for the expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content Production & Distribution reporting unit and is not deductible for tax purposes.
The valuation and allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.
Valuation Methodology
Customer relationships for ChizComm wereThe digital network was valued by performing a discounted cash flow analysis using the multiperiod excess earnings method.analysis. This method includes discounting the projected cash flows associated with existing customersthe current digital network content, based primarily upon customer turnover datahistorical revenue and projections over its expected life and considers the operating expenses and contributory asset charges associated with servicing such existing customers.network. Projected cash flows attributable to the customer relationships weredigital network was discounted to theirthe present value at a rate commensurate with the perceived risk. The useful liveslife of customer relationships arethe digital network is estimated based primarily upon the present value of cash flows attributable to the customer relationships.digital network.
Trademarks andThe Ameba trade names for ChizComm werename was valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value. The useful life of the trade name is based on the estimated time it will take for the Company to rebrand the Ameba trade name and logo with the Company branded Kartoon Channel! Kidaverse trade name.
Non-compete agreements wereThe technology was valued using a with and without method. Under this method, estimated prospective financial information (“PFI”) is calculated withat cost as the existence and ownership of an intangible asset and compared toCompany determined that the PFI incost approximated the absence of the ownership of the intangible asset. The after-tax differential PFI attributable to the intangible asset is then discounted to its presentfair value.
AssumptionsThe assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:
| · | Historical performance including sales and profitability. |
| · |
| · | Contributory asset charges. | |
| · | Estimated economic life of asset. |
| · | Acquisition of new customers. |
| · | Attrition of existing customers. |
TheWow Unlimited Media
On April 6, 2022, the Company completed the acquisition was treated for tax purposes asof Wow. On October 26, 2021, the Company’s wholly-owned subsidiary, 1326919 B.C. LTD., a nontaxable transaction and as such,corporation existing under the historical tax basislaws of the acquired assets, net operating loss,Province of British Columbia and other tax attributesWow, entered into an Arrangement Agreement to effect a plan of ChizComm will carryover. As a result, no new goodwillarrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. The Company purchased 100% of issued and outstanding shares of Wow for tax purposes was created$38.3 million in connectioncash and shares of the Company’s common stock, including Wow’s subsidiary Frederator. The plan of arrangement and final agreement, together with the acquisition of Wow’s Mainframe Studios and its subsidiary Frederator, are referred to as therethe “Wow Acquisition.”
Final consideration paid by the Company in the transaction at closing consisted of $38.3 million in cash and 11,057,085 shares of the Company’s common stock, including 691,262 Exchangeable Shares, with a fair value of $11.6 million, options granted to employees of Wow with a fair value of previously vested options of $, included in the purchase price, and $0.3 million for future services and $1.6 million in severance and bonuses to executives, for total consideration of $52.7 million, or $50.1 million net of cash acquired, excluding transaction costs as described in more detail below.
Transaction costs incurred relating to the Wow Acquisition, including banks, legal and accounting, totaled $3.1 million, which is no step-upincluded in general and administrative expenses on the statements of operations for the nine months ended September 30, 2022. The Company will also expense the unvested replacement options, with a fair value of $, as stock-based compensation expense over the remaining requisite service period specified in the agreements.
The Wow Acquisition facilitates the Company’s expansion as a global animation and children’s digital media company. With Wow’s content, ongoing production projects and the addition of two studios that can also be leveraged for in-house production of the Company’s properties, will drive cost synergies, facilitate further expansion into the global children’s entertainment market and strengthen financial growth. Frederator, with its owned and operated channels on YouTube, will provide a distribution platform to facilitate the global growth of Kartoon Channel!.
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The Company has determined that the Wow Acquisition constitutes a business acquisition as defined by ASC 805. Accordingly, the assets acquired, and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based on the requirements of ASC 820 and represents managements best estimates.
The following table summarizes the consideration paid:
| Schedule of total purchase price consideration paid | ||||
| Amount | ||||
| Cash | $ | 38,310 | ||
| Genius Common Stock Issued | 10,832 | |||
| Shares Issued Exchangeable for Genius Common Stock | 722 | |||
| Stock Option Value of Replacement Options- Pre-Combination Vested Options | 1,213 | |||
| Severance Payments | 1,044 | |||
| Bonuses | 529 | |||
| Total | $ | 52,650 | ||
As of September 30, 2022, the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets. The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent quarters.
The preliminary purchase price allocation is based upon the estimate of the fair value of the underlying tax bases ofassets acquired and the acquired net assets.
The following supplemental pro forma information summarize the Company’s results of operations for the current reporting period, as ifliabilities assumed by the Company completed the acquisitionon April 6, 2022 as of the beginning of the annual reporting period.follows (in thousands):
Supplemental pro forma information as follows:
| Supplemental pro forma information | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Total Revenues | $ | 1,871,449 | $ | 3,786,292 | $ | 6,630,216 | $ | 5,414,987 | ||||||||
| Net Loss | (9,253,380 | ) | (2,164,427 | ) | (93,533,387 | ) | (391,625,312 | ) | ||||||||
| Net Loss per Common Share (Basic and Diluted) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.32 | ) | $ | (3.63 | ) | ||||
| Weighted Average Shares Outstanding (Basic and Diluted) | 300,321,658 | 218,991,119 | 296,001,742 | 107,786,940 | ||||||||||||
| Schedule of fair value of the assets acquired and the liabilities assumed | ||||
| Cash and cash equivalents | $ | 2,573 | ||
| Accounts Receivable | 34,237 | |||
| Other Receivables | 78 | |||
| Prepaid Expenses and Other | 1,245 | |||
| Property and Equipment | 1,936 | |||
| ROU Assets | 10,311 | |||
| IP (In-Process) | 4,600 | |||
| IP (Proprietary Productions) | 5,684 | |||
| Tradename | 7,631 | |||
| Customer Relationships | 16,064 | |||
| Networks and Platforms | 803 | |||
| Goodwill | 21,399 | |||
| Accounts Payable | (1,547 | ) | ||
| Participations Payable | (1,380 | ) | ||
| Bank Debt | (1,475 | ) | ||
| Accrued Liabilities | (3,825 | ) | ||
| Interim Production Facilities | (16,930 | ) | ||
| Deferred Revenue | (18,080 | ) | ||
| Lease Liabilities | (10,614 | ) | ||
| Other Liabilities | (60 | ) | ||
| Total Consideration | $ | 52,650 |
The identifiable intangible assets acquired of $34.8 million is comprised of $16.1 million for Customer Relationships, with remaining economic lives of 8 years, $10.3 million for IP Content including completed productions and productions in progress, that is included as part of Film and Television costs on the condensed consolidated balance sheet and will be amortized as such, Tradenames for $7.6 million, with an indefinite life and Networks and Platforms of $0.8 million, with a remaining economic life of 16 years. The goodwill of $21.4 million arising from the acquisition consists largely of the synergies expected from the combined businesses, including the Company’s ability to produce its content in-house utilizing the acquired studios and expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content Production & Distribution reporting unit and is not deductible for tax purposes.
The valuation and allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.
Valuation Methodology
The Networks and Platforms were valued by performing a discounted cash flow analysis, specifically the multi-period excess earnings method. This method involves quantifying the amount of residual (or excess) cash flows generated by the current digital network content, based primarily upon historical revenue and projections over its expected life, and considers the operating expenses and contributory asset charges associated with servicing such network. Projected cash flows attributable to the networks are discounted to present value at a rate commensurate with the perceived risk. The significant assumptions used in this model included the customer attrition rate, acquisition rate of new customers, weighted average cost of capital, and expense estimates. The useful life of the networks is estimated based primarily upon the present value of cash flows attributable to the digital network. The significant assumptions used in this method included the royalty rate and weighted average cost of capital.
The Tradenames were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income approach wherein estimates of a company’s earnings attributable to the intangible asset are based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.
Supplemental Pro Forma Information
The following unaudited supplemental pro forma information summarizes the Company’s results of operations as if the acquisitions were completed at the beginning of the periods presented (in thousands, except for share and per share data):
| Supplemental pro forma information | ||||||||||||||||
| Three Months Ended | ||||||||||||||||
Genius Brands Consolidated (including Wow and Ameba results) | Wow | Ameba | ||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2021(1) | September 30, 2021 | |||||||||||||
| Total Revenues | $ | 19,679 | $ | 18,091 | $ | 16,033 | $ | 186 | ||||||||
| Net Income (Loss) | $ | (11,218 | ) | $ | (8,338 | ) | $ | 833 | $ | 82 | ||||||
| Net Loss per Share of Common Stock (Basic and Diluted) | $ | (0.04 | ) | $ | (0.03 | ) | $ | – | $ | – | ||||||
| Weighted Average Shares Outstanding (Basic and Diluted) | 317,282,770 | 300,321,658 | – | – | ||||||||||||
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| Nine months Ended | ||||||||||||||||||||||||
Genius Brands Consolidated (including Wow and Ameba results) | Wow | Ameba | Wow | Ameba | ||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022(1) | September 30, 2022 | September 30, 2021(1) | September 30, 2021 | |||||||||||||||||||
| Total Revenues | $ | 61,346 | $ | 48,927 | $ | 53,242 | $ | 1,274 | $ | 43,130 | $ | 519 | ||||||||||||
| Net Income (Loss) | $ | (28,144 | ) | $ | (90,388 | ) | $ | 158 | $ | (22 | ) | $ | 2,272 | $ | 247 | |||||||||
| Net Loss per Share of Common Stock (Basic and Diluted) | $ | (0.09 | ) | $ | (0.31 | ) | $ | – | $ | – | $ | – | $ | – | ||||||||||
| Weighted Average Shares Outstanding (Basic and Diluted) | 312,243,439 | 296,001,742 | – | – | – | – | ||||||||||||||||||
(1) The unaudited historical financial statements of Wow are not adjusted for conversion to U.S. GAAP from International Financial Reporting Standards, as the adjustments are immaterial to the periods presented.
Note 4: Variable Interest Entity
In July 2020, the Company entered into a binding term sheet with POW, Inc. (“POW!”) in which the Company agreed to form an entity with POW! to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called “Stan Lee Universe, LLC” (“SLU”). POW! and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021, with activity commencing during the fourth quarter of 2021. The purpose of the acquisition was to enable the Company to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations (the “Stan Lee Assets”), from which Genius Brands plans to develop and license multiple properties each year.
The Company contributed $2.0 million to obtain 50% of SLU’s voting equity and POW, for the remaining 50%, contributed the specified intangible assets associated with the Stan Lee Assets. POW will retain certain rights in the transferred intangible assets, namely existing the rights/obligations arising from current licensing agreements. Under ASC 805, the Company determined that the value of SLU was wholly attributable to the Stan Lee Assets and would be accounted for as an asset acquisition. The acquisition cost of $2.0 million was equivalent to the value of the Stan Lee Assets contributed by POW. Therefore, the fair value of the consideration paid by the entity of $2.0 million and the fair value of the 50% non-controlling interest approximated a total of $4.0 million.
Pursuant to the guidance under ASC 810, the Company concluded that SLU qualifies as a variable interest entity (“VIE”). The Company consolidates the results of SLU as it was determined that the Company is the primary beneficiary due to having the power through the collaboration to direct the activities that most significantly impact the entity’s economic performance and the Company is required to fund over half of the economic support of the entity. Accordingly, the Company recorded the total fair value of the Stan Lee Assets in SLU of $4.0 million, as an intangible asset to be amortized over the duration of 70 years, the life of the publicity rights related to Stan Lee’s name, likeness, voice, physical characteristics, etc.
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During the three and nine months ended September 30, 2022, SLU generated $46,947 and $2.3 million in net income, respectively. During the nine months ended September 30, 2022, the Company distributed $1.2 million to POW as their share of the non-controlling interest in SLU. The Company’s investment in SLU, net of the cash received from a distribution of $1.2 million, is $0.8 million as of September 30, 2022. In addition, the Company has incurred $0.4 million of costs incurred for marketing and operational services.
There were no changes in facts and circumstances that occurred during the three or nine months ended September 30, 2022 that would result in a re-evaluation of the VIE assessment.
Note 5: Investment in Equity Interest
On December 1, 2021, the Company completed a $6.8 million investment in YFE. In exchange for $3.4 million in cash and shares of the Company’s common stock (valued at approximately $3.4 million), the Company received shares of YFE’s common stock.
Following the initial equity investment in YFE during the fourth quarter of 2021, the Company participated in a mandatory tender offer for the remaining publicly traded shares held by YFE shareholders. Upon the expiration of the offer on February 14, 2022, the Company purchased an additional shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders, were converted into shares of YFE common stock, of which were purchased by the Company at 2.00 EUROS per share, or $0.6 million. On April 5, 2022, the Company exercised its subscription rights to purchase an additional shares of YFE’s common stock at 3.00 EUROS per share, or $2.7 million, increasing the number of YFE’s outstanding shares to . As of September 30, 2022 and December 31, 2021, the Company’s ownership in YFE was 48.0% and 29.0%, respectively.
The Company has elected to apply the fair value option for its investment in YFE (Level 1) as YFE is a publicly traded company on the Frankfurt Exchange, therefore its trading price is readily available and relied upon by investors. The Company recognizes changes in the fair value of its investment in YFE as unrealized gains (losses), net in the accompanying consolidated statements of operations with other income (loss), net.
The Company revalues the investment in YFE securities as of the end of each reporting period. During the three and nine months ended September 30, 2022, the Company recorded a total loss of $5.4 million and $3.8 million, respectively, within other income (expense) on the Company’s condensed consolidated statements of operations. The total loss includes $1.3 million and $2.6 million due to the change in the foreign currency translation rate during the three and nine months ended September 30, 2022, respectively.
Wow has a 63% membership interest in Ratchet Productions, LLC (“RPLLC”), a privately-owned company registered in Colorado. Wow accounts for its interest using the equity method of accounting. Prior to the Wow Acquisition, in 2016, Wow determined that its investment in RPLLC was impaired and reduced its investment to $0. As the investment has been $0, and remains as such, there has been no impact on the Company’s financial statements for the membership interest in RPLLC.
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Note 4:6: Marketable Securities
The Company classifies and accounts for its marketable debt securities as available-for-sale and the securities are stated at fair value.
The investments in marketable securities had an adjusted cost basis of $125,692,272$97.5 million and a market value of $125,340,336$89.9 million as of September 30, 2022. The balances consisted of the following securities (in thousands):
| Summary of investment in marketable security | ||||||||||||
| Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | ||||||||||
| Corporate Bonds | $ | 44,822 | $ | (2,968 | ) | $ | 41,854 | |||||
| U.S. Treasury | 20,922 | (1,437 | ) | 19,485 | ||||||||
| Mortgage-Backed | 6,285 | (760 | ) | 5,525 | ||||||||
| U.S. agency and government sponsored securities | 13,116 | (1,495 | ) | 11,621 | ||||||||
| U.S. states and municipalities | 11,818 | (988 | ) | 10,830 | ||||||||
| Asset-Backed | 567 | (9 | ) | 558 | ||||||||
| Total | $ | 97,530 | $ | (7,657 | ) | $ | 89,873 | |||||
The investments in marketable securities had an adjusted cost basis of $113.8 million and a market value of $112.5 million as of December 31, 2021. The balances consisted of the following securities (in thousands):
| Summary of Investment in marketable security | ||||||||||||||||||||||||
| Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | Adjusted Cost | Unrealized Gain/(Loss) | Fair Value | |||||||||||||||||||
| Corporate Bonds | $ | 50,870,232 | $ | (140,716 | ) | $ | 50,729,516 | $ | 47,864 | $ | (529 | ) | $ | 47,335 | ||||||||||
| U.S. Treasury | 27,074,769 | (62,950 | ) | 27,011,819 | 24,410 | (257 | ) | 24,153 | ||||||||||||||||
| Mortgage-Backed | 7,504 | (143 | ) | 7,361 | ||||||||||||||||||||
| U.S. agency and government sponsored securities | 6,898,275 | (12,234 | ) | 6,886,041 | 14,675 | (87 | ) | 14,588 | ||||||||||||||||
| U.S. states and municipalities | 15,549,377 | (60,999 | ) | 15,488,378 | 11,871 | (189 | ) | 11,682 | ||||||||||||||||
| Asset-Backed | 24,301,617 | (75,488 | ) | 24,226,129 | 6,456 | (50 | ) | 6,406 | ||||||||||||||||
| Commercial paper | 998,002 | 451 | 998,453 | 998 | – | 998 | ||||||||||||||||||
| Total | $ | 125,692,272 | $ | (351,936 | ) | $ | 125,340,336 | $ | 113,778 | $ | (1,255 | ) | $ | 112,523 | ||||||||||
The Company reported the net unrealized losses in accumulated other comprehensive (loss) income, a component of stockholders' equity. The decline in fair value is largely due to changes in interest rates and other market conditions and is expected to recover as the securities approach maturity. The Company has evaluated these securities and determined that no allowance is necessary based on the credit quality and the low risk of loss due to the security type. The Company hasholds sixty-two available-for-sale securities, all of which are in an unrealized loss position as of September 30, 2022. The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period greater than 12 months as of September 30, 2022 are as follows (in thousands):
| Schedule of unrealized losses and fair values of available for sale securities | ||||||||
Gross Unrealized Loss | Fair Value | |||||||
| Corporate Bonds | $ | (2,375 | ) | $ | 34,365 | |||
| U.S. Treasury | (1,456 | ) | 19,489 | |||||
| Mortgage-Backed | (829 | ) | 5,528 | |||||
| U.S. agency and government sponsored securities | (1,493 | ) | 11,625 | |||||
| U.S. states and municipalities | (781 | ) | 8,020 | |||||
| Asset-Backed | (10 | ) | 558 | |||||
| Total | $ | (6,944 | ) | $ | 79,585 | |||
As of December 31, 2021, the Company had not yet held marketable securities in an unrealized loss position for greater than twelve months. A net realized loss of $24,779$36,332 and $159,624 related to the prepayment of principals for certain mortgage-backed securities was recorded in earnings during the three and nine months ended September 30, 2021.2022, respectively.
