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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

 

  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.)

 

190 N. Canon Dr., 4th Floor

Beverly Hills, CA 90210

(Address of principal executive offices and zip code)

 

310-273-4222

(Registrant’s telephone number, including area code)

____________________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share GNUS The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  Accelerated filer
Non-accelerated filer  Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 14, 2022, the registrant had 319,139,256 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

   

 

 

GENIUS BRANDS INTERNATIONAL, INC.

FORM 10-Q

 

For the Quarterly Period Ended September 30, 2022

 

Table of Contents

 

PART I - FINANCIAL INFORMATION 3
   
Item 1. Financial Statements (Unaudited) 3
   
Condensed Consolidated Balance Sheets 3
   
Condensed Consolidated Statements of Operations 5
   
Condensed Consolidated Statements of Comprehensive Income (Loss) 6
   
Condensed Consolidated Statements of Stockholders’ Equity 7
   
Condensed Consolidated Statements of Cash Flows 9
   
Notes to Condensed Consolidated Financial Statements 11
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 47
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 57
   
Item 4. Controls and Procedures 57
   
PART II - OTHER INFORMATION 58
   
Item 1. Legal Proceedings 58
   
Item 1A. Risk Factors 59
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 61
   
Item 3. Defaults Upon Senior Securities 61
   
Item 4. Mine Safety Disclosures 61
   
Item 5. Other Information 61
   
Item 6. Exhibits 61
   
SIGNATURES 62

 

 

 

 2 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Genius Brands International, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

         
   September 30,
2022
   December 31,
2021
 
    (unaudited)      
ASSETS          
Current Assets:          
Cash and Cash Equivalents  $7,093   $2,058 
Restricted Cash       8,002 
Investments in Marketable Securities (amortized cost of $97,530)   89,873    112,523 
Accounts Receivable, net   9,327    7,632 
Tax Credits Receivable   26,350     
Notes & Accounts Receivable from Related Party   2,695    1,276 
Other Receivable   3,077    969 
Prepaid Expenses and Other Assets   5,143    3,725 
Total Current Assets   143,558    136,185 
           
Noncurrent Assets:          
Property and Equipment, net   2,380    449 
Operating Lease Right of Use Assets, net   8,639    2,785 
Finance Lease Right of Use Assets, net   2,183     
Film and Television Costs, net   14,982    2,940 
Investment in Your Family Entertainment AG   12,480    6,695 
Intangible Assets, net   33,774    9,733 
Goodwill   35,748    15,227 
Other Assets   247    69 
Total Assets  $253,991   $174,083 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts Payable  $4,855   $7,192 
Participations Payable   3,243    2,438 
Accrued Expenses   1,793    535 
Accrued Salaries and Wages   2,492    799 
Deferred Revenue   10,794    432 
Margin Loan   62,372    6,392 
Production Facilities, net   19,283     
Bank Indebtedness   2,092     
Operating Lease Liability   1,071    664 
Finance Lease Liability   1,795     
Warrant Liability   421    855 
Due to Related Party   37    63 
Other Current Liabilities   932    1,761 
Total Current Liabilities   111,180    21,131 
           
Noncurrent Liabilities:          
Deferred Revenue   3,369    3,492 
Operating Lease Liability   7,935    2,460 
Finance Lease Liability   687     
Contingent Earn Out   1,345    1,340 
Other Noncurrent Liabilities   1,017    1,007 
Total Liabilities   125,533    29,430 

 

 

 

 3 

 

 

Commitments and contingent liabilities (Note 21)        
Stockholders’ Equity          
Preferred Stock Series A, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively        
Preferred Stock Series B, $0.001 par value, 1 share authorized, 1 share issued and outstanding as of September 30, 2022 and December 31, 2021, respectively        
Common Stock, $0.001 par value, 400,000,000 shares authorized 318,097,275 and 303,379,122 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively   318    303 
Additional Paid in Capital   762,633    739,495 
Treasury Stock, 6,993 and 0 shares of common stock as of September 30, 2022 and December 31, 2021, respectively, at cost   (3)    
Accumulated Deficit   (624,936)   (595,848)
Accumulated Other Comprehensive Loss   (11,417)   (1,221)
Total Genius Brands International, Inc. Stockholders' Equity   126,595    142,729 
Non-Controlling Interests in Consolidated Subsidiaries   1,863    1,924 
Total Stockholders' Equity   128,458    144,653 
           
Total Liabilities and Stockholders’ Equity  $253,991   $174,083 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 4 

 

 

Genius Brands International, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 

                 
   Three Months Ended   Nine months Ended 
  

September 30,

2022

  

September 30,

2021

  

September 30,

2022

  

September 30,

2021

 
Revenues:                
Production Services  $9,095   $   $19,113   $ 
Content Distribution   9,106    599    18,049    874 
Licensing & Royalties   280    91    2,816    1,497 
Media Advisory & Advertising Services   1,198    1,182    3,266    2,907 
Total Revenues   19,679    1,872    43,244    5,278 
                     
Operating Expenses:                    
Marketing and Sales   880    1,188    2,012    3,331 
Direct Operating Costs   13,875    634    28,865    2,152 
General and Administrative   10,363    9,884    36,327    23,932 
Total Operating Expenses   25,118    11,706    67,204    29,415 
                     
Loss from Operations   (5,439)   (9,834)   (23,960)   (24,137)
                     
Other Income (Expense):                    
Interest Expense   (782)   (2)   (1,256)   (20)
Other Income (Expense), Net   (5,020)   583    (2,733)   (68,750)
Net Other Income (Expense)   (5,802)   581    (3,989)   (68,770)
                     
Loss Before Income Tax Expense   (11,241)   (9,253)   (27,949)   (92,907)
                     
Provision for Tax Expense                
                     
Net Loss   (11,241)   (9,253)   (27,949)   (92,907)
                     
Net Loss (Income) Attributable to Non-Controlling Interests   23        (1,139)    
                     
Net Loss Attributable to Genius Brands International, Inc.  $(11,218)  $(9,253)  $(29,088)  $(92,907)
                     
Net Loss per Share (Basic)  $(0.04)  $(0.03)  $(0.09)  $(0.31)
Net Loss per Share (Diluted)  $(0.04)  $(0.03)  $(0.09)  $(0.31)
                     
Weighted Average Shares Outstanding (Basic)   317,282,770    300,321,658    312,243,439    296,001,742 
Weighted Average Shares Outstanding (Diluted)   317,282,770    300,321,658    312,243,439    296,001,742 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 5 

 

 

Genius Brands International, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

                 
   Three Months Ended   Nine months Ended 
  

September 30,

2022

  

September 30,

2021

  

September 30,

2022

  

September 30,

2021

 
Net Loss  $(11,241)  $(9,253)  $(27,949)  $(92,907)
Other Comprehensive Income (Loss):                    
Change in Unrealized Losses on Marketable Securities   (1,967)   (219)   (6,562)   (377)
Realized Losses on Marketable Securities Reclassified from AOCI into Earnings   37    25    160    25 
Foreign Currency Translation Adjustment   (2,354)   (91)   (3,794)   20 
Total Other Comprehensive Loss   (4,284)   (285)   (10,196)   (332)
Total Comprehensive Net Loss   (15,525)   (9,538)   (38,145)   (93,239)
Less: Comprehensive Income (Loss) Attributable to Non-Controlling Interests   23        (1,139)    
Total Comprehensive Net Loss Attributable to Genius Brands International, Inc.  $(15,502)  $(9,538)  $(39,284)  $(93,239)

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 6 

 

 

Genius Brands International, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share data)

(unaudited)

                                                 
   Common Stock  Preferred Stock   Additional Paid-In   Treasury Stock   Accumulated   Accumulated Other Comprehensive   Non-
Controlling
     
   Shares  Amount  Shares  Amount   Capital   Shares  Amount   Deficit   Loss   Interest   Total 
Balance, December 31, 2021  303,379,122  $303    $   $739,495     $   $(595,848)  $(1,221)  $1,924   $144,653 
                                               
Issuance of Common Stock for Services  386,196            311                      311 
Issuance of Common Stock for Vested Restricted Stock Units  603,648   1         (1)                      
Share Based Compensation              4,491                      4,491 
Other Comprehensive Loss                            (3,384)       (3,384)
Net Loss                        (4,531)       (31)   (4,562)
                                                 
Balance, March 31, 2022  304,368,966  $304    $   $744,296     $   $(600,379)  $(4,605)  $1,893   $141,509 
                                                 
