Notes to Condensed Financial Statements
June 30, 2020 (unaudited)
Note 1: Organization and Business
Organization and Nature of Business
Genius Brands International, Inc. (“we,”
“us,” “our,” or the “Company”) is a global content and brand management company that creates
and licenses multimedia content. Led by experienced industry personnel, we distribute our content in all formats as well as a broad
range of consumer products based on our characters. In the children's media sector, our portfolio features “content with
a purpose” for toddlers to tweens, which provides enrichment as well as entertainment. New intellectual property titles include
the preschool property Rainbow Rangers, which debuted in November 2018 on Nickelodeon and which was renewed for a second
season and preschool property Llama Llama, which debuted on Netflix in January 2018 and was renewed by Netflix for
a second season. Our library titles include the award winning Baby Genius, adventure comedy Thomas Edison's Secret Lab®
and Warren Buffett's Secret Millionaires Club, created with and starring iconic investor Warren Buffett, which is distributed
across our Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox,
Dish, Sling and Zumo as well as Connected TV. We are also developing an all-new animated series, Stan Lee’s Superhero
Kindergarten with Stan Lee’s Pow! Entertainment, Oak Productions and Alibaba. Arnold Schwarzenegger lends his voice
as the lead and is also an Executive Producer on the series. The show will be broadcast in the United States on Amazon Prime and
the Company’s wholly owned distribution outlet, Kartoon Channel!. In July, 2020, the Company entered into a binding term
sheet with POW, Inc. (“POW!”) in which we agreed to form a joint venture with POW! to exploit certain rights in intellectual
property created by Stan Lee, as well as the name and likeness of Stan Lee. The joint venture will be called “Stan Lee Universe,
LLC” and POW! and the Company are finalizing the details of the venture.
In addition, we act as licensing agent
for Penguin Young Readers, a division of Penguin Random House LLC who owns or controls the underlying rights to Llama Llama,
leveraging our existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.
The Company commenced operations in 2006,
assuming all the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement between the Company
and Genius Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “Baby Genius,”
“Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under
those titles. In 2011, the Company reincorporated in Nevada and changed its name to Genius Brands International, Inc. (the “Reincorporation”).
In connection with the Reincorporation, the Company changed its trading symbol to “GNUS.”
In 2013, the Company entered into an Agreement
and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limited liability
company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member of A Squared
(the “Parent Member”), and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“Acquisition
Sub”). Upon closing of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company.
Liquidity
Historically, the Company has
incurred net losses. For the three months ended June 30, 2020 and June 30, 2019, the Company reported net losses of
$383,258,002 and $1,715,152, respectively. For the six months ended June 30, 2020 and June 30, 2019, the Company reported net
losses of $389,093,946 and $6,722,632, respectively. The Company reported net cash used in operating activities of $2,331,261
and $2,550,140 for the six months ended June 30, 2020, and June 30, 2019, respectively. As of June 30, 2020, the Company had
an accumulated deficit of $456,981,465 and total stockholders’ equity of $63,218,056. At June 30, 2020, the Company had
current assets of $58,460,486, including cash and cash equivalent of $54,382,775 and current liabilities of $8,783,171. The
Company had positive working capital of $49,677,315 as of June 30, 2020, compared to negative working capital of $3,650,136
as of December 31, 2019.
Prior to the Company’s
successful capital raises, the Company applied a loan pursuant to the Paycheck Protection Program (PPP) established under
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as interpreted and applied by Small Business Administration
(SBA), an Agency of the United States of America. The application was approved and on April 30,2020, the Company received a
loan with a principal amount of $366,267. The loan has an interest rate of one percent (1%) per year and matures on April 19,
2020. The loan may be eligible, in whole or in part, for forgiveness pursuant to the PPP. The Company shall apply to the
lender for loan forgiveness in accordance with the PPP as implemented by SBA. The Company reported the proceeds from the PPP
loan as debt using the effective interest rate method.
Warrant Exercise Agreement
On January 22, 2020, the Company entered
into a private transaction (the “Private Transaction”) pursuant to a Warrant Exercise Agreement (the “Agreement”)
with the holder of the Company’s existing warrants (the “Original Warrants”). The Original Warrants were originally
issued on October 3, 2017, to purchase an aggregate of 500,000 shares of Common Stock (as defined below) at an exercise price of
$3.90 per share and were to expire in October 2022.
Pursuant to the Agreement, the holder of
the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and
the Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (the average closing price (as reflected
on Nasdaq.com) of the Common Stock (as defined below) for the five trading days immediately preceding the signing of the Agreement)
(the “Amended Exercise Price”). The Company received approximately $170,000 from the exercise of the Original Warrants.
Secured Convertible Note and Warrant Private Placement
On March 11, 2020, the Company and certain
accredited investors (each an “Investor” and collectively, the “Investors”) entered into a Securities Purchase
Agreement (the “SPA”) pursuant to which the Company agreed to sell and issue (1) Senior Secured Convertible Notes to
the Investors in the aggregate principal amount of $13,750,000 (each, a “Note” and collectively, the “2020 Convertible
Notes”) and $11,000,000 funding amount (reflecting an original issue discount of $2,750,000) and (2) warrants to purchase
65,476,190 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), exercisable
for a period of five years at an initial exercise price of $0.26 per share (each a “Warrant” and collectively, the
“Warrants”), for consideration consisting of (i) a cash payment of $7,000,000, and (ii) full recourse cash secured
promissory notes payable by the Investors to the Company (each, an “Investor Note” and collectively, the “Investor
Notes”) in the principal amount of $4,000,000 (the “Investor Notes Principal”) (collectively, the “Financing”).
Andy Heyward, the Company’s Chairman and Chief Executive Officer, participated as an Investor and invested $1,000,000 in
connection with the Financing, all of which was paid at the closing and not pursuant to an Investor Note.
The closing of the sale and issuance of
the 2020 Convertible Notes, the Warrants and the Placement Agent Warrants (as defined below) described below in Note 10 occurred
on March 17, 2020 (the “Closing Date”). The maturity date of the 2020 Convertible Notes is September 30, 2021 and the
maturity date of the Investor Notes is March 11, 2060.
2020 Convertible Notes can be converted
at the investor’s option into Common Stock at the conversion rate of $1.375 per share to be adjusted to $0.21 per share upon
receipt of stockholder approval and subject to certain other adjustments, according to the terms of the 2020 Convertible Notes
(the “Conversion Price”). On May 15, 2020, the Company received the necessary stockholder approval in connection with
the Nasdaq proposals described below in Note 10. As a result, the Conversion Price and the exercise price of the Warrants were
each reduced to $0.21.
The 2020 Convertible Notes can be converted
at the Company’s option, provided certain conditions are met, into Common Stock at the lower of the Conversion Price and
85% of the average of the five lowest daily weighted average prices of Company’s shares during the measuring period, according
to the terms of the 2020 Convertible Notes.
Between June 10 and June 23, 2020, the
2020 Convertible Notes were converted and repaid through the issuance of 65,476,190 shares of Common Stock.
March 2020 Securities Purchase Agreement
On March 22, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “March Investors”), pursuant to which we agreed to issue
and sell, in a registered direct offering by the Company directly to the March Investors, an aggregate of 4,000,000 shares of our
Common Stock, at an offering price of $0.2568 per share for gross proceeds of approximately $1.0 million before deducting offering
expenses.
May 2020 Securities Purchase Agreements
On May 7, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 7th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 7th Investors,
an aggregate of 8,000,000 shares of our Common Stock, at an offering price of $0.35 per share for gross proceeds of approximately
$2.8 million before deducting offering expenses.
On May 8, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 8th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 8th Investors,
an aggregate of 12,000,000 shares of our Common Stock, at an offering price of $0.454 per share for gross proceeds of approximately
$5.448 million before deducting offering expenses.
On May 18, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 18th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 18th Investors,
an aggregate of 7,500,000 shares of our Common Stock, at an offering price of $1.20 per share for gross proceeds of approximately
$9.0 million before deducting offering expenses.
On May 28, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 28th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 28th Investors,
an aggregate of 20,000,000 shares of our Common Stock, at an offering price of $1.50 per share for gross proceeds of approximately
$30.0 million before deducting offering expenses.
Between May 18 and June 11, 2020, the Company
received $5,649,319, net of expenses, from the exercise of 29,666,283 warrants at an exercise price of $0.21 per share.
On June 23, 2020, the Company received
$3,600,000 from the payment of the Investor Notes Principal.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 2020 and 2019 condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”).