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The contractual maturities of the Company’s marketable investments as of September 30, 20212022 were as follows: follows (in thousands):
| Summary of contractual maturity | ||||
| Fair Value | ||||
| Due after 1 year through 5 years | $ | 104,873,382 | ||
| Due after 5 years through 10 years | 6,740,772 | |||
| Due after 10 years (a) | 13,726,182 | |||
| Total | $ | 125,340,336 | ||
| Summary of contractual maturity | ||||
| Fair Value | ||||
| Due within 1 year | $ | 8,889 | ||
| Due after 1 year through 5 years | 70,060 | |||
| Due after 5 years through 10 years | 3,752 | |||
| Due after 10 years | 7,172 | |||
| Total | $ | 89,873 | ||
The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.
The Company did not sell any securities during the three or nine months ended September 30, 2021,2022 that resulted in material gains or losses.
Note 5:7: Property and Equipment, Net
The Company has property and equipment as follows as of September 30, 2021 and December 31, 2020: (in thousands):
| Schedule of property and equipment, net | ||||||||||||||||
September 30, 2021 | December 31, 2020 | September 30, 2022 | December 31, 2021 | |||||||||||||
| Furniture and Equipment | $ | 179,905 | $ | 19,419 | $ | 221 | $ | 181 | ||||||||
| Computer Equipment | 264,357 | 168,122 | 290 | 173 | ||||||||||||
| Leasehold Improvements | 43,485 | 14,182 | 2,008 | 44 | ||||||||||||
| Software | 115,622 | 68,152 | 254 | 177 | ||||||||||||
| Production Equipment | 23,017 | 0 | 23 | 23 | ||||||||||||
| Property and Equipment, Gross | 626,386 | 269,875 | 2,796 | 598 | ||||||||||||
| Less Accumulated Depreciation | (227,172 | ) | (174,047 | ) | (416 | ) | (149 | ) | ||||||||
| Property and Equipment, Net | $ | 399,214 | $ | 95,828 | $ | 2,380 | $ | 449 | ||||||||
During the three months ended September 30, 20212022 and 2020,2021, the Company recorded depreciation expense of $23,66586,980 and $10,20623,665, respectively. During the nine months ended September 30, 20212022 and 2020,2021, the Company recorded depreciation expense of $53,4940.2 million and $37,28153,494, respectively.
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Note 6:8: Right of Use Leased AssetAssets
Right of use assetassets consisted of the following as of September 30, 2021 and December 31, 2020:(in thousands):
| Schedule of right of use asset | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
| Office Lease Asset | $ | 2,696,036 | $ | 2,245,093 | ||||
| Printer Lease Asset | 12,374 | 12,374 | ||||||
| Right Of Use Asset, Gross | 2,708,410 | 2,257,467 | ||||||
| Accumulated Amortization | (487,123 | ) | (285,103 | ) | ||||
| Right Of Use Asset, Net | $ | 2,221,287 | $ | 1,972,364 | ||||
| Schedule of right of use asset | ||||||||
September 30, 2022 | December 31, 2021 | |||||||
| Office Lease Assets | $ | 9,683 | $ | 3,351 | ||||
| Equipment Lease Assets | 3,056 | 13 | ||||||
| Right of Use Assets, Gross | 12,739 | 3,364 | ||||||
| Accumulated Amortization | (1,917 | ) | (579 | ) | ||||
| Right of Use Assets, Net | $ | 10,822 | $ | 2,785 | ||||
ROU asset amortization duringDuring the three months ended September 30, 2022 and 2021, and September 30, 2020, wasthe Company recorded ROU asset amortization expense of $82,3230.7 million and $89,4120.1 million, respectively. ROU asset amortization duringDuring the nine months ended September 30, 2022 and 2021, and September 30, 2020, wasthe Company recorded ROU asset amortization expense of $202,0201.3 million and $307,1150.2 million, respectively.
Note 7:9: Film and Television Costs, Net
As ofDuring the nine months ended September 30, 2021, the Company had net2022, Film and Television Costs increased by $12.0 million, net of $16,293,040,amortization expense, as compared to $11,828,494 as of December 31, 2020. The increase2021. Excluding the $7.3 million from the Wow Acquisition, Film and Television Costs increased $4.4 million during the nine months ended September 30, 2022, primarily relatesdue to the production costs related toof Stan Lee’s Superhero KindergartenShaq’s Garage and KC Pop Quiz,. The increase is partially offset by amortization of Rainbow Rangers Season 1&2and Llama Llama Seasons 1 & 2Superhero Kindergarten.
During the three months ended September 30, 20212022 and 2020,2021, the Company recorded Film and Television Cost amortization expense of $249,1412.8 million and $101,7160.2 million, respectively. During the nine months ended September 30, 20212022 and 2020,2021, the Company recorded Film and Television Cost amortization expense of $907,5115.1 million and $3$95,0731.1 million, respectively.
The following table highlights the activity in Film and Television Costs as of September 30, 2021,2022 and December 31, 2020: 2021 (in thousands):
| Schedule of film and television costs activity | ||||||||
| Total | ||||||||
| Film and Television Costs, Net as of December 31, 2019 | $ | 9,906,885 | ||||||
| Additions to Film and Television Costs | 2,901,207 | |||||||
| Film Amortization Expense | (979,598 | ) | ||||||
| Film and Television Costs, Net as of December 31, 2020 | 11,828,494 | $ | 11,828 | |||||
| Additions to Film and Television Costs | 5,537,700 | 10,650 | ||||||
| Film Amortization Expense | (1,073,154 | ) | (19,538 | ) | ||||
| Film and Television Costs, Net as of September 30, 2021 | $ | 16,293,040 | ||||||
| Film and Television Costs, Net as of December 31, 2021 | 2,940 | |||||||
| Additions to Film and Television Costs | 17,708 | |||||||
| Disposals | (11 | ) | ||||||
| Film Amortization Expense | (5,100 | ) | ||||||
| Foreign Currency Translation Adjustment | (555 | ) | ||||||
| Film and Television Costs, Net as of September 30, 2022 | $ | 14,982 | ||||||
| 34 |
Note 8:10: Goodwill and Intangible Assets, Net and Goodwill
Intangible Assets, Net
The Company had the following intangible assets (in thousands) with their weighted average remaining amortization period (in years):
Intangible Assets, Net
| Schedule of intangible assets | ||||||||||||
| Weighted Average Remaining Amortization Period | September 30, 2022 | December 31, 2021 | ||||||||||
| Customer Relationships | 9 | $ | 22,199 | $ | 6,120 | |||||||
| Digital Networks | 17 | 3,537 | – | |||||||||
| Trade names | 69 | 11,654 | 4,000 | |||||||||
| Technology | 2 | 293 | – | |||||||||
| Non-Compete | 2 | 60 | 60 | |||||||||
| Other Intangible Assets (a) | 2 | 322 | 301 | |||||||||
| Intangible Assets, Gross | 38,065 | 10,481 | ||||||||||
| Less Accumulated Amortization | (2,364 | ) | (772 | ) | ||||||||
| Foreign Currency Translation Adjustment | (1,927 | ) | 24 | |||||||||
| Intangible Assets, Net | $ | 33,774 | $ | 9,733 | ||||||||
__________________
| (a) | Represents the remaining unamortized logo and website intangible assets related to the merger with A Squared. |
During the three months ended September 30, 2022 and 2021, the Company recorded amortization expense of $0.7 million and $0.1 million, respectively. During the nine months ended September 30, 2022 and 2021, the Company recorded amortization expense of $1.7 million and $0.4 million, respectively.
Pursuant to ASC 350-30, General Intangibles Other than Goodwill, the Company reviews these intangible assets periodically to determine if the value should be retired or impaired due to recent events. There were no changes in events or circumstances during the nine months ended September 30, 2022 that would indicate an impairment of the intangible assets. As of December 31, 2021, the Company decided to discontinue the use of the trade name acquired as part of the acquisition of Beacon Media Group (formerly ChizComm), resulting in a write-down of the full book value of $3.4 million.
Expected future intangible asset amortization as of September 30, 2022 is as follows (in thousands):
| Expected future intangible asset amortization | ||||
| Fiscal Year: | ||||
| 2022 | $ | 684 | ||
| 2023 | 2,733 | |||
| 2024 | 2,709 | |||
| 2025 | 2,602 | |||
| 2026 | 2,597 | |||
| Thereafter | 22,449 | |||
| Total | $ | 33,774 | ||
| 35 |
Goodwill
In 2013, the Company recognized $10,365,806$10.4 million in goodwill, representingas a result of the merger with A Squared. During the first quarter of 2021, the Company recognized $9.7 million in goodwill, as a result of the acquisition of the Beacon Media Group (formerly ChizComm), which was subsequently determined to be impaired as of December 31, 2021, resulting in an impairment charge of $4.8 million and a goodwill balance of $4.9 million.
As a result of the Ameba Acquisition during the first quarter of 2022, the Company recorded goodwill of $0.7 million as determined to be the amount in excess of the fair value of the considerationassets acquired and liabilities assumed in the acquisition. The goodwill recorded for the merger with A Squared 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 impairmentAmeba Acquisition was allocated to the goodwill asset.Content Production and Distribution reportable segment.
As a result of the ChizComm acquisition,Wow Acquisition during the consideration exceededsecond quarter of 2022, the Company recorded goodwill of $21.4 million as determined to be the amount in excess of the fair value of the assets acquired by $9,607,027. Accordingly, this amountand liabilities assumed in the acquisition. The goodwill recorded for the Wow Acquisition was recorded as goodwill atallocated to the time of the acquisition.Content Production and Distribution reportable segment.
Through September 30, 2021, the Company has not recognized any impairment on goodwill. As Beacon Communications and Wow are incorporated as Canadian companies with CAD being their functional currency, goodwill will change each period due to currency exchange differences.
The Company will perform its annual review of goodwill during the fourth quarter.quarter of 2022. There were no events or changes in circumstances that would indicate an impairment in goodwill during the nine months ended September 30, 2022.
The following table summarizes the changes in the carrying amount of goodwill by reportable segment:segment (in thousands):
| Schedule of Goodwill | ||||||||||||
| Content Production & Distribution | Media & Advertising Services | Total | ||||||||||
| Goodwill as of December 31, 2020 | $ | 10,365,806 | $ | 0 | $ | 10,365,806 | ||||||
| Acquisition of ChizComm Entities | 0 | 9,607,027 | 9,607,027 | |||||||||
| Foreign Currency Translation Adjustment | 0 | 3,999 | 3,999 | |||||||||
| Goodwill as of September 30, 2021 | $ | 10,365,806 | $ | 9,611,026 | $ | 19,976,832 | ||||||
Intangible Assets, Net
The Company had the following intangible assets as of September 30, 2021 and December 31, 2020:
| Schedule of Intangible Asset | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
| Trademarks (a) | $ | 129,831 | $ | 129,831 | ||||
| Trade Name (b) | 3,430,000 | 0 | ||||||
| Customer Relations (c) | 6,140,000 | 0 | ||||||
| Non-Compete (d) | 60,000 | 0 | ||||||
| Other Intangible Assets (a) | 304,028 | 299,028 | ||||||
| Intangible Assets, Gross | 10,063,859 | 428,859 | ||||||
| Foreign Currency Translation Adjustment | 15,353 | 0 | ||||||
| Less Accumulated Amortization | (768,912 | ) | (400,165 | ) | ||||
| Intangible Assets, Net | $ | 9,310,300 | $ | 28,694 | ||||
Expected future intangible asset amortization as of September 30, 2021 is as follows:
| Expected future intangible asset amortization | ||||
| Fiscal Year: | ||||
| Remaining 2021 | $ | 135,725 | ||
| 2022 | 542,900 | |||
| 2023 | 538,955 | |||
| 2024 | 514,703 | |||
| Thereafter | 4,148,017 | |||
| Total | $ | 5,880,300 | ||
| Schedule of goodwill | ||||||||||||
| Content Production & Distribution | Media Advisory & Advertising Services | Total | ||||||||||
| Goodwill as of December 31, 2021 | $ | 10,366 | $ | 4,861 | $ | 15,227 | ||||||
| Acquisition of Ameba | 673 | – | 673 | |||||||||
| Acquisition of Wow | 21,398 | – | 21,398 | |||||||||
| Foreign Currency Translation Adjustment | (1,546 | ) | (4 | ) | (1,550 | ) | ||||||
| Goodwill as of September 30, 2022 | $ | 30,891 | $ | 4,857 | $ | 35,748 | ||||||
Note 9:11: Deferred Revenue
As of September 30, 20212022 and December 31, 2020,2021, the Company had total short term and long term deferred revenue of $3,938,83914.2 million and $4,432,3773.9 million, respectively. Included in the deferred revenue balance as of September 30, 2022 is $10.6 million the Company assumed in the Wow Acquisition. The deferred revenue balance assumed represents cash received from customers for productions in progress. Revenue is fully recognized upon production completion. Deferred revenue also 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 September 30, 2021 and December 31, 2020 is the $3,369,695 which is the remaining balance from the total $3,489,583 advance against future royalty that Sony paid to the Company for both the foreign and domestic distribution rights.
| 36 |
Note 10:12: Accrued Expenses, Salaries and Wages – CurrentSupplemental Financial Statement Information
AsOther Income (Expense), Net
Components of September 30, 2021 and December 31, 2020, the Company has the following current accrued liabilities:other income (expense), net are summarized as follows (in thousands):
| Schedule of other accrued liabilities | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
| Other Accrued Expenses (a) | $ | 155,327 | $ | 408,459 | ||||
| Accrued Salaries and Wages (b) | 612,040 | 428,922 | ||||||
| Total Accrued Liabilities – Current | $ | 767,367 | $ | 837,381 | ||||
| Schedule of other income (expense) | ||||||||||||||||
| Three Months Ended | Nine months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Gain (Loss) on Warrant Revaluation (a) | $ | 166 | $ | 420 | $ | 434 | $ | 103 | ||||||||
| Loss on Foreign Exchange (b) | (1,336 | ) | 5 | (2,596 | ) | (3 | ) | |||||||||
| Loss on Marketable Securities Investments (c) | (36 | ) | (25 | ) | (160 | ) | (25 | ) | ||||||||
| Gain (Loss) on Revaluation of Equity Investment in YFE(d) | (4,071 | ) | – | (1,170 | ) | – | ||||||||||
| Interest Income (e) | 257 | 183 | 759 | 314 | ||||||||||||
| Warrant Incentive Expense (f) | – | – | – | (69,139 | ) | |||||||||||
| Interest Expense (g) | (782 | ) | (2 | ) | (1,256 | ) | (20 | ) | ||||||||
| Net Other Income (Expense) | $ | (5,802 | ) | $ | 581 | $ | (3,989 | ) | $ | (68,770 | ) | |||||
| (a) | ||
| (b) | ||
| (c) | The Company started investing in marketable securities during the three months ended June 30, 2021. The net realized loss on marketable securities recognized during the three and nine months ended September 30, 2022 reflects the | |
| (d) | The loss on revaluation of the equity investment in YFE is the change in fair value recognized on the Company’s investments in YFE accounted for using the fair value option. The loss is a result of the change in YFE’s stock price at the end of the current reporting period. | |
| (e) | Interest Income received during the three and nine months ended | |
| (f) | The Warrant Incentive Expense is related to the fair value of new warrants that were issued in 2021 to certain existing warrant holders in exchange for previously issued outstanding warrants. | |
| (g) | Interest expense during the three and nine months ended September 30, 2022 primarily consists of $0.4 million and $0.6 million, respectively, of interest incurred on the Company’s margin loan collateralized by its marketable security investments and $0.3 million and $0.6 million, respectively, of interest incurred on its production facilities loan and bank indebtedness assumed as part of the Wow Acquisition. |
Note 11:14: Senior Secured Convertible NotesBank Indebtedness and Production Facilities
On March 11, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (each an “Investor” and collectively, the “Investors”) pursuant to which the Company agreed to sell and issue (1) Senior Secured Convertible Notes to the Investors in the aggregate principal amount of $13,750,000 (each, a “Note” and collectively, the “2020 Convertible Notes”) and $11,000,000 funding amount (reflecting an original issue discount of $2,750,000) and (2) warrants to purchase shares of the Company’s common stock exercisable for a period of five years at an initial exercise price of $0.26 per share (each a “Warrant” and collectively, the “Warrants”), for consideration consisting of (i) a cash payment of $7,000,000, and (ii) full recourse cash secured promissory notes payable by the Investors to the Company (each, an “Investor Note” and collectively, the “Investor Notes”) in the principal amount of $4,000,000 (the “Investor Notes Principal”) (collectively, the “Financing”). Andy Heyward, the Company’s Chairman and Chief Executive Officer, participated as an Investor and invested $1,000,000 in connection with the Financing, all of which was paid at the closing and not pursuant to an Investor Note. The Special Equities Group, LLC, a division of Bradley Woods & Co. LTD, acted as placement agent and received warrants to purchase shares at an exercise price of $0.26 per share (the “Placement Agent Warrants”).