Shares Issued for Wow Acquisition  11,057,085   11  1       11,543                      11,554 
Fair Value of Replacement Options Related to Wow Acquisition              1,213                      1,213 
Issuance of Common Stock for Services  736,667   1         441                      442 
Issuance of Common Stock for Vested Restricted Stock Units  1,072,398   1         (1)                      
Share Based Compensation              4,245                      4,245 
Other Comprehensive Loss                            (2,528)       (2,528)
Distributions to Non-Controlling Interests                                (1,200)   (1,200)
Net (Loss) Income                        (13,341)       1,193    (12,148)
                                                 
Balance, June 30, 2022  317,235,116  $317  1  $   $761,737     $   $(613,720)  $(7,133)  $1,886   $143,087 
                                               
Issuance of Common Stock for Vested Restricted Stock Units, Net of Shares Withheld for Taxes  862,159   1         (1)  (6,993)  (3 )              (3)
Purchase of Treasury Stock Not Yet Settled              (285)                     (285)
Share Based Compensation              1,182                      1,182 
Other Comprehensive Loss                            (4,284)       (4,284)
Net Loss                        (11,216)       (23)   (11,239)
                                                 
Balance, September 30, 2022  318,097,275  $318  1  $   $762,633   (6,993) $(3 ) $(624,936)  $(11,417)  $1,863   $128,458 

 

 


 7 

 

 

   Common Stock  Preferred Stock   Additional Paid-In   Treasury Stock   Accumulated   Accumulated Other Comprehensive   Non-
Controlling
     
   Shares  Amount  Shares  Amount   Capital   Shares  Amount   Deficit   Loss   Interest   Total 
Balance, December 31, 2020  258,438,514  $258    $   $588,501     $   $(469,557)  $(5)  $   $119,197 
                                                 
Shares Issued for ChizComm acquisition  1,980,658   2         3,525                      3,527 
Proceeds From Warrant Exchange, net  39,740,500   40         57,225                      57,265 
Issuance of Common Stock for Services  161,986            241                      241 
Share Based Compensation              2,573                      2,573 
Warrant Incentive              69,138                      69,138 
Net Loss                        (76,259)           (76,259)
                                                 
Balance, March 31, 2021  300,321,658  $300    $   $721,203     $   $(545,816)  $(5)  $   $175,682 
                                                 
Issuance of Common Stock for Services  469,677   1         728                      729 
Share Based Compensation              2,994                      2,994 
Other Comprehensive Loss                            (47)       (47)
Net Loss                        (7,395)           (7,395)
                                                 
Balance, June 30, 2021  300,791,335  $301    $   $724,925     $   $(553,211)  $(52)  $   $171,963 
                                                 
Other Comprehensive Loss                            (285)       (285)
Net Loss                        (9,253)           (9,253)
                                                 
Balance, September 30, 2021  300,791,335  $301    $   $730,478     $   $(562,464)  $(337)  $   $167,978 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 8 

 

 

Genius Brands International, Inc.

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2022 and September 30, 2021

(in thousands)

(unaudited)

 

         
   September 30, 2022   September 30, 2021 
Cash Flows from Operating Activities:          
Net Loss  $(27,949)  $(92,907)
           
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Amortization of Film and Television Costs   5,100    1,073 
Depreciation and Amortization of Property, Equipment & Intangible Assets   1,857    426 
Amortization of Right of Use Asset   1,345    202 
Share Based Compensation Expense   9,918    11,120 
Amortization of Premium on Marketable Securities   807    334 
Loss on Revaluation of Equity Investment in Your Family Entertainment AG   1,170     
Loss on Foreign Currency Transactions   2,584     
Gain on Warrant Revaluation   (434)   (103)
Interest Incurred on Debt   1,190     
Realized Loss on Marketable Securities   160    25 
Warrant Incentive Expense       69,139 
Stock Issued for Services   312    41 
Other   73    (78)
           
Decrease (Increase) in Operating Assets:          
Accounts Receivable, net   5,942    3,047 
Other Receivables   272    (179)
Tax Credits Earned (less capitalized)   (8,166)    
Tax Credits Received   3,874     
Film and Television Costs, net   (7,388)   (4,810)
Prepaid Expenses & Other Assets   (326)   (654)
           
Increase (Decrease) in Operating Liabilities:          
Accounts Payable   (3,828)   (2,886)
Accrued Salaries & Wages   215    183 
Accrued Expenses   (1,057)   (325)
Accrued Production Costs   (1,654)    
Participations Payable   (498)   788 
Deferred Revenue   (6,472)   (494)
Lease Liability   (365)   (136)
Due to Related Party   (25)   229 
Other Liabilities   506     
Net Cash Used in Operating Activities   (22,837)   (15,965)

 

 

 

 9 

 

 

Cash Flows from Investing Activities:          
Cash Payment for Wow, net of Cash Acquired   (37,311)    
Cash Payment for Equity Investment in YFE   (9,540)    
Cash Payment for Ameba, net of Cash Acquired   (3,893)    
Cash Payment for ChizComm, net of cash acquired       (7,789)
Investment in Stan Lee Universe, LLC       (1,000)
Investment in Marketable Securities       (305,387)
Note Receivable from Related Party   (1,419)    
Proceeds from Principal Collections on Marketable Securities   6,445    1,762 
Proceeds from Sales of Marketable Securities   8,836    177,110 
Purchase of Property & Equipment   (459)   (209)
Investment in Intangible Assets   (21)   (9)
Net Cash Used in Investing Activities   (37,362)   (135,522)
           
Cash Flows from Financing Activities:          
Proceeds from Margin Loan   63,165     
Repayments of Margin Loan   (7,802)    
Proceeds from Production Facilities   7,455     
Repayments of Production Facilities   (3,984)   (1,100)
(Repayment)/Proceeds from Bank Indebtedness   760     
Finance Lease Payments   (920)    
Distributions to Noncontrolling Interests   (1,200)    
Debt Issuance Costs   (33)    
(Repayment)/Proceeds from Note Payable   (19)   116 
Shares Withheld for Taxes on Vested Restricted Shares   (3)    
Repayment of Payroll Protection Program       (366)
Proceeds from Warrant Exchange, net       57,265 
Net Cash Provided by Financing Activities   57,419    55,915 
           
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash   (187)    
           
Net Increase/(Decrease) in Cash, Cash Equivalents and Restricted Cash   (2,967)   (95,572)
Beginning Cash, Cash Equivalents and Restricted Cash   10,060    100,456 
Ending Cash, Cash Equivalents and Restricted Cash  $7,093   $4,884 
           
Schedule of Non-Cash Financing and Investing Activities          
Shares issued for Wow Acquisition  $11,554   $ 
FV of Replacement Options Granted Related to Wow Acquisition  $1,213   $ 
Liability for Treasury Stock Not Yet Settled  $285      
Shares issued for ChizComm acquisition  $   $3,527 
Liability for Acquisition Earnout Shares  $   $7,210 
Issuance of Common Stock for Services  $   $728 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 10 

 

 

Genius Brands International, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(unaudited)

 

Note 1: Organization and Business

 

Organization and Nature of Business

 

Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a publicly traded (NASDAQ:GNUS) global content and brand management company that creates, produces, licenses, and broadcasts timeless and educational, multimedia animated content for children. Led by experienced industry personnel, the Company distributes its content primarily on streaming platforms and television and licenses its properties for a broad range of consumer products based on the Company’s characters. The Company is a leading “work for hire” producer for many of the streaming outlets and IP holders. In the children’s media sector, the Company’s portfolio features “content with a purpose” for toddlers to tweens, providing enrichment as well as entertainment. The Company’s programs, along with those programs it acquires and/or licenses, are being broadcast in the United States on the Company’s wholly-owned advertisement supported video on demand (“AVOD”) service, Kartoon Channel!, and its subscription video on demand (“SVOD”) distribution outlets, Kartoon Channel! Kidaverse, and Ameba TV. These streaming services are available on Apple TV, Apple iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Zumo, Pluto, Samsung Smart TVs, LG Smart TVs, as well as YouTube, among other popular platforms. The Company’s in-house owned and produced shows include Stan Lee’s Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, Rainbow Rangers, KC Pop Quiz, and the upcoming Shaq’s Garage starring Shaquille O’Neal, scheduled to debut in the fourth quarter of 2022. The Company’s library titles include the award-winning Baby Genius, adventure comedy Thomas Edison’s Secret Lab®, and Warren Buffett’s Secret Millionaires Club, created with and starring iconic investor Warren Buffett.