Principles of Consolidation
The accompanying condensed consolidated
financial statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared LLC, Llama
Productions LLC and Rainbow Rangers Productions LLC, as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”).
All significant inter-company balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements
have been prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 805 Business Combinations.
Use of Estimates
The preparation of financial statements
in conformity with 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.
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 June 30, 2020, and December 31,
2019, the Company had Cash and Cash Equivalents of $54,382,775 and $305,121, respectively.
Allowance for Doubtful Accounts
Accounts receivable are presented on the
balance sheets net of estimated uncollectible amounts. The Company assesses its accounts receivable balances on a quarterly basis
to determine collectability and records an allowance for estimated uncollectible accounts in an amount approximating anticipated
losses based on historical experience and future expectations. Individual uncollectible accounts are written off against the allowance
when collection of the individual accounts appears doubtful. The Company had an allowance for doubtful accounts of $99,792 for
June 30, 2020 and $0 as of December 31, 2019.
Inventories
Inventories are stated at the lower of
average cost or net realizable value and consist of finished goods such as DVDs, CDs and other products. A reserve for slow-moving
and obsolete inventory is established for all inventory deemed potentially non-saleable. The current inventory is considered properly
valued and saleable. The Company concluded that there was an appropriate reserve for slow moving and obsolete inventory of $0 at
both June 30, 2020 and December 31, 2019.
Property and Equipment
Property and equipment are recorded at
cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the
assets, which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add to the value of the
assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property
and equipment are reflected in the condensed consolidated statement of operations.
Right of Use Leased Assets
In February 2016, the FASB issued Accounting
Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise
from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance
is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the
beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the
beginning of an interim or annual reporting period.
In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842), Targeted Improvements, which allows for an additional optional transition method where comparative periods
presented in the financial statements in the period of adoption will not be restated and instead those periods will be presented
under existing guidance in accordance with ASC 840, Leases. Management used this optional transition method. As of January 1, 2019,
management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070, a reversal
of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase
price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance
with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful
lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise.
The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year.
To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we
have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted
cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment
regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate
of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible
assets in future periods.
Other intangible assets have been acquired,
either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual amortization
of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Debt and Attached Equity-Linked Instruments
The Company measures issued debt on an
amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or
the straight-line method when the latter does not lead to materially different results.
The Company accounts for the proceeds from
the issuance of convertible notes payable in accordance with FASB ASC 470-20 Debt with Conversion and Other Options. Pursuant to
FASB ASC 470-20, the intrinsic value of the embedded conversion feature (beneficial conversion interest), which is in the money
on the commitment date is included in the discount to debt and amortized to interest expense over the term of the note agreement.
When the conversion option is not separated, the Company accounts for the entire convertible instrument including debt and the
conversion feature as a liability.
The Company analyzes freestanding equity-linked
instruments including warrants attached to debt to conclude whether the instrument meets the definition of the derivative and whether
it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to 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 ASC 815-40 Contract’s in Entity’s Own
Equity. When the requirements are met the instrument is recorded as part of the Company’s equity, initially measured based
on its relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument
is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.
When required, the Company also considers
the bifurcation guidance for embedded derivatives per FASB ASC 815-15 Embedded Derivatives.
Film and Television Costs
The Company capitalizes production costs
for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production
costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment
over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenue
in the period of delivery of the episodes.
The Company capitalizes production costs
for films produced in accordance with FASB ASC 926-20 Entertainment - Films - Other Assets - Film Costs. Accordingly, production
costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair
value of the film(s) delivered and recognized as revenue. The Company evaluates its capitalized production costs annually and limits
recorded amounts by their ability to recover such costs through expected future sales.
In March 2019, the FASB issued ASU No.
2019-02, Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters Intangibles-Goodwill and
Other (Subtopic 920-350). The update aligns the accounting for production costs of an episodic television series with the accounting
for production costs of films by removing the content distinction for capitalization. The amendments also require that an entity
reassess estimates of the use of a film in a film group and account for any changes prospectively. The amendments in this update
require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment
at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements.
For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. We have prospectively adopted ASU 2019-02. The impact to our consolidated financial
position, results of operations and cash flows were not material.
Additionally, for both episodic series
and films, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing
content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are
capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
On January 1, 2018, the Company adopted
the new accounting standard ASC 606 (“Topic 606”), Revenue from Contracts with Customers and all the related amendments
(“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed
as of January 1, 2018.
As a result of the change, beginning January
1, 2018, the Company began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees,
the Company recognizes fixed revenue upon delivery of content and the start of the license period. For functional IP contracts
with a variable component, the Company estimates revenue such that it is probable there will not be a material reversal of revenue
in future periods. Revenue under these types of contracts was previously recognized when royalty statements were received. The
Company began recognizing revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although
it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature
of the license.
The Company sells advertising on its Kid
Genius channel in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, the
Company recognizes revenue when all five revenue recognition criteria under FASB ASC 606 are met. For impressions served, the Company
delivers a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM
per impression. Impressions served are reported to the Company on a monthly basis, and revenue is reported in the month the impressions
are served.
The Company recognizes revenue related
to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated
to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for
future performance to directly bring about the resale of the product by the buyer.
Direct Operating Costs
Direct operating costs include costs of
our product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related
to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with
which we are obligated to share net profits of the properties on which they have rendered services.
Share-Based Compensation
As required by FASB ASC 718 - Stock Compensation,
the Company recognizes an expense related to the fair value of our share-based compensation awards, including stock options, using
the Black-Scholes calculation as of the date of grant. The Company has elected to use the graded attribution method for awards
which are in-substance, multiple awards based on the vesting schedule.
Earnings Per Share
Basic earnings (loss) per common share
(“EPS”) is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number
of shares of Common Stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common
shareholders by the weighted average number of shares of Common Stock outstanding, plus the assumed exercise of all dilutive securities
using the treasury stock or “as converted” method, as appropriate. During periods of net loss, all Common Stock equivalents
are excluded from the diluted EPS calculation because they are antidilutive.
Income Taxes
Deferred income tax assets and liabilities
are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted
tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other possible
sources of realization of deferred tax assets and records a valuation allowance that reduces the deferred tax assets to an amount
that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized.
Concentration of Risk
The Company’s cash is maintained
at three financial institutions and from time to time the balances for this account exceed the Federal Deposit Insurance Corporation’s
(“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC
up to $250,000 per account. As of June 30, 2020, the Company had four accounts with an uninsured balance of $53,365,354.
For the three months ended June 30, 2020,
the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 46%
of the total revenue and 13% of accounts receivable. One other customer accounted for 56% of accounts receivable. For the six months
ended June 30, 2020, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer
accounted for 29% of the total revenue and 13% of accounts receivable. One other customer accounted for 56% of accounts receivable.
For three and six months ended June 30, 2019, the Company had two customers whose total revenue each exceeded 10% of the total
consolidated revenue. Those customers accounted for 52% and 57% of the total revenue respectively for the three and six months
ended June 30, 2019 respectively. The Company had three customers that represented 75% of accounts receivable as of June 30, 2019.
Fair value of financial instruments
The carrying amounts of cash, receivables,
accounts payable, and accrued liabilities approximate fair value due to the short-term maturity of the instruments. The carrying
amount of the Production Loan Facility approximates fair value since the debt carries a variable interest rate that is tied to
either the current Prime or LIBOR rates plus an applicable spread.
The Company adopted FASB ASC 820 as of
January 1, 2008, for financial instruments measured at fair value on a recurring basis. FASB ASC 820 defines fair value, establishes
a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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·
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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·
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Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
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·
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Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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Recent Accounting Pronouncements
In March 2019, the FASB issued ASU No.
2019-02, Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters Intangibles-Goodwill and
Other (Subtopic 920-350). The update aligns the accounting for production costs of an episodic television series with the accounting
for production costs of films by removing the content distinction for capitalization. The amendments also require that an entity
reassess estimates of the use of a film in a film group and account for any changes prospectively. The amendments in this update
require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment
at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements.
For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. We have prospectively adopted ASU 2016-18. The impact to our consolidated financial
position, results of operations and cash flows were not material.
Various other accounting pronouncements
have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific
industries and are not expected to have a material effect on our financial position, results of operations, or cash flows.
