This prospectus supplement
no. 4 (the “
Supplement
”) supplements information contained in the prospectus dated January 30, 2018 (the “
Prospectus
”),
relating to the sale of up to 1,647,691 shares of our common stock, par value $0.001 per share (“
Common Stock
”),
by the selling stockholders of Genius Brands International, Inc., a Nevada corporation, named in this prospectus. The shares being
offered consist of an aggregate of 1,647,691 shares (the “
Shares
”) of Common Stock, at an offering price of
$3.90 per share. The shares offered by the prospectus were issued in connection with (i) an October 2017 Securities Purchase Agreement
(the “
Purchase Agreement
”) with certain investors named therein (the “
Investors
”), pursuant
to which we agreed to issue and sell, in a registered direct offering directly to the Investors (the “
Registered Offering
”)
the Shares, at an offering price of $3.90 per share; and (ii) a concurrent private placement (the “
Private Placement
”
and together with the Registered Offering, the “
Offerings
”), under which we agreed to issue to the Investors
who participated in the Registered Offering warrants (the “
Warrants
”) exercisable for one share of Common Stock
for each Share purchased in the Registered Offering for an aggregate of 1,647,691 shares of Common Stock at an exercise price of
$3.90 per share.
This Supplement is
being filed to update and supplement the information in the Prospectus with the information contained in our Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on May 15, 2018 (the “
Form 10-Q
”). Accordingly,
we have attached the Form 10-Q to this Supplement.
This Supplement is
incorporated by reference into, and should be read in conjunction with, the Prospectus. This Supplement is not complete without,
and may not be delivered or utilized except in connection with, the Prospectus, including any amendments or supplements thereto.
Any statement contained in the Prospectus shall be deemed to be modified or superseded to the extent that information in this Supplement
modifies or supersedes such statement. Any statement that is modified or superseded shall not be deemed to constitute a part of
the Prospectus except as modified or superseded by this Supplement.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act. (Check one)
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,516,969 shares of
common stock, par value $0.001, were outstanding as of May 15, 2018.
Note 1: Organization and Business -
Organization and Nature of Business
Genius Brands International, Inc. (“we,”
“us,” “our,” or the “Company”) is a global content and brand management company that creates
and licenses multimedia content. Led by proven industry leaders, the Company distributes its content in all formats as well as
a broad range of consumer products based on its characters. In the children's media sector, the Company’s portfolio features
“content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment, including the
award-winning
Baby Genius,
new preschool property
Rainbow Rangers
, debuting November 5, 2018 on Nickelodeon;
preschool property
Llama Llama
; that debuted on Netflix in December 2017 and has already been picked up by Netflix
for a second season; tween music-driven brand
SpacePop
; adventure comedy
Thomas Edison's Secret Lab®
, available
on, public broadcast stations and the Company’s Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku,
Amazon Fire, You Tube and Amazon Prime; Warren Buffett's
Secret Millionaires Club,
created with and starring iconic
investor Warren Buffett. The Company also has a partnership with Stan Lee's Pow! Entertainment which it manages
for creation, production, licensing and management of original Stan Lee superhero programs.
In addition, the Company acts as
licensing agent for Llama Llama, leveraging its existing licensing infrastructure to expand this brand into new product categories,
new retailers, and new territories.
The Company commenced operations in 2006,
assuming all the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement between the Company
and Genius Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “Baby Genius,”
“Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under
those titles. In 2011, the Company reincorporated in Nevada and changed its name to Genius Brands International, Inc. In
connection with the Reincorporation, the Company changed its trading symbol to “GNUS.”
In 2013, the Company entered into
an Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limited
liability company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member of
A Squared (the “Parent Member”) and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“Acquisition
Sub”). Upon closing of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiary of the
Company.
On November 4, 2016, the Company filed
a certificate to change its Articles of Incorporation to effect a reverse split on a one-for-three basis (the “2016 Reverse
Split”). The 2016 Reverse Split became effective on November 9, 2016. All common stock share and per share information in
this Quarterly Report on Form 10-Q (“Form 10-Q”), including the accompanying consolidated financial statements and
notes thereto, have been adjusted to reflect retrospective application of the 2016 Reverse Split, unless otherwise indicated.