 

The Company also licenses its programs to other services worldwide, in addition to the operation of its own channels, including but not limited to Netflix, HBO Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.

  

Through the Company’s recent investment in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on the Frankfurt Exchange (RTV-Frankfurt), it has gained access to one of the largest animation catalogues in Europe with over 3,000 titles, and a global distribution network, which currently covers over 60 territories worldwide and, which the Company is currently in process of rebranding as Kartoon Channel! Worldwide.

 

The Company also recently acquired WOW Unlimited Media Inc. (“Wow”), and through that acquisition, established an affiliate relationship with Mainframe Studios, which is one of the largest animation producers in the world. In addition, Wow owns Frederator Networks Inc. (“Frederator”) and its Channel Frederator Network, the largest animation focused multi-channel network on YouTube, with over 2,500 content creators and currently averages over 1 billion views per month.

 

The Company owns a select amount of valuable IP, including among them a controlling interest in Stan Lee Universe (“SLU”), through which it controls the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”). The Company plans to launch a Stan Lee Centennial program of merchandise set to coincide with Stan Lee’s 100th birthday on December 28, 2022.

 

The Company also owns Beacon Media, the largest media buying service for children in North America. Beacon represents over 30 major toy companies, including Playmobile, Bandai Toys, Bazooka, Moose Toys, and JAKKS Pacific.

 

In addition, the Company recently acquired the Canadian company Ameba TV (“Ameba”), which distributes a profitable SVOD channel for kids and is now expected to become the backbone of the newly launched SVOD channel of Kartoon Channel!, Kartoon Channel! Kidaverse.

 

 

 

 11 

 

 

The combination of the Company, its investment in YFE, its acquired companies Wow, Ameba and Beacon Media provide the Company with world class animation production studios, a catalogue representing thousands of hours of premium global content for children, a broadcast system for delivering that content and an in-house Consumer Products Licensing infrastructure to fully exploit the content.

 

Recent Investments

 

On January 13, 2022, the Company completed its acquisition of the issued and outstanding shares of Ameba and gained access to its kid-safe SVOD platform technology and 13,000 episodes of content. Refer to Note 3 for additional details.

 

On April 6, 2022, the Company completed its acquisition of Wow. On October 26, 2021, the Company’s wholly-owned subsidiary, 1326919 B.C. LTD., a corporation existing under the laws of the Province of British Columbia and Wow, entered into an Arrangement Agreement to effect a plan of arrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. The Company purchased 100% of Wow’s issued and outstanding shares for approximately $38.3 million in cash and 11,057,000 shares of the Company’s common stock. Refer to Note 3 for additional details.

 

Following the initial equity investment in YFE during the fourth quarter of 2021, the Company participated in a mandatory tender offer for the remaining publicly traded shares held by YFE shareholders. Upon the expiration of the offer on February 14, 2022, the Company purchased an additional 2,637,717 shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders were converted into 2,574,000 shares of YFE common stock, 304,631 of which were purchased by the Company, at 2.00 EUROS per share or $0.6 million. On April 5, 2022, the Company exercised its subscription rights to purchase an additional 914,284 shares of YFE’s common stock at 3.00 EUROS per share, or $2.7 million, increasing the number of YFE’s outstanding shares to 6,857,132. As of September 30, 2022, the Company’s ownership in YFE is 48.0%.

 

Liquidity

 

During the nine months ended September 30, 2022, the Company’s cash, cash equivalents and restricted cash decreased by $3.0 million. The decrease was primarily due to cash used in investment activities, inclusive of the Wow and Ameba acquisitions and the YFE investments, totaling $35.9 million, $24.2 million used for operational activities, offset by $57.4 million of financing from the margin loan, production facilities and bank indebtedness assumed in the Wow Acquisition.

 

As of September 30, 2022, the Company held marketable securities with a fair value of $89.9 million as available-for-sale, a decrease of $22.7 million as compared to December 31, 2021 primarily due to the Company selling $8.8 million of its held securities during the period, a decrease in fair value of $6.4 million recorded as an unrealized loss, additional prepayment proceeds of $6.4 million on principals for certain mortgage-backed securities, a realized loss of $0.2 million and $0.8 million of continued amortization of premiums during the period. The available-for-sale securities consist principally of corporate and government debt securities and are also available as a source of liquidity.

 

The Company borrowed an additional $63.2 million from its investment margin account during the nine months ended September 30, 2022 and repaid $7.8 million with cash received from sales and/or redemptions of its marketable securities. During the nine months ended September 30, 2022, the borrowed amounts were used to finance the Company’s additional investments in YFE and the closing of the acquisitions of Ameba and Wow, in each case pledging certain of its marketable securities as collateral. During the three months ended September 30, 2022, the additional borrowings of $4.2 million related to quarterly operational costs. The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 0.65% with interest only payable monthly. The weighted average interest rate was 2.65% on an average margin loan balance of $61.2 million during the three months ended September 30, 2022. The weighted average interest rate was 1.54% on an average margin loan balance of $43.4 million during the nine months ended September 30, 2022. The Company incurred interest expense of $0.6 million during the nine months ended September 30, 2022. The investment margin account borrowings do not mature but are payable on demand as the custodian can issue a margin call at any time, therefore the margin loan is recorded as a current liability on the Company’s condensed consolidated balance sheets.

 

 

 

 12 

 

 

Upon the acquisition of Wow, the Company assumed certain credit facilities (the “Facilities”) with a Canadian bank. The Facilities are comprised of: (i) a $5.0 million CAD ($3.9 million USD) revolving demand facility, (ii) an $8.0 million CAD ($6.2 million USD) equipment lease line, (iii) a treasury risk management facility of up to $0.5 million CAD ($0.4 million USD) for foreign exchange forward contracts, and (iv) interim financing facilities for specific production titles. The Facilities are guaranteed by the Company and the security reflects substantially all of the tangible and intangible assets of the Company and its subsidiary guarantors subject to permitted encumbrances, including a combination of federal and provincial tax credits, other government incentives, production service agreements, and license agreements. The Facilities are generally repayable on demand and are subject to customary affirmative and negative covenants, default provisions, representations and warranties and other terms and conditions. Refer to Note 14 for additional details.

 

Historically, the Company has incurred net losses. For the three months ended September 30, 2022 and 2021, the Company reported net losses of $11.2 million and $9.3 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company reported net losses of $29.1 million and $92.9 million, respectively. The Company reported net cash used in operating activities of $22.8 million and $16.0 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the Company had an accumulated deficit of $624.9 million and total stockholders’ equity of $128.5 million. As of September 30, 2022, the Company had current assets of $143.6 million, including cash and cash equivalents of $7.1 million and current liabilities of $111.2 million. The Company had working capital of $32.4 million as of September 30, 2022, compared to working capital of $115.1 million as of December 31, 2021.

 

Note 2: Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from audited statements. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“US GAAP”) for complete financial statements and should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on April 6, 2022.

 

The accompanying condensed consolidated financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to state fairly the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Loss, Statements of Stockholders' Equity, and Statements of Cash Flows for all periods presented.

 

Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

 

Segments

 

The Company determined its operating segments on the same basis that it assesses performance and makes operating decisions. The Company principally operates in two distinct business segments: the Content Production & Distribution Segment, which produces and distributes children’s content, and the Media Advisory & Advertising Services Segment, which provides media and advertising services. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company has identified its Chief Executive Officer as the CODM. The segments are organized around the products and services provided to customers and represent the Company’s reportable segments. Prior to the acquisition of the Beacon Media Group (formerly “ChizComm”), the Company’s operations were comprised of a single segment.

 

The accounting policies for each segment are the same as for the Company as a whole. Refer to Note 23 for additional information.

 

 

 

 13 

 

 

Principles of Consolidation and Basis of Presentation

 

The Company’s condensed consolidated financial statements include the accounts of Genius Brands International, Inc. and its wholly-owned subsidiaries. The Company consolidates all majority-owned subsidiaries, investments in entities in which it has controlling influence and variable interest entities where the Company has been determined to be the primary beneficiary. Minority interests are recorded as non-controlling interests. Non-consolidated investments are accounted for using the equity method or the fair value option when the Company has the ability to significantly influence the operating decisions of the investee. When the Company does not have the ability to significantly influence the operating decisions of an investee, these equity securities are classified as either marketable investment securities or other investments and recorded at fair value with changes recognized within other Income (expense) on the consolidated statements of operations and comprehensive income (loss). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Business Combinations

 

The Company accounts for transactions that are classified as business combinations in accordance with the Financial Accounting Standards Boards’ (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). Once a business is acquired, the Company allocates the fair value of the purchase consideration to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. As required, preliminary fair values are determined upon acquisition, with the final determination of the fair values being completed within the one-year measurement period from the date of acquisition. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets requires that the Company use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. The Company estimates the fair value based upon assumptions management believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.