The closing of the sale and issuance of the 2020 Convertible Notes, the Warrants and the Placement Agent Warrants occurred on March 17, 2020 (the “Closing Date”). The maturity date of the 2020 Convertible Notes was September 30, 2021 and the maturity date of the Investor Notes was March 11, 2060.
The Company held a stockholder meeting to approveassumed the issuancefollowing bank indebtedness instruments and production facilities as part of shares of common stock issuablethe Wow Acquisition.
Revolving Demand Facility
Draws under the 2020 Convertible Notes and pursuant to$5.0 million CAD revolving demand facility can be made in Canadian or US dollars at the terms of the SPA for the purposes of compliance with the stockholder approval rules of The Nasdaq Stock Market (“Stockholder Approval”).
In addition, pursuant to the terms of the SPA, the 2020 Convertible Notes and the Warrants, the Company agreed that the following will apply or become effective only following Stockholder Approval: (1) the conversion price of the 2020 Convertible Notes shall be reduced to $0.21 per share and may be further reduced to any amount and for any period of time deemed appropriate by the board of directorsoption of the Company (the “Boardby way of Directors”), (2)bank prime rate loans, Canadian Bankers’ Acceptances, USD LIBOR, or letters of credit and can be repaid at any time without penalty and without notice and are generally repayable on demand. Canadian or US dollar bank prime borrowings bear interest at a rate equal to bank prime plus 2.00% per annum. For other draws under the exercise pricerevolving facility, the respective loans bear interest at a rate equal to Canadian Bankers’ Acceptances or USD LIBOR plus 3.75% per annum. As of September 30, 2022, the Company had an outstanding balance of $2.1 million USD on the revolving demand facility, included as Bank Indebtedness within current liabilities on the Company’s condensed consolidated balance sheet.
As of September 30, 2022, the Company was in compliance with all covenants under the revolving demand facility.
Equipment Lease Line
Each transaction under the $8.0 million CAD equipment lease line has specific financing terms in respect of the Warrants shall be immediately reduced to $0.21 per shareleased equipment such as term, finance amount, rate, and may be further reduced to any amount andpayment terms. The finance rates for any period of time deemed appropriate by the Board of Directors, (3) the 2020 Convertible Notes and Warrants shall each have full ratchet anti-dilution protection for subsequent financings (subject to certain exceptions), (4) existing warrant holders that are participating in the Financing (representing warrants to purchase an aggregate of shares of Company common stock) will have their existing warrants’ exercise prices reduced to $0.21 and (5) the investors shall have a most favored nations right which provides that if the Company enters into a subsequent financing, then the Investors (togetherthese equipment leases range from 4%- 4.5% with their affiliates) at their sole discretion shall have the ability to exchange their 2020 Convertible Notes on a $1 for $1 basis into securities issued in the new transaction. Additionally, in the event that any warrants or options (or any similar security or right) issued in a subsequent financing include any terms more favorable to the holders thereof (less favorable to the Company) than theremaining lease terms of the Warrants, the Warrants shall be automatically amended to include such more favorable terms. On March 16, 2020, the holders17-31 months as of the August 2018 Secured Convertible Notes were repaidWow Acquisition date. The Company has recorded right of use assets and lease liabilities for the leased equipment acquired in full including anyrespect of these draws. The Company has drawn down a total of $7.9 million CAD ($6.0 million USD), with an outstanding interest.
On May 15, 2020, the Company received the necessary Stockholder Approval in connection with the Nasdaq proposals described above. As a result, the Conversion Pricebalance as of the 2020 Convertible Notes and the exercise priceSeptember 30, 2022 of the Warrants were each reduced to $0.21. In addition, existing warrant holders that participated in the Financing (representing warrants to purchase an aggregate of shares of Common Stock) also had their existing warrants’ exercise prices reduced to $0.21.
On June 23, 2020, the Company received $3,600,000$2.2 million CAD ($1.6 million USD), net of expenses, fromrepayments, included within current and noncurrent finance lease liabilities on the paymentCompany’s condensed consolidated balance sheet.
Treasury Risk Management Facility
Advances under the treasury risk management facility are subject to market rates as determined by the lender’s treasury department or derivatives group at the time of the Investor Notes Principal.drawdown request. The maximum term for foreign exchange forward contracts and interest rate swaps is one year.
Between June 19As of September 30, 2022, there were no outstanding amounts drawn under the treasury risk management facility.
Interim Financing Facilities
The Company’s interim financing facilities for specific productions bear interest at rates ranging from bank prime plus 1.25% - 1.75% per annum. The interim production financing facilities are generally repayable on demand and June 23, 2020,are generally secured by a combination of federal and provincial tax credits, other government incentives, production service agreements and license agreements. As of September 30, 2022, the Convertible Notes were converted and repaid throughCompany had an outstanding balance of $19.3 million USD recorded as Production Facilities, net within current liabilities on the issuance of 65,476,190 shares of common stock.Company’s condensed consolidated balance sheet.
Note 12:15: Production Loan Facility
On August 8, 2016, Llama Productions LLC (“Llama”) closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”) with Bank Leumi USA (the “Lender”) to produce its animated series Llama Llama, (the “Series”) which is configured as fifteen half-hour episodes comprised of thirty 11-minute programs that were delivered to Netflix in fall 2017. 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.
On September 28, 2018, Llama entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with 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 used to pay the majority of the expenses of producing, completing and delivering two 22-minute episodes and nineteen 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 could 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. The Maturity Date of the Prime Rate Loan facility and LIBOR Loan facility was June 30, 2021.
In addition, on September 28, 2018, Llama and the Lender entered into Amendment No. 2 to the 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 8, 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, 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 December 31, 2020, the Company had gross outstanding borrowings under the facility of $1,099,713. The outstanding balance of $274,365 was repaid on July 14, 2021.
Note 13: 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 believed 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 14: Payroll Protection ProgramMargin Loan
On AprilThe Company borrowed an additional $63.2 million from its investment margin account during the nine months ended September 30, 2020,2022 and repaid $7.8 million with cash received from sales and/or redemptions of its marketable securities. During the nine months ended September 30, 2022, the borrowed amounts were used to finance the Company’s additional investments in YFE and the closing of the acquisitions of Ameba and Wow, in each case pledging certain of its marketable securities as collateral. During the three months ended September 30, 2022, the additional borrowings of $4.2 million were used for quarterly operational costs. The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 0.65% with interest only payable monthly. The weighted average interest rate was 2.65% on an average margin loan balance of $61.2 million during the three months ended September 30, 2022. The weighted average interest rate was 1.54% on an average margin loan balance of $43.4 million during the nine months ended September 30, 2022. The Company received loan proceeds in the amountincurred interest expense of $366,2670.6 million underduring the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and is administered through the Small Business Administration (“SBA”). The Company repaid the outstanding balance, including interest of $3,452 on April 28, 2021.
Note 15: Note Payable
On February 1, 2021, as part of the ChizComm Acquisition, the Company assumed a $200,000 business loan that was entered into on October 15, 2019. The loan matures on September 15, 2026, with payments of $2,999, plus interest at a rate of Prime plus 2.85% per annum, due monthly. As ofnine months ended September 30, 2021,2022. The investment margin account borrowings do notmature but are payable on demand as the Company has an outstanding balance of $116,195, classifiedcustodian can issue a margin call at any time, therefore the margin loan is recorded as a note payable within current and noncurrent liabilitiesliability on itsthe Company’s condensed consolidated balance sheets.
Note 16: Stockholders’ Equity
Common Stock
As of September 30, 2021,2022, the total number of authorized shares of Common Stockcommon stock was .
On March 22, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain long-standing investors (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “Registered Offering”), an aggregate of shares of common stock at an offering price of $0.2568 per share for gross proceeds of approximately $1.0 million before deducting offering expenses. The Registered Offering closed on March 25, 2020.
As of September 30, 20212022, and December 31, 2020,2021, there were and shares of common stock outstanding, respectively.
On January 6, 2021,February 18, 2022, the Company issued shares of the Company’s common stock valued at $1.400.3 million per shareto a nonemployee for marketingproductions services.
On January 21, 2021,February 24, 2022, the Company issued shares of the Company’s common stock valued at $1.4665,515 per share for marketing services.which were held in escrow as part of the ChizComm acquisition.
On February 1, 2021,April 7, 2022, the Company issued shares of the Company’s common stock valued at $1.7810.8 million per sharerelated to the Wow Acquisition, as partial consideration forpart of the ChizComm acquisition.purchase price. Also included as part of the Wow Acquisition, the Company has issued shares, valued at $0.7 million, which will be exchanged at a future redemption date upon tender of ExchangeCo (as defined below) shares as specified in the agreement. See additional information on the ExchangeCo shares below under “Preferred Stock.”
On February 4, 2021,During the nine months ended September 30, 2022, the Company issued shares of the Company’s common stock valued at $1.811.6 million per share as partial consideration for the ChizComm acquisition.
On May 14, 2021, the Company issued sharesrepresenting delivery of the Company’s common stock valued at $ per share for production services.vested RSUs.
Preferred Stock
The Company has 10,000,001 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 ourthe Company’s 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 ourthe Company’s Board of Directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
There were no
| 39 |
In connection with the Company’s acquisition of Wow, certain eligible Canadian shareholders, noteholders and optionholders of Wow elected to receive the Exchangeable Shares in the capital of the Wow Exchange Co. Inc. (“ExchangeCo”) instead of shares of preferredthe Company’s common stock outstandingto which they were otherwise entitled.
The shares of ExchangeCo are exchangeable into shares of the Company’s common stock in accordance with their terms. Holders of the ExchangeCo shares are entitled to defined voting rights (the “Voting Rights”) in the Company pursuant to a voting and exchange trust agreement (the “Voting Agreement”) dated April 6, 2022 between the Company, ExchangeCo, 1329258 B.C. Ltd. and Computershare Trust Company of Canada (the “Voting Trustee”). The Voting Trustee holds a single share of Series B Preferred Stock in the capital of the Company (the “Special Voting Share”), which grants the Voting Trustee that number of votes at the meetings of the Company’s shareholders as is equal to the number of shares of the Company’s common stock that at such time have not been delivered pursuant to the tender of ExchangeCo shares. The Voting Trustee is required to exercise each vote attached to the Special Voting Share only as directed by the relevant holder of the underlying Company shares of common stock and, in the absence of any instructions, will not exercise voting rights with respect to the applicable shares.
As of September 30, 20212022 and December 31, 2020.2021, there were 0 shares of Series A Convertible Preferred Stock outstanding. As of September 30, 2022 and December 31, 2021, there was 1 share of Series B Preferred Stock outstanding.
Treasury Stock
During the three months ended September 30, 2022, shares of common stock were withheld to cover withholding taxes owed by certain employees, all of which were taken into treasury stock.
In addition, during the three months ended September 30, 2022, the Company agreed to settle the lawsuit, Harold Chizick and Jennifer Chizick v. Genius Brands International, Inc., ChizComm Ltd, pursuant to a settlement agreement (the “Settlement Agreement”) dated October 6, 2022 (the “Settlement Date”). Pursuant to the Settlement Agreement, the Company agreed to purchase the non-escrow shares of common stock (the “Settlement Shares”) that the Chizicks held as of the Settlement Date. The Settlement Shares were purchased at the market price of $ per share, plus a premium of $ per share, for a total purchase price of $834,479. As of September 30, 2022, the Company recorded a liability within other current liabilities on the Company’s condensed consolidated balance sheet for the total purchase price, and the Company recorded the cost based on the market price on the Settlement Date of $285,148 to additional paid in capital for the share repurchase yet to be settled as of the balance sheet date. The Company recorded the amount in excess of cost of $549,330 as a legal expense within general and administrative expenses on the Company’s condensed consolidated statements of comprehensive income (loss).
On September 18, 2015, the Company adopted the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The total number of shares that can be issued under the 2015 Plan is shares.
On September 1, 2020, the Company adopted the Genius Brands International, Inc. 2020 Incentive Plan (the “2020 Plan”). On August 4, 2020, the Board of Directors voted to adopt the 2020 Plan. The shares available for issuance under the 2020 Plan was approved by stockholders on August 27, 2020. The 2020 Plan as approved by the stockholders increased the maximum number of shares available for issuance up to an aggregate of shares of common stock.
stock, which does not include shares that the Company may issue related to acquisitions.
During the threenine months ended March 31, 2021,September 30, 2022, the Company granted options to purchase shares of common stock to employees with a fair market value of $1.3 million. The options vest evenly over three years and grantedexpire five to eachten years from grant date.
In addition, as part of the members ofWow Acquisition, the Board of Directors Company granted replacement options to purchase shares of the Company’s common stock with an option price of $ per share.
Duringto Wow employees who would continue to provide services to the three months ended June 30, 2021, the Company granted options to purchaseCompany. shares of common stock to employees that The Company also granted 20,000 options to purchase shares of common stock were also granted to a new membercertain departing Wow shareholders to replace their previously vested Wow options. These options were cancelled after 30 days of the Boardgrant date if not exercised. The fair market value of Directors that $vest on June 24,1.5 million was determined utilizing assumptions as of the replacement date of April 6, 2022 and havewere valued using the BSM option pricing model. The number of shares granted was determined by using an exchange ratio calculated by a five-year term.third party based on the intrinsic value of the Wow common stock purchased as part of the acquisition and the value of the Company’s common stock as of the agreement date. The vesting terms of the replacement options remained the same as the Wow options for which they were exchanged. All shares have an optionthat replaced previously vested Wow shares were included as part of the purchase price based on the calculated fair value on the acquisition date of $ per share.for shares. The remaining options to vest with a fair value of $ will be expensed over the remaining requisite period. The options expire within 3 years from the replacement option grant date or the original Wow option, whichever is greater.
The Company did not grant anyfair value of the options granted during the threenine months ended September 30, 2021.
