UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission file number: 000-54389
GENIUS BRANDS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 20-4118216 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 301 North Canon Drive, Suite 305 | ||
| Beverly Hills, California | 90210 | |
| (Address of principal executive offices) | (Zip Code) |
310-273-4222
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☐ (Do not check if a smaller reporting company) | 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 o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,516,969 shares of common stock, par value $0.001, were outstanding as of May 15, 2018.
GENIUS BRANDS INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2018
| ii |
PART I - FINANCIAL INFORMATION
Genius Brands International, Inc.
Condensed Consolidated Balance Sheets
As of March 31, 2018 and December 31, 2017
| ASSETS | March 31, 2018 | December 31, 2017 | ||||||
| (unaudited) | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | 6,223,073 | $ | 6,929,399 | ||||
| Restricted Cash | 237 | 568,673 | ||||||
| Accounts Receivable, net | 2,314,983 | 2,893,902 | ||||||
| Other Receivable | – | 160,545 | ||||||
| Inventory, net | 17,053 | 17,589 | ||||||
| Prepaid and Other Assets | 299,618 | 264,818 | ||||||
| Total Current Assets | 8,854,964 | 10,834,926 | ||||||
| Property and Equipment, net | 77,705 | 94,666 | ||||||
| Accounts Receivable | 1,125,000 | 1,687,500 | ||||||
| Other Receivables | – | 96,327 | ||||||
| Film and Television Costs, net | 4,336,217 | 2,777,088 | ||||||
| Lease Deposits | 358,103 | – | ||||||
| Intangible Assets, net | 1,864,639 | 1,856,280 | ||||||
| Goodwill | 10,365,805 | 10,365,805 | ||||||
| Total Assets | $ | 26,982,433 | $ | 27,712,592 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 458,372 | $ | 453,201 | ||||
| Accrued Expenses | 2,405,987 | 1,717,970 | ||||||
| Deferred Revenue | 294,884 | 453,927 | ||||||
| Accrued Salaries and Wages | 174,227 | 168,549 | ||||||
| Disputed Trade Payable | 925,000 | 925,000 | ||||||
| Total Current Liabilities | 4,258,470 | 3,718,647 | ||||||
| Long Term Liabilities: | ||||||||
| Deferred Revenue | 4,440,956 | 4,631,456 | ||||||
| Production Loan Facility, net | 2,689,320 | 4,322,643 | ||||||
| Total Liabilities | 11,388,746 | 12,672,746 | ||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock, $0.001 par value, 10,000,000 shares authorized, respectively; 3,530 and 3,530 shares issued and outstanding, respectively | 4 | 4 | ||||||
| Common Stock, $0.001 par value, 233,333,334 shares authorized, respectively; 8,202,794 and 7,610,794 shares issued and outstanding, respectively | 8,203 | 7,611 | ||||||
| Common Stock to Be Issued | 24 | 24 | ||||||
| Additional Paid in Capital | 58,232,423 | 56,588,822 | ||||||
| Accumulated Deficit | (42,641,849 | ) | (41,551,497 | ) | ||||
| Accumulated Other Comprehensive (Loss) | (5,118 | ) | (5,118 | ) | ||||
| Total Equity | 15,593,687 | 15,039,846 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 26,982,433 | $ | 27,712,592 | ||||
The accompanying notes are an integral part of these financial statements.
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Genius Brands International, Inc.
Condensed Consolidated Statements of Operations
Three months ended March 31, 2018 and March 31, 2017
| Three Months Ended | Three Months Ended | |||||||
| March 31, 2018 | March 31, 2017 | |||||||
| (unaudited) | ||||||||
| Revenues: | ||||||||
| Television & Home Entertainment | $ | 3,754 | $ | 43,373 | ||||
| Licensing & Royalties | 66,812 | 153,213 | ||||||
| Kid Genius Networks | 22,009 | 1,505 | ||||||
| Product Sales | 638 | – | ||||||
| Total Revenues | 93,213 | 198,091 | ||||||
| Operating Expenses: | ||||||||
| Marketing and Sales | 60,980 | 89,504 | ||||||
| Direct Operating Costs | (26,749 | ) | 23,069 | |||||
| General and Administrative | 1,322,452 | 1,400,925 | ||||||
| Total Operating Expenses | 1,356,683 | 1,513,498 | ||||||
| Loss from Operations | (1,263,470 | ) | (1,315,407 | ) | ||||
| Other Income (Expense): | ||||||||
| Other Income | 279 | 26 | ||||||
| Interest Expense | (273 | ) | (853 | ) | ||||
| Net Other Income (Expense) | 6 | (827 | ) | |||||
| Loss before Income Tax Expense | (1,263,464 | ) | (1,316,234 | ) | ||||
| Income Tax Expense | – | – | ||||||
| Net Loss | $ | (1,263,464 | ) | $ | (1,316,234 | ) | ||
| Net Loss per Common Share (Basic and Diluted) | $ | (0.18 | ) | $ | (0.26 | ) | ||
| Weighted Average Shares Outstanding (Basic and Diluted) | 6,856,517 | 5,020,154 | ||||||
The accompanying notes are an integral part of these financial statements.
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Genius Brands International, Inc.
Condensed Consolidated Statements of Comprehensive Income
Three months ended March 31, 2018 and March 31, 2017
(unaudited)
| Three Months Ended | Three Months Ended | |||||||
| March 31, 2018 | March 31, 2017 | |||||||
| Net Loss | $ | (1,263,464 | ) | $ | (1,316,234 | ) | ||
| Other Comprehensive Income (Loss), Net of Tax: | ||||||||
| Unrealized Gain (Loss) on Foreign Currency Translation | – | – | ||||||
| Other Comprehensive Income (Loss), Net of Tax: | – | – | ||||||
| Comprehensive Income (Loss) | $ | (1,263,464 | ) | $ | (1,316,234 | ) |
The accompanying notes are an integral part of these financial statements.
| 5 |
Genius Brands International, Inc.