Note 3: Property and Equipment, Net
The Company has property and equipment
as follows as of June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Furniture and Equipment
|
|
$
|
19,419
|
|
|
$
|
19,419
|
|
Computer Equipment
|
|
|
144,643
|
|
|
|
144,643
|
|
Leasehold Improvements
|
|
|
14,182
|
|
|
|
14,182
|
|
Software
|
|
|
15,737
|
|
|
|
15,737
|
|
Property and Equipment, Gross
|
|
|
193,981
|
|
|
|
193,981
|
|
Less Accumulated Depreciation
|
|
|
(156,180
|
)
|
|
|
(129,105
|
)
|
Property and Equipment, Net
|
|
$
|
37,801
|
|
|
$
|
64,876
|
|
During the three months ended June 30,
2020 and 2019, the Company recorded depreciation expense of $13,537 and $9,120, respectively. During the six months ended June
30, 2020 and 2019, the Company recorded depreciation expense of $27,075 and $18,845, respectively.
Note 4: Right Of Use Leased Asset
Right of use asset consisted of the following
as of June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Office Lease Asset
|
|
$
|
2,155,237
|
|
|
$
|
2,155,237
|
|
Printer Lease Asset
|
|
|
2,245,093
|
|
|
|
2,245,093
|
|
Right Of Use Asset, Gross
|
|
|
4,400,330
|
|
|
|
4,400,330
|
|
|
|
|
|
|
|
|
|
|
Office Lease Accumulated Amortization
|
|
|
(436,128
|
)
|
|
|
(321,773
|
)
|
Printer Lease Accumulated Amortization
|
|
|
(172,069
|
)
|
|
|
(68,720
|
)
|
Right Of Use Asset, Net
|
|
$
|
3,792,133
|
|
|
$
|
4,009,837
|
|
During the three months ended June 30,
2020 and June 30, 2019, the Company recorded amortization expense of $109,458 and $37,059, respectively. During the six months
ended June 30, 2020 and June 30, 2019, the Company recorded amortization expense of $217,704 and $214,101, respectively.
Note 5: Film and Television Costs, Net
As of June 30, 2020, the Company had net
Film and Television Costs of $9,996,300, compared to $9,906,885 at December 31, 2019. The increase primarily relates to the production
costs associated with Rainbow Rangers Season 2 and development of Stan Lee’s Superhero Kindergarten offset
by the amortization of Rainbow Rangers Season 1 and Llama Llama Seasons 1 and 2.
During the three months ended June 30,
2020 and 2019, the Company recorded Film and Television Cost amortization expense of $185,748 and $192,803, respectively. During
the six months ended June 30, 2020 and 2019, the Company recorded Film and Television Cost amortization expense of $292,363 and
$621,986, respectively.
The following table highlights the activity
in Film and Television Costs of June 30, 2020 and December 31, 2019:
|
|
Total
|
|
Film and Television Costs, Net as of December 31, 2018
|
|
$
|
8,166,131
|
|
Additions to Film and Television Costs
|
|
|
3,920,013
|
|
Capitalized Interest
|
|
|
50,765
|
|
Film Amortization Expense
|
|
|
(2,230,024
|
)
|
Film and Television Costs, Net as of December 31, 2019
|
|
|
9,906,885
|
|
Additions to Film and Television Costs
|
|
|
381,778
|
|
Capitalized Interest
|
|
|
–
|
|
Film Amortization Expense
|
|
|
(292,363
|
)
|
Film and Television Costs, Net as of June 30, 2020
|
|
$
|
9,996,300
|
|
Note 6: Goodwill and Intangible Assets,
Net
Goodwill
In 2013, the Company recognized $10,365,806
in Goodwill, representing the excess of the fair value of the consideration for the merger over net identifiable assets acquired.
Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization but is subject to annual review to determine if certain events
warrant impairment to the Goodwill asset. Through June 30, 2020, the Company has not recognized any impairment to Goodwill.
Intangible Assets, Net
The Company had the following intangible
assets as of June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Trademarks (a)
|
|
$
|
129,831
|
|
|
$
|
129,831
|
|
Other Intangible Assets (a)
|
|
|
273,028
|
|
|
|
272,528
|
|
Intangible Assets, Gross
|
|
|
402,859
|
|
|
|
402,359
|
|
Less Accumulated Amortization (b)
|
|
|
(372,414
|
)
|
|
|
(350,776
|
)
|
Intangible Assets, Net
|
|
$
|
30,445
|
|
|
$
|
51,583
|
|
|
(a)
|
Pursuant to FASB ASC 350-30-35, the Company reviews these intangible assets periodically to determine if the value should be retired or impaired due to recent events. Through June 30, 2019, the Company has not recognized any impairment expense related to these assets.
|
|
(b)
|
During the three months ended June 30, 2020 and June 30, 2019, the Company recognized $10,847 and $9,720, respectively, in amortization expense related to the Trademarks and Other Intangible Assets. During the six months ended June 30, 2020 and June 30, 2019, the Company recognized $21,638 and $19,492, respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets.
|
Note 7: Deferred Revenue
As of June 30, 2020 and December 31, 2019,
the Company had total short term and long term deferred revenue of $5,171,243 and $5,108,953, respectively. Deferred revenue includes
both (i) variable fee contracts with licensees and customers in which the Company had collected advances and minimum guarantees
against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these contracts when all revenue
recognition criteria have been met. Included in the deferred revenue balance as of June 30, 2020 and December 31, 2019 is the $3,367,086
which is the remaining balance from the total $3,489,583 advance against future royalty that Sony paid to the Company for both
the foreign and domestic distribution rights.
Note 8: Accrued Liabilities –
Current
As of June 30, 2020 and December 31, 2019,
the Company has the following current accrued liabilities:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Other Accrued Expenses (a)
|
|
$
|
220,099
|
|
|
$
|
124,940
|
|
Accrued Salaries and Wages (b)
|
|
|
301,281
|
|
|
|
231,481
|
|
Total Accrued Liabilities – Current
|
|
$
|
521,380
|
|
|
$
|
356,421
|
|
|
(a)
|
Represents accrued interest, insurance liability and lease deposit on sub-lease.
|
|
(b)
|
Represents accrued salaries and wages and accrued vacation payable to employees for the six months ended June 30, 2020 and the year ended December 31, 2019.
|
Note 9: Secured Convertible Notes
On August 17, 2018, the Company entered
into a Securities Purchase Agreement (the “August 2018 Purchase Agreement”) with certain investors (the “Investors”),
pursuant to which the Company agreed to sell (i) an aggregate principal amount of $4.50 million in secured convertible notes, convertible
into shares of our Common Stock, at a conversion price of $2.50 per share (the “August 2018 Secured Convertible Notes”)
and (ii) warrants to purchase 1,800,000 shares of our Common Stock at an exercise price of $3.00 per share (the “Warrants,”
and, together with the August 2018 Secured Convertible Notes, the “Securities”). We received approximately $4,500,000
in gross proceeds from the Offering.
The August 2018 Secured Convertible Notes
were our senior secured obligations and were secured by certain tangible and intangible property of the Company as described in
the August 2018 Purchase Agreement.
During the three months ended March 31,
2020, the Company recognized $7,288 of discount amortization which is included in interest expense.
In conjunction with the February 2019 Offering
(as defined below) and concurrent private placement, we entered into an amendment, waiver and consent agreement, or the “Amendment,
Waiver and Consent Agreement,” with certain holders of our August 2018 Secured Convertible Notes. Pursuant to the Amendment,
Waiver and Consent Agreement, such holders agreed to amend the August 2018 Purchase Agreement, waive any applicable rights and
remedies under the August 2018 Purchase Agreement, and consent to the February 2019 Offering and concurrent private placement.
In consideration for such Amendment, Waiver and Consent Agreement, we agreed to issue such holders warrants to purchase up to an
aggregate amount 1,800,000 shares of our Common Stock. Such warrants have an exercise price of $2.55 per share, will become exercisable
commencing six months and one day from the date of issuance and will expire five (5) years from the date of issuance. The issuance
of the warrants resulted in a modification of debt in accordance with ASC 470 and is characterized as an extinguishment of debt
in accordance with ASC-470-50-40. In accordance with ASC-470-50-40-2 the Company derecognized the existing debt as if it was extinguished
and recorded the new debt, with the difference between the reacquisition price of the new debt and the net carrying amount of the
extinguished debt, $2,064,193 being recorded as a loss on the extinguishment of debt.
On March 16, 2020, the holders of the August
2018 Secured Convertible Notes were repaid in full including interest
Note 10: Senior Secured Convertible
Notes
On March 11, 2020, the Company and the
Investors entered into the SPA pursuant to which the Company agreed to sell and issue (1) the 2020 Convertible Notes and $11,000,000
funding amount (reflecting an original issue discount of $2,750,000) and (2) the Warrants, for consideration consisting of (i)
a cash payment of $7,000,000, and (ii) the Investor Notes in the principal amount of $4,000,000. Andy Heyward, the Company’s
Chairman and Chief Executive Officer, participated as an Investor and invested $1,000,000 in connection with the Financing, all
of which was paid at the closing and not pursuant to an Investor Note.