The table below outlines2022 were calculated using the weighted average assumptions for options granted duringBSM option pricing model based on the three months ended March 31, 2021 and June 30, 2021:following assumptions:
| Schedule of assumptions used | ||||||||||||||||||||||||
| March 31, 2021 | June 30, 2021 | 3/17/2022 Options | 4/6/22 Replacement Options | 6/23/22 Options | 7/11/22 Options | |||||||||||||||||||
| Exercise Price | $ | 3.06 | $ | 1.98 | $ | $-$ | $ | $ | ||||||||||||||||
| Dividend Yield | % | % | % | % | % | % | ||||||||||||||||||
| Volatility | % | % | % | %-% | % | % | ||||||||||||||||||
| Risk-free interest rate | % | % | % | %-% | % | % | ||||||||||||||||||
| Expected life of options | years | years | years | - years | years | years | ||||||||||||||||||
The following table summarizes the stock option activity during the nine months ended September 30, 2021: 2022:
| Schedule of stock option activity | ||||||||||||
| Number of Shares | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | ||||||||||
| Outstanding at December 31, 2020 | 9,116,176 | $ | 1.69 | |||||||||
| Granted | 933,636 | 4.45 | $ | 2.74 | ||||||||
| Exercised | 0 | – | $ | – | ||||||||
| Forfeited | (165,000 | ) | $ | 3.98 | ||||||||
| Expired | 0 | – | $ | – | ||||||||
| Outstanding at September 30, 2021 | 9,884,812 | $ | 1.77 | |||||||||
| Unvested at September 30, 2021 | 3,255,303 | $ | 2.31 | |||||||||
| Vested and exercisable September 30, 2021 | 6,629,509 | $ | 1.50 | |||||||||
| Schedule of stock option activity | ||||||||||||
| Number of Shares | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | ||||||||||
| Outstanding at December 31, 2021 | 10,197,312 | $ | 1.75 | |||||||||
| Granted | 4,394,809 | 4.74 | $ | 1.06 | ||||||||
| Exercised | – | – | $ | – | ||||||||
| Forfeited/Cancelled | (1,082,915 | ) | $ | 1.62 | ||||||||
| Expired | – | – | $ | – | ||||||||
| Outstanding at September 30, 2022 | 13,509,206 | $ | 1.51 | |||||||||
| Unvested at September 30, 2022 | 4,361,195 | $ | 1.33 | |||||||||
| Vested and exercisable at September 30, 2022 | 9,148,011 | $ | 1.60 | |||||||||
During the three and nine months ended September 30, 2022 and 2021, the Company recognized $ and $, respectively, in share-based compensation expense related to stock options. During the three and nine months ended September 30, 2020,2022 and 2021, the Company recognized $ and $, respectively, in share-based compensation expense.expense related to stock options. The unrecognized share-based compensation expense asrelated to stock options at September 30, 2022 of $ will be recognized through the third quarter of 2025 based on the remaining vesting periods, assuming the options are not cancelled or forfeited. As of September 30, 20212022, there was $ and will be recognized over a weighted average remaining contractual life of years. The outstanding shares as of September 30, 2021 have an aggregatedaggregate intrinsic value of $.related to outstanding unvested options. The weighted average fair valuesvalue per option granted forduring the ninethree months ended September 30, 20212022 was determined to be $.
Note 18: Restricted Stock Units
On December 7, 2020,During the nine months ended September 30, 2022, the Company granted shares of Restricted Stock Units (RSUs)fully vested RSUs to nonemployees with a fair market value of $12,614,2501.0 million to certain employees and officers. Of such RSUs, were issued to Andy Heyward, the Company’s Chief Executive Officer (“CEO”) and were to vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued employment (the “service-based awards”). The CEO also received an additional RSUs that vested in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain performance goals (the “performance-based awards”), which have not been established at the time the CEO and the Company entered into the arrangement, and subject to his continued employment. As the performance conditions have not been established for the performance-based awards, a grant date was not yet established.
On February 1, 2021, the Company issued RSUsan employee with a fair market value of $74,193390,000. that vest evenly over three years. The RSUs expire five years from date of grant.
On June 23, 2021, the Compensation CommitteePer terms of the Board of Directors amendedrestricted stock agreements, for certain employees the service-based awards grantedCompany paid the employee’s related taxes associated with the employee’s vested stock and decreased the freely tradable shares issued to the CEO, such that 3,750,000employee by a corresponding value, resulting in a share issuance net of such RSUs shall continuetaxes to vest in four equal installments on the first, second, third and fourth anniversariesemployee. The value of December 7, 2020, subject to his continued employment and the remaining 3,750,000 RSUs shall be modified to vest based on performance or market conditions. The previously issued 7,500,000 performance-based awards, along with the 3,750,000 modified service-based awards, shall vest as follows: (i) 3,750,000 RSUs vest when the Company’sshares netted for employee taxes represents treasury stock repurchased. An aggregate of shares of common stock closing sale price equals or exceeds $3.00 per share or the Company’s market capitalization equals or exceeds $903,000,000 for 20 consecutive trading days; (ii) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.50 per share or the Company’s market capitalization equals or exceeds $1,053,500,000 for 20 consecutive trading days, and (iii) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.75 per share or the Company’s market capitalization equals or exceeds $1,128,750,000 for 20 consecutive trading days (the “market conditions”). In addition to the stock price and market capitalization vesting conditions set forth above, such 11,250,000 RSUs may also vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain operating performance-based vesting conditions established by the Compensation Committee on June 23, 2021 and subject to his continued employment, adjusted pro-ratably for vesting pursuant to the market conditions. Aswere issued as a result of these modifications, thevested RSUs, subject to the market conditions were valued at $15,649,700 with a derived service period of 12 months, using a Monte-Carlo simulation model.
On June 24, 2021, the Company issuedwhich, shares of RSUs with a fair market valuecommon stock were withheld to pay employee taxes upon such vesting. The Company recorded the cost of the withheld shares of $422,9992,553. as treasury stock as of September 30, 2022.
The following table summarizes the Company’s RSU activity during the nine months ended September 30, 2021:2022:
| Schedule of restricted stock units | ||||||||||||||||||||
| Restricted Stock Units | Weighted- Average Remaining Contractual Life | Weighted- Average Grant Date Fair Value per Share | ||||||||||||||||||
| Restricted Stock Units | Weighted- Average Grant Date Fair Value Per Share | |||||||||||||||||||
| Unvested at December 31, 2020 | 9,075,000 | $ | 1.39 | |||||||||||||||||
| Unvested at December 31, 2021 | 15,383,234 | $ | 1.40 | |||||||||||||||||
| Granted | 7,767,399 | $ | 1.40 | 1,886,667 | $ | 0.88 | ||||||||||||||
| Vested | 0 | $ | – | (4,088,301 | ) | $ | 1.26 | |||||||||||||
| Forfeited | 0 | $ | – | |||||||||||||||||
| Unvested at September 30, 2021 | 16,842,399 | $ | 1.40 | |||||||||||||||||
| Forfeited/Cancelled | – | – | $ | – | ||||||||||||||||
| Unvested at September 30, 2022 | 13,181,600 | $ | 1.37 | |||||||||||||||||
During the three and nine months ended September 30, 2022 and 2021, the Company recognized $ and $, respectively, in share-based compensation expense related to RSU awards. The unvestedRSUs. During the nine months ended September 30, 2022 and 2021, the Company recognized $ and $, respectively, in share-based compensation as ofexpense related to RSUs. The unrecognized share-based compensation expense related to RSUs at September 30, 2021 is2022 of $ which will be recognized through the fourthsecond quarter of 2024,2025 based on the remaining vesting periods, assuming the underlying grants are not cancelled or forfeited.
Note 19: Warrants
The Company hashad warrants outstanding to purchase up to 44,843,429 shares and 45,511,965 shares of the Company’s common stock as of September 30, 20212022 and December 31, 2020.
On January 22, 2020, the Company entered into2021, respectively with a private transaction (the “Private Transaction”) pursuant tototal value of $74.1 million, a Warrant Exercise Agreement (the “Agreement”) with the holder of the Company’s existing warrants (the “Original Warrants”). The Original Warrants were originally issued on October 3, 2017, to purchase an aggregate of 500,000 shares of common stock, at an exercise price of $3.90 per share and were to expire in October 2022.
Pursuant to the Agreement, the holder of the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and the Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (theweighted average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the Agreement) (the “Amended Exercise Price”). The Company received approximately $170,000 from the exercise of the Original Warrants.
The placement agent received warrants to purchase 50,000 shares at an exercise price of $0.34 per share.
Pursuant to the SPA described in Note 11, the Company issued to the note holders warrants to purchase 65,476,191 shares of common stock, exercisable for a period of 5five years at an initial exercise price of $0.262.24 per share.and a weighted average remaining term of 3.4 years as of September 30, 2022.
The placement agent receivedAs of September 30, 2022, 892,857 liability classified derivative warrants to purchase 6,547,619shares at an exercise price of $0.26 per share. The fair values of derivative warrants attached to the 2020 Convertible NotesCompany’s common stock remained outstanding and Notes conversion option were determined using the Black-Scholes-Merton option pricing model with standard valuation inputs. The valuation inputs as of March 17, 2020 included expected volatility of 89%, and annual interest rate of 0.66%. The warrants were determined to be liability classified and adjusted to fair value as ofare revalued each reporting period. As of September 30, 2021,2022, the warrants to purchase 892,857 shares were outstanding and re-valuedrevalued at $1,094,023,$0.4 million, resulting in a net decrease of $0.4 million in liability of $103,046, as compared to December 31, 2020.2021. The change in value is recorded in the Warrant Revaluation Gain (Loss) line item within Net Other Income (Expense)net other income (expense) on the condensed consolidated statementstatements of operations. The valuation inputs as of September 30, 20212022 included an expected volatility of 107%,% and an annual interest rate of 0.64%%.
On January 28, 2021, the Company entered into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to exercise certain outstandingAugust 11, 2022, warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of the Company’s common stock at their original exercise price of $1.55 per share (the “Exercise”). The Company received approximately $61.6 million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent and received a cash fee of $4,286,844. In consideration for the exercise of the Existing Warrants for cash, the exercising holders received new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”) at an exercise price of $2.37 per share, exercisable immediately, with an exercise period of five years from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends and other language typical for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock underlying the New Warrants is effective after six months). The Company registered the resale of the shares of common stock issuable upon exercise of the New Warrants. The fair value of these warrants was determined to be $69,138,527 using the Black-Scholes option pricing model and was recorded as Warrant Incentive Expense within Net Other Income (Expense) on the condensed consolidated statement of operations, based on the following assumptions: expired.
| Schedule of assumptions for warrant activity | ||||
| Exercise Price | $ | 2.37 | ||
| Dividend Yield | % | |||
| Volatility | % | |||
| Risk-free interest rate | % | |||
| Expected life of options | years |
The following table summarizes the changes in the Company’s outstanding warrants during the nine months ended September 30, 2021:
| Schedule of warrant activity | ||||||||||||||||
| Warrants Outstanding Number of Shares | Exercise Prices Per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price Per Share | |||||||||||||
| Balance at December 31, 2020 | 45,511,965 | $ | years | $ | 1.55 | |||||||||||
| Warrants Granted | 39,740,500 | $ | 4.58 years | $ | 2.37 | |||||||||||
| Warrants Exercised | (39,740,500 | ) | $ | 1.55 | 4.76 years | $ | 1.55 | |||||||||
| Warrants Expired | 0 | $ | – | – | $ | 0 | ||||||||||
| Balance at September 30, 2021 | 45,511,965 | $ | 0.21 - 5.30 | years | $ | 2.27 | ||||||||||
| Exercisable December 31, 2020 | 7,176,620 | $ | 0.76 - 6.00 | 3.77 years | $ | 2.52 | ||||||||||
| Exercisable September 30, 2021 | 44,511,965 | $ | 0.21 - 5.30 | 4.77 years | $ | 2.29 | ||||||||||
Note 20: Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 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.
ASC 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.
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, 2021,2022 and December 31, 2020,2021, the Company had 0no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and in the statestates of California, and Massachusetts and New Jersey.Jersey and will start filing in New York. 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.
Genius Brands International, Inc.The Company is subject to US income taxes on a stand-alone basis. Genius Brands International, Inc.The Company, the Beacon Media Group (formerly ChizComm) and ChizComm CanadaWow file separate stand-alone tax returns in each jurisdiction in which they operate. ChizComm Canada is a corporationBeacon Communications, Wow and Ameba are corporations operating in Canada and isare subject to Canadian income taxes on its stand-alone taxable income.
Note 21: Commitment and Contingencies
Effective January 1, 2019, the Company adopted ASC 842, The following is a schedule of future minimum contractual obligations as of September 30, 2022 (in thousands):
| Schedule of future minimum lease payments | ||||||||||||||||||||||||||||
| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | ||||||||||||||||||||||
| Operating Leases | $ | 435 | $ | 1,629 | $ | 1,692 | $ | 1,741 | $ | 1,758 | $ | 6,040 | $ | 13,295 | ||||||||||||||
| Finance Leases | 460 | 1,499 | 456 | – | – | – | 2,415 | |||||||||||||||||||||
| Employment Contracts | 1,692 | 3,311 | 971 | 427 | – | – | 6,401 | |||||||||||||||||||||
| Consulting Contracts | 1,467 | 482 | – | – | – | – | 1,949 | |||||||||||||||||||||
| Debt | 64,470 | 19,057 | 24 | 24 | 18 | – | 83,593 | |||||||||||||||||||||
| $ | 68,524 | $ | 25,978 | $ | 3,143 | $ | 2,192 | $ | 1,776 | $ | 6,040 | $ | 107,653 | |||||||||||||||
Leases, using the modified retrospective transition method applied at the effective date of the standard. Pursuant to the adoption, management recorded a right-of-use asset of $2,153,747, accumulated amortization of $124,070, a lease liability of $2,071,903, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306 for the operating lease entered into on February 6, 2018, for 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to a 91-month lease that commenced on May 25, 2018. The Company paid rent of $364,130 annually, subject to annual escalations of 3.5%.
Effective January 21, 2019, the Company entered into an 83-month sublease for the 6,969 square feet of general office space, that commenced on February 4, 2019. The subtenant paid the Company rent of $422,321 annually, subject to annual escalations of 3.5%. On September 11, 2020, the Company entered into a Surrender Agreement with the landlord which terminated the 131 South Rodeo Dr. lease agreement. As a result, the Company recorded a decrease in the right-of-use asset, accumulated amortization, and the lease liability of $2,142,863, $465,124 and $1,760,302 respectively. The termination of the lease resulted in a loss of $338,586. Simultaneously, as part of the Surrender Agreement the Sublease was terminated.
On January 30, 2019, the Company entered into an operating lease for 5,838 square feet of general office space at 190 N. Canon Drive, Suite 400, Beverly Hills, CA 90210 pursuant to a 96-month lease that commenced on August 1, 2019. The Company pays rent of $392,316$0.4 million annually, subject to annual escalations of 3.5%.
On February 1, 2021, as part of the ChizComm Acquisition, the Company assumed an operating lease that was entered into on May 19, 2019 for 6,845 square feet of general office space located at 245 Fairview Mall Drive, Suites 202 and 301, Toronto, Ontario M2J 4T1 pursuant to an 84-month lease which commenced on October 1, 2019. The Company pays rent of $95,830 annually, subject to annual escalations 5% to 7%. Also, as part of the ChizComm Acquisition, the Company assumed an operating lease that was entered into on April 30, 2019 for 3,379 square feet of general office space located at One International Boulevard, 11th Floor, Mahawh, New Jersey pursuant to a 24-month lease which ended on May 1, 2021. The Company paidpays rent of $74,338 annually.
| 43 |
On March 2, 2021, the Company entered into an operating lease for 4,765 square feet of general office space located at 1050 Wall Street West, Suite 665, Lyndhurst NJ, 07071 pursuant to an 89-month lease which commenced on October 1, 2021. The Company will pay $114,360pays rent of $0.1 million annually subject to annual escalations of 2.5%.
On April 6, 2022, as part of the Wow Acquisition, the Company assumed an operating lease for 45,119 square feet of general office space located at 2025 West Broadway, Suite 200, Vancouver, B.C., V6J 1Z6. The right of use asset and lease liability were revalued on the acquisition date based on the remaining lease term of 117 months with payments of $81,769 per month, subject to escalations of 7% each of the third and fifth years. The lease liability and right of use asset were determined to be $6.6 million, utilizing a discount rate of 11.5%. As part of the assumed office lease, the Company also assumed a parking lease for 80 parking spaces. The parking lease was also revalued utilizing the 11.5% discount rate. With a remaining lease term of 117 months, paying $6,091 per month, the ROU asset and lease liability were determined to be $0.5 million as of the acquisition date.
Also, as part of the Wow Acquisition, the Company assumed various equipment finance leases, the majority of which are under Master Line of Credit Agreements with certain banking institutions. As the rates were implicit in the leases, the Company determined that the carrying value of the leases as of the acquisition date equaled the fair value. As determined by utilizing the implicit rate in the leases that ranged from 3.7%- 14.5% with remaining lease terms of 10-33 months and monthly payments of $1,346-$57,362 as of the Wow Acquisition date. The remaining finance lease obligations of $3.5 million as of the acquisition date was included as part of the Company’s existing current and noncurrent finance lease liabilities on the Company’s condensed consolidated balance sheet upon consolidation.
As of September 30, 2022, the weighted-average lease term for the Company’s operating leases are 95 months and the weighted-average discount rate on the leases was 10.39%. As of September 30, 2022, the weighted-average lease term for the Company’s finance leases are 27 months and the weighted-average discount rate on the leases was 5.11%.