 

Variable Interest Entities

 

The Company holds an interest in Stan Lee University (“SLU”), an entity that is considered a variable interest entity (“VIE”). The variable interest relates to 50% ownership in the entity that is comprised of the Stan Lee Assets (as defined below) and that requires additional financial support from the Company to continue operations. The Company’s total net cash investment in SLU as of September 30, 2022, is $0.8 million. In addition, the Company has incurred $0.4 million of costs incurred for marketing and operational services. The Company is considered the primary beneficiary and is required to consolidate the VIE.

 

In evaluating whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and the Company’s decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.

 

In determining whether the Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, the Company evaluates all of its economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings (losses), subordination of the Company’s interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of the Company’s economic interests is a matter that requires the exercise of professional judgment. The Company continuously assesses whether it is the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in the Company consolidating its collaborators or partners.

 

 

 

 14 

 

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

Foreign Currency

 

The Company considers the U.S. dollar to be its functional currency for its United States based operations. The Company considers the Canadian dollar to be its functional currency for its Canada based operations. Accordingly, the financial information is translated from the Canadian dollar to the U.S. dollar for inclusion in the Company’s consolidated financial statements. Revenue and expenses are translated at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are included as a component of accumulated other comprehensive income (loss), net in stockholders’ equity.

 

Foreign exchange transaction gains and losses are included in other income (expense), net in the condensed consolidated statements of operations.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of September 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of $7.1 million and $2.1 million, respectively.

 

Tax Credits Receivable

 

The Federal and certain Provincial governments in Canada provide programs that are designed to assist film and television production in the form of refundable tax credits or other incentives.

 

Estimated amounts receivable in respect of refundable tax credits are recorded as an offset to the related production operating cost, or to investment in film and television programming when the conditions for eligibility of production assistance based on the government’s criteria are met, the qualifying expenditures are made and there is reasonable assurance of realization. Determination of when and if the conditions of eligibility have been met is based on management’s judgment, and the amount recognized is based on management’s estimates of qualifying expenditures. The ultimate collection of previously recorded estimates is subject to ordinary course audits from the Canada Revenue Agency (“CRA”) and Provincial agencies. Changes in administrative policies by the CRA or subsequent review of eligibility documentation may impact the collectability of these estimates. The Company continuously reviews the results of these audits to determine if any circumstances arise that in management’s judgment would result in a previously recognized amount to be considered no longer collectible.

 

The Company classifies the tax credits receivable as current based on their normal operating cycle. Government assistance, in the form of refundable tax credits, is relied upon as a key component of production financing. These amounts are claimed from the CRA through the submission of income tax returns and can take up to 18 to 24 months from the date of the first tax credit dollar being earned to being received. As this financing is fundamental to the Company’s ability to produce animated productions and generate revenue in the normal course of business, the normal operating cycle for such assets is considered to be a 12-to-24-month period, or the time it takes for the CRA to assess and refund the tax credits earned.

 

As of September 30, 2022, the Company had recorded $26.4 million in current tax credit receivables related to Wow’s film and television productions on its condensed consolidated balance sheet. The Company does not have an allowance on tax credits receivable as of September 30, 2022, based on historical experience and future expectations.

 

 

 

 15 

 

 

Marketable Debt Securities

 

The Company purchases high quality, investment grade securities from diverse issuers. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, the Company classifies its investments in marketable securities as “available-for-sale” and records these investments at fair value. The securities are available to support current operations and, accordingly, the Company classifies the investments as current assets without regard to their contractual maturity.

 

Unrealized gains or losses on available-for-sale securities for which the Company expects to fully recover the amortized cost basis are recognized in accumulated other comprehensive (loss) income, a component of stockholders’ equity. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized as a loss in the condensed consolidated statements of operations.

 

The Company reports accrued interest receivable separately from the available-for-sale securities and has elected not to measure an allowance for credit losses for accrued interest receivables. Uncollectible accrued interest is written off when the Company determines that no additional interest payments will be received. Classified within Other Receivables on the condensed consolidated balance sheets, approximately $0.4 million in interest income was receivable as of September 30, 2022 and December 31, 2021.

 

Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums accounted for by the level yield method with no pre-payment anticipated.

 

Equity-Method Investments

 

When the Company does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.

 

In general, the Company accounts for investments acquired at fair value. See Note 5 for further information about the Company’s investment in YFE’s equity securities accounted for under the fair value option.

 

Allowance for Doubtful Accounts

 

Accounts receivable are presented on the balance sheets net of estimated uncollectible amounts. The carrying amounts of trade accounts receivable and unbilled accounts receivable represents the maximum credit risk exposure of these assets. The Company evaluates its accounts receivable balances on a quarterly basis to determine collectability based on an assessment of past events, current economic conditions, and forecasts of future events. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful.

 

The Company limits its exposure to this credit risk through a credit approval process and credit monitoring procedures. In addition, Wow’s contracts with customers usually require upfront and milestone payments throughout the production process. The Company’s customer base is mainly comprised of major Canadian, American, and worldwide studios, distributors, broadcasters, toy companies and AVOD and SVOD platforms that have been customers for several years.

 

 

 

 16 

 

 

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 ten years. Maintenance, repairs, and renewals, which neither materially add to the value of the assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property and equipment are reflected in the consolidated statements of operations.

 

Right of Use Leased Assets

 

The Company determines at contract inception whether the arrangement is a lease based on its ability to control a physically distinct asset and determines the classification of the lease as either operating or finance under FASB ASC 842, Leases (“ASC 842”). For all leases, the Company combines all components of the lease including related nonlease components as a single component. Operating leases are reflected as operating lease right of use (“ROU”) assets and operating lease liabilities and finance leases are reflected as finance lease ROU assets and finance lease liabilities in the consolidated balance sheets.

 

Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company estimates the incremental borrowing rate to reflect the profile of collateralized borrowing over the expected term of the leases based on the information available on the lease commencement date or for leases existing upon the date of initial adoption of ASC 842, the date of adoption. The implicit rates within the Company’s existing finance leases are determinable and therefore used to determine the present value of finance lease payments.

 

The operating lease ROU asset also includes any lease payments made prior to lease commencement date and excludes lease incentives. Lease terms may include options to extend or terminate the lease when the Company is reasonably certain that it will exercise the option. Lease expense is recognized on a straight-line basis over the lease term in the consolidated statements of operations. Lease incentives are recognized as a reduction to the lease expense on a straight-line basis over the underlying lease term.

 

Film and Television Costs

 

The Company capitalizes production costs for episodic series produced in accordance with FASB ASC 926-20, Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and amortized using the individual-film-forecast-computation method, whereby these costs are amortized, and participations costs are accrued based on the ratio of the current period’s revenues to management’s estimate of ultimate revenue expected to be recognized from each production.

 

Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of the Company’s business, some titles are more successful or less successful than anticipated. Management reviews its ultimate revenue for productions in development and cost estimates on a title-by-title basis, when an event or change in circumstances indicates that the fair value of the production may be less than its unamortized cost. This may result in a change in the rate of amortization of film costs and participations and/or a write-down of all or a portion of the unamortized costs of the film or television production to its estimated fair value.

 

These write-downs are included in amortization expense within Direct Operating Expenses on the Company’s condensed consolidated statements of operations. There were no events or changes in circumstances that would indicate a change in fair value of productions and therefore the Company has not recorded any impairment charges during the nine months ended September 30, 2022 or 2021.

 

The Company expenses all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes. Additionally, for episodic series, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing content. After the initial release of the episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred.

 

 

 

 17 

 

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the acquisition method. In accordance with FASB ASC 350, Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill impairment, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit, of which the Company has two, is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

 

Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.

 

Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.

 

Debt and Attached Equity-Linked Instruments

 

The Company measures issued debt on an amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or the straight-line method when the latter does not lead to materially different results.