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2018 and March 31, 2017
(unaudited)
| Three Months Ended | Three Months Ended | |||||||
| March 31, 2018 | March 31, 2017 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | (1,263,464 | ) | $ | (1,316,234 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
| Amortization of Film and Television Costs | 26,738 | 4,605 | ||||||
| Depreciation and Amortization Expense | 32,274 | 34,630 | ||||||
| Bad Debt Expense | 2,400 | – | ||||||
| Stock Issued for Services | – | 100,000 | ||||||
| Stock Compensation Expense | 47,852 | 221,992 | ||||||
| Decrease (Increase) in Operating Assets: | ||||||||
| Accounts Receivable, net | 1,139,019 | (319,161 | ) | |||||
| Other Receivables | 256,872 | – | ||||||
| Inventory | 536 | (16,010 | ) | |||||
| Prepaid Expenses & Other Assets | (49,474 | ) | (60,642 | ) | ||||
| Lease Deposits | (358,103 | ) | – | |||||
| Film and Television Costs, net | (928,289 | ) | (937,535 | ) | ||||
| Increase (Decrease) in Operating Liabilities: | ||||||||
| Accounts Payable | (91,877 | ) | (322,236 | ) | ||||
| Accrued Salaries | 5,678 | 27,102 | ||||||
| Deferred Revenue and Advances | 59,607 | 230,157 | ||||||
| Other Accrued Expenses | (93,876 | ) | 7,122 | |||||
| Net Cash Used in Operating Activities | (1,214,107 | ) | (2,346,210 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Investment in Intangible Assets | (21,358 | ) | – | |||||
| Investment in Fixed Assets | (2,314 | ) | – | |||||
| Net Cash Used in Investing Activities | (23,672 | ) | – | |||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Warrant Exchange, net | – | 3,400,658 | ||||||
| Proceeds from Sale of Common Stock, net | 1,596,340 | – | ||||||
| Repayment of Production Facility, net | (1,633,323 | ) | 1,284,728 | |||||
| Net Cash (Used in) Provided by Financing Activities | (36,983 | ) | 4,685,386 | |||||
| Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | (1,274,762 | ) | 2,339,176 | |||||
| Beginning Cash, Cash Equivalents, and Restricted Cash | 7,498,072 | 2,887,921 | ||||||
| Ending Cash, Cash Equivalents, and Restricted Cash | $ | 6,223,310 | $ | 5,227,097 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash Paid for Interest | $ | – | $ | 853 | ||||
| Schedule of Non-Cash Financing and Investing Activities | ||||||||
| Issuance of Common Stock for services rendered | $ | 780,000 | – | |||||
| Issuance of Common Stock in Relation to Sony Transaction | $ | – | $ | 1,489,583 | ||||
The accompanying notes are an integral part of these financial statements.
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Genius Brands International, Inc.
Notes to Condensed Financial Statements
March 31, 2018 (unaudited)
Note 1: Organization and Business -
Organization and Nature of Business
Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates and licenses multimedia content. Led by proven industry leaders, the Company distributes its content in all formats as well as a broad range of consumer products based on its characters. In the children's media sector, the Company’s portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment, including the award-winningBaby Genius, new preschool propertyRainbow Rangers, debuting November 5, 2018 on Nickelodeon; preschool propertyLlama Llama; that debuted on Netflix in December 2017 and has already been picked up by Netflix for a second season; tween music-driven brandSpacePop; adventure comedyThomas Edison's Secret Lab®, available on, public broadcast stations and the Company’s Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, You Tube and Amazon Prime; Warren Buffett'sSecret Millionaires Club, created with and starring iconic investor Warren Buffett. The Company also has a partnership with Stan Lee's Pow! Entertainment which it manages for creation, production, licensing and management of original Stan Lee superhero programs.
In addition, the Company acts as licensing agent for Llama Llama, leveraging its 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. 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 closing of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company.
On November 4, 2016, the Company filed a certificate to change its Articles of Incorporation to effect a reverse split on a one-for-three basis (the “2016 Reverse Split”). The 2016 Reverse Split became effective on November 9, 2016. All common stock share and per share information in this Quarterly Report on Form 10-Q (“Form 10-Q”), including the accompanying consolidated financial statements and notes thereto, have been adjusted to reflect retrospective application of the 2016 Reverse Split, unless otherwise indicated.
Liquidity
Historically, the Company has incurred net losses. For the three months ended March 31, 2018 and March 31, 2017, the Company reported net losses of $1,263,464 and $1,316,234 respectively. The Company reported net cash used in operating activities of $1,214,107 and $2,346,210 for the three months ended March 31, 2018, and March 31, 2017, respectively. As of March 31, 2018, the Company had an accumulated deficit of $42,641,849 and total stockholders’ equity of $15,593,687. At March 31, 2018, the Company had current assets of $8,854,964, including cash, cash equivalents, and restricted cash of $6,223,310 and current liabilities of $4,258,470, including certain trade payables of $925,000 to which the Company disputes the claim. The Company had working capital of $4,596,494 as of March 31, 2018 compared to working capital of $7,116,279 as of December 31, 2017.
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On January 8, 2018, the Company entered into a Securities Purchase Agreement with certain accredited investors pursuant to which the Company sold approximately $1,800,000 of common stock and warrants to such investors (the “January 2018 Private Placement”). The Company issued and sold warrants to purchase 592,000 shares of common stock at an exercise price of $3.00 per share.
While the Company believes that its cash balances and working capital combined with its production facility and deal pipeline will be sufficient to fund operations for the next twelve months, there can be no assurance that cash flows from operations will continue to improve in the near future. If the Company is unable to attain profitable operations and attain positive operating cash flows, it may need to (i) seek additional funding, (ii) scale back its development or production plans, or (iii) reduce certain operations.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 2018 and 2017 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared and Llama Productions as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-company balances and transactions have been eliminated in consolidation.
The financial statements have been prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 Business Combinations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these condensed consolidated financial statements to conform to current period classifications.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of March 31, 2018, and 2017 Restricted Cash totaled $237 and $568,673 respectively, which represents funds held in a cash account to be used solely for the production ofLlama Llama as a condition of its loan agreement with Bank Leumi USA.
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Allowance for Doubtful Accounts
Accounts receivable are presented on the balance sheets net of estimated uncollectible amounts. The Company assesses its accounts receivable balances on a quarterly basis to determine collectability and records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses based on historical experience and future expectations. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company had an allowance for doubtful accounts of $110,658 as of both March 31, 2018 and December 31, 2017.
Inventories
Inventories are stated at the lower of average cost or net realizable value and consist of finished goods such as DVDs, CDs and other products. A reserve for slow-moving and obsolete inventory is established for all inventory deemed potentially non-saleable. The current inventory is considered properly valued and saleable. The Company concluded that there was an appropriate reserve for slow moving and obsolete inventory of $26,097 at both March 31, 2018 and December 31, 2017.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add to the value of the assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property and equipment are reflected in the statement of operations.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets in future periods.
Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Film and Television Costs
The Company capitalizes production costs for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.
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The Company capitalizes production costs for films produced in accordance with FASB ASC 926-20 Entertainment - Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates its capitalized production costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.
Additionally, for both episodic series and films, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
On January 1, 2018, the Company adopted the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, (Topic 605).
Accordingly, on January 1, 2018 the Company recorded a cumulative effect adjustment to beginning accumulated deficit in the amount of $173,112. The impact to our financial statements for the three months ended March 31, 2018 resulting from the adoption of Topic 606 as of January 1, 2018 was a reduction of revenue in the amount $68,184 and a corresponding reduction in costs in the amount of $10,099 from the amounts reported. The amounts prior to adoption were not recognized pursuant to Topic 606 and would have been reported pursuant to Topic 605.