As of December 31, 2021, the weighted-average lease term for operating leases equals towas 6970 months. Weighted-averageThe weighted-average discount rate equals toon the leases was 8.3224.9%.
In addition, the Company has contractual commitments for employment agreements of certain employees.
Rental expenses incurred for operating and finance leases during the three months ended September 30, 20212022 and September 30, 20202021 were $124,1890.9 million and $141,9620.1 million, respectively. Rental expenses incurred for operating and finance leases during the nine months ended September 30, 20212022 and September 30, 20202021 were $367,9352.0 million and $557,6400.4 million, respectively. During the nine months ended September 30, 2021, the Company did not receive sub-lease income. During the nine months ended September 30, 2020, the Company received sub-lease income of $316,762.
Other Funding Commitments
The followingCompany 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, in which the Company is obligated to share net profits with the underlying rights holders on a schedulecertain 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 future minimum contractual obligationsthe net profits of the properties on which they have rendered services, as of September 30, 2021, under the Company’s operating leases and employment agreements: defined in each respective agreement.
| Schedule of future minimum lease payments | ||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||
| Operating Leases | $ | 162,898 | $ | 679,772 | $ | 665,681 | $ | 690,463 | $ | 711,662 | $ | 1,306,939 | $ | 4,217,415 | ||||||||||||||
| Employment Contracts | 856,355 | 2,932,028 | 2,236,787 | 1,105,566 | 506,583 | 0 | 7,637,319 | |||||||||||||||||||||
| Consulting Contracts | 75,000 | 187,500 | 0 | 0 | 0 | 0 | 262,500 | |||||||||||||||||||||
| $ | 1,094,253 | $ | 3,799,300 | $ | 2,902,468 | $ | 1,796,029 | $ | 1,218,245 | $ | 1,306,939 | $ | 12,117,234 | |||||||||||||||
Note 22: Related Party Transactions
Pursuant to his employment agreements dated November 16, 2018 and November 16,December 7, 2020, Mr.Andy Heyward, the Company’s CEO, is entitled to an Executive Producer fee of $12,500 per halfone-half hour episode for each episode he provides services as an executive producer. The fourth identified series under thisproducer. During the nine months ended September 30, 2022, Mr. Heyward earned and the Company paid $0.6 million in producer fees. During the nine months ended September 30, 2021, Mr. Heyward earned $0.2 million in producer fees. Mr. Heyward has also earned $55,000 as part of his quarterly discretionary bonus in each of the quarters of 2022 and 2021.
Pursuant to his employment agreement is Stan Lee’s Superhero Kindergarten. Accordingly, Mr. Heyward is owed $175,000 which is included in Due to Related Party ondated April 7, 2022, whereas Michael Hirsh was appointed as the CEO of Wow and its Frederator and Mainframe Studio subsidiaries, a member of the Company’s condensed consolidated balance sheet.Executive Committee and a member of the Company’s Board of Directors, is entitled to an Executive Producer fee of $12,400 per one-half hour for each episode of any audio-visual production produced by Wow and any of its subsidiaries during the term of his employment, up to 52 episodes per year. During the nine months ended September 30, 2022, Mr. Hirsh did not yet earn any producer fees under the employment agreement.
| 44 |
On July 21, 2020, 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.Heyward. The Company entered into a customary merchandise license agreement with AHAA for the use of characters and logos related to Warren Buffett’s Secret Millionaires Club and Stan 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. DuringSince execution of the three and nine months ended September 30, 2021,agreement, the Company has earned $0 in royalties from this agreement.
AsOn September 30, 2021, the Company entered into a Loan Agreement and Promissory Note with POW! in the amount of $1,250,000, accruing simple interest at the annualized rate of 9%. The entire principal sum was required to be remitted to POW!’s client trust account of POW!’s legal counsel within 5 days of the effective date. The principal, plus interest must be repaid by no later than November 1, 2022. Within the Loan Agreement, it is stated that the proceeds of $1,000,000 are required to be used by POW! to settle the arbitration against Stan Lee Studios (aka Proxima Studios) and $250,000 shall be used to solely pay for the payment of legal costs and fees. The principal amount was transferred to POW! on October 12, 2021 and on or about November 4, 2021, POW and Proxima entered into a binding settlement agreement resolving all the claims made by Proxima. The loan has accrued interest of $78,660 and $26,221 as of September 30, 2022 and December 31, 2021, Mr. Heyward was awarded $55,000 as a quarterly bonus and is owed $931 for reimbursable expenses which are included in Due torespectively, recorded with the principal balance within Note Receivable from Related Party on the Company’s condensed consolidated balance sheets. In addition, pursuant to its joint venture with POW! and formation of the entity Stan Lee Universe, LLC, the Company included within Note Receivable from Related Party, the amount owed to the Company related to the 50% non-controlling interest held by POW!.
During the three months ended September 30, 2022, the Company and YFE completed an asset exchange transaction pursuant to a License and Distribution Agreement (the “Agreement”) signed on June 27, 2022. The Agreement includes multiple elements, including (i) broadcast rights and (ii) distribution rights. Stefan Piëch, a member of the Company’s Board of Directors since June 23, 2022, is the chief executive officer of YFE. The Company currently has a 48.0% economic ownership interest in YFE and Mr. Piech has a 28.2% economic ownership interest in YFE. Pursuant to the Agreement, the Company granted YFE the right to use certain of the Company’s programs to broadcast on YFE’s channels in certain territories and in exchange, the Company shall be entitled to receive a flat fee of EUR 1,000,000 upon delivery of the programs. In addition, YFE granted the Company the right to use certain of YFE’s programs to broadcast on the Company’s channels in certain territories and in exchange, YFE shall be entitled to receive a flat fee of EUR 1,000,000 upon YFE’s delivery of the programs. The rights between the parties were exchanged and invoices were generated and marked as paid without cash actually being exchanged between the parties as it was agreed that the physical transfer of cash was unnecessary. The EUR 1,000,000 was treated as an asset exchange and was not included as part of revenue generated by the Company. Each party granted to the other distribution rights to those same titles. The distribution rights grant the Company the right to license the YFE titles to third parties within specific territories and YFE the right to license the Company’s titles to third parties worldwide. Each party will earn a commission of 30% from gross receipts of titles distributed and reimbursement of up to 5% of expenses incurred.
On July 19, 2022, the Company entered into a Shareholder Loan Agreement with YFE in the amount of USD $1.3 million, accruing interest at the fixed annualized rate of 5%, with successive interest periods of three months due on the last day of each calendar quarter. The entire principal sum was required to be remitted to YFE within 5 days of the effective date. The principal, plus interest must be repaid by no later than June 30, 2026. The loan has accrued interest of USD $11,639 as of September 30, 2022 recorded with the principal balance within Note Receivable from Related Party on the Company’s condensed consolidated balance sheet.
Note 23: Segment Reporting
The Company’s CODM uses revenue and net earnings to evaluate the profitability and performance of each operating segment. All other financial information is reviewed by the CODM on a consolidated basis. The CODM does not evaluate the operating segments using asset information and it is therefore not disclosed. All expenses directly attributable to each reportable segment is included in operating results for each segment. However, the CODM does not evaluate the expenses by operating segment and, therefore, it is not separately presented.
The following table presents the revenue and net earnings within ourthe Company’s two operating segments:
Segment information by revenuessegments for the three and net earningsnine months ended September 30, 2022 and 2021 (in thousands):
| Segment information by revenues and net earnings | ||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | Three Months Ended |
Nine months Ended | |||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||
| Total Revenues: | ||||||||||||||||||||||||||||||||
| Content Production & Distribution | $ | 689,657 | $ | 273,992 | $ | 2,371,412 | $ | 1,169,410 | $ | 18,481 | $ | 690 | $ | 39,978 | $ | 2,371 | ||||||||||||||||
| Media & Advertising Services | 1,181,792 | 0 | 2,906,504 | 0 | ||||||||||||||||||||||||||||
| Media Advisory & Advertising Services | 1,198 | 1,182 | 3,266 | 2,907 | ||||||||||||||||||||||||||||
| Total Revenue | $ | 1,871,449 | $ | 273,992 | $ | 5,277,916 | (1,169,410 | ) | $ | 19,679 | $ | 1,872 | $ | 43,244 | $ | 5,278 | ||||||||||||||||
| Net Loss: | ||||||||||||||||||||||||||||||||
| Content Production & Distribution | (8,872,348 | ) | (2,007,209 | ) | (91,702,308 | ) | $ | (391,101,155 | ) | (10,831 | ) | (8,872 | ) | (27,735 | ) | (91,702 | ) | |||||||||||||||
| Media & Advertising Services | (381,032 | ) | 0 | (1,204,663 | ) | 0 | ||||||||||||||||||||||||||
| Total Operating Loss | (9,253,380 | ) | (2,007,209 | ) | $ | (92,906,971 | ) | $ | (391,101,155 | ) | ||||||||||||||||||||||
| Media Advisory & Advertising Services | (387 | ) | (381 | ) | (1,353 | ) | (1,205 | ) | ||||||||||||||||||||||||
| Total Net Operating Loss | $ | (11,218 | ) | $ | (9,253 | ) | $ | (29,088 | ) | $ | (92,907 | ) | ||||||||||||||||||||
Geographic Information
The following table provides information about disaggregated revenue by geographic area:area for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| Schedule of segments by geographic area | ||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | Three Months Ended | Nine months Ended | |||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||
| Total Revenues: | ||||||||||||||||||||||||||||||||
| United States | $ | 1,209,753 | $ | 273,992 | $ | 3,689,866 | $ | 1,169,410 | $ | 14,451 | $ | 1,210 | $ | 31,267 | $ | 3,690 | ||||||||||||||||
| Canada | 661,696 | 0 | 1,588,050 | 0 | 4,690 | 662 | 10,464 | 1,588 | ||||||||||||||||||||||||
| United Kingdom | 538 | – | 1,513 | – | ||||||||||||||||||||||||||||
| Total Revenue | $ | 1,871,449 | $ | 273,992 | $ | 5,277,916 | $ | 1,169,410 | $ | 19,679 | $ | 1,872 | $ | 43,244 | $ | 5,278 | ||||||||||||||||
Note 24: Subsequent Events
On September 30, 2021, the Company entered into a loan agreement and promissory with POW! in which the Company loaned POW! $1,250,000. The loan bears interest at 9% and is due November 1, 2022. The loanOctober 4, 2022, Andy Heyward was funded on October 12, 2021.paid $55,000 for his third quarter discretionary bonus.
On October 5, 2021, Mr. Heyward was paid $55,000 in bonuses, this amount was included in Due6, 2022, pursuant to Related Party on the Company’s condensed consolidated Balance Sheet as of September 30, 2021.
On October 8, 2021 Mr. Heyward was paid $175,000 for producer fees, this amount was included in Due to Related Party on the Company’s condensed consolidated Balance Sheet as of September 30, 2021.
On October 22, 2021 Mr. Heyward was paid $75,000 for producer fees.
On October 26, 2021, 1326919 B.C. LTD., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of the Company and Wow Unlimited Media Inc. (“WOW”), a corporation existing under the laws of the Province of British Columbia, entered into an ArrangementSettlement Agreement, to effect a transaction among the parties by way of a plan of arrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act, whereby the Company will purchase 100% of WOW’s issued and outstanding shares for $38.4 million in cash and 11,000,000 shares of the Company’s common shares. The acquisition will allow the Company to expand its audience demographic into the lucrative teens and young adult marketplaces, provide additional content on Kartoon Channel! and provide additional brands to be put through the consumer products and global distribution sales networks. Since the acquisition occurred after the reporting date but before the filing of this form 10-Q, the Company has not completed its initial accounting for the business combination which will be accounted for using the acquisition method of accounting. The fair value of the assets and liabilities are still to be determined, which precludes the Company from reporting substantially all the required disclosure including the supplemental pro forma information at this time.
On October 27, 2021, the Company issued 176,101419,336 shares of the Company’s common stock valuedwere purchased at $1.59the market price of $0.68 per share, plus a premium of $1.31 per share, for production servicesa total purchase price of $834,479. The cost of $285,148 was recorded as treasury stock.
On October 10, 2022, the Company received a notification of exercise from a holder of certain warrants with a put option exercisable on October 25, 2022. The put option was exercisable for a fixed rate of $250,000 for the 500,000 warrants held. The Company paid the amount on October 10, 2022.
On October 21, 2022, the Company issued 100,000 shares of common stock to an unrelated third party.a nonemployee for vested RSUs valued at $62,000.
On November 1, 2022, Andy Heyward was paid $50,000 for producer fees.
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, 20212022 and 2020.2021. 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, 2021April 6, 2022 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 discussionManagement’s Discussion and analysisAnalysis of Financial Condition and Results of Operations (“MD&A”) is based onintended to provide readers of our condensed consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United Statesperspectives of America. The preparationmanagement. This should allow the readers of these financialthis report to obtain a comprehensive understanding of our businesses, strategies, current trends, and future prospects. It should be noted that the MD&A contains forward-looking statements requires us to make certain estimatesthat involve risks 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.uncertainties.
Our Business
Organization and Nature of Business
Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a publicly traded (NASDAQ:GNUS) global content and brand management company that creates, produces, licenses, and licensesbroadcasts, timeless and educational, multimedia content.animated content for children. Led by experienced industry personnel, we distribute content primarily on streaming platforms and television and we license our content in all formats as well asproperties for a broad range of consumer products based on our characters. We are a leading “work for hire” producer for many of the streaming outlets and IP holders. In the children'schildren’s media sector, our portfolio features “content with a purpose” for toddlers to tweens, which providesproviding enrichment as well as entertainment. New intellectual property titles include Stan Lee’s Superhero Kindergarten producedOur programs along with Stan Lee’s Pow! Entertainment, and Oak Productions. Arnold Schwarzenegger lends his voice as the lead and is also an Executive Producer on the series. Another new offering is KC Pop Quiz, a live action game show featuring kids as contestants. The show is hosted by Casey Simpson, a prominent influencer and former Nickelodeon star. Both KC Pop Quiz and Superhero Kindergartenthose programs we acquire and/or license, are being broadcast in the United States on our wholly-owned distribution outlet, advertisement supported video on demand (“AVOD”) service, Kartoon Channel!. Other newer series include, the preschool property Rainbow Rangers, which debuted in November 2018and our subscription video on Nickelodeondemand (“SVOD”) distribution outlets, Kartoon Channel! Kidaverse and which was renewed for a second seasonAmeba TV. These streaming services are available on Apple TV, Apple iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Zumo, Pluto, Samsung Smart TVs, LG Smart TVs, as well as YouTube, among other popular platforms. Our in-house owned and preschool propertyproduced shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama which debuted on Netflixstarring Jennifer Garner, Rainbow Rangers, KC Pop Quiz, and the upcoming Shaq’s Garage starring Shaquille O’Neal, scheduled to debut in January 2018 and was renewed by Netflix for a second season.the fourth quarter of 2022. Our library titles include the award-winning Baby Genius, adventure comedy Thomas Edison'sEdison’s Secret Lab®Lab®, and Warren Buffett’s Secret Millionaires Club, created with and starring iconic investor Warren 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. In July 2020, we entered into a binding term sheet with POW, Inc. in which we agreed to form an entity with POW! to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called “Stan Lee Universe, LLC”. POW! and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021. This agreement enables us to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations, from which Genius Brands plans to develop and license multiple properties each year. We are also in production on a new animated series starring Shaquille O’Neal called Shaq’s Garage.Buffett.
We license our programs to other services worldwide, in addition to the operation of our own channels, including but not limited to Netflix, HBO Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.
Through our recent investment in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on the Frankfurt Exchange (RTV-Frankfurt), we have gained access to one of the largest animation catalogues in Europe with over 3,000 titles and a global distribution network which currently covers over 60 territories, worldwide and which we are currently in the process of rebranding as Kartoon Channel! Worldwide.
We recently acquired WOW Unlimited Media Inc. (“Wow”), and through that acquisition, we established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world. In addition, Wow owns Frederator Networks Inc. (“Frederator”) and its Channel Frederator Network, the largest animation focused multi-channel network on YouTube, with over 2,500 content creators and currently averages over 1 billion views per month.
We own a select amount of valuable IP, including among them a controlling interest in Stan Lee Universe (“SLU”), through which we control the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”). We plan to launch a Stan Lee Centennial program of merchandise set to coincide with Stan Lee’s 100th birthday on December 28, 2022.
We also own Beacon Media, the largest media buying service for children in North America. Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka, Moose Toys and JAKKS Pacific.