The closing of the sale and issuance of
the 2020 Convertible Notes, the Warrants and the Placement Agent Warrants occurred on March 17, 2020. The maturity date of the
2020 Convertible Notes is September 30, 2021 and the maturity date of the Investor Notes is March 11, 2060.
The SPA contains certain representations
and warranties, covenants and indemnities customary for similar transactions
In addition, pursuant to the terms of the
SPA, the 2020 Convertible Notes and the Warrants, the Company agreed that the following will apply or become effective only following
Stockholder Approval: (1) the conversion price of the 2020 Convertible Notes shall be reduced to $0.21 per share and may be further
reduced to any amount and for any period of time deemed appropriate by the board of directors of the Company (the “Board
of Directors”), (2) the exercise price of the Warrants shall be immediately reduced to $0.21 per share and may be further
reduced to any amount and for any period of time deemed appropriate by the Board of Directors, (3) the 2020 Convertible Notes and
Warrants shall each have full ratchet anti-dilution protection for subsequent financings (subject to certain exceptions), (4) existing
warrant holders that are participating in the Financing (representing warrants to purchase an aggregate of 8,715,229 shares of
Company Common Stock) will have their existing warrants’ exercise prices reduced to $0.21 and (5) the investors shall have
a most favored nations right which provides that if the Company enters into a subsequent financing, then the Investors (together
with their affiliates) at their sole discretion shall have the ability to exchange their 2020 Convertible Notes on a $1 for $1
basis into securities issued in the new transaction. Additionally, in the event that any warrants or options (or any similar security
or right) issued in a subsequent financing include any terms more favorable to the holders thereof (less favorable to the Company)
than the terms of the Warrants, the Warrants shall be automatically amended to include such more favorable terms.
On May 15, 2020, the Company received necessary
Stockholder Approval in connection with the Nasdaq proposals described above. As a result, the conversion price of the 2020 Convertible
Notes and the exercise price of the Warrants were each reduced to $0.21. In addition, existing warrant holders that participated
in the Financing (representing warrants to purchase an aggregate of 9,172,463 shares of Common Stock) also had their existing warrants’
exercise prices reduced to $0.21.
Amortization of Principal
The 2020 Convertible Notes provide that
the Company will repay the principal amount of 2020 Convertible Notes in equal monthly installments of 1/12th of the principal
amount of the 2020 Convertible Notes beginning October 31, 2020 and the last business day of each calendar month anniversary thereafter
(each an “Installment Date”). On each Installment Date, assuming the Equity Conditions described below are met and
Stockholder Approval has been obtained, all or some of the Installment Amount (as defined in the 2020 Convertible Notes) shall
be converted into shares of Common Stock, provided however that the Company may elect prior to any Installment Date to pay all
or a portion of the installment amount in cash, under certain conditions in the SPA.
Any holder of a 2020 Convertible Note may,
by notice to the Company, accelerate future installment payments to any applicable Installment Date, in which case the Company
will deliver shares of Common Stock for the conversion of such accelerated payments (the “Accelerated Amount”), regardless
of whether the Installment Amount scheduled to be paid on such applicable Installment Date shall be paid in cash, shares of Common
Stock or a combination thereof. In the event that the Investor delivers one or more such notices of acceleration, the aggregated
Accelerated Amount shall not be greater than six (6) times such Investor’s pro rata amount.
If the Company fails to redeem the Company
Redemption Amount on the applicable Installment Date by payment of the Company Installment Redemption Price on such date, then
at the option of the Investor designated in writing to the Company (any such designation shall be deemed a “Conversion Notice”
pursuant to the 2020 Convertible Notes), (i) the Investor shall have the rights set forth in the 2020 Convertible Notes as if the
Company failed to pay the applicable Company Installment Redemption Price and all other rights as an Investor in the 2020 Convertible
Notes (including, without limitation, such failure constituting an Event of Default described in the 2020 Convertible Notes) and
(ii) the Investor may require the Company to convert all or any part of the Company Redemption Amount at the Company Conversion
Price as in effect on the applicable Installment Date.
Subject to certain beneficial ownership
limitations, until the Company Installment Redemption Price is paid in full, the Company Redemption Amount may be converted, in
whole or in part, by the Investor into Common Stock. In the event the Investor elects to convert all or any portion of the Company
Redemption Amount prior to the applicable Installment Date as set forth in the immediately preceding sentence, the Company Redemption
Amount so converted shall be deducted in reverse order starting from the final Installment Amount to be paid on the final Installment
Date, unless the Investor otherwise indicates and allocates among any Installment Dates in the applicable Conversion Notice.
Payment of Investor’s Notes
The Company will receive the applicable
portion of the Investor Notes Principal due upon each voluntary or mandatory prepayment of the Investor Notes. The Investors may,
at their option and at any time, voluntarily prepay the Investor Notes, in whole or in part. The Investor Notes are also subject
to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the mandatory prepayment events. The Company
may require an investor to prepay the Investor Notes provided certain conditions are met including but not limited to the following:
Stockholder Approval has been obtained, and no Event of Default as defined in the terms of the 2020 Convertible Notes took place.
The Investor Notes also contain certain
offset rights of the Company and the Investors, which if exercised, would reduce the amount outstanding under 2020 Convertible
Notes and the Investor Notes by the same amount and, accordingly, the cash proceeds received by the Company from the investors.
These offset rights are triggered by specific occurrences that could jeopardize an Investor’s investment.
On the maturity date of the 2020 Convertible
Notes, the outstanding principal amount owed by an Investor to the Company under such Investor Note shall be satisfied and cancelled
in exchange for the cancellation of an equal amount owed the Company to such Investor under the related 2020 Convertible Notes.
The Company reports the Investor Notes
and the respective portion of the Convertible Notes that may be offset against the Investor Notes on a “gross” basis,
i.e. as an asset and a liability, respectively.
Optional Redemption at Company’s
Election
At any time after the date of issuance
of the 2020 Convertible Notes, the Company will have the right to redeem a portion or all of the 2020 Convertible Notes in cash
at prices depending on certain conditions as described in the SPA.
Conversion of the 2020 Convertible Notes
Each 2020 Convertible Note is convertible,
at the option of the holder, into shares of Common Stock at an initial conversion price of $1.375, subject to adjustment as provided
in the 2020 Convertible Notes; provided, however, upon receipt of Stockholder Approval, the conversion price shall be $0.21, subject
to adjustment as provided in the 2020 Convertible Notes.
On or after the date Stockholder Approval
is obtained, if the Company issues or sells, or the Company publicly announces the issuance or sale of, any shares of Common Stock,
or convertible securities or options issuable or exchangeable into Common Stock (a “New Issuance”), under which such
Common Stock is sold for a consideration per share less than the Conversion Price then in effect, the Conversion Price of the 2020
Convertible Notes will be adjusted to the New Issuance price in accordance with the formulas provided in the 2020 Convertible Notes.
Any such adjustment will not apply with respect to the issuance of Excluded Securities (as defined in the 2020 Convertible Notes).
Upon Stockholder Approval, the Conversion Price may be further reduced to any amount and for any period of time deemed appropriate
by the Board of Directors.
The Company classified the detachable warrants
as derivative financial liabilities that are recorded at fair value on a recurring basis separately from debt. The Company classified
investors’ and Company’s conversion options as a compound embedded derivative liability recorded separately from the
debt. The amount of debt discount arising from the separate accounting of the above financial instruments at March 17, 2020 was
$10,729,852.
On May 15, 2020 stockholders of the Company
approved the reduction of the Conversion Price to $0.21. During the three months ended June 30, 2020 the Investors converted their
2020 Convertible Notes in accordance with the terms of the agreement. $105,000 of the 2020 Convertible Notes were converted on
June 6, 2020 with the remainder of $13,645,000 converted on June 23, 2020. As part of the conversion accounting, the Company increased
the equity by the sum of the carrying amounts of the debt and separated conversion option liabilities, with no gain or loss recognized.
Overall amount credited to equity per the above accounting treatment was 1,990,413 on June 6, 2020 and 169,845,316 on June 23,
2020.