Liquidity
Historically, the Company has incurred net losses. For the three months
ended March 31, 2018 and March 31, 2017, the Company reported net losses of $1,263,464 and $1,316,234 respectively. The Company
reported net cash used in operating activities of $1,214,107 and $2,346,210 for the three months ended March 31, 2018, and March
31, 2017, respectively. As of March 31, 2018, the Company had an accumulated deficit of $42,641,849 and total stockholders’
equity of $15,593,687. At March 31, 2018, the Company had current assets of $8,854,964, including cash, cash equivalents, and
restricted cash of $6,223,310 and current liabilities of $4,258,470, including certain trade payables of $925,000 to which the
Company disputes the claim. The Company had working capital of $4,596,494 as of March 31, 2018 compared to working capital of
$7,116,279 as of December 31, 2017.
On January 8, 2018, the Company entered
into a Securities Purchase Agreement with certain accredited investors pursuant to which the Company sold approximately $1,800,000
of common stock and warrants to such investors (the “January 2018 Private Placement”). The Company issued and sold
warrants to purchase 592,000 shares of common stock at an exercise price of $3.00 per share.
While the Company believes that its cash balances and working capital combined with its production facility and deal pipeline will be sufficient to fund operations
for the next twelve months, there can be no assurance that cash flows from operations will continue to improve in the near future.
If the Company is unable to attain profitable operations and attain positive operating cash flows, it may need to (i) seek additional
funding, (ii) scale back its development or production plans, or (iii) reduce certain operations.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 2018 and 2017
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared and Llama Productions
as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-company balances and transactions
have been eliminated in consolidation.
The financial statements have been prepared
using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 805 Business Combinations.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods.
Financial Statement Reclassification
Certain account balances from prior
periods have been reclassified in these condensed consolidated financial statements to conform to current period
classifications.
Cash, Cash Equivalents, and Restricted
Cash
The Company considers all highly liquid
debt instruments with initial maturities of three months or less to be cash equivalents. As of March 31, 2018, and 2017 Restricted
Cash totaled $237 and $568,673 respectively, which represents funds held in a cash account to be used solely for the production
of
Llama Llama
as a condition of its loan agreement with Bank Leumi USA.
Allowance for Doubtful Accounts
Accounts receivable are presented on the
balance sheets net of estimated uncollectible amounts. The Company assesses its accounts receivable balances on a quarterly basis
to determine collectability and records an allowance for estimated uncollectible accounts in an amount approximating anticipated
losses based on historical experience and future expectations. Individual uncollectible accounts are written off against the allowance
when collection of the individual accounts appears doubtful. The Company had an allowance for doubtful accounts of $110,658 as
of both March 31, 2018 and December 31, 2017.
Inventories
Inventories are stated at the lower of
average cost or net realizable value and consist of finished goods such as DVDs, CDs and other products. A reserve for slow-moving
and obsolete inventory is established for all inventory deemed potentially non-saleable. The current inventory is considered properly
valued and saleable. The Company concluded that there was an appropriate reserve for slow moving and obsolete inventory of $26,097
at both March 31, 2018 and December 31, 2017.
Property and Equipment
Property and equipment are recorded at
cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the
assets, which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add to the value of the
assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property
and equipment are reflected in the statement of operations.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase
price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance
with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful
lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise.
The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year.
To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we
have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted
cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment
regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate
of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible
assets in future periods.
Other intangible assets have been acquired,
either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual amortization
of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Film and Television Costs
The Company capitalizes production costs
for episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production
costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment
over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenue
in the period of delivery of the episodes.
The Company capitalizes production
costs for films produced in accordance with FASB ASC 926-20 Entertainment - Films - Other Assets - Film Costs. Accordingly,
production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on
the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates its capitalized production
costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.
Additionally, for both episodic series
and films, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing
content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are
capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
On January 1, 2018, the Company adopted
the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new
revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January
1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts
are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, (Topic 605).
