Notes to Condensed Financial Statements
June 30, 2021 (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 Stan Lee’s Superhero
Kindergarten produced with Stan Lee’s Pow! Entertainment, and Oak Productions. Arnold Schwarzenegger lends his voice as
the lead and is also an Executive Producer on the series. The show is being broadcast in the United States on the Company’s wholly-owned
distribution outlet, Kartoon Channel!. Other newer series 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. The Company’s library titles include the award-winning Baby Genius,
adventure comedy Thomas Edison's Secret Lab® and Warren Buffett’s Secret Millionaires Club, created with and starring
iconic investor Warren Buffett, which is distributed across the Company’s Genius Brands Network on Comcast’s Xfinity on Demand,
AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and Zumo, as well as Connected TV. In July 2020, the Company entered
into a binding term sheet with POW, Inc. (“POW!”) in which the Company agreed to form an entity with POW! to exploit certain
rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called “Stan Lee
Universe, LLC”. POW! and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021. This agreement
enables the Company to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and
animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over
100 original Stan Lee creations, from which Genius Brands plans to develop and license multiple properties each year. The Company is in
production on a new animated series starring Shaquille O’Neal called Shaq’s Garage.
In addition, the Company acts as licensing agent
for Penguin Young Readers, a division of Penguin Random House LLC which owns or controls the underlying rights to Llama Llama, leveraging
the Company’s existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.
The Company commenced operations in 2006, assuming
all the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement between the Company and Genius Products,
Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “Baby Genius,” “Kid Genius,”
“123 Favorite Music” and “Wee Worship,” and all then existing productions under those titles. In 2011, the Company
reincorporated in Nevada and changed its name to Genius Brands International, Inc. (the “Reincorporation”). In connection
with the Reincorporation, the Company changed its trading symbol to “GNUS.”
In 2013, the Company entered into an Agreement
and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limited liability company
(“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member of A Squared (the “Parent
Member”), and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“Acquisition Sub”). Upon closing
of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company.
Liquidity
During the six months ended June 30, 2021, the
Company’s cash and cash equivalents and marketable security positions increased by $38,308,505, net. Cash and cash equivalents were
used to purchase marketable securities of $ during the six months ended June 30, 2021. Cash in excess of immediate requirements
is invested in accordance with the Company’s investment policy, primarily with a view to liquidity and capital preservation. Accordingly,
available for sale securities, consisting principally of corporate and government debt securities stated at fair value, are also available
as a source of liquidity.
Historically, the Company has incurred net losses.
For the three months ended June 30, 2021 and June 30, 2020, the Company reported net losses of $7,383,978 and $383,258,002, respectively.
For the six months ended June 30, 2021 and June 30, 2020, the Company reported net losses of $83,642,921 and $389,093,946, respectively.
The Company reported net cash used in operating activities of $8,972,775 and $2,331,260 for the six months ended June 30, 2021 and June
30, 2020, respectively. As of June 30, 2021, the Company had an accumulated deficit of $553,200,246 and total stockholders’ equity
of $171,621,715. As of June 30, 2021, the Company had current assets of $152,521,636, including cash and cash equivalents of $58,372,335,
and current liabilities of $15,507,100. The Company had working capital of $137,014,536 as of June 30, 2021, compared to working capital
of $101,387,183 as of December 31, 2020.
On January 28, 2021, the Company entered into
letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to exercise certain
outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of the Company’s
common stock at their original exercise price of $1.55 per share (the “Exercise”). The Company received approximately $61.6
million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent
and received a cash fee of approximately $4.3 million. In consideration for the exercise of the Existing Warrants for cash, the exercising
holders received new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”)
at an exercise price of $2.37 per share and with an exercise period of five years from the initial issuance date. Pursuant to the Letter
Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends and other language typical
for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise if no resale registration
statement covering the common stock underlying the New Warrants is effective after six months), were exercisable immediately, and the
Company was required to register the shares of common stock underlying the New Warrants for resale.
As more fully discussed in Note 3 on February
1, 2021, the Company through GBI Acquisition LLC, a New Jersey limited liability company, and 2811210 Ontario Inc., a company organized
under the laws of the Province of Ontario, two wholly-owned subsidiaries of the Company, purchased the outstanding
equity interests of ChizComm Ltd., a corporation organized in Canada and ChizComm USA Corp., a New Jersey corporation.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited 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 Entertainment LLC, Llama
Productions LLC, Rainbow Rangers Productions LLC, Superhero Kindergarten LLC, ChizComm Beacon Media LLC, ChizComm Ltd., Stan Lee Universe
LLC and Shaq’s Garage Productions LLC. 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 and ASC 810 Consolidation.
Use of Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
Foreign Currency
The Company considers the
U.S. dollar to be its functional currency for its United States based operations. The Company considers the Canadian dollar to be its
functional currency for its Canada based operation. Accordingly, the financial information is translated from the Canadian dollar to the
U.S. dollar for inclusion in the Company’s consolidated financial statements. Revenue and expenses are translated at average exchange
rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting
translation adjustments are included as a component of accumulated other comprehensive income (loss), net in stockholders’ equity.
Foreign exchange transaction
gains and losses are included in other income (expense), net in the consolidated statements of operations.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments
with initial maturities of three months or less to be cash equivalents. As of June 30, 2021, and December 31, 2020, the Company had cash
and cash equivalents of $58,372,335 and $100,456,324, respectively.
Marketable Debt Securities
The Company purchases high
quality, investment grade securities from diverse issuers with a weighted average credit rating of AA/Aa2. Management determines
the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently,
the Company classifies its investments in marketable securities as “available-for-sale” and records these investments at fair
value. The securities are available to support current operations and, accordingly, the Company classifies the investments as current
assets without regard to their contractual maturity.
Unrealized gains or losses
on available-for-sale securities for which the Company expects to fully recover the amortized cost basis are recognized in accumulated
other comprehensive (loss) income, a component of stockholders’ equity. If the Company intends to sell a debt security, or it is
more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference
between the security's amortized cost basis and its fair value at the balance sheet date would be recognized as a loss in the consolidated
statements of operations.
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 $54,840 as of June 30, 2021 and $43,676 as of December
31, 2020.
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
Effective January 1, 2019, the Company adopted
ASC 842, Leases, using the modified retrospective transition method applied at the effective date of the standard.
The Company determines at contract inception whether the arrangement
is a lease based on its ability to control a physically distinct asset and determines the classification of the lease as either operating
or finance. For all leases, the Company combines all components of the lease including related nonlease components as a single component.
Operating leases are reflected as operating right-of-use (“ROU”) assets and operating lease liabilities in the consolidated
balance sheets. The Company does not have any finance leases.
Operating lease ROU assets and liabilities are
recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not
provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining
the present value of lease payments. The Company estimates the incremental borrowing rate to reflect the profile of collateralized borrowing
over the expected term of the leases based on the information available at the later of the initial date of adoption, or the lease commencement
date.