Changes to the opening balances in prepaid and other assets, film and television costs, total assets, accrued expenses, deferred revenue and total liabilities resulting from the adoption of the new guidance were as follows (thousands):
| December 31, 2017 | Impact of Adoption | January 1, 2018 | ||||||||||
| Prepaid and Other Assets | $ | 265 | $ | (15 | ) | $ | 250 | |||||
| Film and Television Costs, net | 2,777 | (219 | ) | 2,558 | ||||||||
| Total assets | 27,713 | (234 | ) | 27,479 | ||||||||
| Accrued Expenses | 1,718 | 2 | 1,720 | |||||||||
| Deferred Revenue | 5,085 | (409 | ) | 4,676 | ||||||||
| Total liabilities | 12,673 | (407 | ) | 12,266 | ||||||||
The Company performed its analysis of its existing revenue contracts and has completed its new revenue accounting policy documentation under the new standard. The Company has identified the following six material and distinct performance obligations:
| · | License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability be played or aired. Functional intellectual property derives a substantial portion of its utility from its significant standalone functionality.) |
| · | License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs associated with its animated content.) |
| · | Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.) |
| · | Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.) |
| · | Fixed fee advertising revenue generated from the Genius Brands Network |
| · | Variable fee advertising revenue generated from the Genius Brands Network |
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As a result of the change, beginning January 1, 2018, the Company began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees, the Company recognizes fixed revenue upon delivery of content and the start of the license period. 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. Revenue under these types of contracts was previously recognized when royalty statements were received. The Company began recognizing revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.
The Company sells advertising on its Kid Genius channel in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under FASB ASC 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.
The Company recognizes revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer.
Direct Operating Costs
Direct operating costs include costs of our product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which we are obligated to share net profits of the properties on which they have rendered services.
Share-Based Compensation
As required by FASB ASC 718 - Stock Compensation, the Company recognizes an expense related to the fair value of our share-based compensation awards, including stock options, using the Black-Scholes calculation as of the date of grant. The Company has elected to use the graded attribution method for awards which are in-substance, multiple awards based on the vesting schedule.
Earnings Per Share
Basic earnings (loss) per common share (“EPS”) is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of common 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.
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Concentration of Risk
The Company’s cash is maintained at two financial institutions and from time to time the balances for this account exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of March 31, 2018, the Company had three accounts with a combined uninsured balance of $5,723,310. As of December 31, 2017, the Company had four accounts with a combined uninsured balance of $6,998,072.
For the three months ended March 31, 2018, the Company had two customers whose total revenue each exceeded 10% of the total consolidated revenue. The Company had one customer who accounted for 98% of accounts receivable balance as of March 31, 2018.
Fair value of financial instruments
The carrying amounts of cash, receivables, accounts payable, and accrued liabilities approximate fair value due to the short-term maturity of the instruments. The carrying amount of the Production Loan Facility approximates fair value since the debt carries a variable interest rate that is tied to either the current Prime or LIBOR rates plus an applicable spread.
We adopted FASB ASC 820 as of January 1, 2008, for financial instruments measured at fair value on a recurring basis. FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| · | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; | |
| · | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
| · | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. We have prospectively adopted ASU 2016-18 in our 2017 financial statements. The impact to our consolidated financial position, results of operations and cash flows was minimal.
In January 2017, the FASB issued Accounting StandardsUpdate 2017-04, “Simplifyingthe Test for Goodwill Impairment,” which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted.We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
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In May 2017, the FASB issued Accounting Standard Update 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting,” which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The standard is effective beginning January 1, 2018, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries and are not expected to have a material effect on our financial position, results of operations, or cash flows.
Note 3: Property and Equipment, Net
The Company has property and equipment as follows as of March 31, 2018 and December 31, 2017:
| March 31, 2018 | December 31, 2017 | |||||||
| Furniture and Equipment | $ | 12,385 | $ | 12,385 | ||||
| Computer Equipment | 119,570 | 117,256 | ||||||
| Leasehold Improvements | 176,903 | 176,903 | ||||||
| Software | 15,737 | 15,737 | ||||||
| Property and Equipment, Gross | 324,595 | 322,281 | ||||||
| Less Accumulated Depreciation | (246,890 | ) | (227,615 | ) | ||||
| Property and Equipment, Net | $ | 77,705 | $ | 94,666 | ||||
During the three months ended March 31, 2018 and 2017, the Company recorded depreciation expense of $19,275 and $16,933, respectively.
Note 4: Film and Television Costs, Net
As of March 31, 2018, the Company had net Film and Television Costs of $4,336,217 compared to $2,777,088 at December 31, 2017. The increase relates primarily to the production and development ofRainbow Rangers offset by the amortization of film costs associated with the revenue recognized forThomas Edison’s Secret Lab,SpacePop and Llama Llama.
During the three months ended March 31, 2018 and 2017, the Company recorded Film and Television Cost amortization expense of $26,738 and $4,605, respectively.
The following table highlights the activity in Film and Television Costs of March 31, 2018, and December 31, 2017:
| Total | ||||
| Film and Television Costs, Net as of December 31, 2016 | $ | 2,260,964 | ||
| Additions to Film and Television Costs | 2,863,076 | |||
| Capitalized Interest | 187,883 | |||
| Film Amortization Expense | (2,534,835 | ) | ||
| Film and Television Costs, Net as of December 31, 2017 | 2,777,088 | |||
| Additions to Film and Television Costs | 1,766,865 | |||
| Capitalized Interest | 42,919 | |||
| Film Amortization Expense | (250,655 | ) | ||
| Film and Television Costs, Net as of March 31, 2018 | $ | 4,336,217 | ||
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Note 5: Goodwill and Intangible Assets, Net
Goodwill
In connection with the Merger in 2013, the Company recognized $10,365,805 in Goodwill, representing the excess of the fair value of the consideration for the Merger over net identifiable assets acquired. Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization but is subject to annual review to determine if certain events warrant impairment to the Goodwill asset. Through March 31, 2018, the Company has not recognized any impairment to Goodwill.