The Company estimated that the fair value
of the investor’s conversion options and the fair value of Company’s conversion options at March 17, 2020 and March
31, 2020 were immaterial. The estimated fair value of the investor’s conversion options associated with $105,000 of debt
immediately before the conversion on June 6, 2020 was 1,990,408. The estimated fair value of the investor’s conversion options
associated with $13,645,000 of debt immediately before the conversion on June 12, 2020 was $169,845,321. The Company estimated
that the fair value of Company’s conversion option on both conversion dates was immaterial. During the three months ended
June 30, 2020, the Company recognized a revaluation loss of $171,835,729 associated with the 2020 Convertible Notes conversion
options. Additionally, the Company recognized revaluation loss associated with detachable warrants of $208,760,698.
Company’s interest expense associated
with the 2020 Convertible Notes was $401,814 and $ 1,033,666, respectively for the three and six months ended June 30, 2020. The
interest expense included $631,852 excess of discount over the 2020 Convertible Notes’ principal. The discount is mainly
attributable to detachable warrants and 20% original issuance discount. The amount of unamortized discount at June 30, 2020 is
$0 Company recognizes interest expense associated with 2020 Convertible Notes using the effective interest rate method.
On June 23, 2020 the Company received $3,600,000,
net of expenses, from the payment of the Investor Notes Principal.
Between June 10 and June 23, 2020, the
2020 Convertible Notes were converted and repaid through the issuance of 65,476,190 shares of Common Stock.
Note 11: Production Loan Facility
On August 8, 2016, Llama Productions LLC
(“Llama”) closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”)
with Bank Leumi USA (the “Lender”) to produce its animated series Llama Llama, (the “Series”) which
is configured as fifteen half-hour episodes comprised of thirty 11-minute programs that were delivered to Netflix in fall 2017.
The Facility is secured by the license fees the Company will receive from Netflix for the delivery of the Series as well as the
Company’s copyright in the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1%
or one, three, or six-month LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, the Company deposited $1,000,000
into a cash account to be used solely to produce the Series. Additionally, the Facility contains certain standard affirmative and
negative non-financial covenants such as maintaining certain levels of production insurance and providing standard financial reports.
As of June 30, 2020, the Company was in compliance with these covenants.
On September 28, 2018, Llama entered into
a Loan and Security Agreement (the “Loan and Security Agreement”) with the Lender, pursuant to which the Lender agreed
to make a secured loan in an aggregate amount not to exceed $4,231,989 to Llama (the “Loan”). The proceeds of the Loan
will be used to pay the majority of the expenses of producing, completing and delivering two 22-minute episodes and sixteen 11-
minute episodes of the second season of the animated series Llama Llama to be initially exhibited on Netflix. To secure
payment of the Loan, Llama has granted to the Lender a continuing security interest in and against, generally, all of its tangible
and intangible assets, which includes all seasons of the Llama Llama animated series.
Under the Loan and Security Agreement,
Llama can request revolving loan advances under (a) the Prime Rate Loan facility and (b) the LIBOR Loan facility, each as further
described in the Loan and Security Agreement attached as an exhibit hereto. Prime Rate Loan advances shall bear interest, on the
outstanding balance thereof, at a fluctuating per annum rate equal to 1.0% plus the Prime Rate (as such term is defined in the
Loan and Security Agreement), provided that in no event shall the interest rate applicable to Prime Rate Loans be less than 4.0%
per annum. LIBOR Loan advances shall bear interest, on the outstanding balance thereof, for the period commencing on the funding
date and ending on the date which is one (1), three (3) or six (6) months thereafter, at a per annum rate equal to 3.25% plus the
LIBOR determined for the applicable Interest Period (as such terms are defined in the Loan and Security Agreement), provided that
in no event shall the interest rate applicable to LIBOR Loans be less than 3.25% per annum. The Maturity Date of the Prime Rate
Loan facility and LIBOR Loan facility is March 31, 2021. Interest rates on advances under the Loan and Security Agreement were
between 3.57% and 4.99% as of June 30, 2020.
In addition, on September 28, 2018, Llama
and the Lender entered into Amendment No. 2 to the Loan and Security Agreement, effective as of August 27, 2018, by and between
Llama and the Lender (the “Amendment”). Pursuant to the Amendment, the original Loan and Security Agreement, dated
as of August 8, 2016 and amended as of November 7, 2017 (the “Original Loan and Security Agreement”), was amended to
(i) reduce the loan commitment thereunder to $1,768,010, and (ii) include the Llama Llama season two obligations under the
Loan and Security Agreement as obligations under the Original Loan and Security Agreement.
As of June 30, 2020, the Company had gross
outstanding borrowing under the facility of $1,889,426. As of December 31, 2019, the Company had gross outstanding borrowing under
the facility of $3,091,739.
Note 12: Disputed Trade Payable
As part of the merger in 2013, the Company
assumed certain liabilities from a previous member of A Squared which has claimed certain liabilities totaling $925,000. The Company
disputes the basis for this liability. As of December 31, 2017, the Company believed that the statute of limitations applicable
to the assertion of any legal claim relating to the collection of these liabilities has expired and therefore believes this liability
is not owed.
Note 13: Stockholders’ Equity
Common Stock
As of June 30, 2020, the total number of
authorized shares of Common Stock was 233,333,334.
On January 8, 2020, the Company issued
43,077 shares of Common Stock valued at $0.65 per share to a provider for investor relations services.
On January 15, 2020, the Company issued
3,171,428 shares of Common Stock in exchange for 667 shares of Preferred Stock at a conversion price of $0.21 per share.
On January 22, 2020, the Company entered
into the Private Transaction pursuant to the Agreement with the holder of the Original Warrants. The Original Warrants were originally
issued on October 3, 2017, to purchase an aggregate of 500,000 shares of Common Stock, at an exercise price of $3.90 per share
and were to expire in October 2022.
Pursuant to the Agreement, the holder of
the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and
the Company would amend the Original Warrants to reduce the exercise price thereof to the Amended Exercise Price. The Company received
approximately $170,000 from the exercise of the Original Warrants.
On March 22, 2020, the Company entered
into the Purchase Agreement with the Investors, pursuant to which the Company agreed to issue and sell, in the Registered Offering,
an aggregate of 4,000,000 shares Common Stock at an offering price of $0.2568 per share for gross proceeds of approximately $1.0
million before deducting offering expenses. The Registered Offering closed on March 25, 2020.
On May 7, 2020, we entered into a Securities
Purchase Agreement with the May 7th Investors, pursuant to which we agreed to issue and sell, in a registered direct
offering by the Company directly to the May 7th Investors, an aggregate of 8,000,000 shares of our Common Stock,
at an offering price of $0.35 per share for gross proceeds of approximately $2.8 million before deducting offering expenses.
On May 8, 2020, we entered into a Securities
Purchase Agreement with the May 8th Investors, pursuant to which we agreed to issue and sell, in a registered direct
offering by the Company directly to the May 8th Investors, an aggregate of 12,000,000 shares of our Common Stock,
at an offering price of $0.454 per share for gross proceeds of approximately $5.448 million before deducting offering expenses.
On May 18, 2020, we entered into a Securities
Purchase Agreement with the May 18th Investors, pursuant to which we agreed to issue and sell, in a registered
direct offering by the Company directly to the May 18th Investors, an aggregate of 7,500,000 shares of our Common
Stock, at an offering price of $1.20 per share for gross proceeds of approximately $9.0 million before deducting offering expenses.
On May 28, 2020, we entered into a Securities
Purchase Agreement with the May 28th Investors, pursuant to which we agreed to issue and sell, in a registered
direct offering by the Company directly to the May 28th Investors, an aggregate of 20,000,000 shares of our Common
Stock, at an offering price of $1.50 per share for gross proceeds of approximately $30.0 million before deducting offering expenses.
Between May 18 and June 11, 2020, the Company
received $5,649,319, net of expenses, from the exercise of 29,666,283 warrants at an exercise price of $0.21 per share.
Between May 15 and June 19, 2020 certain
warrant holders exercised 50,014,895 warrants in cashless transactions resulting in the issuance of 45,000,428 shares of Common
Stock.
Between May 18 and June 24, 2020, the Company
issued 1,571,430 shares of Common Stock in exchange for 330 shares of Preferred Stock at a conversion price of $0.21 per share.
On June 22, 2020, the Company issued 49,610
shares of Common Stock valued at $3.85 per share to a provider for investor relations services.
Between June 10 and June 23, 2020, the
2020 Convertible Notes were converted and repaid through the issuance of 65,476,190 shares of Common Stock.
As of June 30, 2020 and December 31, 2019,
there were 218,856,170 and 21,877,724 shares of Common Stock outstanding, respectively.