The operating lease ROU asset also includes any
lease payments made prior to lease commencement date and excludes lease incentives. Lease terms may include options to extend or terminate
the lease when the Company is reasonably certain that it will exercise the option. Lease expense is recognized on a straight-line basis
over the lease term in the consolidated statement of operations. Lease incentives are recognized as a reduction to the lease expense on
a straight-line basis over the underlying lease term.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price
over the estimated fair value of net assets acquired in business combinations accounted for by the acquisition method. In accordance with
FASB ASC 350, Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives
and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. The Company
completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill
impairment, the Company is required to estimate the fair market value of each of our reporting units, of which the Company has one. While
the Company may use a variety of methods to estimate fair value for impairment testing, its primary method is discounted cash flows. The
Company estimates future cash flows and allocations of certain assets using estimates for future growth rates and judgment regarding the
applicable discount rates. Changes to judgments and estimates could result in a significantly different estimate of the fair market value
of the reporting units, 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 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.
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
The Company accounts for revenue according to
standard FASB ASC 606, Revenue from Contracts with Customers. The Company has identified the following six material and distinct
performance obligations:
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License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability be played or aired. Functional intellectual property derives a substantial portion of its utility from its significant standalone functionality.)
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License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs associated with its animated content.)
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Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.)
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Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.)
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Fixed fee advertising revenue generated from the Genius Brands Network
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Variable fee advertising revenue generated from the Genius Brands Network
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As a result of the change, beginning January 1,
2018, the Company began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees, the
Company recognizes fixed revenue upon delivery of content and the start of the license period. For functional IP contracts with a variable
component, the Company estimates revenue such that it is probable there will not be a material reversal of revenue in future periods.
Revenue under these types of contracts was previously recognized when royalty statements were received. The Company began recognizing
revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition
pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.
The Company sells advertising on its App and OTT
based “Kartoon 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 provides media and advertising services
to clients. Revenue is recognized in the month that the services are performed.
The Company also purchases advertising for clients
on linear and across digital and streaming platforms and receives a commission on these purchases. Advertising commissions are recognized
as revenue in the month the advertising is displayed.
The Company recognizes revenue related to product
sales when the Company completes its performance obligation, which is when the goods are transferred to the buyer.
Direct Operating Costs
Direct operating costs include costs of the Company’s
product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related to agreements
with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which the Company
is obligated to share net profits of the properties on which they have rendered services.
Share-Based Compensation
The Company issues stock-based awards to employees
and non-employees that are generally in the form of stock options or restricted stock units (“RSUs”). Share-based compensation
cost is recorded for all options and awards of non-vested stock based on the grant-date fair value of the award.
The fair value of stock options is estimated at
the date of grant using the Black-Scholes option pricing model, which requires management to make assumptions with respect to the fair
value on the grant date. The assumptions are as follows: (i) the expected term assumption of the award is based on the Company’s
historical exercise and post-vesting behavior (ii) the expected volatility assumption is based on historical and implied volatilities
of the Company’s common stock calculated based on a period of time generally commensurate with the expected term of the award; (iii)
the risk-free interest rates are based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent expected
term; (iv) and the expected dividend yields of the Company’s stock are based on history and expectations of future dividends payable.
In the case of RSUs the fair value is calculated based on the Company’s underlying common stock on the date of grant.
The Company recognizes compensation expense
over the requisite service period ratably, using the graded attribution method, which is in-substance, recognizing multiple awards
based on the vesting schedule. The Company has elected to account for forfeitures when they occur. The Company issues authorized
shares available for issuance under the 2015 and 2020 Plans upon employees’ exercise of their stock options.
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, 2021, the Company had three accounts with an uninsured balance of $56,601,018.
The Company’s investment portfolio consists
of investment-grade securities diversified among security types, industries and issuers. The investments are held and managed by a financial
institution that follows the Company’s investment policy. The Company’s policy limits the amount of credit exposure to any
one security issue or issuer and the Company believes no significant concentration of credit risk exists with respect to these investments.
For the three months ended June 30, 2021, the
Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 11% of the total
revenue. As of June 30, 2021, the Company had two customers whose accounts receivable exceeded 10% of total consolidated accounts receivable.
Those customers accounted for 62% of accounts receivable. For the six months ended June 30, 2021, the Company had one customer whose total
revenue exceeded 10% of the total consolidated revenue. That customer accounted for 34% of the total revenue.
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.
Fair value of financial instruments
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. FASB ASC 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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Level 1 - Observable inputs such as quoted prices for identical instruments
in active markets;
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Level 2 - Inputs other than quoted prices in active markets that are either
directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active; and
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Level 3 - Unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
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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 fair values of the available-for-sale securities
are generally based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services,
which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures.
Level II securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed
securities, United States Government securities, foreign government securities, and certain other asset-backed securities. For securities
not actively traded, the pricing services may use quoted market prices of comparable instruments or a variety of valuation techniques,
incorporating inputs that are currently observable in the markets for similar securities.
The following table summarizes the marketable
securities measured at fair value by level within the fair value hierarchy as of June 30, 2021:
Schedule of marketable security measured at fair value
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Level 1
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Level 2
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Total Fair Value
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Marketable investments:
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Corporate Bonds
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$
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–
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$
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45,254,451
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$
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45,254,451
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U.S. Treasury
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5,964,342
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–
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5,964,342
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U.S. agency and government sponsored securities
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–
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5,294,277
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5,294,277
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U.S. states and municipalities
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–
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11,150,277
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11,150,277
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Asset-Backed
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–
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12,729,147
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12,729,147
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Total
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$
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5,964,342
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$
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74,428,151
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$
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80,392,494
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Fair values were determined for each individual
security in the investment portfolio. The Company’s marketable securities are considered to be available-for-sale investments as
defined under ASC 320, Investments – Debt and Equity Securities. There were no impairment charges recorded for the marketable
securities. Refer to Note 4 for additional details. The fair values of the derivative warrants attached to the 2020 Convertible Notes
were determined using the Black-Scholes-Merton model (Level 2) with standard valuation inputs. Refer to Note 18 for additional details.
The fair value of the contingent earn-out liability was valued using Level 3 inputs. Refer to Note 3 for additional details.
The Company did not have any financial assets
and liabilities measured at fair value on a non-recurring basis as of June 30, 2021 or December 31, 2020.
Business Combinations
The Company allocates
the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired
based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill. The valuation of acquired assets and assumed liabilities requires significant judgment
and estimates, especially with respect to intangible assets. The valuation of intangible assets requires that the Company use valuation
techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted
cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs,
and discount rates. The Company estimates the fair value based upon assumptions management believes to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions
may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses
and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards
Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the
“incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance
for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new
model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit
losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans,
leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”)
debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they
do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The
ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure
requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October
16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company,
delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods.