Accordingly, on January 1, 2018 the Company
recorded a cumulative effect adjustment to beginning accumulated deficit in the amount of $173,112. The impact to our financial
statements for the three months ended March 31, 2018 resulting from the adoption of Topic 606 as of January 1, 2018 was a reduction
of revenue in the amount $68,184 and a corresponding reduction in costs in the amount of $10,099 from the amounts reported. The
amounts prior to adoption were not recognized pursuant to Topic 606 and would have been reported pursuant to Topic 605.
Changes to the opening balances in prepaid
and other assets, film and television costs, total assets, accrued expenses, deferred revenue and total liabilities resulting from
the adoption of the new guidance were as follows (thousands):
|
|
December 31,
2017
|
|
|
Impact of
Adoption
|
|
|
January 1,
2018
|
|
Prepaid and Other Assets
|
|
$
|
265
|
|
|
$
|
(15
|
)
|
|
$
|
250
|
|
Film and Television Costs, net
|
|
|
2,777
|
|
|
|
(219
|
)
|
|
|
2,558
|
|
Total assets
|
|
|
27,713
|
|
|
|
(234
|
)
|
|
|
27,479
|
|
Accrued Expenses
|
|
|
1,718
|
|
|
|
2
|
|
|
|
1,720
|
|
Deferred Revenue
|
|
|
5,085
|
|
|
|
(409
|
)
|
|
|
4,676
|
|
Total liabilities
|
|
|
12,673
|
|
|
|
(407
|
)
|
|
|
12,266
|
|
The Company performed its analysis of its
existing revenue contracts and has completed its new revenue accounting policy documentation under the new standard. The Company
has identified the following six material and distinct performance obligations:
·
|
License rights to exploit Functional Intellectual Property (Functional Intellectual Property
or “functional IP” is defined as intellectual property that has significant standalone functionality, such as the
ability be played or aired. Functional intellectual property derives a substantial portion of its utility from its
significant standalone functionality.)
|
·
|
License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or
“symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and
substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing
activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs
associated with its animated content.)
|
·
|
Options to renew or extend a contract at fixed terms. (While this performance obligation is not
significant for the Company’s current contracts, it could become significant in the future.)
|
·
|
Options on future seasons of content at fixed terms. (While this performance obligation is not
significant for the Company’s current contracts, it could become significant in the future.)
|
|
|
·
|
Fixed fee advertising revenue
generated from the Genius Brands Network
|
|
|
·
|
Variable fee advertising revenue
generated from the Genius Brands Network
|
As a result of the change, beginning January
1, 2018, the Company began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees,
the Company recognizes fixed revenue upon delivery of content and the start of the license period. For functional IP contracts
with a variable component, the Company estimates revenue such that it is probable there will not be a material reversal of revenue
in future periods. Revenue under these types of contracts was previously recognized when royalty statements were received. The
Company began recognizing revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although
it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature
of the license.
The Company sells advertising on its Kid
Genius channel in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, the
Company recognizes revenue when all five revenue recognition criteria under FASB ASC 606 are met. For impressions served, the Company
delivers a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM
per impression. Impressions served are reported to the Company on a monthly basis, and revenue is reported in the month the impressions
are served.
The Company recognizes revenue related
to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated
to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for
future performance to directly bring about the resale of the product by the buyer.
Direct Operating Costs
Direct operating costs include costs of
our product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related
to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with
which we are obligated to share net profits of the properties on which they have rendered services.
Share-Based Compensation
As required by FASB ASC 718 - Stock Compensation,
the Company recognizes an expense related to the fair value of our share-based compensation awards, including stock options, using
the Black-Scholes calculation as of the date of grant. The Company has elected to use the graded attribution method for awards
which are in-substance, multiple awards based on the vesting schedule.
Earnings Per Share
Basic earnings (loss) per common share
(“EPS”) is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number
of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common
shareholders by the weighted average number of shares of common stock outstanding, plus the assumed exercise of all dilutive securities
using the treasury stock or “as converted” method, as appropriate. During periods of net loss, all common stock equivalents
are excluded from the diluted EPS calculation because they are antidilutive.