Preferred Stock
The Company has 10,000,000 shares of preferred
stock authorized with a par value of $0.001 per share (the “Preferred Stock”). The Board of Directors is authorized,
subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares
of Preferred Stock in one or more series. Each series of Preferred Stock will have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as shall be determined by our Board of Directors, which
may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
As of June 30, 2020 and December 31,
2019, there were 100 and 1,097 shares of Series A Convertible Preferred Stock outstanding respectively.
On February 19, 2019, the Company entered
into a Securities Purchase Agreement with a certain accredited investor pursuant to which we sold 945,894 shares of Common Stock
and warrants to purchase up to 945,894 shares of our Common Stock at 2.12 per share. As a result, the conversion price of the
Series A Convertible Preferred Stock decreased to $2.12. This decrease resulted in a beneficial conversion feature of $322,240
which was recognized February 19, 2019.
Between
October 4, 2019 and October 22, 2019, the Company issued 296,053 shares of Common Stock in exchange for 225 shares of Series A
Convertible Preferred Stock at a conversion price of $0.76 per share.
On November 20, 2019, we entered into a
settlement agreement and release (“Settlement Agreement”) with certain holders of our Series A Convertible Preferred
Stock (each, a “Preferred Holder” and collectively, the “Preferred Holders”) constituting 58% of the outstanding
Series A Preferred Stock in connection with a dispute that arose between the parties with respect to certain rights under the Certificate
of Designations. Pursuant to the Settlement Agreement, we agreed to adjust the conversion price of the Series A Convertible Preferred
Stock to $0.21 and the parties agreed to terminate and deem null and void that certain Securities Purchase Agreement, dated as
of May 14, 2014, by and among the Preferred Holders and the other parties signatories thereto, with respect to the Preferred Holders.
The Preferred Holders, constituting the holders of at least a majority of the outstanding Preferred Shares (the “Required
Holders”), agreed and consented to an amendment and restatement of the Certificate of Designations. The parties also agreed
to customary releases and a covenant not to sue as further contained in the Settlement Agreement. Accordingly, on November 21,
2019, we filed an Amended and Restated Certificate of Designation (the “Amended and Restated Certificate”) for our
Series A Convertible Preferred Stock. The amendments, among other things, had the effect of setting the conversion price of the
Series A Convertible Preferred Stock at $0.21.
Between May 18 and June 24, 2020, the Company
issued 1,571,428 shares of Common Stock in exchange for 330 shares of Series A Convertible Preferred Stock at a conversion price
of $0.21 per share.
On January 9, 2020, the Company issued
3,171, 428 shares of the Common stock in exchange for 667 shares of Series A Convertible Preferred Stock at a conversion price
of $0.21 per share.
Note 14: Stock Options
On September 18, 2015, the Company adopted
the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The 2015 Plan was approved by the Company’s
stockholders in September 2015. The 2015 Plan as approved by the stockholders authorized the issuance up to an aggregate of 150,000
shares of Common Stock. On December 14, 2015, the Board of Directors voted to amend the 2015 Plan to increase the total number
of shares that can be issued under the 2015 Plan by 1,293,334 from 150,000 shares to 1,443,334 shares. The increase in shares available
for issuance under the 2015 Plan was approved by stockholders on February 3, 2016. On May 18, 2017, the Board of Directors voted
to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 223,333 shares from 1,443,334
shares to an aggregate of 1,667,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by the
stockholders on July 25, 2017. On September 6, 2018, the Board of Directors voted to amend the 2015 Plan to increase the total
number of shares that can be issued under the 2015 Plan by 500,000 shares from 1,667,667 shares to an aggregate of 2,167,667 shares.
The increase in shares available for issuance under the 2015 Plan was approved by the Company’s stockholders on October 2,
2018.
On June 25, 2020, the Company granted options
to purchase 185,000 shares of Common Stock to certain employees and granted options to purchase 445,000 shares of Common Stock
to consultants for services. These stock options generally vest in three years. The fair value of these options was determined
to be $2,649,379 using the Black-Scholes option pricing model based on the following assumptions:
Exercise Price
|
$2.61 - $10.00
|
Dividend Yield
|
0%
|
Volatility
|
122%
|
Risk-free interest rate
|
0.31%
|
Expected life of options
|
5.0 years
|
The following table summarizes the changes
in the Company’s stock option plan during the six months ended June 30, 2020:
|
|
Options Outstanding Number Of Shares
|
|
|
Exercise Prices Per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Aggregate Intrinsic Value
|
|
Balance at December 31, 2019
|
|
|
1,289,866
|
|
|
$
|
1.99 - 12.00
|
|
|
|
6.49 years
|
|
|
$
|
7.18
|
|
|
|
–
|
|
Options Granted
|
|
|
630,000
|
|
|
$
|
2.61 - 10.00
|
|
|
|
4.99 years
|
|
|
$
|
5.08
|
|
|
|
–
|
|
Options Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Options Cancelled
|
|
|
2,000
|
|
|
$
|
1.99
|
|
|
|
3.69 years
|
|
|
$
|
1.99
|
|
|
|
–
|
|
Options Expired
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Balance at June 30, 2020
|
|
|
1,917,866
|
|
|
$
|
1.99 - 10.00
|
|
|
|
2.26 years
|
|
|
$
|
3.49
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2019
|
|
|
1,176,416
|
|
|
$
|
1.99 - 9.00
|
|
|
|
6.25 years
|
|
|
$
|
7.67
|
|
|
|
–
|
|
Exercisable June 30, 2020
|
|
|
1,321,142
|
|
|
$
|
1.99 - 3.17
|
|
|
|
1.12 years
|
|
|
$
|
2.69
|
|
|
|
–
|
|
During the three and six months ended
June 30, 2020, the Company recognized $328,497 and $352,311, respectively in share-based compensation expense. During the three
and six months ended June 30, 2019, the Company recognized $80,800 and $116,549, respectively in share-based compensation expense.
The unvested share-based compensation as of June 30, 2020 was $2,383,856 which will be recognized through the second quarter of
2025 assuming the underlying grants are not cancelled or forfeited.
Note 15: Warrants
The Company has warrants outstanding to
purchase up to 5,274,208 and 11,124,405 shares as of June 30, 2020 and December 31, 2019, respectively.
On February 19, 2019, the Company entered
into a securities purchase agreement with a certain accredited investor pursuant to which we sold 945,894 shares of Common Stock
and warrants to purchase up to 945,894 shares of our Common Stock, or the registered warrants, to such investor (the “February
2019 Offering”). The Company received $1,757,552 in net proceeds from this offering. Each share of Common Stock was accompanied
by a registered warrant to purchase one share of Common Stock at an exercise price of $2.12. Each share of Common Stock and accompanying
registered warrant were sold at a combined purchase price of $2.12. The shares of Common Stock and registered warrants were purchased
together and were issued separately and were immediately separable upon issuance. In a concurrent private placement, the Company
also sold to the purchaser in the February 2019 Offering, warrants to purchase up to 945,894 shares of our Common Stock, or the
private warrants.
In connection with the February 2019 Offering
and concurrent private placement, we entered into the Amendment, Waiver and Consent Agreement with certain holders of our August
2018 Secured Convertible Notes. Pursuant to the Amendment, Waiver and Consent Agreement, such holders agreed to amend the notes
purchase agreement, waive any applicable rights and remedies under the notes purchase agreement, and consent to the February 2019
Offering and concurrent private placement. In consideration for such Amendment, Waiver and Consent Agreement, we agreed to issue
such holders warrants to purchase up to an aggregate amount of 1,800,000 shares of our Common Stock. Such warrants have an exercise
price of $2.55 per share, will become exercisable commencing six months and one day from the date of issuance and will expire five
(5) years from the date of issuance.
The allocation of carrying basis between
the Warrants issued and the August 2018 Secured Convertible Notes was determined based on relative valuation. The carrying basis
attributable to the Warrants to acquire Common Stock was $1,287,962 and was calculated using the Black-Scholes option pricing model.