Intangible Assets, Net
The Company had the following intangible assets as of March 31, 2018, and December 31, 2017:
| March 31, 2018 | December 31, 2017 | |||||||
| Identifiable Artistic-Related Assets (a) | $ | 1,740,000 | $ | 1,740,000 | ||||
| Trademarks (b) | 129,831 | 129,831 | ||||||
| Product Masters (b) | 64,676 | 64,676 | ||||||
| Other Intangible Assets (b) | 272,529 | 251,171 | ||||||
| Intangible Assets, Gross | 2,207,036 | 2,185,678 | ||||||
| Less Accumulated Amortization (c) | (342,397 | ) | (329,398 | ) | ||||
| Intangible Assets, Net | $ | 1,864,639 | $ | 1,856,280 | ||||
| (a) | In connection with the Merger in 2013, the Company acquired $1,740,000 of Identifiable Artistic-Related Assets. These assets, related to certain properties owned by A Squared and assumed by the Company, were valued using an independent firm. Based on certain legal, regulatory, contractual, and economic factors, the Company has deemed these assets to be indefinite-lived. Hence, pursuant to FASB ASC 350-30, these assets are not subject to amortization and are tested annually for impairment. Through March 31, 2018, the Company has not recognized any impairment expense related to these assets. | |
| (b) | Pursuant to FASB ASC 350-30-35, the Company reviews these intangible assets periodically to determine if the value should be retired or impaired due to recent events. Through March 31, 2018, the Company has not recognized any impairment expense related to these assets. | |
| (c) | During the three months ended March 31, 2018 and March 31, 2017, the Company recognized $12,999 and $17,697, respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets. |
Expected future intangible asset amortization as of March 31, 2018 is as follows:
| Fiscal Year: | ||||||
| 2018 | $ | 29,139 | ||||
| 2019 | 30,593 | |||||
| 2020 | 30,013 | |||||
| 2021 | 7,399 | |||||
| 2022 | 1,861 | |||||
| Remaining | 4,277 | |||||
| Total | $ | 103,282 | ||||
Note 6: Deferred Revenue
As of March 31, 2018, and December 31, 2017, the Company had total short term and long term deferred revenue of $4,735,840 and $5,085,383, respectively. Deferred revenue includes both (i) variable fee contracts with licensees and customers in which the Company had collected advances and minimum guarantees against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these contracts when all revenue recognition criteria have been met. Included in the deferred revenue balance as of March 31, 2018 and December 31, 2017 is the $2,000,000 advance against future royalty that Sony paid to the Company in the first quarter of 2016 as well as the remaining portion of the $1,489,583 attributable to the expansion of distribution rights acquired by Sony through the January 2017 Sony Transactions.
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Note 7: Accrued Liabilities – Current
As of March 31, 2018, and December 31, 2017, the Company has the following current accrued liabilities:
March 31, | December 31, 2017 | |||||||
| Accrued Salaries and Wages (a) | $ | 174,227 | $ | 168,549 | ||||
| Disputed Trade Payables (b) | 925,000 | 925,000 | ||||||
| Other Accrued Expenses (c) | 2,405,987 | 1,717,970 | ||||||
| Total Accrued Liabilities - Current | $ | 3,505,214 | $ | 2,811,519 | ||||
| (a) | Accrued Salaries and Wages represent accrued vacation payable to employees. | |
| (b) | 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 March 31, 2018, the Company believes that the statute of limitations applicable to the assertion of any legal claim relating to the collection of these liabilities has expired and therefore believes this liability is uncollectible. | |
| (c) | Other Accrued Expenses include estimates of expenses incurred but not yet recorded. |
Note 8: Production Loan Facility
On August 8, 2016, Llama Productions closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”) with Bank Leumi USA to produce its animated seriesLlama Llama, (the “Series”) which is configured as fifteen half-hour episodes comprised of thirty 11 minute programs that were delivered to Netflix in fall 2017. The Facility is secured by the license fees the Company will receive from Netflix for the delivery of the Series as well as the Company’s copyright in the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1% or one, three, or six month LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, the Company deposited $1,000,000 into a cash account to be used solely to produce the Series. Additionally, the Facility contains certain standard affirmative and negative non-financial covenants such as maintaining certain levels of production insurance and providing standard financial reports. As of March 31, 2018, the Company was in compliance with these covenants.
As of March 31, 2018, the Company had gross outstanding borrowing under the facility of $2,804,764 against which financing costs of $115,444 were applied resulting in net borrowings of $2,689,320. As of December 31, 2017, the Company had gross outstanding borrowing under the facility of $4,436,528 against which financing costs of $113,885 were applied resulting in net borrowings of $4,322,643.
Note 9: Stockholders’ Equity
Common Stock
As of March 31, 2018, the total number of authorized shares of common stock was 233,333,334.
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On October 29, 2015, the Company entered into securities purchase agreements with certain accredited investors pursuant to which the Company sold an aggregate of 1,443,362 shares of its common stock, par value $0.001 per share, and warrants to purchase up to an aggregate of 1,443,362 shares of common stock (the “Original Warrants”) for a purchase price of $3.00 per share and the associated warrants for gross proceeds to the Company of $4,330,000 (“2015 Private Placement”). The closing of the 2015 Private Placement occurred on November 3, 2015. Stock offering costs were $502,218. (See Note 11 for additional information about these warrants.)
On October 6, 2016, the Board of Directors of the Company authorized a reverse stock split in preparation for the Company’s anticipated up listing on the NASDAQ Capital Market.
On November 4, 2016, the Company filed a certificate of change to the Company’s Articles of Incorporation with the Secretary of State of the State of Nevada to effect a one-for-three reverse stock split of the Company’s issued and outstanding common stock. As a result of the 2016 Reverse Split, every three shares of the Company’s issued and outstanding common stock were automatically combined and reclassified into one share of the Company’s common stock. The 2016 Reverse Split affected all issued and outstanding shares of common stock, as well as common stock underlying stock options and warrants outstanding. No fractional shares were issued in connection with the 2016 Reverse Split. Stockholders who would otherwise hold a fractional share of common stock will receive an increase to their common stock as the common stock will be rounded up to a full share. The total number of authorized shares of common stock was reduced from 700,000,000 to 233,333,334 in conjunction with the 2016 Reverse Split. The 2016 Reverse Split became effective on November 9, 2016. All disclosures of shares and per share data in these consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split for all periods presented.
On February 9, 2017, the Company entered into a private transaction (the “Private Transaction”) pursuant to a Warrant Exercise Agreement with certain holders of the Company’s existing warrants (the “Original Warrants”). Pursuant to the Warrant Exercise Agreement, the holders of the Original Warrants and the Company agreed that such Original Warrant holders would exercise their Original Warrants in full, and the Company would issue to each such holder new warrants. (See Note 11 for additional information about these warrants.) In association with the Private Transaction, the Company issued 1,171,690 shares of common stock upon exercise of a portion of the Original Warrants for which it received gross proceeds of $3,866,573 and recording offering costs of $465,915 for net proceeds of $3,400,658.
On January 8, 2018, the Company entered into the January 2018 Private Placement. Pursuant to a Securities Purchase Agreement, the Company issued to the Investors approximately 592,000 shares of common stock at a per share price of $3.00 and warrants to purchase approximately 592,000 shares of common stock. The warrants were immediately exercisable, will be exercisable for a period of five years from the closing date and have an exercise price of $3.00 per share. The closing of the sale of these securities under the Securities Purchase Agreement occurred on January 10, 2018.
As of March 31, 2018, and December 31, 2017, there were 8,202,794 and 7,610,794 shares of common stock outstanding, respectively. Below are the changes to the Company’s common stock during the three months ended March 31, 2018:
Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001 per share. The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our Board of Directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
As of March 31, 2018, and December 31, 2017, there were 3,530 and 3,530 shares of Series A Convertible Preferred Stock outstanding, respectively.