Early adoption is permitted for interim and annual reporting periods. The Company is currently evaluating the effect that the ASU will
have on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06,
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update simplifies the accounting for
convertible instruments by removing certain separation models in Subtopic 470-20, Debt—Debt with Conversion and Other Options, for
convertible instruments. As part of the amendment, the embedded conversion features are no longer separated from the host contract for
convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives
and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. The FASB has eliminated the cash conversion
and beneficial conversion feature models. The FASB has also modified accounting rules relating to application of the scope exception from
derivative accounting. The amendments revise the guidance in ASC 815-40-25-10, to remove three out of seven conditions from the settlement
guidance, referred to as additional equity classification requirements. Following the above amendments, more convertible debt instruments
will be accounted for as a single liability measured at its amortized cost and more convertible preferred stock will be accounted for
as a single equity instrument measured at its historical cost, as long as no features require bifurcation and recognition as derivatives.
The amendments are effective for public business entities, excluding smaller reporting companies, for fiscal years beginning after December
15, 2021, including interim periods within those fiscal years. For all other entities, including smaller reporting companies the amendments
are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption
is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
The Company has adopted ASU No. 2020-06 starting January 1, 2021. The impact to the Company’s consolidated financial position, results
of operations and cash flows was not material as the Company does not have any outstanding convertible instruments.
Various other accounting pronouncements have been
recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries
and are not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.
Note 3: Acquisition of ChizComm Entities
On February 1, 2021, the Company through GBI Acquisition
LLC, a New Jersey limited liability company, and 2811210 Ontario Inc., a company organized under the laws of the Province of Ontario,
two wholly-owned subsidiaries of the Company, closed its previously announced acquisition pursuant to a Purchase and Sale Agreement (the
“Purchase Agreement”) with (i) Harold Aaron Chizick, (ii) Jennifer Mara Chizick, (iii) Wishing Thumbelina Inc. (“Wishing
Thumbelina”), and (iv) Harold Aaron Chizick and Jennifer Mara Chizick, the trustees of The Chizsix (2019) Family Trust for and on
behalf of Harold Aaron Chizick, Jennifer Mara Chizick and Jay Mark Sonshine, trustees of The Chizsix (2019) Family Trust, (the “Trustees”)
(each a “Seller” and, collectively, “Sellers”), pursuant to which the Company acquired from the Sellers all of
the issued and outstanding equity interests of ChizComm Ltd., a corporation organized in Canada (“ChizComm Canada”), and ChizComm
USA Corp., a New Jersey corporation (“ChizComm USA” and, together with ChizComm Canada, “ChizComm”) (the “Acquisition”).
The following
table summarizes the fair value of the purchase price consideration paid to acquire ChizComm:
Total purchase price consideration paid
|
|
|
|
|
|
Amount
|
|
Cash consideration at closing
|
|
$
|
8,500,000
|
|
Equity consideration at closing
|
|
|
3,527,027
|
|
Fair value of Earn-Out shares
|
|
|
7,210,000
|
|
Total
|
|
$
|
19,237,027
|
|
Total consideration paid by the Company in the
transaction at closing consisted of $8.5 million in cash and 1,980,658 shares (the “Closing Shares”) of the Company’s
common stock with a value of approximately $3.5 million, both as subject
to certain purchase price adjustments. Of the Closing Shares, 674,157 shares of common stock, with a value of approximately $1.2 million,
were deposited into an escrow account to cover potential post-closing indemnification obligations of Sellers under the Purchase Agreement.
Additionally, the Purchase Agreement also provides for the issuance of additional shares of common stock with an aggregate value of up
to $8.0 million that may be issued to the Sellers if certain EBITDA and performance levels are achieved within a four-year period commencing
on the date of the Purchase Agreement (Earn-Out).
The Acquisition
was approved by the board of directors of each Company. Transaction costs incurred relating to this acquisition including legal and accounting
totaled $539,806, which is included in general and administrative expenses on the statement of operations. The acquisition expands the
Company’s revenue streams into media and advertising services.
The Company
has determined that the Acquisition constitutes a business acquisition as defined by Accounting Standards Codification (“ASC”)
805, Business Combinations. Accordingly, the assets acquired and the liabilities assumed in the transaction were recorded at their
estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase
method of accounting in accordance with ASC 805. The Company’s purchase price allocation was based on an evaluation of the appropriate
fair values and represent managements best estimate based on available data. Fair values are determined based on the requirements of ASC
820, Fair Measurements and Disclosures (“ASC 820”).
The Earn-Out
arrangement meets the liability classification criteria outlined in ASC 480, Distinguishing Liabilities from Equity, as it is not
indexed to the Company’s own shares and is classified as a liability in the accompanying balance sheet. Liability classified contingent
consideration is measured initially at the fair value on the acquisition date and is remeasured at each reporting period. Subsequent differences
between the estimated fair value of the Earn-Out recorded at the acquisition date and the remeasurement date will be reflected as a charge
or credit, as applicable, in the statement of operations. As of June 30, 2021, there were no material changes to the assumptions used
on the acquisition date to value the contingent consideration, therefore no change in value was recorded.
The Company
completed and finalized the purchase price allocation during the three months ended June 30, 2021. The Company recorded assets acquired
and liabilities assumed at their respective fair values. The following table summarizes the final fair value of assets acquired and liabilities
assumed:
Assets acquired and liabilities assumed
|
|
|
|
|
Cash
|
|
$
|
711,123
|
|
Accounts Receivable
|
|
|
6,150,919
|
|
Prepaid Expenses
|
|
|
56,594
|
|
Lease Deposits
|
|
|
12,390
|
|
Fixed Assets
|
|
|
147,689
|
|
Trade Name
|
|
|
3,430,000
|
|
Customer Relationships
|
|
|
6,140,000
|
|
Non-Compete Agreements
|
|
|
60,000
|
|
Goodwill
|
|
|
9,607,027
|
|
Accounts Payable and Accrued Expenses
|
|
|
(7,006,350
|
)
|
Payroll Tax Liability
|
|
|
(72,365
|
)
|
|
|
|
|
|
Total Consideration
|
|
$
|
19,237,027
|
|
The identifiable intangible assets acquired of
$9,630,000 was composed of $3,430,000 for ChizComm’s trade name with an indefinite remaining economical life, $6,140,000 for ChizComm’s
customer base with a remaining useful life of approximately 12 years, and $60,000 for ChizComm’s non-compete agreements with a remaining
economic life of 3 years.
Valuation Methodology
Customer relationships
for ChizComm were valued by performing a discounted cash flow analysis using the multiperiod excess earnings method. This method includes
discounting the projected cash flows associated with existing customers based primarily upon customer turnover data over its expected
life and considers the operating expenses and contributory asset charges associated with servicing such existing customers. Projected
cash flows attributable to the customer relationships were discounted to their present value at a rate commensurate with the perceived
risk. The useful lives of customer relationships are estimated based primarily upon the present value of cash flows attributable to the
customer relationships.