 

The Company analyzes freestanding equity-linked instruments including warrants attached to debt to conclude whether the instrument meets the definition of the derivative and whether it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to the Company’s stock, it is classified as an asset or liability recorded at fair value. If the instrument is considered indexed to the Company’s stock, the Company analyzes additional equity classification requirements per FASB ASC 815-40, Contract’s in Entity’s Own Equity. When the requirements are met, the instrument is recorded as part of the Company’s equity, initially measured based on its relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.

 

When required, the Company also considers the bifurcation guidance for embedded derivatives per ASC 815-15, Embedded Derivatives

 

Treasury stock

 

The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.

 

 

 

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Borrowing Costs

 

Borrowing costs relate to the issuance of Wow’s interim production financing and are recorded as a reduction to the carrying amount of interim production financing and measured at amortized cost using the effective interest method. Borrowing costs are recognized as part of interest expense in the condensed consolidated statements of operations in the period in which they are incurred. Borrowing costs directly attributable to the acquisition or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time the assets are substantially ready for their intended use or sale. Upon the acquisition of Wow, the Company recorded $0.3 million and $0.6 million related to production financing during the three and nine months ended September 30, 2022, respectively.

 

Revenue Recognition

 

The Company accounts for revenue according to standard FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”).

 

Revenue is measured based on the consideration specified in a contract with a customer. Revenue is recognized when a customer obtains control of the products or services in a contract. Judgment is required in determining the timing of whether the transfer of control occurs at a point in time or over time and is discussed below. The Company evaluates each contract to identify separate performance obligations as a contract with a customer may have one or more performance obligations. Consideration in a contract with multiple performance obligations is allocated to the separate performance obligations based on their stand-alone selling prices. If a stand-alone selling price is not determinable, the Company estimates the stand-alone selling price using an adjusted market assessment approach. The Company’s main sources of revenue are derived from animation production services provided to third parties, the sale of licenses for the distribution of films and television programs, advertising revenues, and merchandising and licensing sales.

 

Gross versus Net Revenue Presentation

 

The Company evaluates individual arrangements with third parties to determine whether the Company acts as principal or agent under the terms. To the extent that the Company acts as the principal in an arrangement, revenues are reported on a gross basis, resulting in revenues and expenses being classified in their respective financial statement line items. To the extent that the Company acts as the agent in an arrangement, revenues are reported on a net basis, resulting in revenues being presented net of any expenses incurred in providing agency services. Determining whether the Company acts as principal or agent is based on an evaluation of which party has substantial risks and rewards of ownership under the terms of an arrangement. The most significant factors that the Company considers include identification of the primary obligor, as well as which party has credit risk, general and inventory risk and the latitude or ability in establishing prices.

 

The Company has identified the following material and distinct performance obligations.

 

  · Provide animation production services.
     
  · License rights to exploit Functional Intellectual Property (“functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability be played or aired. Functional IP derives a substantial portion of its utility from its significant standalone functionality).

 

 

 

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  · License rights to exploit Symbolic Intellectual Property (“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).
     
  · Provide media and advertising services to clients.
     
  · Fixed and variable fee advertising and subscription-based revenue generated from the Genius Brands Kartoon Channel! and the Frederator owned and operated YouTube channels.
     
  · Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future).
     
  · Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future).

 

Production Services

 

Animation Production Services

 

For revenue from animation production services, the customer controls the output throughout the production process. Each production is made to an individual customer’s specifications and if the contract is terminated by the customer, the Company is entitled to be reimbursed for any costs incurred to date, and for any prepaid commitments made, plus the agreed contractual mark-up. Revenue and the associated costs of such contracts are recognized over time on a percentage of completion basis - i.e. as the project is being produced, prior to it being delivered to the customer. The percentage-of-completion is calculated based upon the proportion of costs incurred cumulatively to total expected costs. Changes in revenue recognized as a result of adjustments to total expected costs are recognized in profit or loss on a prospective basis. Invoices related to these projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds milestone billings, the Company recognizes this difference as unbilled accounts receivable. Unbilled accounts receivable is transferred to accounts receivable when the Company has an unconditional right to consideration.

 

When the outcome of an arrangement cannot be estimated reliably, revenue is recognized only to the extent of the expenses incurred that are recoverable.

 

Content Distribution

 

Film and Television Licensing

 

The Company recognizes revenue related to licensed rights to exploit functional IP in two ways; for minimum guarantees, the Company recognizes fixed revenue upon delivery of content and the start of the license period and for functional IP contracts with a variable component, the Company estimates revenue such that it is probable there will not be a material reversal of revenue in future periods. The Company recognizes revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.

 

Invoices related to these projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds milestone billings, the Company recognizes this difference as unbilled accounts receivable. Unbilled accounts receivables are transferred to accounts receivable when the Company has an unconditional right to consideration.

 

 

 

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Advertising revenues

 

The Company sells advertising and subscriptions on its wholly-owned AVOD service, Kartoon Channel!, and its SVOD distribution outlets, Kartoon Channel! Kidaverse, and Ameba TV. Advertising sales are generated in the form of either flat rate promotions or advertising impressions served. For flat rate promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under ASC 606 are met. For impressions served, the Company delivers a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM per impression. Impressions served are reported to the Company on a monthly basis, and revenue is reported in the month the impressions are served. For subscription-based revenue, the Company recognizes revenue when a customer downloads the mobile device application and their credit card is charged.

 

Upon the acquisition of Wow, the Company generates advertising revenue from Frederator’s owned and operated YouTube channels as well as revenues generated from the operation of its multi-channel network on YouTube. Revenue is recognized when services are provided in accordance with the Company’s agreement with YouTube, the price is fixed or determinable, and collection of the related receivable is probable. Receivables are usually collectable within 30 days.

 

Licensing & Royalties

 

Merchandising and licensing

 

The Company enters into merchandising and licensing agreements that allow customers to produce merchandise utilizing certain of the Company’s intellectual property. For minimum guaranteed amounts that make up a contract, revenue is recognized over time, over the term of the license period commencing on the date at which the customer can use and benefit from the licensed content. Variable consideration in excess of non-refundable guaranteed amounts, such as royalties and other contractual payments are recognized as revenue when the amounts are known and become due provided collectability is reasonably assured. Invoices are issued based on the contractual terms of an agreement and are usually payable within 30-45 days.

 

Product Sales

 

The Company recognizes revenue related to product sales when the Company completes its performance obligation, which is when the goods are transferred to the buyer.

 

Media Advisory & Advertising Services

 

Media and Advertising Services

 

The Company provides media and advertising services to clients. Revenue is recognized when the services are performed. When the Company purchases advertising for clients on linear and across digital and streaming platforms and receives a commission, the commissions are recognized as revenue in the month the advertising is displayed.

 

Direct Operating Costs

 

Direct operating costs include costs of the Company’s product sales, non-capitalizable film costs, film and television cost amortization expense, impairment expenses related to film and television costs, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which the Company is obligated to share net profits of the properties on which they have rendered services. Upon the acquisition of Wow, the Company also includes salaries and related service production employee costs as part of its direct operating costs.

 

 

 

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Share-Based Compensation

 

The Company issues stock-based awards to employees and non-employees that are generally in the form of stock options or restricted stock units (“RSUs”). Share-based compensation cost is recorded for all options and awards of unvested stock based on the grant-date fair value of the award.

 

The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which requires management to make assumptions with respect to the fair value on the grant date. The assumptions are as follows: (i) the expected term assumption of the award is based on the Company’s historical exercise and post-vesting behavior (ii) the expected volatility assumption is based on historical and implied volatilities of the Company’s common stock calculated based on a period of time generally commensurate with the expected term of the award; (iii) the risk-free interest rates are based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent expected term; (iv) and the expected dividend yields of the Company’s stock are based on history and expectations of future dividends payable. In the case of RSUs the fair value is calculated based on the Company’s underlying common stock on the date of grant.

 

The Company recognizes compensation expense over the requisite service period ratably, using the graded attribution method, which is in-substance, recognizing multiple awards based on the vesting schedule. The Company has elected to account for forfeitures when they occur. The Company issues authorized shares available for issuance under the Company’s 2015 Incentive Plan and the Company’s 2020 Incentive Plan upon employees’ exercise of their stock options.

  

Earnings Per Share

 

Basic earnings (loss) per share of common stock (“EPS”) is calculated by dividing net income (loss) applicable to common stockholders 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 stockholders by the weighted average number of shares of common stock outstanding, plus the assumed exercise of all dilutive securities using the treasury stock or “as converted” method, as appropriate. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.