On May 12, 2014, the Board of Directors authorized the designation of a class of preferred stock as “Series A Convertible Preferred Stock.” On May 14, 2014, the Company filed the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible Preferred Stock with the Secretary of State of the State of Nevada.
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Each share of the Series A Convertible Preferred Stock is convertible into shares of the Company’s common stock, par value $0.001 per share, based on a conversion calculation equal to the Base Amount divided by the conversion price. The Base Amount is defined as the sum of (i) the aggregate stated value of the Series A Convertible Preferred Stock to be converted and (ii) all unpaid dividends thereon. The stated value of each share of the Series A Convertible Preferred Stock is $1,000 and the initial conversion price is $6.00 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. Additionally, in the event the Company issues shares of its common stock or common stock equivalents at a per share price that is lower than the conversion price then in effect, the conversion price shall be adjusted to such lower price, subject to certain exceptions. The Company is prohibited from effecting a conversion of the Series A Convertible Preferred Stock to the extent that as a result of such conversion, the investor would beneficially own more than 9.99% in the aggregate of the issued and outstanding shares of the Company’s common stock, calculated immediately after giving effect to the issuance of shares of common stock upon conversion of the Series A Convertible Preferred Stock. The shares of Series A Convertible Preferred Stock possess no voting rights.
On May 14, 2014, we entered into securities purchase agreements with certain accredited investors pursuant to which we sold an aggregate of 6,000 shares of our then newly designated Series A Convertible Preferred Stock at a price of $1,000 per share for gross proceeds to us of $6,000,000. Related to the sale, we incurred offering costs of $620,085 resulting in net proceeds of $5,379,915. The transaction closed on May 15, 2014.
As the conversion price of the Series A Convertible Preferred Stock on a converted basis was below the market price of the common shares on the closing date, this resulted in a beneficial conversion feature recorded as an “imputed” dividend of $2,010,000. In addition, during the fourth quarter of 2015, in connection with the 2015 Private Placement in which the Company’s common stock was sold at $3.00 per share, the conversion price of the Series A Convertible Preferred Stock decreased to $3.00. This decrease resulted in an additional beneficial conversion feature of $3,383,850 recognized as of the time of the 2015 Private Placement. In the future, issuance of common stock or the grant of any rights to purchase our common stock or other securities convertible into our common stock for a per share price less than the then existing conversion price of the Series A Convertible Preferred Stock would result in an adjustment to the then current conversion price of the Series A Convertible Preferred Stock. This reduction would give rise to a beneficial conversion feature recorded as an “imputed” dividend.
Note 10: Stock Options
On September 18, 2015, the Company adopted the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The 2015 Plan was approved by our stockholders in September 2015. The 2015 Plan as approved by the stockholders authorized the issuance up to an aggregate of 150,000 shares of common stock. On December 14, 2015, the Board of Directors voted to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 1,293,334 from 150,000 shares to 1,443,334 shares. The increase in shares available for issuance under the 2015 Plan was approved by stockholders on February 3, 2016. On May 18, 2017, the Board of Directors voted to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 223,333 shares from 1,443,334 shares to an aggregate of 1,667,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by the stockholders on July 25, 2017.
The following table summarizes the changes in the Company’s stock option plan during the three months ended March 31, 2018:
| Options Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | Weighted Average Exercise Price per Share | ||||||||||||||||
| Balance at December 31, 2017 | 1,294,045 | $ | 2.82 - 12.00 | 2.99 years | $ | – | $ | 8.14 | ||||||||||||
| Options Granted | – | |||||||||||||||||||
| Options Exercised | – | |||||||||||||||||||
| Options Cancelled | – | |||||||||||||||||||
| Options Expired | – | |||||||||||||||||||
| Balance at March 31, 2018 | 1,294,045 | $ | 2.82 - 12.00 | 2.74 years | $ | – | $ | 8.14 | ||||||||||||
| Exercisable December 31, 2017 | 1,070,869 | $ | 2.82 - 9.00 | 2.96 years | $ | – | $ | 7.44 | ||||||||||||
| Exercisable March 31, 2018 | 1,070,869 | $ | 2.82 - 9.00 | 2.72 years | $ | – | $ | 7.44 | ||||||||||||
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During the year ended December 31, 2015, the Company granted options to purchase 1,407,775 shares of common stock to officers, directors, employees, and consultants. These stock options generally vest between one and three years, while a portion vested upon grant. The fair value of these options was determined to be $2,402,460 using the Black-Scholes option pricing model based on the following assumptions:
| Exercise Price | $2.82 - $12.00 |
| Dividend Yield | 0% |
| Volatility | 100% - 137% |
| Risk-free interest rate | 0.89% - 1.25% |
| Expected life of options | 2.5 - 3.5 years |
During the three months ended March 31, 2018, the Company recognized $47,852 in share-based compensation expense. The unvested share-based compensation as of March 31, 2018, was $80,417 which will be recognized through the second quarter of 2019 assuming the underlying grants are not cancelled or forfeited.
Note 11: Warrants
The Company has warrants outstanding to purchase up to 4,099,389 and 3,414,389 shares as of March 31, 2018 and December 31, 2017, respectively.
In connection with the sale of the Company’s Series A Convertible Preferred Stock in May 2014, Chardan Capital Markets LLC (“Chardan”) acted as sole placement agent in consideration for which it received a cash fee of $535,000 and a warrant to purchase up to 100,002 shares of the Company’s common stock. These warrants are exercisable immediately, have an exercise price of $6.00 per share, and have a five-year term.
In connection with the 2015 Private Placement, the Company issued to accredited investors the Original Warrants to purchase up to an aggregate of 1,443,362 shares of common stock for a purchase price of $3.00 per share. The Original Warrants are exercisable into shares of common stock for a period of five (5) years from issuance at an initial exercise price of $3.30 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. The Original Warrants are exercisable immediately. The Company is prohibited from effecting an exercise of the warrants to the extent that as a result of such exercise, the holder would beneficially own more than 4.99% (subject to increase up to 9.99% upon 61 days’ notice) in the aggregate of the issued and outstanding shares of common stock, calculated immediately after giving effect to the issuance of shares of common stock upon exercise of the warrant.
In connection with the 2015 Private Placement, Chardan acted as sole placement agent in consideration for which it received a cash fee of $300,000 and a warrant to purchase up to 141,668 shares of the Company’s common stock. These warrants are exercisable immediately, have an exercise price of $3.60 per share, and have a five-year term.