Trademarks and trade
names for ChizComm were valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a
company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it
did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset.
The resulting annual royalty payments are tax-affected and then discounted to present value.
Non-compete agreements
were valued using a with and without method. Under this method, estimated prospective financial information (“PFI”) is calculated
with the existence and ownership of an intangible asset and compared to the PFI in the absence of the ownership of the intangible asset.
The after-tax differential PFI attributable to the intangible asset is then discounted to its present value.
Assumptions used in forecasting
cash flows for each of the identified intangible assets included consideration of the following:
|
·
|
Historical performance including sales and profitability.
|
|
·
|
Business prospects and industry expectations.
|
|
·
|
Estimated economic life of asset.
|
|
·
|
Acquisition of new customers.
|
|
·
|
Attrition of existing customers.
|
The acquisition was treated for tax purposes as
a nontaxable transaction and as such, the historical tax basis of the acquired assets, net operating loss, and other tax attributes
of ChizComm will carryover. As a result, no new goodwill for tax purposes was created in connection with the acquisition as there is no
step-up to the fair value of the underlying tax bases of the acquired net assets.
The following supplemental pro forma information
summarize the Company’s results of operations for the current reporting period, as if the Company completed the acquisition as of
the beginning of the annual reporting period.
Supplemental
pro forma information as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
2021
|
|
|
|
June 30,
2020
|
|
|
|
June 30,
2021
|
|
|
|
June 30,
2020
|
|
Total Revenues
|
|
$
|
2,342,205
|
|
|
$
|
1,293,956
|
|
|
$
|
4,758,768
|
|
|
$
|
6,963,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(7,383,978
|
)
|
|
|
(383,624,941
|
)
|
|
|
(84,269,062
|
)
|
|
|
(391,305,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Common Share (Basic and Diluted)
|
|
$
|
(0.02
|
)
|
|
$
|
(4.89
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(15.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding (Basic and Diluted)
|
|
|
300,646,819
|
|
|
|
78,503,414
|
|
|
|
293,969,462
|
|
|
|
24,690,154
|
|
Note 4: Marketable Securities
The Company classifies and accounts for its marketable
debt securities as available-for-sale and the securities are stated at fair value.
The investments in marketable securities had an adjusted cost basis
of $80,902,119 and a market value of $80,392,494 as of June 30, 2021.
Summary of Investment in marketable security
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Cost
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
Corporate Bonds
|
|
$
|
45,625,483
|
|
|
$
|
(371,032
|
)
|
|
$
|
45,254,451
|
|
U.S. Treasury
|
|
|
5,997,340
|
|
|
|
(32,998
|
)
|
|
|
5,964,342
|
|
U.S. agency and government sponsored securities
|
|
|
5,300,463
|
|
|
|
(6,186
|
)
|
|
|
5,294,277
|
|
U.S. states and municipalities
|
|
|
11,231,747
|
|
|
|
(81,470
|
)
|
|
|
11,150,277
|
|
Asset-Backed
|
|
|
12,747,086
|
|
|
|
(17,939
|
)
|
|
|
12,729,147
|
|
Total
|
|
$
|
80,902,119
|
|
|
$
|
(509,625
|
)
|
|
$
|
80,392,494
|
|
The Company reported the unrealized losses, net
of taxes, as a component of stockholders' equity. The decline in fair value is largely due to changes in interest rates and other market
conditions. The Company has evaluated these securities and determined that no allowance is necessary based on the credit quality and the
low risk of loss due to the security type. The fair value is expected to recover as the securities approach maturity.
The contractual maturities of the Company’s marketable investments
as of June 30, 2021 were as follows:
Summary of contractual maturity
|
|
|
|
|
|
Fair Value
|
|
Due after 1 year through five years
|
|
$
|
70,408,695
|
|
Due after 5 years through 10 years
|
|
|
2,074,020
|
|
Due after 10 years (a)
|
|
|
7,909,779
|
|
Total
|
|
$
|
80,392,494
|
|
|
(a)
|
Included within this category are municipal bonds with a fair value of $2,300,000 that the Company plans to sell within the next twelve months.
|
The Company may sell certain of its marketable debt securities prior
to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.
The Company did not sell any securities during the three or six months
ended June 30, 2021, that resulted in gains or losses.
Note 5: Property and Equipment, Net
The Company has property and equipment as follows
as of June 30, 2021 and December 31, 2020:
Schedule of property and equipment, net
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Furniture and Equipment
|
|
$
|
124,585
|
|
|
$
|
19,419
|
|
Computer Equipment
|
|
|
231,097
|
|
|
|
168,122
|
|
Leasehold Improvements
|
|
|
43,485
|
|
|
|
14,182
|
|
Software
|
|
|
115,622
|
|
|
|
68,152
|
|
Production Equipment
|
|
|
23,017
|
|
|
|
–
|
|
Property and Equipment, Gross
|
|
|
537,806
|
|
|
|
269,875
|
|
Less Accumulated Depreciation
|
|
|
(203,908
|
)
|
|
|
(174,047
|
)
|
Property and Equipment, Net
|
|
$
|
333,898
|
|
|
$
|
95,828
|
|
During the three months ended June 30, 2021 and
2020, the Company recorded depreciation expense of $15,265 and $13,537, respectively. During the six months ended June 30, 2021 and 2020,
the Company recorded depreciation expense of $29,829 and $27,075, respectively.
Note 6: Right of Use Leased Asset
Right of use asset consisted of the following
as of June 30, 2021 and December 31, 2020:
Schedule of right of use asset
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Office Lease Asset
|
|
$
|
2,700,864
|
|
|
$
|
2,245,093
|
|
Printer Lease Asset
|
|
|
12,374
|
|
|
|
12,374
|
|
Right Of Use Asset, Gross
|
|
|
2,713,238
|
|
|
|
2,257,467
|
|
|
|
|
|
|
|
|
|
|
Office Lease Accumulated Amortization
|
|
|
(402,403
|
)
|
|
|
(274,980
|
)
|
Printer Lease Accumulated Amortization
|
|
|
(11,605
|
)
|
|
|
(10,123
|
)
|
Right Of Use Asset, Net
|
|
$
|
2,299,230
|
|
|
$
|
1,972,364
|
|
During the three months ended June 30, 2021 and
June 30, 2020, the Company recorded amortization expense of $82,668 and $109,458, respectively. During the six months ended June 30, 2021
and June 30, 2020, the Company recorded amortization expense of $128,905 and $217,704, respectively.
Note 7: Film and Television Costs, Net
As of June 30, 2021, the Company had net
Film and Television Costs of $14,972,446, compared to $11,828,494 as of December 31, 2020. The increase primarily relates to the
development costs related to Stan Lee’s Superhero Kindergarten offset by amortization of Rainbow Rangers Season
1 and Llama Llama Seasons 1 & 2.