In addition, we act as licensing agentrecently acquired the Canadian company Ameba TV (“Ameba”), which distributes a profitable SVOD channel for Penguin Young Readers,kids and is now expected to become the backbone of the newly launched SVOD channel of Kartoon Channel!, Kartoon Channel! Kidaverse.
The combination of ourselves, our investment in YFE, our acquired companies Wow, Ameba and Beacon Media provides us with world class animation production studios, a divisioncatalogue representing thousands of Penguin Random House LLC which owns or controls the underlying rights to Llama Llama, leveraging our existing licensinghours of premium global content for children, a broadcast system for delivering that content and an in-house Consumer Products Licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.fully exploit the content.
Environmental, Social and Governance Strategy
We are attempting to shape culture, social attitudes and societal outcomes with our animated content and consumer products that touch the lives of young people and their families. As a global content company that reaches millions of people, we aim to be a positive force in the world.
We are committed to advancing and strengthening our approach to environmental, social and governance (“ESG”) topics to help serve our partners, audiences, employees and shareholders — and to enhance our success as a business.
We are committed to responsible, ethical and inclusionary business practices as outlined below:
Human Capital Management
As of September 30, 2022, we employed 798 full-time employees and 454 independent contractors.
We aim to build a culture that attracts and retains the best employees and a workplace where everyone feels welcome, safe and inspired. Our human capital management strategy is intended to address the following areas:
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A Culture of Diversity, Equity and Inclusion
We seek to foster a culture of diversity, equity and inclusion through a range of partnerships, collaborations, programs and initiatives, some of which are described below.
We strive to be an inclusionary workplace because we believe that it strengthens our business. In 2021, we created the role of Chief Diversity Officer. That role is responsible for both helping meet our hiring goals and reviewing the content we create.
Preventing Harassment and Discrimination
We have enacted policies addressing harassment, discrimination and other behaviors that could create a hostile workplace, some of which are described below.
| · | We make available to our employees, training on preventing sexual harassment, discrimination and retaliation. | |
| · | We expect employees to report any violations of Company policies, including sexual harassment, they witness. Among other ways, employees can report incidents of harassment using our anonymous complaint and reporting hotline. |
Social Impact and Corporate Social Responsibility
We believe that the content we produce, primarily directed at young people and their families, both reflects and influences how our young viewers perceive and understand important issues. We endeavor to earn our viewers’ trust through a variety of practices, and we are focused on using our platforms to create positive social impacts.
By way of just a few examples: in our show Rainbow Rangers, a diverse cast of girls works to save animals and protect the environment, while demonstrating the power of teamwork; in our Llama Llamaseries, we teach kindness and inclusion, and feature a differently abled character, which we have been told is appreciated by moms and kids who deal with physical challenges. In the earliest days of the COVID-19 pandemic, we spread public service messages to keep our audiences safe and informed with animated shorts featuring the iconic voices from our series including Warren Buffett from The Secret Millionaires Club and Jennifer Garner, the voice of Mama Llama from the Llama Llama series.
Our mission statement says it all: “Content with a Purpose.” Social justice, caring about the environment and modeling appropriate and inclusionary behavior for kids has been part of our company for many years and we are constantly seeking ways to improve on what we have already been doing.
Recent FinancingsAcquisition of Wow Unlimited Media Inc.
On January 28,April 6, 2022, we completed the acquisition of Wow. On October 26, 2021 weour wholly-owned subsidiary, 1326919 B.C. LTD., a corporation existing under the laws of the Province of British Columbia and Wow, entered into letter agreements (the “Letter Agreements”) with certain existing institutionalan Arrangement Agreement to effect a plan of arrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. We purchased 100% of Wow’s issued and accredited investors to exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500shares for $38.3 million in cash and 11,057,085 shares of our common stock at their original exercise price of $1.55 per share (the “Exercise”). We received approximately $61.6 million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent and received a cash fee of approximately $4,286,844. In consideration for the exercise of the Existing Warrants for cash, the exercising holders received new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”) at an exercise price of $2.37 per share, exercisable immediately, with an exercise period of five years from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends and other language typical for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock underlying the New Warrants is effective after six months). We were required to register the resale of the shares of common stock issuable upon exercise of the New Warrants.stock.
Coronavirus (COVID-19)Recent Investments
With respectFollowing the initial equity investment in YFE during the fourth quarter of 2021, we participated in a mandatory tender offer for the remaining publicly traded shares held by YFE shareholders. Upon the expiration of the offer on February 14, 2022, we purchased an additional 2,637,717 shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders were converted into 2,574,000 shares of YFE common stock, 304,631 of which were purchased by us, at 2.00 EUROS per share or $0.6 million. On April 5, 2022, we exercised our subscription rights to purchase an additional 914,284 shares of YFE’s common stock at 3.00 EUROS per share, or $2.7 million, increasing the ongoing and evolving coronavirus (“COVID-19”) outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, COVID-19 has caused substantial disruption in international and U.S. economies and markets. COVID-19 has had an adverse impact on the entertainment industry and, if repercussionsnumber of COVID-19 are prolonged, could have a significant adverse impact on our business, which could be material. The majority of our employees have been working remotely from home, with only a few individuals monitoring the office as needed. A safe return-to-work plan has been developed. We had announced a returnYFE’s outstanding shares to office date6,857,132. As of September 7, 2021, for fully vaccinated employees. However, due to a recent surge30, 2022, our ownership in COVID-19 cases and the increased transmissibility of COVID-19 variants, the planned date for returning, in-person, to the office is January 3, 2022.
To date, we believe that COVID-19 has started to cause a negative impact on our business, including the effects on our customers, suppliers and vendors, which could have a negative impact on our financial results. Our management cannot at this point estimate the impact of COVID-19 on our business, and no provision for COVID-19 is reflected in the accompanying financial statements. However, with regard to content distribution, we have observed demand increases for streaming entertainment services in 2021. Supply chain issues are affecting the toy industry which may impact sales efforts in our ChizComm Beacon Media subsidiary. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders.YFE was 48.0%.
Coronavirus (COVID-19)
We continue to work with our stakeholders (including customers, employees, consumers, suppliers, business partners and local communities) to responsibly address this global pandemic. We will continue to monitor the situation and assess possible implications to our business and our stakeholders and will take appropriate actions in an effort to mitigate adverse consequences. We cannot assure you that we will be successful in any such mitigation efforts. The extent to which the COVID-19 pandemic will continue to negatively impact our operations will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, the emergence of new virus variants, new information which may emerge concerning the severity of the COVID-19 pandemic, outbreaks occurring at any of our facilities, the actions taken to control the spread of COVID-19 or treat its impact, and changes in worldwide and U.S. economic conditions. Further deteriorations in economic conditions, as a result of the COVID-19 pandemic or otherwise, could lead to a further or prolonged decline in demand for our products and services and negatively impact our business. It may also impact financial markets and corporate credit markets which could adversely impact our access to financing or the terms of any such financing. We cannot at this time predict the extent of the impact of the COVID-19 pandemic and its resulting economic impact, but it could have a material adverse effect on our business, financial position, results of operations and cash flows. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in “Item 1A. Risk Factors” and elsewhere in the 2021 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on April 6, 2022, such as our ability to protect our information technology networks and infrastructure from unauthorized access, misuse, malware, phishing and other events that could have a security impact as a result of our remote working environment or otherwise. On March 15, 2022, we began implementing our “Return to Office” plan. We continue to be flexible with employee in-office requirements as we adjust to COVID-19 outbreaks and employee preferences for remote work.
Results of Operations
Our summary results for the three months ended September 30, 20212022 and September 30, 20202021 are below.
Revenues
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
September 30, 2021 | September 30, 2020 | Change | % Change | September 30, 2022 | September 30, 2021 | Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||||||
| Production Services Revenue | $ | 9,095 | $ | – | $ | 9,095 | –% | |||||||||||||||||||||||||
| Content Distribution | 9,106 | 599 | 8,507 | 1,420% | ||||||||||||||||||||||||||||
| Licensing & Royalties | $ | 90,660 | $ | 199,572 | $ | (108,912 | ) | (55)% | 280 | 91 | 189 | 208% | ||||||||||||||||||||
| Media Advisory & Advertising Services | 1,181,792 | – | 1,181,792 | NA | 1,198 | 1,182 | 16 | 1% | ||||||||||||||||||||||||
| Television & Home Entertainment | 520,691 | 31,375 | 489,316 | 1,560 % | ||||||||||||||||||||||||||||
| Advertising Sales | 76,901 | 42,715 | 34,186 | 80 % | ||||||||||||||||||||||||||||
| Product Sales | 1,405 | 330 | 1,075 | 326 % | ||||||||||||||||||||||||||||
| Total Revenue | $ | 1,871,449 | $ | 273,992 | $ | 1,597,457 | 583 % | $ | 19,679 | $ | 1,872 | $ | 17,807 | 951% | ||||||||||||||||||
Production Services revenue is generated specifically by Wow providing animation production services for the three months ended September 30, 2022, since the acquisition of Wow at the start of the second quarter.
Content Distribution revenue is generated from the distribution of our properties for broadcast on television, video-on-demand (“VOD”) or SVOD in domestic and international markets and the sale of DVDs for home entertainment through our partners. Content Distribution also includes our advertising sales generated on our digital networks, the Kartoon Channel! in the form of either flat rate promotions or advertising impressions served, SVOD revenues generated by Ameba and revenue generated by Frederator on its multi-channel network.
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Fluctuations in Content Distribution revenue are based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content or advertisement to the customer. Revenue related to our AVOD and SVOD, including advertising sales during the three months ended September 30, 2022, increased 1,420% as compared to the three months ended September 30, 2021, primarily due to the acquisition of Ameba, Wow and Frederator, increasing revenue by $8.8 million, offset by a $0.3 million decrease.
Licensing and& Royalties revenue includerevenues are generated by the items forin 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. DuringRevenue related to our licensing and royalties for the three months ended September 30, 20212022 increased 208% as compared to the three months ended September 30, 2020, Licensing2021, due to entering in an agreement for the licensing of certain Stan Lee Assets.
Expenses
| Three Months Ended | ||||||||||||||||
| September 30, 2022 | September 30, 2021 | Change | % Change | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Marketing and Sales | $ | 880 | $ | 1,188 | $ | (308 | ) | (26)% | ||||||||
| Direct Operating Costs | 13,875 | 634 | 13,241 | 2,088% | ||||||||||||
| General and Administrative | 10,363 | 9,884 | 479 | 5% | ||||||||||||
| Total Expenses | $ | 25,118 | $ | 11,706 | $ | 13,412 | 115% | |||||||||
Marketing and Royalties revenue decreased $108,912Sales expenses consist primarily of advertising expenses and certain payments made to our marketing partners. Advertising expenses include promotional activities such as digital and television advertising. Marketing expenses also include payroll and related expenses for personnel that support marketing activities. The decrease in marketing and sales expenses for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 was primarily due to a decrease in marketing and advertising expenses incurred to promote Kartoon Channel.
Salaries and related expenses of the animation production services employees of Mainframe and Frederator make up the majority of our Direct Operating Costs. Channel expenses, licensing and production of content costs, such as participation expenses related to profit sharing obligations with various animation studios, post-production studios, writers, directors, musicians or 55%.other creative talent that have rendered services and amortization, including any impairments of film and television costs, make up the remainder of Direct Operating Costs. The decreaseincrease in direct operating costs for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 was primarily due to the expirationconsolidation of certain consumer product licenses that were not renewed.Wow and Frederator’s animation production service salaries and channel expenses into our direct operating costs.
Media Advisory & Advertising Services revenue isGeneral and Administrative expenses primarily consist of payroll and related expenses, share-based compensation related to our equity compensation plan, rent, depreciation of our property and equipment and amortization of our intangible assets, as well as professional fees and other general corporate expenses. The $0.5 million increase in general and administrative expenses for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 primarily consisted of a combination$3.0 million increase in costs associated with the acquisition of client retainer fee-based servicesWow and media commissions. The increase of $1,181,792 wasFrederator and a result ofdecrease in share-based compensation expense for the ChizComm acquisition on February 1, 2021.three months ended September 30, 2022.
Television & Home EntertainmentOur summary results for the nine months ended September 30, 2022 and September 30, 2021 are below.
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Revenues
| Nine months Ended | ||||||||||||||||
September 30, 2022 | September 30, 2021 | Change | % Change | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Production Services Revenue | $ | 19,113 | $ | – | $ | 19,113 | –% | |||||||||
| Content Distribution | 18,049 | 874 | 17,175 | 1,965% | ||||||||||||
| Licensing & Royalties | 2,816 | 1,497 | 1,319 | 88% | ||||||||||||
| Media Advisory & Advertising Services | 3,266 | 2,907 | 359 | 12% | ||||||||||||
| Total Revenues | $ | 43,244 | $ | 5,278 | $ | 37,966 | 719% | |||||||||
Production Services Revenue is generated specifically by Wow providing animation production services for the nine months ended September 30, 2022.
Content Distribution revenue is generated from the distribution of our properties for broadcast on television, video-on-demand (“VOD”), or subscription video-on-demand (“SVOD”) in domestic and international markets and the sale of DVDs for home entertainment through our partners. Content Distribution also includes our advertising sales generated on our digital network, the Kartoon Channel! in the form of either flat rate promotions or advertising impressions served, SVOD revenues generated by Ameba and revenue generated by Frederator on its multi-channel network.
Fluctuations in Television & Home EntertainmentContent Distribution revenue occur period over periodare based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content or advertisement to the customer. During the three months ended September 30, 2021 compared to the three months ended September 30, 2020, Television & Home Entertainment revenue increased $489,316, or 1,560%. The increase was primarily due to the recognition of revenueRevenue related to Stan Lee’s Superhero Kindergartenour AVOD and Rainbow Rangers.
AdvertisingSVOD, including 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 $34,186 or 80%, during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily due to the addition of new licensed titles and revenue generated by Stan Lee’s Superhero Kindergarten.
Product sales are generated through Merch by Amazon and consist of on-demand printed t-shirt sales for the Llama Llama and Rainbow Rangers brands. Product sales increased $1,075 or 326%, during the three months ended September 30, 2021 compared to the three months ended September 30, 2021.
Expenses
| Three Months Ended | ||||||||||||||||
September 30, 2021 | September 30, 2020 | Change | % Change | |||||||||||||
| Marketing and Sales | $ | 1,187,754 | $ | 364,869 | $ | 822,885 | 226 % | |||||||||
| Direct Operating Costs | 634,082 | 219,451 | 414,631 | 189 % | ||||||||||||
| General and Administrative | 9,884,073 | 3,042,178 | 6,841,895 | 225 % | ||||||||||||
| Interest Expense | 2,057 | 17,193 | (15,136 | ) | (88)% | |||||||||||
| Total | $ | 11,707,966 | $ | 3,643,691 | $ | 8,064,275 | 221 % | |||||||||
Marketing and sales expenses increased $822,885, or 226%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to an increase in marketing and advertising expenses to promote Stan Lee’s Superhero Kindergarten and the Kartoon Channel!.
Direct operating costs include costs of our product sales, unamortizable 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, 2021, we recorded film and television cost amortization expense of $249,141 and participation expense of $320,064 compared to expenses of $101,717 and $113,894, respectively, for the three months ended September 30, 2020. The increases in direct operating costs for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 is primarily due to increased amortization and participation expenses related to revenues from the Rainbow Rangers property.
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 expenses for three months ended September 30, 2021 increased $6,841,895, or 225%, compared to the same period in 2020. This increase was primarily due to an increase in share-based compensation expense of approximately $5.1 million as a result of the CEO’s RSU modification and consolidation of ChizComm expenses due to the ChizComm Acquisition on February 1, 2021. ChizComm general and administrative expenses consist primarily of salaries, employee benefits and rent.
Interest expense for the three months ended September 30, 2021 decreased $15,136, or 88%, compared to the same period in 2020. The decrease is primarily due to the repayment of the outstanding Production Facility balance under the Loan and Security Agreement on July 14, 2021.
Our summary results for the nine months ended September 30, 2021 and2022, increased 1,965% as compared to the nine months ended September 30, 2020 are below.2021 primarily due to the acquisition of Ameba, Wow and Frederator, increasing revenue by $17.3 million, offset by a $0.1 million decrease.