 

Income Taxes

 

Deferred income tax assets and liabilities are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred tax assets and records a valuation allowance that reduces the deferred tax assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized.

  

Concentration of Risk

 

The Company maintains its cash in bank deposit accounts which, at times, may exceed the Federal Deposit Insurance Corporation’s (“FDIC”) or the Canadian Deposit Insurance Corporation’s (“CDIC”) insured amounts. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account and deposits in banks in Canada are insured by the CDIC up to $100,000 CAD. As of September 30, 2022, the Company had fifteen accounts with an uninsured balance in bank deposit accounts of $3.0 million. As of December 31, 2021, the Company had four accounts with an uninsured balance in bank deposit accounts of $1.1 million.

 

 

 

 22 

 

 

The Company has a managed account and a brokerage account with a financial institution. The managed account maintains the Company’s investments in marketable securities of $89.9 million and $112.5 million as of September 30, 2022 and December 31, 2021, respectively. The brokerage account did not hold a material amount of the Company’s cash as of September 30, 2022 or December 31, 2021. Assets in the managed and brokerage account are protected by the Securities Investor Protection Corporation (“SIPC”) up to $500,000 (with a limit of $250,000 for cash). In addition, the financial institution provides additional “excess of SIPC” coverage which insures up to $1 billion. As of September 30, 2022 and December 31, 2021, the Company has not had account balances held at this financial institution that exceeded the insured balances.

 

The Company also has an account with a German bank that manages its foreign transactions with YFE. The cash balance as of September 30, 2022 held at the German institution was $2.7 million. Deposits in German banks are subject to a mandatory basic security amount up to $100,000 EURO. In addition, the institution is a member of the deposit protection fund for the German private banking industry that currently insures $5.5 million of each customer’s deposit account. As of September 30, 2022 and December 31, 2021, the Company has not had account balances held at this financial institution that exceeded the insured balances.

 

The Company’s investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. The Company’s policy limits the amount of credit exposure to any one security issue or issuer and the Company believes no significant concentration of credit risk exists with respect to these investments.

 

For the three months ended September 30, 2022, the Company had four customers, whose total revenue exceeded 10% of total consolidated revenue. These customers accounted for 83% of total revenue.

 

For the nine months ended September 30, 2022, the Company had four customers whose total revenue exceeded 10% of total consolidated revenue. These customers accounted for 74% of total revenue. As of September 30, 2022, the Company had two customers whose total accounts receivable exceeded 10% of total accounts receivable. These customers accounted for 28% of the total accounts receivable as of September 30, 2022.

 

For the three months ended September 30, 2021, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. This customer accounted for 13% of total revenue.

 

For the nine months ended September 30, 2021, the Company had one customer, whose total revenue exceeded 10% of total consolidated revenue. This customer accounted for 22% of total revenue. As of September 30, 2021, the Company had three customers whose accounts receivable exceeded 10% of total accounts receivable. Those customers accounted for 59% of accounts receivable. 

 

There is significant financial risk associated with a dependence upon a small number of customers. The Company periodically assesses the financial strength of these customers and establishes allowances for any anticipated bad debt. As of September 30, 2022 and December 31, 2021, the Company recorded an allowance for bad debt of $87,710 and $22,080, respectively.

 

Fair value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820, Fair Value Measurement (“ASC 820”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

 

  · Level 1 - Observable inputs such as quoted prices for identical instruments in active markets;
     
  · Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
     
  · Level 3 - Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

 

 

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Financial instruments that are not measured at fair value on the condensed consolidated statements of operations are represented by cash, receivables, payables, accrued liabilities, bank indebtedness, the Company’s margin loan and interim production financing.

 

The carrying amounts of cash, restricted cash, receivables, payables, accrued liabilities, bank indebtedness and the Company’s margin loan approximate fair value due to the short-term nature of the instruments. The fair values of the Company’s liability-classified derivative warrants are revalued at the end of each reporting period determined using the BSM model (Level 2) with standard valuation inputs. Refer to Note 19 for additional details. The investment in YFE is also revalued at the end of each reporting period based on the trading price of YFE (Level 1). Refer to Note 5 for additional details. Upon acquisition of Wow, the Company assumed foreign currency forward contracts that are not traded in active markets. These are fair valued using observable forward exchange rates at the measurement dates and interest rates corresponding to the maturity of the contracts.

 

The fair values of the available-for-sale securities are generally based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level 1 or Level 2 inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level 2 securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States Government securities, foreign government securities, and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or a variety of valuation techniques, incorporating inputs that are currently observable in the markets for similar securities.

 

The following table summarizes the marketable securities measured at fair value by level within the fair value hierarchy as of September 30, 2022 (in thousands):

               
   Level 1   Level 2   Total Fair Value 
Marketable investments:               
Corporate Bonds  $30,530   $11,324   $41,854 
U.S. Treasury   19,485        19,485 
Mortgage-Backed       5,525    5,525 
U.S. agency and government sponsored securities       11,621    11,621 
U.S. states and municipalities       10,830    10,830 
Asset-Backed       558    558 
Total  $50,015   $39,858   $89,873 

 

Fair values were determined for each individual security in the investment portfolio. The Company’s marketable securities are considered to be available-for-sale investments as defined under FASB ASC 320, Investments – Debt and Equity Securities. There were no impairment charges recorded for the marketable securities. Refer to Note 6 for additional details.

 

Financial and nonfinancial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs and include the Company’s contingent earn-out liability, goodwill and film and television costs as of September 30, 2022. There were no significant events that occurred or circumstances that resulted in an adjustment to the fair value of those assets and liabilities measured on a non-recurring basis during the nine months ended September 30, 2022.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption is permitted for interim and annual reporting periods. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements but does not expect that the adoption of this standard will have a material impact.

 

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" (“ASU 2021-08”). The standard requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, “Revenue from Contracts with Customers,” as if it had originated the contracts. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company adopted this ASU during the second quarter of 2022 and has incorporated this guidance in its evaluation of the accounting for the acquisition of Wow.

 

 

 

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Note 3: Acquisitions

        

Ameba

 

On January 13, 2022, the Company completed the acquisition of Ameba, pursuant to a Stock Purchase Agreement (the “SPA”) by and between the Company and Tony Havelka, a resident of the Province of Manitoba (the “Seller”), in which the Company acquired from the Seller all of the issued and outstanding equity interests of Ameba. Concurrently, pursuant to an Asset Purchase Agreement (the “APA”) by and among the Company, the Seller and Tek Gear Inc., a corporation owned by the Seller, the Company acquired from the Seller a proprietary software platform (the “Technology”) that powers the Ameba SVOD deliveries. The transactions contemplated by the SPA and the APA are referred to as the “Ameba Acquisition.”

 

Consideration paid by the Company in the transaction at closing consisted of $3.8 million in cash, inclusive of $0.3 million for a net working capital adjustment (the “NWC Adjustment”) pursuant to the SPA and $0.3 million in cash pursuant to the APA, for total consideration of $4.1 million, or $3.9 million net of cash acquired, excluding transaction costs and subject to as described in more detail below.

 

Transaction costs incurred relating to the Ameba Acquisition, including legal and accounting, totaled $0.1 million, which are included in general and administrative expenses on the statements of operations. The agreement provided for an adjustment to the purchase price based on an adjusted net working capital (“NWC”) as defined in the agreement.

 

The Ameba acquisition facilitates the Company’s expansion into SVOD with its technology and content essential to the launch of the ad-free subscription-based Kartoon Channel! Kidaverse platform. The acquisition provides immediate benefit recognized through the content available on the SVOD Ameba channel app, available for download on Amazon Fire TV, Roku, Xbox 360, Xumo, LG Smart TV, TiVo, VEWD, CINEMOOD and iOS and Android devices.

 

The Company has determined that the Ameba Acquisition constitutes a business acquisition as defined by ASC 805. Accordingly, the assets acquired, and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based on the requirements of ASC 820 and represents managements best estimates.

 

The following table summarizes the consideration paid, including the Net Working Capital Adjustment (in thousands):

     
   Amount 
SPA cash consideration at closing  $3,500 
APA cash consideration at closing   300 
Net working capital adjustment   269 
Total  $4,069 

 

The net working capital calculation was finalized as $268,657 and paid to the acquiree during the three months ended June 30, 2022, as determined by the Company and agreed upon by the acquiree.

 

As of September 30, 2022, the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets. The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent quarters.