During the three months ended June 30, 2021 and
2020, the Company recorded Film and Television Cost amortization expense of $553,562 and $185,748, respectively. During the six months
ended June 30, 2021 and 2020, the Company recorded Film and Television Cost amortization expense of $658,369 and $292,363, respectively.
The following table highlights the activity in
Film and Television Costs as of June 30, 2021, and December 31, 2020:
Schedule of film and television costs activity
|
|
|
|
|
|
Total
|
|
Film and Television Costs, Net as of December 31, 2019
|
|
$
|
9,906,885
|
|
Additions to Film and Television Costs
|
|
|
2,901,207
|
|
Film Amortization Expense
|
|
|
(979,598
|
)
|
Film and Television Costs, Net as of December 31, 2020
|
|
|
11,828,494
|
|
Additions to Film and Television Costs
|
|
|
3,903,941
|
|
Film Amortization Expense
|
|
|
(759,989
|
)
|
Film and Television Costs, Net as of June 30, 2021
|
|
$
|
14,972,446
|
|
Note 8: 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 with A Squared over net identifiable
assets acquired. Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization but is subject to annual review to
determine if certain events warrant impairment to the goodwill asset.
As a result of the ChizComm acquisition, the consideration
exceeded the fair value of the assets acquired by $9,607,027. Accordingly, this amount was recorded as goodwill at the time of the acquisition.
Through June 30, 2021, the Company has not recognized any impairment on goodwill.
The following table represents details of our
goodwill balance:
Schedule of Goodwill
|
|
|
|
|
|
Total
|
|
Goodwill as of December 31, 2020
|
|
$
|
10,365,806
|
|
Acquisition of ChizComm Entities
|
|
|
9,607,027
|
|
Foreign Currency Translation Adjustment
|
|
|
22,203
|
|
Goodwill as of June 30, 2021
|
|
$
|
19,995,036
|
|
Intangible Assets, Net
The Company had the following intangible assets
as of June 30, 2021 and December 31, 2020:
Schedule of Intangible Asset
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Trademarks (a)
|
|
$
|
129,831
|
|
|
$
|
129,831
|
|
Trade Name (b)
|
|
|
3,430,000
|
|
|
|
–
|
|
Customer Relations (c)
|
|
|
6,140,000
|
|
|
|
–
|
|
Non-Compete (d)
|
|
|
60,000
|
|
|
|
–
|
|
Other Intangible Assets (a)
|
|
|
304,028
|
|
|
|
299,028
|
|
Intangible Assets, Gross
|
|
|
10,063,859
|
|
|
|
428,859
|
|
Foreign Currency Translation Adjustment
|
|
|
89,202
|
|
|
|
–
|
|
Less Accumulated Amortization
|
|
|
(634,292
|
)
|
|
|
(400,165
|
)
|
Intangible Assets, Net
|
|
$
|
9,518,769
|
|
|
$
|
28,694
|
|
|
(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. During the three months ended June 30, 2021 and June 30, 2020, the Company recognized, $8,276
and $10,847,
respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets. During the six months
ended June 30, 2021 and June 30, 2020, the Company recognized, $11,131
and $21,638,
respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets.
|
|
(b)
|
Amount represents fair value of the ChizComm and ChizComm Beacon Media Trade Names which have been determined to have an indefinite useful life.
|
|
(c)
|
Amount represents fair value of the ChizComm and ChizComm Beacon Media Customer Relationships with a useful life of 12 years. Amortization expense for the three and six months ended June 30, 2021 was $129,277 and $214,610, respectively.
|
|
(d)
|
Amount represents fair value of the Non-Compete agreements as part of the ChizComm acquisition. The Non-Compete agreements have a useful life of 3 years. Amortization expense for the three and six months ended June 30, 2021 was $5,053 and $8,386, respectively.
|
Expected future intangible asset amortization as of June
30, 2021 is as follows:
Expected future intangible asset amortization
|
|
|
|
Fiscal Year:
|
|
|
|
Remaining 2021
|
|
$
|
276,655
|
|
2022
|
|
|
552,963
|
|
2023
|
|
|
549,018
|
|
2024
|
|
|
524,678
|
|
Thereafter
|
|
|
4,185,455
|
|
Total
|
|
$
|
6,088,769
|
|
Note 9: Deferred Revenue
As of June 30, 2021 and December 31, 2020, the
Company had total short term and long term deferred revenue of $3,957,937 and $4,432,377, 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, 2021 and December 31, 2020 is the $3,394,967 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 10: Accrued Expenses, Salaries and Wages
– Current
As of June 30, 2021 and December 31, 2020, the
Company has the following current accrued liabilities:
Schedule of other accrued liabilities
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Other Accrued Expenses (a)
|
|
$
|
151,345
|
|
|
$
|
408,459
|
|
Accrued Salaries and Wages (b)
|
|
|
470,240
|
|
|
|
428,922
|
|
Total Accrued Liabilities – Current
|
|
$
|
621,585
|
|
|
$
|
837,381
|
|
|
(a)
|
Primarily represents accrued interest and legal fees.
|
|
(b)
|
Represents accrued salaries and wages and accrued vacation payable to employees as of June 30, 2021 and the year ended December 31, 2020.
|
Note 11: Senior Secured Convertible Notes
On March 11, 2020, the Company entered into a
Securities Purchase Agreement (the “SPA”) with certain accredited investors (each an “Investor” and collectively,
the “Investors”) pursuant to which the Company agreed to sell and issue (1) Senior Secured Convertible Notes to the Investors
in the aggregate principal amount of $13,750,000 (each, a “Note” and collectively, the “2020 Convertible Notes”)
and $11,000,000 funding amount (reflecting an original issue discount of $2,750,000) and (2) warrants to purchase 65,476,190 shares of
the Company’s common stock exercisable for a period of five years
at an initial exercise price of $0.26 per share (each a “Warrant” and collectively, the “Warrants”), for consideration
consisting of (i) a cash payment of $7,000,000, and (ii) full recourse cash secured promissory notes payable by the Investors to the Company
(each, an “Investor Note” and collectively, the “Investor Notes”) in the principal amount of $4,000,000 (the “Investor
Notes Principal”) (collectively, the “Financing”). Andy Heyward, the Company’s Chairman and Chief Executive Officer,
participated as an Investor and invested $1,000,000 in connection with the Financing, all of which was paid at the closing and not pursuant
to an Investor Note. The Special Equities Group, LLC, a division of Bradley Woods & Co. LTD, acted as placement agent and received
warrants to purchase 6,547,619 shares at an exercise price of $0.26 per share (the “Placement Agent Warrants”).
The closing of the sale and issuance of the 2020
Convertible Notes, the Warrants and the Placement Agent Warrants occurred on March 17, 2020 (the “Closing Date”). The maturity
date of the 2020 Convertible Notes was September 30, 2021 and the maturity date of the Investor Notes was March 11, 2060.