On February 9, 2017, the Company entered into the Private Transaction pursuant to the Warrant Exercise Agreement with certain holders of the Original Warrants. Pursuant to the Warrant Exercise Agreement, the holders of the Original Warrants and the Company agreed that such Original Warrant holders would exercise their Original Warrants in full, and the Company would issue to each such holder new warrants, with the new warrants being identical to the Original Warrants except that the termination date of such new warrants is February 10, 2022 (the “Reload Warrants”). In addition, depending on the number of Original Warrants exercised by all holders of the Original Warrants, the Company also agreed to issue to the holders another new warrant, identical to the Original Warrant except that the exercise price of such warrant is $5.30 and such warrant is not exercisable until August 10, 2017 (the “Market Price Warrants” and together with the Reload Warrants, the “New Warrants”).
The Company received gross proceeds of $3,866,573 from the exercise of the Original Warrants and issued Reload Warrants to purchase an aggregate of 799,991 shares of the Company’s common stock and Market Price Warrants to purchase an aggregate of 371,699 shares of the Company’s common stock. In association with the Private Transaction, the Company recorded warrant exchange expense of $1,402,174 representing the difference in the fair market value of the Original Warrants and the New Warrants, as an adjustment to additional paid - capital.
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Chardan acted as financial advisor on the Private Transaction in consideration for which Chardan received $363,617 and Chardan and its designees were New Warrants for 115,000 shares of the Company’s common stock.
On October 3, 2017, the Company sold, in a registered direct offering, 1,647,691 shares of common stock at an offering price of $3.90 per share and, in a concurrent private placement, warrants to purchase an aggregate of 1,647,691 shares of common stock for gross proceeds of approximately $6,425,995 before deducting the placement agent fee and related offering expenses.
On January 10, 2018, the Company issued warrants for 592,000 shares of the Company’s common stock in connection with the January 2018 Private Placement. The warrants were issued to the parties who purchased the Company’s common stock, as well as to Chardan and its designees who acted as placement agents of the deal. The warrants expire in five years and were exercisable immediately at an exercise price of $3.00 per share.
The following table summarizes the changes in the Company’s outstanding warrants during the three months ended March 31, 2018:
| Warrants Outstanding Number of Shares | Exercise Price per Share | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price per Share | Aggregate Intrinsic Value | ||||||||||||||||
| Balance at December 31, 2017 | 3,414,389 | $ | 3.30 – 6.00 | 4.21 years | $ | 3.92 | $ | – | ||||||||||||
| Warrants Granted | 685,000 | $ | 3.00 | 4.78 years | 3.00 | – | ||||||||||||||
| Warrants Exercised | – | – | – | – | – | |||||||||||||||
| Warrants Expired | – | – | – | – | – | |||||||||||||||
| Balance at March 31, 2018 | 4,099,389 | $ | 3.00 – 6.00 | 4.10 years | $ | 3.77 | $ | – | ||||||||||||
| Exercisable December 31, 2017 | 3,414,389 | $ | 3.30 – 6.00 | 4.21 years | $ | 3.92 | $ | – | ||||||||||||
| Exercisable March 31, 2018 | 4,099,389 | $ | 3.00 – 6.00 | 4.10 years | $ | 3.77 | $ | – | ||||||||||||
Note 12: Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740 Income Taxes (“Topic 740”), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.
Topic 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 March 31, 2018, and December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions.
On December 22, 2017, the United States federal government enacted the Tax Cuts and Jobs Act (the “2017 Act”). The 2017 Act will have pervasive financial reporting implications for all companies with U.S. operations, including reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent. We reviewed and incorporated the new tax bill implications through 2017 financial statements. We remeasured the deferred taxes at new corporation rate of 21%, which reduced the net deferred tax assets, before valuation allowance, by approximately $2,809,700. Due to full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance. The 2017 Act has no significant impact on the financial statements for the three months ended March 31, 2018 or for the year ended Decembert 31, 2017.
Due to the complexities of the 2017 Act, the SEC issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed. Any subsequent adjustment to these amounts will be recorded to current tax expense in 2018 when the analysis is complete.
The Company files income tax returns in the U.S. federal jurisdiction and in the state of California and Massachusetts. The Company is currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
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Note 13: Lease Commitments
Rental expenses incurred for operating leases during the three months ended March 31, 2018 and March 31, 2017 were $35,160 and $35,007, respectively.
During the first quarter of 2015, the Company entered into an agreement for new office space to which it relocated its operations upon the expiration of its prior lease. Effective May 1, 2015, the Company began leasing approximately 3,251 square feet of general office space at 301 North Canon Drive, Suite 305, Beverly Hills, California 90210 pursuant to a 35-month sub-lease that commenced on May 1, 2015. The Company will pay $136,542 annually subject to annual escalations of 3%.
On February 6, 2018, the Company entered into lease for approximately 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to a 91-month leave that commences on May 25, 2018. The Company will pay rent of approximately $364,130 annually, subject to annual escalations of 3.5%.
The following is a schedule of future minimum lease payments required by the non-cancelable operating lease agreement:
| Year | Amount | |||||
| 2018 | $ | 198,617 | ||||
| 2019 | 371,082 | |||||
| 2020 | 384,070 | |||||
| 2021 | 397,512 | |||||
| 2022 | 411,425 | |||||
| Thereafter | 1,322,708 | |||||
| $ | 3,085,414 | |||||
Note 14: Commitment and Contingencies
In the normal course of its business, the Company enters into various agreements which call for the potential future payment of royalties or “profit” participations associated with its individual properties. These profit participations can be for the use of third party intellectual property, such as the case withStan Lee and the Mighty 7 andLlama Llama among others, in which the Company is obligated to share net profits with the underlying rights holders on a certain basis as defined in the respective agreements.
In addition, in the normal course of its business, the Company enters into agreements with various service providers such as animation studios, post-production studios, writers, directors, musicians or other creative talent. Pursuant to these agreements, the Company is obligated to share with these service providers a portion of the net profits of the properties on which they have rendered services, as defined in each respective agreement.
Note 15: Related Party Transactions
On April 21, 2016, the Company entered into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward, the Company’s Chief Executive Officer. The Company entered into a customary merchandise license agreement with AHAA for the use of characters and logos related to Warren Buffett’sSecret Millionaires Club andStan Lee’s Mighty 7 in connection with certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry, and the Company earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. No amounts were earned during the three months ended March 31, 2018, under this agreement.
On July 25, 2016, the Company entered into a consulting agreement with Foothill Entertainment, Inc. (“Foothill”), an entity whose Chairman is Gregory Payne, our corporate secretary. The Company has engaged Foothill Entertainment, Inc. for a term of six months to assist in the distribution and commercial exploitation of its audiovisual content as well as for the preparation and attendance on behalf of the Company at the MIPJR and MIPCOM markets in Cannes. Foothill receives $12,500 per month for these services. This agreement was extended on a month to month basis through and terminated on January 31, 2018. As of March 31, 2018, Foothill owed the Company $17,784 that Foothill collected on the Company’s behalf for a content license. Greg Payne owed the Company $2,939 for expenses. These amounts were repaid on April 30, 2018.