Income Taxes
Deferred income tax assets and liabilities
are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted
tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other
possible sources of realization of deferred tax assets and records a valuation allowance that reduces the deferred tax assets to
an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not
will be realized.
Concentration
of Risk
The Company’s cash is maintained
at two financial institutions and from time to time the balances for this account exceed the Federal Deposit Insurance Corporation’s
(“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC
up to $250,000 per account. As of March 31, 2018, the Company had three accounts with a combined uninsured balance of $5,723,310.
As of December 31, 2017, the Company had four accounts with a combined uninsured balance of $6,998,072.
For the three months ended March 31, 2018,
the Company had two customers whose total revenue each exceeded 10% of the total consolidated revenue. The Company had one customer
who accounted for 98% of accounts receivable balance as of March 31, 2018.
Fair value of financial instruments
The carrying amounts of cash, receivables, accounts payable,
and accrued liabilities approximate fair value due to the short-term maturity of the instruments. The carrying amount of the Production
Loan Facility approximates fair value since the debt carries a variable interest rate that is tied to either the current Prime
or LIBOR rates plus an applicable spread.
We adopted FASB ASC 820 as of January 1,
2008, for financial instruments measured at fair value on a recurring basis. FASB ASC 820 defines fair value, establishes a framework
for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise
from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance
is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the
beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the
beginning of an interim or annual reporting period. We are currently evaluating the potential impact of adopting this guidance
on our consolidated financial statements.
In November 2016, the FASB issued Accounting
Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.”
This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash
flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15,
2017 and interim periods within those fiscal years. Early adoption is permitted. We have prospectively adopted ASU 2016-18 in our
2017 financial statements. The impact to our consolidated financial position, results of operations and cash flows was minimal.
In
January 2017, the FASB issued Accounting Standards
Update 2017-04, “Simplifying
the
Test for Goodwill Impairment,” which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill
impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the
total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under
which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the
carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted.
We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
I
n May 2017,
the FASB issued Accounting Standard Update 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting,”
which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification
(equity or liability) of the new award are different from the original award immediately before the original award is modified.
The standard is effective beginning January 1, 2018, with early adoption permitted. We are currently evaluating the potential impact
of adopting this guidance on our consolidated financial statements.
Various other accounting pronouncements
have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific
industries and are not expected to have a material effect on our financial position, results of operations, or cash flows.
Note 3: Property and Equipment, Net
The Company has property and equipment
as follows as of March 31, 2018 and December 31, 2017:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Furniture and Equipment
|
|
$
|
12,385
|
|
|
$
|
12,385
|
|
Computer Equipment
|
|
|
119,570
|
|
|
|
117,256
|
|
Leasehold Improvements
|
|
|
176,903
|
|
|
|
176,903
|
|
Software
|
|
|
15,737
|
|
|
|
15,737
|
|
Property and Equipment, Gross
|
|
|
324,595
|
|
|
|
322,281
|
|
Less Accumulated Depreciation
|
|
|
(246,890
|
)
|
|
|
(227,615
|
)
|
Property and Equipment, Net
|
|
$
|
77,705
|
|
|
$
|
94,666
|
|
During the three months ended March 31,
2018 and 2017, the Company recorded depreciation expense of $19,275 and $16,933, respectively.
Note 4: Film and Television Costs,
Net
As of March 31, 2018, the Company had
net Film and Television Costs of $4,336,217 compared to $2,777,088 at December 31, 2017. The increase relates primarily to the
production and development of
Rainbow Rangers
offset by the amortization of film costs associated with the revenue recognized
for
Thomas Edison’s Secret Lab
,
SpacePop and Llama Llama.
During the three months ended March 31,
2018 and 2017, the Company recorded Film and Television Cost amortization expense of $26,738 and $4,605, respectively.