The Company held a stockholder meeting to approve
the issuance of shares of common stock issuable under the 2020 Convertible Notes and pursuant to the terms of the SPA for the purposes
of compliance with the stockholder approval rules of The Nasdaq Stock Market (“Stockholder Approval”).
In addition, pursuant to the terms of the SPA,
the 2020 Convertible Notes and the Warrants, the Company agreed that the following will apply or become effective only following Stockholder
Approval: (1) the conversion price of the 2020 Convertible Notes shall be reduced to $0.21 per share and may be further reduced to any
amount and for any period of time deemed appropriate by the board of 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 March 16, 2020, the holders of the August 2018 Secured Convertible Notes were repaid in full including
any outstanding interest.
On May 15, 2020, the Company received the necessary
Stockholder Approval in connection with the Nasdaq proposals described above. As a result, the Conversion 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.
On June 23, 2020, the Company received $3,600,000,
net of expenses, from the payment of the Investor Notes Principal.
Between June 19 and June 23, 2020, the Convertible
Notes were converted and repaid through the issuance of 65,476,190 shares of common stock.
Note 12: 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 was June 30, 2021. Interest rates on advances under the Loan and Security Agreement averaged 4.25% 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, 2021, the Company had gross
outstanding borrowing under the facility of $274,365.
As of December 31, 2020, the Company had gross outstanding borrowing under the facility of $1,099,713. The outstanding balance was repaid on July 14, 2021.
Note 13: Disputed Trade Payable
As part of the merger in 2013, the Company assumed
certain liabilities from a previous member of A Squared which has claimed certain liabilities totaling $925,000. The Company disputes
the basis for this liability. As of December 31, 2017, the Company believed that the statute of limitations applicable to the assertion
of any legal claim relating to the collection of these liabilities has expired and therefore believes this liability is not owed.
Note 14: Payroll Protection Program Loan
On April 30, 2020, the Company received loan proceeds
in the amount of $366,267 under the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid,
Relief and Economic Security (“CARES”) Act and is administered through the Small Business Administration (“SBA”).
The Company repaid the loan, including interest of $3,452 on April 28, 2021.
Note 15: Stockholders’ Equity
Common Stock
As of June 30, 2021, the total number of authorized
shares of Common Stock was 400,000,000.
On March 22, 2020, the Company entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with certain long-standing investors (the
“Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company
directly to the Investors (the “Registered Offering”), an aggregate of 4,000,000
shares of common stock at an offering price of $0.2568 per share for gross proceeds of approximately $1.0
million before deducting offering expenses. The Registered Offering closed on March 25, 2020.
As of June 30, 2021 and December 31, 2020, there
were 300,791,335 and 258,438,514 shares of common stock outstanding, respectively.
On January 6, 2021, the Company issued 25,000
shares of the Company’s common stock valued at $1.40 per share for marketing services.
On January 21, 2021, the Company issued 136,986
shares of the Company’s common stock valued at $1.46 per share for marketing services.
On February 1, 2021, the Company issued 1,932,163
shares of the Company’s common stock valued at $1.78 per share as partial consideration for the ChizComm acquisition.
On February 4, 2021, the Company issued 48,495
shares of the Company’s common stock valued at $1.81 per share as partial consideration for the ChizComm acquisition.
On May 14, 2021, the Company issued 469,677 shares
of the Company’s common stock valued at $1.55 per share for production services.
Preferred Stock
The Company has 10,000,000 shares of preferred
stock authorized with a par value of $0.001 per share. The Board of Directors is authorized, subject to any limitations prescribed by
law, without further vote or action by our stockholders, to issue from time-to-time shares of preferred stock in one or more series. Each
series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by our Board of Directors, which may include, among others, dividend rights, voting rights,
liquidation preferences, conversion rights and preemptive rights.
There were no shares of preferred
stock outstanding as of June 30, 2021 and December 31, 2020.
Note 16: Stock Options
On September 18, 2015, the Company adopted the
Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The total number of shares that can be issued under
the 2015 Plan is 2,167,667 shares.
On September 1, 2020, the Company adopted the
Genius Brands International, Inc. 2020 Incentive Plan (the “2020 Plan”). On August 4, 2020, the Board of Directors voted to
adopt the 2020 Plan. The shares available for issuance under the 2020 Plan was approved by stockholders on August 27, 2020. The 2020 Plan
as approved by the stockholders increased the maximum number of shares available for issuance up to an aggregate of 32,167,667 shares
of common stock.
During the three months ended March 31, 2021,
the Company granted options to purchase 520,000 shares of common stock to employees and granted to each of the members of the Board of
Directors 20,000 options to purchase shares of the Company’s common stock with an option price of $3.06 per share. The options vest
on January 27, 2022 and have a five-year term.
During the three months ended June 30, 2021,
the Company granted options to purchase 253,636
shares of common stock to employees that fully
vest on January 24, 2024 and have a five-year term. The Company also granted 20,000
options to purchase shares of common stock to a new member of the Board of Directors that vest
on June 24, 2022 and have a five-year term. The shares have an option price of $1.98
per share.
The table below outlines the weighted average
assumptions for options granted during the three months ended March 31, 2021 and June 30, 2021:
Schedule of assumptions used
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
June 30, 2021
|
|
Exercise Price
|
|
$
|
3.06
|
|
|
$
|
1.98
|
|
Dividend Yield
|
|
|
0%
|
|
|
|
0%
|
|
Volatility
|
|
|
143%
|
|
|
|
101%
|
|
Risk-free interest rate
|
|
|
0.41%
|
|
|
|
0.90%
|
|
Expected life of options
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
The following table summarizes the changes in
the Company’s stock option plan during the six months ended June 30, 2021:
Schedule of stock option activity
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted- Average Remaining Contractual Life
|
|
|
Weighted- Average Exercise Price
|
|
Outstanding at December 31, 2020
|
|
|
9,116,176
|
|
|
|
1.69
|
|
|
$
|
1.69
|
|
Granted
|
|
|
933,636
|
|
|
|
4.70
|
|
|
$
|
2.74
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
150,000
|
|
|
|
4.26
|
|
|
$
|
2.82
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Outstanding at June 30, 2021
|
|
|
9,899,812
|
|
|
|
8.55
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2021
|
|
|
3,280,303
|
|
|
|
|
|
|
$
|
2.32
|
|
Vested and exercisable June 30, 2021
|
|
|
6,619,509
|
|
|
|
|
|
|
$
|
1.48
|
|
During the three and six months ended June 30,
2021, the Company recognized $762,341 and $1,920,965, respectively in share-based compensation expense related to stock options. During
the three and six months ended June 30, 2020, the Company recognized $328,497 and $352,311, respectively in share-based compensation expense.
The unrecognized share-based compensation as of June 30, 2021 was $3,098,651 and will be recognized over a weighted average remaining
contractual life of 7.62 years. The outstanding shares as of June 30, 2021 have an aggregated intrinsic value of $0. The weighted average
fair values per option granted for the six months ended June 30, 2021 was determined to be $2.36.