Revenues
| Nine Months Ended | ||||||||||||||||
September 30, 2021 | September 30, 2020 | Change | % Change | |||||||||||||
| Licensing & Royalties | $ | 1,497,277 | $ | 565,696 | $ | 931,581 | 165% | |||||||||
| Media Advisory & Advertising Services | 2,906,504 | – | 2,906,504 | NA | ||||||||||||
| Television & Home Entertainment | 672,120 | 409,837 | 262,283 | 64% | ||||||||||||
| Advertising Sales | 199,464 | 191,728 | 7,736 | 4% | ||||||||||||
| Product Sales | 2,551 | 2,149 | 402 | 19% | ||||||||||||
| Total Revenue | $ | 5,277,916 | $ | 1,169,410 | $ | 4,108,506 | 351% | |||||||||
Licensing and& Royalties revenue includerevenues are generated by the items forin 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. DuringRevenue related to our licensing and royalties for the nine months ended September 30, 20212022 increased 88% as compared to the nine months ended September 30, 2020, Licensing and Royalties revenue increased $931,581, or 165%. The increase was2021 primarily due to proceeds received in conjunction withentering an agreement for the mutually agreed terminationlicensing of certain licensing rights during the second quarter.Stan Lee Assets.
Media Advisory & Advertising Services revenue is a combination of client retainer fee-based services and media commissions.commissions generated by our wholly-owned subsidiary, Beacon Media Group, which we acquired on February 1, 2021. The increase of $2,906,5504 was a result of the ChizComm acquisition on February 1, 2021.
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 achievement12% represents an additional month of revenue recognition criteria suchrecognized during the nine months ended September 30, 2022 as the start of a license period and the delivery of the content to the customer. Duringcompared the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, Television & Home Entertainment revenue increased $262,283, or 64%. The increase was primarily due to the recognitionand new customers acquired, net of revenue related to Stan Lee’s Superhero Kindergarten and Rainbow Rangers.
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 $7,736 or 4%,churn during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to the addition of new licensed titles and revenue generated by Stan Lee’s Superhero Kindergarten.
Product sales are generated through Merch by Amazon and consist of on-demand printed t-shirt sales for the Llama Llama and Rainbow Rangers brands. Product sales increased $402 or 19%, during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2021.period.
Expenses
| Nine months Ended | ||||||||||||||||||||||||||||||||
| Nine Months Ended | September 30, 2022 | September 30, 2021 | Change | % Change | ||||||||||||||||||||||||||||
September 30, 2021 | September 30, 2020 | Change | % Change | (in thousands, except percentages) | ||||||||||||||||||||||||||||
| Marketing and Sales | $ | 3,330,915 | $ | 606,125 | $ | 2,724,790 | 450% | $ | 2,012 | $ | 3,331 | $ | (1,319 | ) | (40)% | |||||||||||||||||
| Direct Operating Costs | 2,151,848 | 886,972 | 1,264,876 | 143% | 28,865 | 2,152 | 26,713 | 1,241% | ||||||||||||||||||||||||
| General and Administrative | 23,932,322 | 7,173,594 | 16,758,728 | 234% | 36,327 | 23,932 | 12,395 | 52% | ||||||||||||||||||||||||
| Interest Expense | 19,565 | 1,168,801 | (1,149,236 | ) | (98 | )% | ||||||||||||||||||||||||||
| Total | $ | 29,434,650 | $ | 9,835,492 | $ | 19,599,158 | 199% | |||||||||||||||||||||||||
| Total Expenses | $ | 67,204 | $ | 29,415 | $ | 37,789 | 128% | |||||||||||||||||||||||||
Marketing and Sales expenses consist primarily of advertising expenses and certain payments made to our marketing partners. Advertising expenses include promotional activities such as digital and television advertising. Marketing expenses also include payroll and related expenses for personnel that support marketing activities. The decrease in marketing and sales expenses increased $2,724,790, or 450%, for the nine months ended September 30, 20212022 as compared to the nine months ended September 30, 2020,2021 was primarily due to an increasea decrease in marketing and advertising expenses incurred to promote Stan Lee’s Superhero Kindergarten and the Kartoon Channel!.
Direct operating costs include costsSalaries and related expenses of the animation production services employees of Mainframe and Frederator make up the majority of our product sales, unamortizable post-productionDirect Operating Costs. Channel expenses, licensing and production of content costs, film and television cost amortization expense, andsuch as participation expenseexpenses related to agreementsprofit sharing obligations 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 theythat have rendered services. During the nine months ended September 30, 2021, we recordedservices and amortization, including any impairments of film and television cost amortization expensecosts, make up the remainder of $907,511 and participation expense of $1,025,012 compared to expenses of $395,073 and $484,697, respectively, for the nine months ended September 30, 2020.Direct Operating Costs. The increasesincrease in direct operating costs for the ninethree months ended September 30, 2022 as compared to the three months ended September 30, 2021 compared to the nine months ended September 30, 2020 iswas primarily due to increased amortizationthe consolidation of Wow and participationFrederator’s animation production service salaries and channel expenses related to revenues from the Rainbow Rangers property.into our direct operating costs.
General and administrativeAdministrative expenses primarily consist primarily of salaries, employee benefits,payroll and related expenses, share-based compensation related to stock options, insurances,our equity compensation plan, rent, depreciation of our property and equipment and amortization of our intangible assets, as well as other professional fees related to finance, accounting, legal and investor relations. Generalother general corporate expenses. The $12.4 million increase in general and administrative expenses for the nine months ended September 30, 2021 increased $16,758,728, or 234%,2022 as compared to the same period in 2020. The increase is primarily related to the acquisition of the ChizComm entities, increases in legal professional fees, increase in share-based compensation expense related to the modification of the CEO’s RSUs, rent expense and directors’ and officers’ insurance.
Interest expense for the nine months ended September 30, 2021 decreased $1,149,236, or 98%primarily consisted of a $6.1 million increase in costs associated with the acquisition of Wow and Frederator, a $2.5 million increase in professional fees related to costs to acquire Wow and Frederator and a $1.1 million increase related to an increase in salaries and wages, directors’ and officers’ insurance and the consolidation of Wow’s general and administration expenses for the three months ended September 30, 2022.
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Other Income (Expense), compared to the same period Net
Components of other income (expense), net are summarized as follows (in 2020. The decrease is primarily due to the repayment of the outstanding Production Facility balance under the Loan and Security Agreement on July 14, 2021.thousands):
| Three Months Ended | Nine months Ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Gain (Loss) on Warrant Revaluation (a) | $ | 166 | $ | 420 | $ | 434 | $ | 103 | ||||||||
| Loss on Foreign Exchange (b) | (1,336 | ) | 5 | (2,596 | ) | (3 | ) | |||||||||
| Loss on Marketable Securities Investments (c) | (36 | ) | (25 | ) | (160 | ) | (25 | ) | ||||||||
| Gain (Loss) on Revaluation of Equity Investment in YFE(d) | (4,071 | ) | – | (1,170 | ) | – | ||||||||||
| Interest Income (e) | 257 | 183 | 759 | 314 | ||||||||||||
| Warrant Incentive Expense (f) | – | – | – | (69,139 | ) | |||||||||||
| Interest Expense (g) | (782 | ) | (2 | ) | (1,256 | ) | (20 | ) | ||||||||
| Net Other Income (Expense) | $ | (5,802 | ) | $ | 581 | $ | (3,989 | ) | $ | (68,770 | ) | |||||
| (a) | The gain on warrant revaluation is related to the change in fair value of outstanding warrants that were determined to be derivative liabilities attached to previously issued and converted convertible notes. | |
| (b) | For the three and nine months ended September 30, 2022, loss on foreign exchange primarily relates to the foreign exchange loss on the investment in YFE’s equity securities accounted for under the fair value option. For the three and nine months ended September 30, 2021, loss on foreign exchange related to foreign currency denominated monetary transactions. | |
| (c) | We started investing in marketable securities during the three months ended September 30, 2021. The net realized loss on marketable securities recognized during the three and nine months ended September 30, 2022 reflects the loss in the investments in available-for-sale securities that will not be recovered due to prepayments of principals on certain mortgage-backed securities. We did not incur any realized losses on marketable securities during the three and nine months ended September 30, 2021. | |
| (d) | The loss on revaluation of the equity investment in YFE is the change in fair value recognized on our investments in YFE accounted for using the fair value option. The loss is a result of the change in YFE’s stock price at the end of the current reporting period. | |
| (e) | Interest Income received during the three and nine months ended September 30, 2022 and 2021, primarily consists of cash interest received on the investments in marketable securities, net of amortization of premiums. | |
| (f) | The Warrant Incentive Expense is related to the fair value of new warrants that were issued in 2021 to certain existing warrant holders in exchange for previously issued outstanding warrants. | |
| (g) | Interest expense during the three and nine months ended September 30, 2022 primarily consists of $0.4 million and $0.6 million, respectively, of interest incurred on our margin loan collateralized by its marketable security investments and $0.3 million and $0.6 million, respectively, of interest incurred on the production facilities loan and bank indebtedness assumed as part of the Wow Acquisition. |
Liquidity and Capital Resources
During the nine months ended September 30, 2021, our2022, we had cash, and cash equivalents and marketable security positions increasedrestricted cash of $7.1 million, which decreased by $29,768,161. Cash$3.0 million from December 31, 2021. The decrease was primarily due to cash used in excessinvestment activities, inclusive of immediate requirements is investedthe Wow and Ameba acquisitions and the YFE investments, of $35.9 million, $24.2 million used for operational activities, offset by $57.4 million of financing from the margin loan and production facilities and bank indebtedness assumed in accordance with our investment policy, primarily with a view for liquidity and capital preservation. Accordingly, available-for-sale securities, consisting principally of corporate and government debt securities, and money market funds classified as cash equivalents are also available as a source of liquidity. During the nine months ended September 30, 2021, we purchased marketable securities of $128,277,575, net of redemptions during the period.Wow Acquisition.
Working CapitalAs of September 30, 2022, we held marketable securities with a fair value of $89.9 million as available-for-sale, a decrease of $22.7 million as compared to December 31, 2021. The available-for-sale securities, which consist principally of corporate and government debt securities, are also available as a source of liquidity.
Historically, we have incurred net losses. ForWe borrowed an additional $63.2 million from our investment margin account during the nine months ended September 30, 2022 and repaid $7.8 million with cash received from sales and/or redemptions of its marketable securities. the borrowed amounts were used to finance our additional investments in YFE and the closing of the acquisitions of Ameba and Wow, in each case pledging certain of our marketable securities as collateral. During the three months ended September 30, 2021 and2022, the additional borrowings of $4.2 million related to quarterly operational costs. The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 0.65% with interest only payable monthly. The weighted average interest rate was 2.65% on an average margin loan balance of $61.2 million during the three months ended September 30, 2020, we reported net losses2022. The weighted average interest rate was 1.54% on an average margin loan balance of $9,253,380 and $2,007,209, respectively. For$43.4 million during the nine months ended September 30, 2021 and September 30, 2020, we reported net losses2022. We incurred interest expense of $92,906,971 and $391,101,155, respectively. We reported net cash used in operating activities of $15,965,351 and $5,475,826 for$0.6 million during the nine months ended September 30, 20212022. The investment margin account borrowings do not mature but are payable on demand as the custodian can issue a margin call at any time, therefore the margin loan is recorded as a current liability on our condensed consolidated balance sheets.
Upon the acquisition of Wow, we assumed certain credit facilities (the “Facilities”) with a Canadian bank. The Facilities are comprised of: (i) a $5.0 million CAD ($3.9 million USD) revolving demand facility, (ii) an $8.0 million CAD ($6.2 million USD) equipment lease line, (iii) a treasury risk management facility of up to $0.5 million CAD ($0.4 million USD) for foreign exchange forward contracts, and September 30, 2020, respectively. (iv) interim financing facilities for specific production titles.
The Facilities are guaranteed by us and the security reflects substantially all of our and our subsidiary guarantors tangible and intangible assets subject to permitted encumbrances, including a combination of federal and provincial tax credits, other government incentives, production service agreements and license agreements. The Facilities are generally repayable on demand and are subject to customary affirmative and negative covenants, default provisions, representations and warranties and other terms and conditions.
Working Capital
As of September 30, 2021, we had an accumulated deficit of $562,464,295 and total stockholders’ equity of $167,976,968. As of September 30, 2021,2022, we had current assets of $143,046,171,$143.6 million, including cash and cash equivalents of $4,884,149$7.1 million and marketable securities of $125,340,336,$89.9 million and our current liabilities of $11,607,299.were $111.2 million. We had working capital of $131,438,872$32.4 million as of September 30, 2021,2022 as compared to working capital of $101,387,183$115.1 million as of December 31, 2020.
2021. The increasedecrease of $30,051,689$82.7 million in working capital as compared to December 31, 2020,2021 was primarily due to anthe $56.0 million increase in our cashmargin loan balance, a $21.4 million increase due to the assumption of Wow’s current debt for interim production facilities and cash equivalents and marketable security position, offset by the change in net current assets and liabilities as a result ofbank loans upon the acquisition and the increase of ChizComm.deferred revenue of $10.4 million.
During the nine months ended September 30, 2021,2022 we met our immediate cash requirements through existing cash balances. Additionally, we used equity and equity-linked instruments to pay for services and compensation. We have the ability to borrow against license contracts, production service contracts, or refundable tax credits receivable, entering into leases, the issuance of debentures, or the issuance of shares. We manage liquidity risk by continuously monitoring actual and forecasted cash flows, using lease financing and by maintaining our revolving credit facilities. We believe that our current cash and cash equivalents balances and our investments in available for sale marketable securities are sufficient to support our operations for at least the next twelve months. To meet our short and long-term liquidity needs, we expect to use existing cash balances.
Comparison of Cash Flows for the Nine Monthsmonths Ended September 30, 2021,2022 and the Nine Months Ended September 30, 20202021
Our total cash, and cash equivalents were $4,884,149 and $50,461,566restricted cash as of September 30, 2022 and 2021 was $7.1 million and September 30, 2020,$4.9 million, respectively.
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Comparison of Cash Flows
| Nine Months Ended | ||||||||||||||||
| September 30, 2021 | September 30, 2020 | Change | % Change | |||||||||||||
| Cash used in operations | $ | (15,965,351 | ) | $ | (5,475,826 | ) | $ | (10,489,525 | ) | 192% | ||||||
| Cash used in investing activities | (135,521,695 | ) | (554,926 | ) | (134,966,769 | ) | N/A | |||||||||
| Cash provided by financing activities | 55,914,871 | 56,187,197 | (272,326 | ) | (0.48)% | |||||||||||
| (Decrease)/Increase in cash and cash equivalents | $ | (95,572,175 | ) | $ | 50,156,445 | $ | (145,728,620 | ) | (291)% | |||||||
| Nine months Ended | ||||||||||||||||
September 30, 2022 | September 30, 2021 | Change | % Change | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Cash Used in Operating Activities | $ | (22,837 | ) | $ | (15,965 | ) | $ | (6,872 | ) | 43 % | ||||||
| Cash Used in Investing Activities | (37,362 | ) | (135,522 | ) | 98,160 | (72)% | ||||||||||
| Cash Provided by Financing Activities | 57,419 | 55,915 | 1,504 | 3 % | ||||||||||||
| Effect of Exchange Rate Changes on Cash | (187 | ) | – | (187 | ) | – % | ||||||||||
| Decrease in Cash, Cash Equivalents and Restricted Cash | $ | (2,967 | ) | $ | (95,572 | ) | $ | 92,605 | (97)% | |||||||
Operating Activities
Cash used in operating activities for the nine months ended September 30, 2021 was $15,965,3512022 increased $6.9 million as compared to cash used in operating activities of $5,475,826 during the comparable period in the prior year. The increase in cash used in operating activities was primarilynine months ended September 30, 2021 due to an increase in professional fees, marketing expenses, D&O insurance and salaries.cash used of $10.5 million for operating liabilities as compared to the prior period, offset by an increase in cash used of $3.2 million, primarily due to the increase in liabilities assumed as part of the acquisition of Wow.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2021 was $135,521,6952022 decreased $98.2 million as compared to a use of $554,926 forcash used during the nine months ended September 30, 2020.2021. The increasedecrease in cash used for investing was primarily due to a decrease of investment activity in our net investments in marketable securities of $128,277,575. Investing activities also include$141.8 million during the cash paid, netnine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The decrease is partially offset by the increase of cash acquired from$41.2 million in our investment activity related to the ChizCommacquisitions of Wow and Ameba and investments in YFE, as compared to the acquisition of $7,788,877 which occurred on February 1, 2021.Beacon in the prior year period.
Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2021 was $55,914,8712022 increased by $1.5 million as compared to $56,187,197 of cash provided byduring the comparable period in 2020.nine months ended September 30, 2021. The primary source of cash during the nine months ended September 30, 20212022 was the net proceeds borrowed from our margin loan of $57,264,656$55.4 million and $3.5 million from production loans, compared to the primary source of cash during the nine months ended September 30, 2021 of $57.3 million from the warrant exercise during January 2021. During
Material Cash Requirements
We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Our material cash requirements from known contractual and other obligations primarily relate to our debt and lease obligations and our employment and consulting contracts. The aggregate amount of future minimum purchase obligations under these agreements over the nine months endedperiod of next five years is approximately $101.6 million as of September 30, 2020,2022, of which about $64.5 million, could be owed within one year, if the margin loan and interim production facilities are called. For additional information on our primary sourcescontractual commitments and timing of cash werefuture payments see Note 21 to the net sales of common shares for $44,755,672, net proceeds from the 2020 Convertible Notes of $6,098,000, the net proceeds of $5,874,329 from warrant exercises and $3,600,000 from the collection of the Investor Notes.condensed consolidated financial statements included in this Report on Form 10-Q.
Capital ExpendituresWe plan to utilize our liquidity (as described above) to fund our material cash requirements.
As of September 30, 2021,2022, we do not have any material$3.1 million in commitments for capital expenditures.expenditures, related to equipment leases.
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Critical Accounting Policies
The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 20202021 Annual Report on Form 10-K, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 20202021 Annual Report on Form 10-K describe the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements.
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 were not effective for the nine months ended September 30, 2021,2022, 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 CommissionSEC rules and forms.
In the course of our review of our consolidated financial results for the three months and nine months ended September 30, 2021, we identified a material weakness in our internal control over financial reporting related to our failure to adequately evaluate the accounting treatment for warrants and unrealized loss on marketable securities in a timely manner.
The Company and its Board of Directors are committed to maintaining a strong internal control environment. Management, with the oversight of the Audit Committee, has evaluated the ineffectiveness described above and is in the process of designing a remediation plan to address the ineffectiveness and enhance the Company’s internal control environment. The remediation plan and will include a risk assessment process coupled with additional controls and procedures. The Company has hired a head of internal control to assist with the remediation plan. Management is committed to successfully implementing the remediation plan as promptly as possible.
Changes in Internal Control over Financial Reporting
Other thanDuring the nine months ended September 30, 2022, we continued to execute upon our 2021 planned remediation plan being implementedactions as described above,disclosed in Item 9A. of our 2021 Annual Report on Form 10-K which was filed with the SEC on April 6, 2022, which are all intended to strengthen our overall control environment. This includes hiring additional accounting personnel at our corporate headquarters and changesother locations. We are committed to maintaining a strong internal control environment and believe that these remediation efforts will represent significant improvements in our control environment. Our management will continue to monitor, implement, test and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls that have been made related to the integration of ChizComm into the post-acquisition combined company, there have been no changes in our internal controland procedures over financial reporting that occurred during the quarter ended September 30, 2021, that have materially affected,on an ongoing basis and is committed to taking further action and implementing additional enhancements or are reasonably likely to materially affect, our internal control over financial reporting.improvements, as necessary and as funds allow.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of September 30, 2021,2022, there were no material pending legal proceedings to which the Company is a party or as to which any of its property is subject other than described below.
On June 16, 2021, the Company was named as a defendant in a lawsuit filed in the U.S. District Court for the Central District of California styled A Parent Media Co. Inc. v. Genius Brands International, Inc., Case No. 2:21-CV-04897, alleging that the Company has infringed the plaintiff’s federally registered trademarks KIDOODLE.TV, KIDOODLE and KIDOODLETV by sponsoring Google Ads in which the plaintiff’s trademarks appeared. The parties have agreed to entry of a stipulation that the alleged conduct did in fact constitute trademark infringement; however, because the number of consumer impressions was small, the Company contends that the plaintiff’s damages are nominal or zero. The case is scheduled for trial on the issue of damages in December 2021.
As previously disclosed, the Company, its Chief Executive Officer Andy Heyward, and its Chief Financial Officer Robert Denton arewere named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Central District of California and styled In re Genius Brands International, Inc. Securities Litigation, Master File No. 2:20-cv-07457 DSF (RAOx). In a consolidated amended complaint filed February 1, 2021, the leadLead plaintiffs alleged generally that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by making materiallyissuing allegedly false or misleading statements regardingabout the Company’s business and business prospects, artificially inflating the Company’s stock price duringCompany, initially over an alleged class period running from March 11, 2020 throughinto early July 5, 2020. Plaintiffs sought unspecified damages on behalf of the alleged class of persons who invested in ourthe Company’s common stock during the alleged class period. On March 17, 2021, the defendants filed a motionDefendants moved to dismiss thelead plaintiffs’ amended complaint. After full briefing, the Court took the motion under submission without oral argumentcomplaint; and in a decision issued on August 30, 2021, issued a decision dismissingthe Court dismissed the amended complaint but granting thegranted lead plaintiffs a further opportunity to plead a claim if they filed a further amended complaint by September 27, 2021.claim.
On September 27, 2021, the lead plaintiffs above filed a second amended complaint, naming the same defendants. The new complaint allegesalleged again that the Company made numerous false or misleading statements about the Company’s business and business prospects, this time over a class period running from March 11, 2020, through March 30, 2021. The lead plaintiffs also allege a “scheme to defraud” during 2020 that involved several private placements of Company stock with an allegedly “insider” group of investors that purportedly then issued press releases that inflated the stock price, after which these investors purportedly sold their shares at higher prices. Other than Mr. Heyward, who invested $1 million in a private offering at the beginning of theexpanded alleged class period but who did not subsequently sell his shares, no member of the supposed investor group is identified or named as a defendant. Nonetheless, the lead plaintiffsthat extended into March 2021; they again allege violations of Sectionsalleged that these misstatements violated Section 10(b) and 20(a) of the Exchange Act and seekAct. Lead plaintiffs again sought unspecified damages on behalf of thean alleged class—class of persons who invested in the Company’s common stock during the newlyexpanded alleged class period. Defendants intend to fileIn November 2021, defendants filed a motion to dismiss the second amended complaint. On July 15, 2022, the Court issued a decision dismissing the second amended complaint in its entirety and underwith prejudice. On August 12, 2022, lead plaintiffs filed a Court-ordered briefing schedule, that motionnotice of appeal to the United States Court of Appeals for the Ninth Circuit. Briefing of the appeal is expected to be filed by November 22, 2021. The briefing schedule on the motion to dismiss extendsextended into the first quarter of 2022.early 2023. The Company cannot predict the outcome of the motionthat appeal or the timing of a decision from the Court. Pending resolution of the motion to dismiss, neither discovery nor other substantive proceedings are occurring nor expected.on it.
Related to the securities class action, the Company’s directors Chief Executive Officer(other than Dr. Cynthia Turner-Graham), together with Messrs. Heyward and Chief Financial OfficerDenton and former director Michael Klein, have been named as defendants in several putative shareholderstockholder derivative lawsuits. As previously disclosed, these include a consolidated proceeding pending in the U.S. District Court for the Central District of California and styled In re Genius Brands Stockholder Derivative Litigation, Case No. 2:20-cv-08277 DSF (RAOx); an action filed in the Los Angeles County Superior Court captioned Ly, etc. v. Heyward, et al.al., Case No. 20STCV44611; and an additional case pending in the U.S. District Court for the District of Nevada, styled Miceli, etc. v. Heyward, et al.al., Case No. 3:21-cv-00132-MMD-WGC. While the allegations and legal claims vary somewhat among the derivative actions, they all generally allege that the defendants breached fiduciary duties owed to the Company by, among other things, causing the Company to issue the supposedly false and misleading statements that underlie the securities lawsuit, purportedly exposing the Company to liability and damaging the Company in an unspecified amount. By these derivative lawsuits, the plaintiffs seek no recovery from the Company. Instead, as a shareholder derivative action, the Company is named as a nominal defendant. The plaintiffs, all alleged stockholders of the Company, purport to sue on behalf and for the benefit of the Company. Accordingly, the derivative plaintiffs seek no recovery from the Company. Instead, as a stockholder derivative action, the Company is named as a nominal defendant. Pursuant to agreements among the parties, the courts in all of the derivative lawsuits have stayed proceedings pending the outcome of the securities class action. The Company cannot predict the impact of the securities class action’s dismissal on the shareholder derivative lawsuits.
The Company is also a nominal defendant in an action filed in January 2022 in the U.S. District Court for the Southern District of New York and styled Todd Augenbaum v. Anson Investments Master Fund LP, et al., Case No. 1:22-cv-00249 VM. The action, which again purports to be brought on behalf and for the benefit of the Company, seeks the recovery under Section 16(b) of the Exchange Act of supposed short-swing profits allegedly realized by roughly a dozen persons and entities that participated as investors in certain of the Company’s private placements of securities in 2020. Plaintiff Augenbaum, who purports to be a Company stockholder, filed his lawsuit after issuing a demand to the Company’s Board of Directors asking that the Company sue the investor defendants. The Company rejected the demand, and Mr. Augenbaum sued a few weeks later, as Section 16(b) permits him to do. No Company officer or director is among the defendants. The defendant investors in the action requested and received court permission to file a motion to dismiss the action. The motion was filed in July 2022, and the plaintiff has opposed it. Thereafter, the Court ordered additional briefing on the motion, which is currently scheduled to conclude in mid-November 2022. There is otherwise no current activity in the securities action.case. The Company cannot predict the outcome of the motion to dismiss, the timing of court action on the requests, or the outcome of the lawsuit more generally. While the Company again notes that plaintiff seeks no relief against the Company, several of the defendant investors have made demands on the Company that it indemnify their costs of defending the action, invoking provisions in the agreements by which the investors acquired Company securities.
On July 7, 2020,January 18, 2022, the Company receivedwas named as a letter fromdefendant in a law firm alleging that rights thatlawsuit filed in the Supreme Court of the State of New York, County of New York styled Harold Chizick and Jennifer Chizick v. Genius Brands had licensed from POW!International, Inc., LLC, through its joint venture, Stan Lee Universe, LLC, had already been sold to another company, Proxima, represented by that law firm. The law firm alleged thatChizComm Ltd., Index No. 650278/2022, alleging: (1) breach of employment agreement, (2) breach of duty of good faith, (3) constructive dismissal, (4) indemnification, (5) violation of the Employment Standards Act 2000 of Ontario, and (6) defamation. On February 25, 2022, the Company filed a motion to dismiss on the ground that venue is inter alia, interferingimproper. In response, plaintiffs’ counsel has advised that they will be amending their complaint to address the arguments in the Company’s venue motion. Plaintiffs filed an amended complaint on March 17, 2022, adding a claim for reformation of the plaintiffs’ employment agreements to address the Company’s lack of venue argument and a claim for breach of escrow agreement regarding alleged release of shares held in escrow pursuant to the parties’ Purchase and Sale Agreement (the “PSA”). On April 25, 2022, the Company filed a motion for partial dismissal of the plaintiffs’ amended complaint seeking (1) dismissal of the plaintiffs’ claims for indemnification and defamation and (2) a stay of plaintiffs’ claim for breach of escrow agreement pending the required arbitration of this claim. At the hearing on this motion to dismiss on June 14, 2022, the Company was successful in having (1) the indemnification claim dismissed with Proxima’s contractual rights. This matter was referredprejudice and (2) the claim for breach of escrow agreement stayed pending arbitration of this claim before the American Arbitration Association (“AAA”). On June 3, 2022, plaintiffs commenced their AAA arbitration proceeding regarding their claim for breach of escrow agreement by filing an arbitration demand.
On June 6, 2022, plaintiffs filed a request for emergency relief in the AAA proceeding seeking a mandatory injunction to our outside litigation counsel.release the Company shares held in escrow pending indemnification claims under the terms of the PSA. The Company hasopposed this emergency relief request on multiple grounds (including, without limitation, the lack of any irreparable harm, the adequacy of money damages and the Company’s indemnification claim applicable to the escrowed shares) and the hearing on this emergency relief request occurred at the AAA offices in New York on June 24, 2022.
On October 3, 2022, the parties reached a full and complete settlement of the New York state action and the AAA arbitration proceeding and both proceedings have been informed that the matter is being adjudicated in an arbitration and that the arbitrator issued a gag order preventing further communications from Plaintiff to third parties. On or about November 4, 2021, POW! and Proxima entered a binding settlement agreement resolving all the claims made by Proxima.dismissed with prejudice.
In all of the above-mentioned active proceedings, the Company has denied and continues to deny any wrongdoing and intends to defend the claims vigorously. The Company maintains a program of directors’ and officers’ liability insurance that, subject to the insurers’ reservations of rights, has offset a portion of the costs of defending the securities class action litigation, and that the Company expects will afford coverage for some costs of the other shareholder litigation should any of those cases proceed.
ITEM 1A. RISK FACTORS.
ThereOther than as set forth below, 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, 2020.2021.
Risks Related to our Common Stock
Our failure to meet the continued listing requirements of Nasdaq Capital Market could result in a delisting of our common stock.
If we fail to satisfy the continued listing requirements of Nasdaq Capital Market, such as minimum financial and other continued listing requirements and standards, including those regarding minimum stockholders’ equity, minimum share price, and certain corporate governance requirements, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement, or prevent future non-compliance with Nasdaq’s listing requirements.
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On March 4, 2022, we received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that for the preceding 30 consecutive business days, our common stock did not maintain a minimum closing bid price of $1.00 per share (“Minimum Bid Price Requirement”) as required by Nasdaq Listing Rule 5550(a)(2). The notice had no immediate effect on the listing or trading of our common stock, and our common stock has continued to trade on The Nasdaq Capital Market under the symbol “GNUS.”
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were granted an initial grace period of 180 calendar days, or until August 31, 2022 (the “Initial Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. Compliance would be achieved automatically and without further action if the closing bid price of our common stock remained at or above $1.00 for a minimum of 10 consecutive business days at any time during the Initial Compliance Period. We did not regain compliance with the Minimum Bid Price Requirement during the Initial Compliance Period.
On September 1, 2022, we received a new notice from Nasdaq notifying us that it had determined to grant us an extension of another 180 days, or until February 27, 2023 (the “Second Compliance Period”) to regain compliance with the Minimum Bid Price Requirement. According to this second notice, if at any time during the Second Compliance Period, the closing bid price of our common stock is at least $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide written notification that we have achieved compliance with the Minimum Bid Price Requirement and the common stock will continue to be eligible for listing on The Nasdaq Capital Market. If, however, compliance with the Minimum Bid Price Requirement cannot be demonstrated by February 27, 2023, Nasdaq will provide written notification that our common stock will be subject to delisting. At that time, we may appeal Nasdaq’s delisting determination to a panel. There can be no assurance that, if we do appeal Nasdaq’s delisting determination to the panel, such appeal would be successful.
Risks Related to the Wow Acquisition
We may not realize all of the anticipated financial, marketing and operational benefits of the Wow Acquisition.
The benefits we expect to achieve as a result of the Wow Acquisition will depend, in part, on our ability to realize anticipated growth opportunities and cost synergies. Our success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of Wow’s business and operations with our business and operations. Even if we are able to integrate our business with Wow’s business successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies we currently expect within the anticipated time frame or at all. For example, we may be unable to eliminate duplicative costs, achieve growth plans, or effectively increase market share exposure. Moreover, we anticipate that we will incur substantial expenses in connection with the integration of our business with Wow’s business. While we anticipate that certain expenses will be incurred, such expenses are difficult to estimate accurately, and may exceed current estimates.
Accordingly, the benefits from the Wow Acquisition may be offset by costs incurred or delays in integrating the companies, which could cause our financial assumptions to be inaccurate.
Exchange Rate fluctuations could result in significant foreign currency gains and losses and affect our business results.
Because the results of Wow are reported in Canadian dollars, which we will then translate to U.S. dollars for inclusion in our consolidated financial statements, we will be exposed to more significant currency translation risk as a result of the Wow Acquisition. As a result, changes between the foreign exchange rates, in particular the Canadian dollar and the U.S. dollar, affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. We currently do not enter into hedging arrangements to minimize the impact of foreign currency fluctuations.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit No. | Description |
| 31.1* | Section 302 Certification of Chief Executive Officer. |
| 31.2* | Section 302 Certification of Chief Financial Officer. |
| 32.1** | Section 906 Certification of Chief Executive Officer. |
| 32.2** | Section 906 Certification of Chief Financial Officer. |
| Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| Inline XBRL Taxonomy Extension Schema Document | |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| Inline XBRL Taxonomy Extension Label Linkbase Document | |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File |
____________________________
| * | Filed herewith |
* Filed herewith
** Furnished herewith
| ** | Furnished herewith |
SIGNATURES
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: November | By: | /s/ Andy Heyward |
Andy Heyward Chief Executive Officer (Principal Executive Officer) | ||
| Date: November | By: | /s/ Robert L Denton |
Robert L. Denton Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||