 

 

 

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The preliminary purchase price allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company on January 13, 2022 as follows (in thousands):

     
Cash  $176 
Accounts Receivable   238 
Prepaids Expenses   25 
Trade Name   23 
Digital Network   2,804 
Technology   300 
Goodwill   673 
Accounts Payable and Accrued Expenses   (140)
Tax Liability   (30)
Total Consideration  $4,069 

 

The identifiable intangible assets acquired of $3.1 million is comprised of $2.8 million for the Digital Network, Ameba TV, with a remaining economic life of 18 years, $23,000 for Ameba’s trade name with a useful life of 3 years and $0.3 million for the SVOD technology with a remaining useful life of approximately 3 years. The $0.7 million in goodwill arising from the acquisition consists largely of the synergies expected from the combined businesses, including the Company’s build-out of its technology for the expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content Production & Distribution reporting unit and is not deductible for tax purposes.

 

The valuation and allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.

 

Valuation Methodology

 

The digital network was valued by performing a discounted cash flow analysis. This method includes discounting the projected cash flows associated with the current digital network content, based primarily upon historical revenue and projections over its expected life and considers the operating expenses and contributory asset charges associated with servicing such network. Projected cash flows attributable to the digital network was discounted to the present value at a rate commensurate with the perceived risk. The useful life of the digital network is estimated based primarily upon the present value of cash flows attributable to the digital network.

 

The Ameba trade name was valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value. The useful life of the trade name is based on the estimated time it will take for the Company to rebrand the Ameba trade name and logo with the Company branded Kartoon Channel! Kidaverse trade name.

 

The technology was valued at cost as the Company determined that the cost approximated the fair value.

 

 

 

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The assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:

 

  · Historical performance including sales and profitability.
     
  · Expense estimates.
     
  · Contributory asset charges.
     
  · Estimated economic life of asset.
     
  · Acquisition of new customers.
     
  · Attrition of existing customers.

 

Wow Unlimited Media

 

On April 6, 2022, the Company completed the acquisition of Wow. On October 26, 2021, the Company’s wholly-owned subsidiary, 1326919 B.C. LTD., a corporation existing under the laws of the Province of British Columbia and Wow, entered into an Arrangement Agreement to effect a plan of arrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. The Company purchased 100% of issued and outstanding shares of Wow for $38.3 million in cash and 11,057,085 shares of the Company’s common stock, including Wow’s subsidiary Frederator. The plan of arrangement and final agreement, together with the acquisition of Wow’s Mainframe Studios and its subsidiary Frederator, are referred to as the “Wow Acquisition.”

 

Final consideration paid by the Company in the transaction at closing consisted of $38.3 million in cash and 11,057,085 shares of the Company’s common stock, including 691,262 Exchangeable Shares, with a fair value of $11.6 million, 2,409,515 options granted to employees of Wow with a fair value of previously vested options of $1.2 million, included in the purchase price, and $0.3 million for future services and $1.6 million in severance and bonuses to executives, for total consideration of $52.7 million, or $50.1 million net of cash acquired, excluding transaction costs as described in more detail below.

 

Transaction costs incurred relating to the Wow Acquisition, including banks, legal and accounting, totaled $3.1 million, which is included in general and administrative expenses on the statements of operations for the nine months ended September 30, 2022. The Company will also expense the unvested replacement options, with a fair value of $0.3 million, as stock-based compensation expense over the remaining requisite service period specified in the agreements.

 

The Wow Acquisition facilitates the Company’s expansion as a global animation and children’s digital media company. With Wow’s content, ongoing production projects and the addition of two studios that can also be leveraged for in-house production of the Company’s properties, will drive cost synergies, facilitate further expansion into the global children’s entertainment market and strengthen financial growth. Frederator, with its owned and operated channels on YouTube, will provide a distribution platform to facilitate the global growth of Kartoon Channel!.

 

 

 

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The Company has determined that the Wow Acquisition constitutes a business acquisition as defined by ASC 805. Accordingly, the assets acquired, and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based on the requirements of ASC 820 and represents managements best estimates.

 

The following table summarizes the consideration paid:

     
   Amount 
Cash  $38,310 
Genius Common Stock Issued   10,832 
Shares Issued Exchangeable for Genius Common Stock   722 
Stock Option Value of Replacement Options- Pre-Combination Vested Options   1,213 
Severance Payments   1,044 
Bonuses   529 
Total  $52,650 

 

As of September 30, 2022, the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets. The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent quarters.

 

The preliminary purchase price allocation is based upon the estimate of the fair value of the assets acquired and the liabilities assumed by the Company on April 6, 2022 as follows (in thousands):

     
Cash and cash equivalents  $2,573 
Accounts Receivable   34,237 
Other Receivables   78 
Prepaid Expenses and Other   1,245 
Property and Equipment   1,936 
ROU Assets   10,311 
IP (In-Process)   4,600 
IP (Proprietary Productions)   5,684 
Tradename   7,631 
Customer Relationships   16,064 
Networks and Platforms   803 
Goodwill   21,399 
Accounts Payable   (1,547)
Participations Payable   (1,380)
Bank Debt   (1,475)
Accrued Liabilities   (3,825)
Interim Production Facilities   (16,930)
Deferred Revenue   (18,080)
Lease Liabilities   (10,614)
Other Liabilities   (60)
Total Consideration  $52,650 

 

 

 

 

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The identifiable intangible assets acquired of $34.8 million is comprised of $16.1 million for Customer Relationships, with remaining economic lives of 8 years, $10.3 million for IP Content including completed productions and productions in progress, that is included as part of Film and Television costs on the condensed consolidated balance sheet and will be amortized as such, Tradenames for $7.6 million, with an indefinite life and Networks and Platforms of $0.8 million, with a remaining economic life of 16 years. The goodwill of $21.4 million arising from the acquisition consists largely of the synergies expected from the combined businesses, including the Company’s ability to produce its content in-house utilizing the acquired studios and expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content Production & Distribution reporting unit and is not deductible for tax purposes.

 

The valuation and allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.

 

Valuation Methodology

 

The Networks and Platforms were valued by performing a discounted cash flow analysis, specifically the multi-period excess earnings method. This method involves quantifying the amount of residual (or excess) cash flows generated by the current digital network content, based primarily upon historical revenue and projections over its expected life, and considers the operating expenses and contributory asset charges associated with servicing such network. Projected cash flows attributable to the networks are discounted to present value at a rate commensurate with the perceived risk. The significant assumptions used in this model included the customer attrition rate, acquisition rate of new customers, weighted average cost of capital, and expense estimates. The useful life of the networks is estimated based primarily upon the present value of cash flows attributable to the digital network. The significant assumptions used in this method included the royalty rate and weighted average cost of capital.

 

The Tradenames were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income approach wherein estimates of a company’s earnings attributable to the intangible asset are based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.

 

Supplemental Pro Forma Information

 

The following unaudited supplemental pro forma information summarizes the Company’s results of operations as if the acquisitions were completed at the beginning of the periods presented (in thousands, except for share and per share data):

                    
   Three Months Ended 
  

Genius Brands Consolidated

(including Wow and Ameba results)

   Wow   Ameba 
  

September 30,

2022

  

September 30,

2021

   September 30, 2021(1)  

September 30,

2021

 
                 
Total Revenues  $19,679   $18,091   $16,033   $186 
                     
Net Income (Loss)  $(11,218)  $(8,338)  $833   $82 
                     
Net Loss per Share of Common Stock (Basic and Diluted)  $(0.04)  $(0.03)  $   $ 
                     
Weighted Average Shares Outstanding (Basic and Diluted)   317,282,770    300,321,658         

 

 

 

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   Nine months Ended 
  

Genius Brands Consolidated

(including Wow and Ameba results)

   Wow   Ameba   Wow   Ameba 
   September 30, 2022   September 30, 2021   September 30, 2022(1)   September 30, 2022   September 30, 2021(1)   September 30, 2021 
                         
Total Revenues  $61,346   $48,927   $53,242   $1,274   $43,130   $519 
                               
Net Income (Loss)  $(28,144)  $(90,388)  $158   $(22)  $2,272   $247 
                               
Net Loss per Share of Common Stock (Basic and Diluted)  $(0.09)  $(0.31)  $   $   $   $ 
                               
Weighted Average Shares Outstanding (Basic and Diluted)   312,243,439    296,001,742                 

 

(1) The unaudited historical financial statements of Wow are not adjusted for conversion to U.S. GAAP from International Financial Reporting Standards, as the adjustments are immaterial to the periods presented.