On July 22, 2019, the Company entered into
an amendment, waiver and consent agreement (the “Amendment, Waiver and Consent”) with certain holders constituting
(i) a majority-in-interest of the holders of the August 2018 Secured Convertible Notes and (ii) 51% in interest of the shares of
Common Stock issued pursuant to a securities purchase agreement, dated as of January 8, 2018, by and among the Company and the
purchasers identified on the signature pages thereto (the “January 2018 Purchase Agreement”). Pursuant to the Amendment,
Waiver and Consent, such holders have agreed to (i) amend the definition of “Exempt Issuance” in each of the August
2018 Purchase Agreement and January 2018 Purchase Agreement to include an agreement to issue or announce the issuance or proposed
issuance of Common Stock or Common Stock Equivalents (as that term is defined in each of the August 2018 Purchase Agreement and
January 2018 Purchase Agreement) in a public offering for an effective per share purchase price of Common Stock of less than $2.50
(the “Offering”), (ii) waive any applicable rights and remedies under the August 2018 Purchase Agreement and January
2018 Purchase Agreement, and (iii) consent to the Offering. In consideration for the Amendment, Waiver and Consent, the Company
agreed to reduce the conversion price of the Notes from $2.50 per share of Common Stock to $1.515 (the “Note Amendment”)
and issue all of the purchasers under the August 2018 Purchase Agreement warrants to purchase up to an aggregate of 1,800,000 shares
of our Common Stock (the “Waiver Warrants”). The Waiver Warrants will have an exercise price of $1.14 per share, will
become exercisable commencing six months and one day from the date of issuance and will expire five (5) years from the date of
issuance.
On September 18, 2019, the Company entered
into a private transaction (the “2019 Private Transaction”) pursuant to the Agreement with the holder of the Original
Warrants. The Original Warrants were originally issued on February 19, 2019, to purchase an aggregate of 945,894 shares of Common
Stock at an exercise price of $2.12 per share and were to expire on February 19, 2020.
Pursuant to the Agreement, the holder of
the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and
the Company would amend the Original Warrants to reduce the exercise price thereof to $0.76. The Company received $718,879 from
the exercise of the Original Warrants before paying the placement agent fee of $50,321. The induced exercise resulted in the Company
recognizing and recording an “imputed dividend” of $181,884.
In connection with a private placement,
the Company issued to the Investor warrants exercisable for one share of Common Stock for an aggregate of 477,474 shares of Common
Stock at an exercise price of $0.76 per share. Each Warrant will be immediately exercisable on the date of its issuance and will
expire five years from the date it becomes exercisable. Subject to limited exceptions, a holder of a Warrant will not have the
right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of
4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such exercise. The Special Equities
Group, LLC, a division of Bradley Woods & Co. LTD, acted as placement agent and will receive a cash fee of $35,280 and warrants
to purchase 46,421 shares at an exercise price of $0.836 per share.
On December 16, 2019, the Company entered
into Warrant Exercise Agreements (the “Exercise Agreements”) with certain of the holders of the Existing Warrants to
purchase an aggregate of 3,646,135 shares of Common Stock (the “Exercising Holders”). Pursuant to the Exercise Agreements,
the Exercising Holders and the Company agreed that, subject to any applicable beneficial ownership limitations, the Exercising
Holders would exercise their Existing Warrants (the “Investor Warrants”) for shares of Common Stock underlying such
Existing Warrants (the “Exercised Shares”) at a reduced exercise price of $0.21 per share of Common Stock. In order
to induce the Exercising Holders to cash exercise the Investor Warrants, the Exercise Agreements provide for the issuance of new
warrants to purchase up to an aggregate of approximately 3,646,135 shares of Common Stock (the “New Warrants”), with
such New Warrants to be issued in an amount equal to the number of the Exercised Shares underlying any Investor Warrants. The New
Warrants are exercisable six months and one day after issuance and terminate on the date that is five years following the initial
exercise date. The New Warrants have an exercise price per share of $0.3004, which was the Nasdaq Official Closing Price on December
13, 2019.
On January 22, 2020, the Company entered
into the Private Transaction pursuant to the Agreement with the holder of the Company’s Original Warrants. The Original Warrants
were originally issued on October 3, 2017, to purchase an aggregate of 500,000 shares of Common Stock, at an exercise price of
$3.90 per share and were to expire in October 2022.
Pursuant to the Agreement, the holder of
the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and
the Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (the average closing price of the Common
Stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the Agreement). The Company received
approximately $170,000 from the exercise of the Original Warrants.
The placement agent received warrants to
purchase 50,000 shares at an exercise price of $0.34 per share.
Pursuant to the SPA described in Note 10,
the Company issued to the note holders warrants to purchase 65,476,191 shares of Common Stock, exercisable for a period of five
years at an initial exercise price of $0.26 per share.
The placement agent received warrants to
purchase 6,547,619 shares at an exercise price of $0.26 per share.
On May 15, 2020 stockholders of the Company
approved the reduction in warrants exercise price for the 2020 Convertible Notes holders to $0.21. During the three months ended
June 30, 2020, certain warrant holders exercised warrants for 29,000,526 shares of Common Stock at $0.21 per share in cash. Certain
other warrant holders exercised 41,508,189, warrants on a cashless basis, resulting in the issuance of 37,449,140 shares of Common
Stock.
Estimated fair value of the exercised warrants
immediately before the exercise was $219,034,621. Estimated fair value of warrants outstanding at June 30, 2020 was $3,179,569.
During the three months ended June 30, 2020 the Company recognized revaluation loss associated with all warrants issued to the
note holders and placement agent of $208,760,698.
The fair values of derivative warrants attached to the 2020
Convertible Notes were determined based on Level 3 inputs, using the Black-Scholes-Merton model with standard valuation inputs. The
valuation inputs used to value the warrants at March 31, 2020 included expected volatility of 89.91%, and annual interest rate
of 0.37%. The valuation inputs for the warrants outstanding at June 30, 2020 included expected volatility of 113.47%, and annual
risk-free interest rate of 0.28%.
On May 15, 2020 stockholders of the Company approved the reduction
of all previously issued warrants held by the 2020 Convertible Notes holders exercise price to $0.21. The repricing of the warrants
resulted in a deemed dividend of $1,840,384, which was charged to additional paid in capital for warrants issued in connection
with prior equity instruments and a warrant repricing loss of $744,321 recorded in Company’s consolidated statements of operations,
if the warrants were issued in connection with prior debt transaction. All warrants were repriced using standard Black-Scholes-Merton
valuation model. The valuation inputs for warrant repricing exercise included expected volatility varying between 98.56% and 203.81%
and annual risk-free interest rate of approximately 0.2%.
During the three months ended June 30, 2020, certain warrant
holders exercised 655,757 warrants for shares of Common Stock at $0.21 per share in cash. Certain other warrant holders exercised
8,506,706 warrants on a cashless basis, resulting in the issuance of 7,551,288 shares of Common Stock.
On May 25, 2020, the Company issued to an individual and his
management company 2,284,172 warrants to purchase shares of Common Stock at $1.39 per share for his involvement with the production
and distribution of a television series being developed by the Company. The warrants have a 10-year term and are fully vested upon
issuance. The warrants become immediately exercisable in whole upon the earlier of May 21, 2021 or the first date the series is
exhibited on television or is otherwise available for viewing through a streaming service or otherwise on the internet. The Company
anticipates the warrants will become exercisable by December 31, 2020. The warrants were valued at $3,174,806 using the Black-Scholes
option pricing model. The warrants were issued as an advance payment against participation amounts that will become due to the
individual upon the performance of the series. The warrants are being accounted as non-employee compensation expense which has
been recorded as prepaid participation expense over the expected exercise period. As of June 30, 2020, $519,514 was recorded as
prepaid participation expense. The valuation inputs for the warrants included expected volatility of 253.01%, and annual risk-free
interest rate of 0.7%.
The following table summarizes the changes
in the Company’s outstanding warrants during the six months ended June 30, 2020:
|
|
Warrants Outstanding Number Of Shares
|
|
|
Exercise Prices Per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price Per Share
|
|
Balance at December 31, 2019
|
|
|
11,124,405
|
|
|
$
|
3.30 - 6.00
|
|
|
|
4.37 years
|
|
|
$
|
1.74
|
|
Warrants Granted
|
|
|
74,357,982
|
|
|
$
|
0.21 - 1.39
|
|
|
|
4.88 years
|
|
|
$
|
0.25
|
|
Warrants Exercised
|
|
|
80,208,179
|
|
|
$
|
0.21 - 5.30
|
|
|
|
4.62 years
|
|
|
$
|
0.25
|
|
Warrants Expired
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Balance at June 30, 2020
|
|
|
5,274,208
|
|
|
$
|
0.21 - 5.30
|
|
|
|
6.66 years
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2019
|
|
|
7,176,620
|
|
|
$
|
0.76 - 6.00
|
|
|
|
3.77 years
|
|
|
$
|
2.52
|
|
Exercisable June 30, 2020
|
|
|
2,940,036
|
|
|
$
|
0.21 - 5.30
|
|
|
|
3.71 years
|
|
|
$
|
1.59
|
|
Note 16: Income Taxes
The Company accounts for income taxes in
accordance with Accounting Standards Codification Topic 740 Income Taxes (“Topic 740”), which requires the recognition
of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have
been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset
to an amount that is more likely than not to be realized.