Note 17: Restricted Stock Units
On December 7, 2020, the Company granted 9,075,000
shares of Restricted Stock Units (RSU’s) with a fair market value of $12,614,250 to certain employees and officers. Of such RSU’s,
7,500,000 were issued to Andy Heyward, the Company’s Chief Executive Officer (“CEO”) and were to vest in four equal
installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued employment (the “service-based
awards”). The CEO also received an additional 7,500,000 RSU’s that vested in four equal installments on the first, second,
third and fourth anniversaries of December 7, 2020, based on achievement of certain performance goals (the “performance-based awards”),
which have not been established at the time the CEO and the Company entered into the arrangement, and subject to his continued employment. As
the performance conditions have not been established for the performance-based awards, a grant date was not yet established.
On February 1, 2021, the Company issued 53,763
shares of RSU’s with a fair market value of $74,193.
On June 23, 2021, the Compensation Committee
of the Board of Directors amended the service-based awards granted to the CEO, such that 3,750,000 of such RSUs shall continue to
vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued
employment and the remaining 3,750,000 RSU’s shall be modified to vest based on performance or market conditions. The
previously issued 7,500,000 performance-based awards, along with the 3,750,000 modified service-based awards, shall vest as
follows: (i) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.00 per share or
the Company’s market capitalization equals or exceeds $903,000,000 for 20 consecutive trading days; (ii) 3,750,000 RSUs vest
when the Company’s common stock closing sale price equals or exceeds $3.50 per share or the Company’s market
capitalization equals or exceeds $1,053,500,000 for 20 consecutive trading days, and (iii) 3,750,000 RSUs vest when the
Company’s common stock closing sale price equals or exceeds $3.75 per share or the Company’s market capitalization
equals or exceeds $1,128,750,000 for 20 consecutive trading days (the “market conditions”). In addition to the stock
price and market capitalization vesting conditions set forth above, such 11,250,000 RSUs may also vest in four equal installments on
the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain operating performance-based
vesting conditions established by the Compensation Committee on June 23, 2021 and subject to his continued employment, adjusted
pro-ratably for vesting pursuant to the market conditions. As a result of these modifications, the RSUs subject to the market
conditions were valued at $15,649,700 with a derived service period of 12 months, using a Monte-Carlo simulation model. This
resulted in a $221,665 increase in stock-based compensation for the three months ended June 30, 2021.
On June 24, 2021, the Company issued 213,636
shares of RSU’s with a fair market value of $422,999.
The following table summarizes the Company’s
restricted stock issuance during the six months ended December 31, 2020:
Schedule of restricted stock units
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Weighted-
Average
Grant Date Fair Value
Per Share
|
|
Unvested at December 31, 2020
|
|
|
9,075,000
|
|
|
$
|
1.39
|
|
Granted
|
|
|
267,399
|
|
|
$
|
1.86
|
|
Vested
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
–
|
|
|
$
|
–
|
|
Unvested at June 30, 2021
|
|
|
9,342,399
|
|
|
$
|
1.40
|
|
During the three and six months ended June 30,
2021, the Company recognized $2,231,833 and $3,646,356, respectively in share-based compensation expense related to RSU awards. The unvested
share-based compensation as of June 30, 2021 is $19,334,519 which will be recognized through the fourth quarter of 2024 assuming the underlying
grants are not cancelled or forfeited.
Note 18: Warrants
The Company has warrants outstanding to
purchase up to 45,511,965
shares as of June 30, 2021 and December 31, 2020.
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, 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 “Amended Exercise Price”). The Company
received approximately $170,000 from the exercise of the Original Warrants.
The placement agent received warrants to purchase
50,000 shares at an exercise price of $0.34 per share.
Pursuant to the SPA described in Note 11,
the Company issued to the note holders warrants to purchase 65,476,191
shares of common stock, exercisable for a period of 5 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. The fair values of derivative warrants attached to 2020 Convertible Notes and
Notes conversion option were determined using the Black-Scholes-Merton model with standard valuation inputs.
The valuation inputs as of March 17, 2020 included expected volatility of 89%, and annual interest rate of 0.66%. The warrants were determined to be liability classified and adjusted
to fair value as of each reporting period. As of June 30, 2021, warrants to purchase 892,857 shares were outstanding and re-valued at
$1,513,883, resulting in a net increase in liability of $316,814, as compared to December 31, 2020. The change in value is recorded in
the Warrant Revaluation Expense line item within Net Other Income (Expense) on the consolidated statement of operations. The valuation
inputs as of June 30, 2021 included expected volatility of 103%, and annual interest rate of 0.61%.
On January 28, 2021, the Company entered
into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to
exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of
the Company’s common stock at their original exercise price of $1.55 per
share (the “Exercise”). The Company received approximately $61.6 million
in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent and
received a cash fee of $4,286,844 million. In consideration for the exercise of the Existing Warrants for cash, the exercising
holders will receive new unregistered warrants to purchase up to an aggregate of 39,740,500 shares
of common stock (the “New Warrants”) at an exercise price of $2.37 per share and with an exercise period of five years
from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing
Warrants (except for customary legends and other language typical for an unregistered warrant, including the ability for the holder
of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock underlying the New
Warrants is effective after six months), will be exercisable immediately, and will have a term of exercise of five years, The
Company registered the resale of the shares of common stock issuable upon exercise of the New Warrants. The valuation inputs at
January 28, 2021 included expected volatility of 144%, and annual interest rate of 0.42%. The fair value of these warrants was
determined to be $69,138,527 using the Black-Scholes option pricing model, which was recorded as a warrant incentive expense and
included in the calculation of the Net Loss per Common Share, based on the following assumptions:
Schedule of assumptions for warrant
activity
|
|
|
|
|
Exercise Price
|
|
$
|
2.37
|
|
Dividend Yield
|
|
|
0%
|
|
Volatility
|
|
|
144%
|
|
Risk-free interest rate
|
|
|
0.42%
|
|
Expected life of options
|
|
|
5.0 years
|
|
The following table summarizes the changes in
the Company’s outstanding warrants during the six months ended June 30, 2021:
Schedule of warrant activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding Number of Shares
|
|
|
Exercise Prices
Per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price Per Share
|
|
Balance at December 31, 2020
|
|
|
45,511,965
|
|
|
$
|
0.21
- 5.30
|
|
|
|
5.19 years
|
|
|
$
|
1.55
|
|
Warrants Granted
|
|
|
39,740,500
|
|
|
$
|
2.37
|
|
|
|
4.58 years
|
|
|
$
|
2.37
|
|
Warrants Exercised
|
|
|
39,740,500
|
|
|
$
|
1.55
|
|
|
|
4.76 years
|
|
|
$
|
1.55
|
|
Warrants Expired
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Balance at June 30, 2021
|
|
|
45,511,965
|
|
|
$
|
0.21 - 5.30
|
|
|
|
4.91 years
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2020
|
|
|
7,176,620
|
|
|
$
|
0.76 - 6.00
|
|
|
|
3.77 years
|
|
|
$
|
2.52
|
|
Exercisable June 30, 2021
|
|
|
44,511,965
|
|
|
$
|
0.21 - 5.30
|
|
|
|
4.77 years
|
|
|
$
|
2.29
|
|
Note 19: Income Taxes
The Company accounts for income taxes in accordance
with Accounting Standards Codification Topic 740 Income Taxes (“Topic 740”), which requires the recognition of deferred tax
liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the
financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more
likely than not to be realized.