 

Note 4: Variable Interest Entity

 

In July 2020, the Company entered into a binding term sheet with POW, Inc. (“POW!”) in which the Company agreed to form an entity with POW! to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called “Stan Lee Universe, LLC” (“SLU”). POW! and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021, with activity commencing during the fourth quarter of 2021. The purpose of the acquisition was to enable the Company to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations (the “Stan Lee Assets”), from which Genius Brands plans to develop and license multiple properties each year.

 

The Company contributed $2.0 million to obtain 50% of SLU’s voting equity and POW, for the remaining 50%, contributed the specified intangible assets associated with the Stan Lee Assets. POW will retain certain rights in the transferred intangible assets, namely existing the rights/obligations arising from current licensing agreements. Under ASC 805, the Company determined that the value of SLU was wholly attributable to the Stan Lee Assets and would be accounted for as an asset acquisition. The acquisition cost of $2.0 million was equivalent to the value of the Stan Lee Assets contributed by POW. Therefore, the fair value of the consideration paid by the entity of $2.0 million and the fair value of the 50% non-controlling interest approximated a total of $4.0 million.

 

Pursuant to the guidance under ASC 810, the Company concluded that SLU qualifies as a variable interest entity (“VIE”). The Company consolidates the results of SLU as it was determined that the Company is the primary beneficiary due to having the power through the collaboration to direct the activities that most significantly impact the entity’s economic performance and the Company is required to fund over half of the economic support of the entity. Accordingly, the Company recorded the total fair value of the Stan Lee Assets in SLU of $4.0 million, as an intangible asset to be amortized over the duration of 70 years, the life of the publicity rights related to Stan Lee’s name, likeness, voice, physical characteristics, etc.

 

 

 

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During the three and nine months ended September 30, 2022, SLU generated $46,947 and $2.3 million in net income, respectively. During the nine months ended September 30, 2022, the Company distributed $1.2 million to POW as their share of the non-controlling interest in SLU. The Company’s investment in SLU, net of the cash received from a distribution of $1.2 million, is $0.8 million as of September 30, 2022. In addition, the Company has incurred $0.4 million of costs incurred for marketing and operational services.

 

There were no changes in facts and circumstances that occurred during the three or nine months ended September 30, 2022 that would result in a re-evaluation of the VIE assessment.

 

Note 5: Investment in Equity Interest

 

On December 1, 2021, the Company completed a $6.8 million investment in YFE. In exchange for $3.4 million in cash and 2,281,269 shares of the Company’s common stock (valued at approximately $3.4 million), the Company received 3,000,000 shares of YFE’s common stock.

 

Following the initial equity investment in YFE during the fourth quarter of 2021, the Company participated in a mandatory tender offer for the remaining publicly traded shares held by YFE shareholders. Upon the expiration of the offer on February 14, 2022, the Company purchased an additional 2,637,717 shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders, were converted into 2,574,000 shares of YFE common stock, 304,631 of which were purchased by the Company at 2.00 EUROS per share, or $0.6 million. On April 5, 2022, the Company exercised its subscription rights to purchase an additional 914,284 shares of YFE’s common stock at 3.00 EUROS per share, or $2.7 million, increasing the number of YFE’s outstanding shares to 6,857,132. As of September 30, 2022 and December 31, 2021, the Company’s ownership in YFE was 48.0% and 29.0%, respectively.

 

The Company has elected to apply the fair value option for its investment in YFE (Level 1) as YFE is a publicly traded company on the Frankfurt Exchange, therefore its trading price is readily available and relied upon by investors. The Company recognizes changes in the fair value of its investment in YFE as unrealized gains (losses), net in the accompanying consolidated statements of operations with other income (loss), net.

 

The Company revalues the investment in YFE securities as of the end of each reporting period. During the three and nine months ended September 30, 2022, the Company recorded a total loss of $5.4 million and $3.8 million, respectively, within other income (expense) on the Company’s condensed consolidated statements of operations. The total loss includes $1.3 million and $2.6 million due to the change in the foreign currency translation rate during the three and nine months ended September 30, 2022, respectively.

 

Wow has a 63% membership interest in Ratchet Productions, LLC (“RPLLC”), a privately-owned company registered in Colorado. Wow accounts for its interest using the equity method of accounting. Prior to the Wow Acquisition, in 2016, Wow determined that its investment in RPLLC was impaired and reduced its investment to $0. As the investment has been $0, and remains as such, there has been no impact on the Company’s financial statements for the membership interest in RPLLC.

 

 

 

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Note 6: Marketable Securities

 

The Company classifies and accounts for its marketable debt securities as available-for-sale and the securities are stated at fair value.

 

The investments in marketable securities had an adjusted cost basis of $97.5 million and a market value of $89.9 million as of September 30, 2022. The balances consisted of the following securities (in thousands):

               
   Adjusted Cost   Unrealized Gain/(Loss)   Fair Value 
Corporate Bonds  $44,822   $(2,968)  $41,854 
U.S. Treasury   20,922    (1,437)   19,485 
Mortgage-Backed   6,285    (760)   5,525 
U.S. agency and government sponsored securities   13,116    (1,495)   11,621 
U.S. states and municipalities   11,818    (988)   10,830 
Asset-Backed   567    (9)   558 
Total  $97,530   $(7,657)  $89,873 

 

The investments in marketable securities had an adjusted cost basis of $113.8 million and a market value of $112.5 million as of December 31, 2021. The balances consisted of the following securities (in thousands):

             
   Adjusted Cost   Unrealized Gain/(Loss)   Fair Value 
Corporate Bonds  $47,864   $(529)  $47,335 
U.S. Treasury   24,410    (257)   24,153 
Mortgage-Backed   7,504    (143)   7,361 
U.S. agency and government sponsored securities   14,675    (87)   14,588 
U.S. states and municipalities   11,871    (189)   11,682 
Asset-Backed   6,456    (50)   6,406 
Commercial paper   998        998 
Total  $113,778   $(1,255)  $112,523 

 

The Company reported the net unrealized losses in accumulated other comprehensive (loss) income, a component of stockholders' equity. The decline in fair value is largely due to changes in interest rates and other market conditions and is expected to recover as the securities approach maturity. The Company has evaluated these securities and determined that no allowance is necessary based on the credit quality and the low risk of loss due to the security type. The Company holds sixty-two available-for-sale securities, all of which are in an unrealized loss position as of September 30, 2022. The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period greater than 12 months as of September 30, 2022 are as follows (in thousands):

        
  

Gross

Unrealized Loss

   Fair Value 
Corporate Bonds  $(2,375)  $34,365 
U.S. Treasury   (1,456)   19,489 
Mortgage-Backed   (829)   5,528 
U.S. agency and government sponsored securities   (1,493)   11,625 
U.S. states and municipalities   (781)   8,020 
Asset-Backed   (10)   558 
Total  $(6,944)  $79,585 

 

As of December 31, 2021, the Company had not yet held marketable securities in an unrealized loss position for greater than twelve months. A net realized loss of $36,332 and $159,624 related to the prepayment of principals for certain mortgage-backed securities was recorded in earnings during the three and nine months ended September 30, 2022, respectively.

 

 

 

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The contractual maturities of the Company’s marketable investments as of September 30, 2022 were as follows (in thousands):

    
   Fair Value 
Due within 1 year  $8,889 
Due after 1 year through 5 years   70,060 
Due after 5 years through 10 years   3,752 
Due after 10 years   7,172 
Total  $89,873 

 

The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.

 

The Company did not sell any securities during the three or nine months ended September 30, 2022 that resulted in material gains or losses.

 

Note 7: Property and Equipment, Net

 

The Company has property and equipment as follows (in thousands):

          
  

September 30,

2022

  

December 31,

2021

 
Furniture and Equipment  $221   $181 
Computer Equipment   290    173 
Leasehold Improvements   2,008    44 
Software   254    177 
Production Equipment   23    23 
Property and Equipment, Gross   2,796    598 
           
Less Accumulated Depreciation   (416)   (149)
Property and Equipment, Net  $2,380   $449 

 

During the three months ended September 30, 2022 and 2021, the Company recorded depreciation expense of $86,980 and $23,665, respectively. During the nine months ended September 30, 2022 and 2021, the Company recorded depreciation expense of $0.2 million and $53,494, respectively.

 

 

 

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Note 8: Right of Use Leased Assets

 

Right of use assets consisted of the following (in thousands):

          
  

September 30,

2022

  

December 31,

2021

 
Office Lease Assets  $9,683   $