On October 1, 2016, Llama Productions LLC entered into an animation production services agreement with Mr. Heyward for services as a producer for which he is to receive $186,000 through the course of production of the Company’s animated seriesLlama Llama.From October 1, 2016 through December 31, 2017, Mr. Heyward has been paid $186,000. No amounts were paid during the three months ended March 31, 2018 under this agreement.
Note 16: Subsequent Events
Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred from March 31, 2018 through the date of issuance of these financial statements. During this period, we did not have any significant subsequent events, except as disclosed below:
| · | On May 14, 2018 the Company issued 277,508 shares of common stock valued at $2.81 per share to a vendor for production services rendered. |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three months ended March 31, 2018 and 2017. 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 April 2, 2018 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 looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire.
Overview
The management’s discussion and analysis is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
Our Business
Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates and licenses multimedia content. Led by proven industry leaders, the Company distributes its content in all formats as well as a broad range of consumer products based on its characters. In the children's media sector, the Company’s portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment, including the award-winningBaby Genius, new preschool propertyRainbow Rangers, debuting November 5, 2018 on Nickelodeon; preschool propertyLlama Llama; that debuted on Netflix in December 2017 and has already been picked up by Netflix for a second season; tween music-driven brandSpacePop; adventure comedyThomas Edison's Secret Lab®, available on, public broadcast stations and the Company’s Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire ,You Tube and Amazon Prime; Warren Buffett'sSecret Millionaires Club, created with and starring iconic investor Warren Buffett. The Company is also has a partnership with Stan Lee's Pow! Entertainment which it manages for creation, production, licensing and management of original Stan Lee superhero programs.
In addition, we act as licensing agent for Llama Llama, leveraging our existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.
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Recent Developments
January 2018 Private Placement
On January 8, 2018, we entered into a Securities Purchase Agreement with certain accredited investors pursuant to which we sold approximately $1,800,000 of common stock and warrants to such investors (the “January 2018 Private Placement”). We issued and sold to such investors warrants to purchase 592,000 shares of common stock at an exercise price of $3.00 per share.
Results of Operations
Our summary results for the three months ended March 31, 2018, and March 31, 2017 are below.
Revenues
| March 31, | March 31, | |||||||||||||||
| 2018 | 2017 | Change | % Change | |||||||||||||
| Television & Home Entertainment | $ | 3,754 | $ | 43,373 | $ | (39,619 | ) | (91)% | ||||||||
| Licensing & Merchandising | 66,812 | 153,213 | (86,401 | ) | (56)% | |||||||||||
| Kid Genius Networks | 22,009 | 1,505 | 20,504 | 1362% | ||||||||||||
| Product Sales | 638 | – | 638 | N/A | ||||||||||||
| Total Revenue | $ | 93,213 | $ | 198,091 | $ | (104,878 | ) | (53)% | ||||||||
Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television, VOD, or SVOD in domestic and international markets and the sale of DVDs for home entertainment through our partners. Fluctuations in Television & Home Entertainment revenue occur period over period based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content to the customer. During the three months ended March 31, 2018, compared to March 31, 2017, Television & Home Entertainment revenue decreased $39,619 or 91% primarily due to the cumulative effect adjustment made as a result of adopting new accounting standard ASC 606. The impact of the adoption reduced revenues for the three months ended March 31, 2018 by $68,184.
Licensing and royalty revenue includes items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent. During the three months ended March 31, 2018, compared to March 31, 2017, this licensing and royalty revenue decreased $86,401 or 56% primarily due to decreases in revenues from ourSpacePop property that was launched in June of 2016. There was no comparable title released during 2017.
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 $20,504 during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to increased advertising impressions served and additional ad campaigns in 2018 as we continue to grow this area of the business.
Total Expenses
| March 31, 2018 | March 31, 2017 | Change | % Change | |||||||||||||
| Marketing and Sales | $ | 60,980 | $ | 89,504 | $ | (28,524 | ) | (32)% | ||||||||
| Direct Operating Costs | (26,749 | ) | 23,069 | (49,818 | ) | (216)% | ||||||||||
| General and Administrative | 1,322,452 | 1,400,925 | (78,473 | ) | (6)% | |||||||||||
| Total Operating Expenses | $ | 1,356,683 | $ | 1,513,498 | $ | (156,815 | ) | (10)% | ||||||||
Marketing and sales expenses decreased $28,524 for the three months ended March 31, 2018 compared to March 31,2017 primarily due to fewer new releases in 2018.
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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 March 31, 2018, we recorded film and television cost amortization expense of $26,738 and participation expense of $3,472 compared to March 31, 2017 expenses of $4,604 and $12,667, respectively. This increase in amortization expense is related to adjustments made to certain film ultimates which increased the amortization rate. The decrease in participation expense is directly related to decreased Television & Home Entertainment and Licensing and Merchandising revenue in the current period compared to the prior period. In March of 2018, we negotiated a $120,000 reduction in the dubbing costs for the Llama Llama series which were accrued during the fourth quarter of 2017 when the series was delivered to Netflix. This reduction resulted in a partial reversal of the accrual during the three months ended March 31, 2018.
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 costs for three months ended March 31, 2018 decreased $78,473 compared to the same period in 2017. This decrease includes: (i) decreases in share-based compensation expense of $174,140 related to the grant of options to officers, directors, employees and consultants in the fourth quarter of 2015 and in 2016; and (ii) decreases in professional fees of $61,069. These decreases were partially offset by increases in other general and administrative expenses of $150,136.
Liquidity and Capital Resources
Working Capital
As of March 31, 2018, we had current assets of $8,854,964, including cash, cash equivalents, and restricted cash of $6,223,310, and current liabilities of $4,258,470, including certain trade payables of $925,000 to which we dispute the claim, resulting in working capital of $4,596,494, compared to working capital of $7,116,279 as of December 31, 2017.
Net working capital decreased $2,519,785. Working capital increased as a result of the $1,800,000 of proceeds received for the sale of common stock and warrants to accredited investors in connection with the January 2018 Private Placement. We issued and sold warrants to purchase 592,000 shares of common stock at an exercise price of $3.00 per share. The increase was more than offset by production costs of Rainbow Rangers and general overhead incurred during the three months ended March 31, 2018 including the lease deposits of $358,103.
Credit Facility
On August 8, 2016, Llama Productions LLC, our wholly-owned subsidiary, closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”) with Bank Leumi USA to produce our animated seriesLlama Llama (the “Series”). The Series is configured as fifteen half-hour episodes comprised of thirty 11 minute programs to be delivered to Netflix in Fall 2017. The Facility is secured by the license fees we will receive from Netflix for the delivery of the Series as well as our copyright in the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1% or one, three, or six month LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, we deposited $1,000,000 into a cash account to be used solely for the production of the series. During the fourth quarter of 2017, the facility was reduced from $5,295,000 to $4,843,416 and a portion of the collateral was released to use, leaving $583,673 in restricted cash as of December 31, 2017. During the three months ended March 31, 2018 the facility was repaid $1,125,000 and the remaining collateral was released and used to further pay down the loan. The facility net balance as of March 31, 2018 is $2,689,320.