Topic 740 provides guidance on the accounting
for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether
it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.
If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the
financial statements.
The Company includes interest and penalties
arising from the underpayment of income taxes in the consolidated statements of operation in the provision for income taxes. As
of June 30, 2020, and December 31, 2019, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in
the U.S. federal jurisdiction and in the state of California and Massachusetts. The Company is currently subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
Note 17: Commitment and Contingencies
In February 2016, the FASB issued Accounting
Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise
from leases on the balance sheet. For practically all leases, a lessee should recognize in the statement of financial position
a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying
asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018.
In July 2018, the FASB issued ASU 2018-11,
Leases (“Topic 842”), Targeted Improvements, which allows for an additional optional transition method where comparative
periods presented in the financial statements in the period of adoption will not be restated and instead those periods will be
presented under existing guidance in accordance with ASC 840, Leases. Management will use this optional transition method. As of
January 1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization
of $124,070, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.
As of June 30, 2020, weighted-average lease
term for operating leases equals to 76.52 months. Weighted-average discount rate equals to 10.31%.
On February 6, 2018, the Company entered
into an operating lease for 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212
pursuant to a 91-month lease that commenced on May 25, 2018. We will pay rent of $364,130 annually, subject to annual escalations
of 3.5%.
Effective January 21, 2019, the Company
entered into a sublease for the 6,969 square feet of general office space located at 131 South Rodeo Drive, Suite 250, Beverly
Hills, CA 90212 pursuant to an 83-month sublease that commenced on February 4, 2019, 2019. The subtenant will pay us rent of $422,321
annually, subject to annual escalations of 3.5%. Since on or about April 2020, the subtenant has failed to make any rent payments.
Consequently, the Company, which had been passing through the subtenant’s rental payments to the landlord declined to pay
the rent due. The Company is engaged in ongoing discussions with both the subtenant and the landlord to resolve the default by
the subtenant.
On January 30, 2019, we entered into an
operating lease for 5,838 square feet of general office space at 190 N. Canon Drive, Suite 400, Beverly Hills, CA 90210 pursuant
to a 96-month lease that is scheduled to commence on August 1, 2019. We will pay rent of $392,316 annually, subject to annual escalations
of 3.5%. Due to the ongoing pandemic, the Company has not been able to lawfully enjoy the use of its office space and the majority
of the employees are working remotely. Consequently, the Company has elected to defer the payment of rent. We are currently in
ongoing discussions with our landlord regarding a rent deferral or possible abatement.
In addition, the Company has contractual
commitments for employment agreements of certain employees.
Rental expenses incurred for operating
leases during the three months ended June 30, 2020 and June 30, 2019 were $207,839 and $176,664, respectively. Rental expenses
incurred for operating leases during the six months ended June 30, 2020 and June 30, 2019 were $415,678 and $321,457, respectively.
During the three months ended June 30, 2020, we received sub-lease income of $121,070. During the six months ended June 30, 2019,
we received sub-lease income of $238,484.
The following is a schedule of future minimum contractual obligations
as of June 30, 2020, under the Company’s operating leases and employment agreements:
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
Thereafter
|
|
|
Total
|
|
Operating Leases
|
|
$
|
347,557
|
|
|
$
|
744,056
|
|
|
$
|
840,125
|
|
|
$
|
871,679
|
|
|
$
|
904,423
|
|
|
$
|
1,871,252
|
|
|
$
|
5,579,092
|
|
Employment Contracts
|
|
|
309,494
|
|
|
|
421,629
|
|
|
|
322,950
|
|
|
|
282,581
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,336,654
|
|
Consulting Contracts
|
|
|
265,000
|
|
|
|
323,333
|
|
|
|
150,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
738,333
|
|
|
|
$
|
922,051
|
|
|
$
|
1,489,018
|
|
|
$
|
1,313,075
|
|
|
$
|
1,154,260
|
|
|
$
|
904,423
|
|
|
$
|
1,871,252
|
|
|
$
|
7,654,079
|
|
Note 18: Related Party Transactions
On April 21, 2016, the Company entered
into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward,
the Company’s Chief Executive Officer. The Company entered into a customary merchandise license agreement with AHAA for the
use of characters and logos related to Warren Buffett’s Secret Millionaires Club and Stan Lee’s Mighty 7
in connection with certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry,
and the Company earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. No amounts
were earned during the three months ended March 31, 2020 and 2019, under this agreement as there were no revenue generated during
the periods.
On August 31, 2018, Llama entered into
an animation production services agreement with Mr. Heyward for services as a producer for which he is to receive $124,000 through
the course of production of the Company’s animated series Llama Llama. Season 2. As of December 31, 2019, Mr. Heyward
was paid $124,000. No further amounts are due or paid during the six months ended June 30, 2020.
Pursuant to his employment agreement dated
November 16, 2018, Mr. Heyward is entitled to an Executive Producer fee of $12,400 per half hour episode for each episode he provides
services as an executive producer. The first identified series under this employment agreement is Rainbow Rangers. As of
December 31, 2019, 26 half hours had been delivered and accordingly Mr. Heyward was owed $322,400, which is included in the Due
To Related Party line item on our consolidated balance sheet. The second identified series under this employment agreement is Rainbow
Rangers Season 2. As of December 31, 2019, 13 half hours had been delivered and accordingly Mr. Heyward was owed $161,200,
which is included in the Due To Related Party line item on our consolidated balance sheet. Both of these amounts were paid on March
17, 2020.
On September 17, 2019, Mr. Heyward purchased
$500,000 of the August 2018 Secured Convertible Notes from another holder. The Company did not receive any proceeds from this transaction.
On
October 2, 2019, Mr. Heyward purchased 1,000,000 shares of Common Stock for an aggregate purchase price of $760,000, or $0.76 per
share.
On March 11, 2020, Mr. Heyward purchased
$1,000,000 of the 2020 Convertible Notes with an original discount of $250,000.
On June 19, 2020, Mr. Heyward received
5,658,474 shares of Common Stock upon the cashless exercise of 6,119,048 warrants.
On June 23, 2020, Mr. Heyward
received 5,952,381 shares of Common Stock upon conversion of $1,250,000 of 2020 Convertible Notes.
As of June 30, 2020, Andy Heyward is owed
$91,006 for reimbursable expenses which are included in the Due To Related Parties line item on our condensed consolidated balance
sheet.
Note 19: Subsequent Events
On June 8, 2020, the Company received $55,011
for the exercise of 16,670 warrants at $3.30 per share. The shares were issued on July 21, 2020 accordingly the $55,011 is included
in accrued expenses at June 30, 2020.
On July 15, 2020, the Company issued 32,609
shares of Common Stock valued at $2.30 per share to a provider for marketing services.
On July 21, 2020, the Company entered into
a two-year production, marketing and sale of animation cells agreement with AHAA. The Company will contribute characters which
are owned and/or controlled by the Company. AHAA will be responsible for providing the funding for the project and the artwork
for the cells as well as all operational functions and costs. AHAA will pay the Company a 15% royalty on all cell sales of any
Company owned or controlled property.
On July 22, 2020, the Company issued 124,449
shares of Common Stock valued at $2.30 per share to the same provider for marketing services.
On or about July 6, 2020, the
Company and POW! entered into an agreement to form a joint venture to be called “Stan Lee Universe, LLC” (the “JV”).
The JV will hold worldwide rights, on a perpetually renewing basis, to the name, physical likeness, and physical signature of Stan
Lee. Further, the JV will have access to the POW! catalogue of intellectual property, created by Stan Lee, to exploit in live-action
and animated motion pictures, television, online, digital, publishing, comic book, and merchandising and licensing. The agreement
is subject to due diligence and documentation. As currently agreed, the Company will be the managing partner of the JV.
On August 6, 2020, the Board of Directors approved, subject to stockholder approval, a proposed amendment to the Company’s Articles of Incorporation, as amended, to increase the authorized number of shares of the Company’s common stock from 233,333,334 to 400,000,000 in order to enable the Company to efficiently take advantage of accretive opportunities, largely targeting acquisitions, which may arise and provide enriched shareholder value as the media industry undergoes a period of consolidation and the 2020 Incentive Plan, which (if approved by the Company’s stockholders) will replace the Company’s 2015 Amended Incentive Plan for all future equity-based incentive awards and enable the Company to attract, motivate, and retain qualified individuals upon whom its business and accretive growth strategy depends.
On July 21, 2020, 16,670 warrants
were exercised at $3.30 per share.