Topic 740 provides guidance on the accounting
for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether
it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If
the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial
statements.
The Company includes interest and penalties arising
from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of June 30, 2021, and December
31, 2020, 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, and New Jersey. The Company is currently subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
Genius Brands International, Inc. is subject to
US income taxes on a stand-alone basis. Genius Brands International, Inc. and ChizComm Canada file separate stand-alone tax returns in
each jurisdiction in which they operate. ChizComm Canada is a corporation operating in Canada and is subject to Canadian income taxes
on its stand-alone taxable income.
Note 20: Commitment and Contingencies
Effective January 1, 2019, the Company adopted
ASC 842, Leases, using the modified retrospective transition method applied at the effective date of the standard.
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, 2021, weighted-average lease term
for operating leases equals to 72.72 months. Weighted-average discount rate equals to 9.86%.
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. The Company pays 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. The subtenant paid the Company rent of $422,321 annually, subject to annual escalations of
3.5%. On September 11, 2020, the Company entered into a Surrender Agreement with the landlord which terminated
the 131 South Rodeo Dr. lease agreement. As a result, the Company recorded a decrease in the Right of Use asset, accumulated amortization,
and the lease liability of $2,142,863, $465,124 and $1,760,302 respectively. The termination of the lease resulted in a loss of $338,586.
Simultaneously, as part of the Surrender Agreement the Sublease was terminated.
On January 30, 2019, the Company entered into
an operating lease for 5,838 square feet of general office space at 190 N. Canon Drive, Suite 400, Beverly Hills, CA 90210 pursuant to
a 96-month lease that commenced on August 1, 2019. The Company pays rent of $392,316 annually, subject to annual escalations of 3.5%.
On February 1, 2021, as part of the Acquisition,
the Company assumed an operating lease that was entered into on May 19, 2019 for 6,845 square feet of general office space located at
245 Fairview Mall Drive, Suites 202 and 301, Toronto, Ontario M2J 4T1 pursuant to a 84 month lease which commenced on October 1, 2019.
The Company pays rent of $95,830 annually, subject to annual escalations 5% to 7%.
On February 1, 2021, as part of the Acquisition,
the Company assumed an operating lease that entered into on April 30, 2019 for 3,379 square feet of general office space located at One
International Boulevard, 11th Floor, Mahawh, New Jersey pursuant to a 24-month lease which commenced on May 1, 2019. The
Company pays rent of $74,338 annually.
On March 2, 2021, the Company entered into an
operating lease for 4,765 square feet of general office space located at 1050 Wall Street West, Suite 665, Lyndhurst NJ, 07071 pursuant
to an 89-month lease which is expected to commence on August 1, 2021. The Company will pay $114,360 annually subject to annual escalations
of 2.5%.
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, 2021 and June 30, 2020 were $131,403 and $207,839, respectively. Rental expenses incurred for operating
leases during the six months ended June 30, 2021 and June 30, 2020 were $243,746 and $415,678, respectively. During the six months ended
June 30, 2021, the Company did not receive sub-lease income. During the six months ended June 30, 2020, the Company received sub-lease
income of $238,484.
The following is a schedule of future minimum contractual obligations
as of June 30, 2021, under the Company’s operating leases and employment agreements:
Schedule of future minimum lease payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
|
Total
|
|
Operating Leases
|
|
$
|
227,931
|
|
|
$
|
572,896
|
|
|
$
|
556,152
|
|
|
$
|
578,180
|
|
|
$
|
596,844
|
|
|
$
|
896,766
|
|
|
$
|
3,428,769
|
|
Employment Contracts
|
|
|
1,544,508
|
|
|
|
2,932,027
|
|
|
|
2,236,788
|
|
|
|
1,105,566
|
|
|
|
506,583
|
|
|
|
–
|
|
|
|
8,325,472
|
|
Consulting Contracts
|
|
|
150,000
|
|
|
|
187,500
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
337,500
|
|
|
|
$
|
1,922,439
|
|
|
$
|
3,692,423
|
|
|
$
|
2,792,940
|
|
|
$
|
1,683,746
|
|
|
$
|
1,103,427
|
|
|
$
|
896,766
|
|
|
$
|
12,091,741
|
|
Note 21: Related Party Transactions
Pursuant to his employment agreements dated November
16, 2018 and November 16, 2020, Mr. Heyward is entitled to an Executive Producer fee of $12,500 per half hour episode for each episode
he provides services as an executive producer. The third identified series under this employment agreement is Stan Lee’s
Superhero Kindergarten. During the six months ended June 30, 2021, 11 half hours were delivered. Accordingly, Mr. Heyward is owed
$137,500 which is included in Due to Related Party on the Company’s condensed consolidated Balance Sheet.
On July 21, 2020, the Company entered into a merchandising
and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward, the Company’s Chief
Executive Officer. 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. During the three and six months ended
June 30, 2021, the Company earned $0 in royalties from this agreement.
As of June 30, 2021, Mr. Heyward is owed
$1,506 for reimbursable expenses which are included in Due to Related Party on the condensed consolidated Balance Sheet.
Note 22: Segment Reporting
The Company has determined that it operates in
two operating segments, the production and distribution of children’s content and to provide media and advertising services.
The following table presents sales and earnings
within our two operating segments.
Schedule of Segment Reporting
|
|
|
|
|
|
|
|
|
|
|
Content Production & Distribution
|
|
Media & Advertising Services
|
|
|
Total
|
|
Total Revenue
|
|
$
|
1,681,756
|
|
|
$
|
1,724,712
|
|
|
$
|
3,406,469
|
|
% of segment revenue
|
|
|
49%
|
|
|
|
51%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
193,873,259
|
|
|
$
|
7,346,495
|
|
|
$
|
201,219,754
|
|
% of segment assets
|
|
|
96%
|
|
|
|
4%
|
|
|
|
100%
|
|
Note 23: Subsequent Events
On July 20, 2021, Mr. Heyward was paid a bonus
of $55,000.
On July 20, 2021, the Company issued 176,101 shares
of the Company’s common stock valued at $1.55 per share to a production company for services.
On August 5, 2021, Mr. Heyward was paid $137,500
for accrued producer fees.