Comparison of Cash Flows for the Three Months Ended March 31, 2018, and March 31, 2017
Our total cash, cash equivalents, and restricted cash was $6,223,310 and $5,227,097 at March 31, 2018, and 2017, respectively.
| March 31, 2018 | March 31, 2017 | Change | ||||||||||
| Cash used in operations | $ | (1,214,107 | ) | $ | (2,346,210 | ) | $ | 1,132,103 | ||||
| Cash used in investing activities | (23,672 | ) | – | (23,672 | ) | |||||||
| Cash (used in) provided by financing activities | (36,983 | ) | 4,685,386 | (4,722,369 | ) | |||||||
| (Decrease) Increase in cash | $ | (1,274,762 | ) | $ | 2,339,176 | $ | (3,613,938 | ) | ||||
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During the three months ended March 31, 2018, our primary sources of cash were the $1,596,340 in net proceeds from the sale of securities under a Securities Purchase Agreement and collections of $1,125,000 from the Llama Llama broadcast agreement. During the three months ended March 31, 2017, our primary sources of cash were the gross proceeds of $3,866,573 from the Private Placement Transaction coupled with $1,284,728 in proceeds from the Llama Llama production facility.
Operating Activities
Cash used in operating activities for the three months ended March 31, 2018 was $1,214,107 as compared to cash used in operating activities of $2,346,210 during the prior period. The decrease in cash used in operating activities is primarily the result of decreases in accounts receivable due to collections associated with the delivery of Llama Llama in December of 2017.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2018 was $23,672 as compared to a use of $0 for the development of certain intangible assets during the comparable period in 2017.
Financing Activities
Cash used in financing activities for the three months ended March 31, 2018 was $36,983 as compared to $4,685,386 generated in the comparable period in 2017. During the three months ended March 31, 2018, the sources of cash generated from financing activities were the $1,596,340 in net proceeds from the sale of securities under a Securities Purchase Agreement offset with payments made on the Llama Llama production loan of $1,633,323. During the three months ended March 31, 2017, the sources of cash generated from financing activities were the $3,400,658 in net proceeds from the Private Transaction coupled with the $1,284,728 in proceeds from theLlama Llama production facility.
Capital Expenditures
As of March 31, 2018, we do not have any material commitments for capital expenditures.
Critical Accounting Policies
Our accounting policies are described in the notes to the financial statements. Below is a summary of the critical accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared and Llama Productions as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-company balances and transactions have been eliminated in consolidation.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. We complete the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets in future periods.
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Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. In accordance with FASB ASC 350 Intangible Assets, the costs of new product development and significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Film and Television Costs
We capitalize production costs for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment over the period of commitment. We expense all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.
We capitalize production costs for films produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value of the film(s) delivered and recognized as revenue. We evaluate its capitalized production costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.
Additionally, for both episodic series and films, from time to time, we develop additional content, improved animation and bonus songs/features for its existing content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
On January 1, 2018, we adopted the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, (Topic 605).
Accordingly, on January 1, 2018 we recorded a cumulative effect adjustment to beginning Accumulated Deficit in the amount of $173,112. The impact to our financial statements for the three months ended March 31, 2018 resulting from the adoption of Topic 606 as of January 1, 2018 was a reduction of revenue in the amount $68,184 and a corresponding reduction in costs in the amount of $10,099 from the amounts reported. The amounts prior to adoption were not recognized pursuant to Topic 606 and would have been reported pursuant to Topic 605.
Changes to the opening balances in prepaid and other assets, film and television costs, total assets, accrued expenses, deferred revenue and total liabilities resulting from the adoption of the new guidance were as follows (thousands):
| December 31, 2017 | Impact of Adoption | January 1, 2018 | ||||||||||
| Prepaid and Other Assets | $ | 265 | $ | (15 | ) | $ | 250 | |||||
| Film and Television Costs, net | 2,777 | (219 | ) | 2,558 | ||||||||
| Total assets | 27,713 | (234 | ) | 27,479 | ||||||||
| Accrued Expenses | 1,718 | 2 | 1,720 | |||||||||
| Deferred Revenue | 5,085 | (409 | ) | 4,676 | ||||||||
| Total liabilities | 12,673 | (407 | ) | 12,266 | ||||||||
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We performed an analysis of our existing revenue contracts and completed our new revenue accounting policy documentation under the new standard. The Company has identified the following six material and distinct performance obligations:
| · | License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual property that has significant standalone functionality for example ability be played or aired. Functional intellectual property derives a substantial portion of its utility from its significant standalone functionality.) |
| · | License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs associated with its animated content.) |
| · | Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for our current contracts, it could become significant in the future.) |
| · | Options on future seasons of content at fixed terms. (While this performance obligation is not significant for our current contracts, it could become significant in the future.) |
| · | Fixed fee advertising revenue generated from the Genius Brands Network |
| · | Variable fee advertising revenue generated from the Genius Brands Network |
As a result of the change, beginning January 1, 2018, we began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees, we will recognize fixed revenue upon delivery of content and the start of the license period. For functional IP contracts with a variable component, we will estimate revenue such that it is probable there will not be a material reversal of revenue in future periods. Revenue under these types of contracts was previously recognized when royalty statements were received. We began recognizing revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.
We sell advertising on our Kid Genius channel in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, we recognize revenue when all five revenue recognition criteria under FASB ASC 606 are met. For impressions served, we deliver a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM per impression. Impressions served are reported to us on a monthly basis, and revenue is reported in the month the impressions are served.
We recognize revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
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In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. We have prospectively adopted ASU 2016-18. The impact to our consolidated financial position, results of operations and cash flows is minimal.
In January 2017, the FASB issued Accounting StandardsUpdate 2017-04, “Simplifyingthe Test for Goodwill Impairment,” which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted.We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In May 2017, the FASB issued Accounting Standard Update 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting,” which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The standard is effective beginning January 1, 2018, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries and are not expected to have a material effect on our financial position, results of operations, or cash flows.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
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 are effective for the period ended March 31, 2018, in ensuring that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
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As of March 31, 2018, there were no material pending legal proceedings to which we are a party or as to which any of its property is subject, and no such proceedings are known to us to be threatened or contemplated against us.
There have been no material changes to the Risk Factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There were no reportable events under this Item 3 during the three months ended March 31, 2018.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
* Filed herewith
** Furnished herewith
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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: May 15, 2018 | By: | /s/ Andy Heyward |
Andy Heyward, Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 15, 2018 | By: | /s/ Robert L Denton |
| Robert L. Denton, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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