The following table highlights the activity
in Film and Television Costs of March 31, 2018, and December 31, 2017:
|
|
Total
|
|
Film and Television Costs, Net as of December 31, 2016
|
|
$
|
2,260,964
|
|
Additions to Film and Television Costs
|
|
|
2,863,076
|
|
Capitalized Interest
|
|
|
187,883
|
|
Film Amortization Expense
|
|
|
(2,534,835
|
)
|
Film and Television Costs, Net as of December 31, 2017
|
|
|
2,777,088
|
|
Additions to Film and Television Costs
|
|
|
1,766,865
|
|
Capitalized Interest
|
|
|
42,919
|
|
Film Amortization Expense
|
|
|
(250,655
|
)
|
Film and Television Costs, Net as of March 31, 2018
|
|
$
|
4,336,217
|
|
Note 5: Goodwill and Intangible
Assets, Net
Goodwill
In connection with the Merger in 2013,
the Company recognized $10,365,805 in Goodwill, representing the excess of the fair value of the consideration for the Merger over
net identifiable assets acquired. Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization but is subject to annual
review to determine if certain events warrant impairment to the Goodwill asset. Through March 31, 2018, the Company has not recognized
any impairment to Goodwill.
Intangible Assets, Net
The Company had the following intangible
assets as of March 31, 2018, and December 31, 2017:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Identifiable Artistic-Related Assets (a)
|
|
$
|
1,740,000
|
|
|
$
|
1,740,000
|
|
Trademarks (b)
|
|
|
129,831
|
|
|
|
129,831
|
|
Product Masters (b)
|
|
|
64,676
|
|
|
|
64,676
|
|
Other Intangible Assets (b)
|
|
|
272,529
|
|
|
|
251,171
|
|
Intangible Assets, Gross
|
|
|
2,207,036
|
|
|
|
2,185,678
|
|
Less Accumulated Amortization (c)
|
|
|
(342,397
|
)
|
|
|
(329,398
|
)
|
Intangible Assets, Net
|
|
$
|
1,864,639
|
|
|
$
|
1,856,280
|
|
|
(a)
|
In connection with the Merger in 2013, the Company acquired $1,740,000 of Identifiable Artistic-Related Assets. These assets, related to certain properties owned by A Squared and assumed by the Company, were valued using an independent firm. Based on certain legal, regulatory, contractual, and economic factors, the Company has deemed these assets to be indefinite-lived. Hence, pursuant to FASB ASC 350-30, these assets are not subject to amortization and are tested annually for impairment. Through March 31, 2018, the Company has not recognized any impairment expense related to these assets.
|
|
(b)
|
Pursuant to FASB ASC 350-30-35, the Company reviews these intangible assets periodically to determine if the value should be retired or impaired due to recent events. Through March 31, 2018, the Company has not recognized any impairment expense related to these assets.
|
|
(c)
|
During the three months ended March 31, 2018 and March 31, 2017, the Company recognized $12,999 and $17,697, respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets.
|
Expected future intangible asset amortization as of March 31,
2018 is as follows:
Fiscal Year:
|
|
|
|
|
|
2018
|
|
|
$
|
29,139
|
|
|
2019
|
|
|
|
30,593
|
|
|
2020
|
|
|
|
30,013
|
|
|
2021
|
|
|
|
7,399
|
|
|
2022
|
|
|
|
1,861
|
|
|
Remaining
|
|
|
|
4,277
|
|
|
Total
|
|
|
$
|
103,282
|
|
Note 6: Deferred Revenue
As of March 31, 2018, and December
31, 2017, the Company had total short term and long term deferred revenue of $4,735,840 and $5,085,383, respectively. Deferred
revenue includes both (i) variable fee contracts with licensees and customers in which the Company had collected advances and
minimum guarantees against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these contracts
when all revenue recognition criteria have been met. Included in the deferred revenue balance as of March 31, 2018 and December
31, 2017 is the $2,000,000 advance against future royalty that Sony paid to the Company in the first quarter of 2016 as well as
the remaining portion of the $1,489,583 attributable to the expansion of distribution rights acquired by Sony through the January
2017 Sony Transactions.
Note 7: Accrued Liabilities –
Current
As of March 31, 2018, and December 31,
2017, the Company has the following current accrued liabilities:
|
|
March
31,
2018
|
|
|
December 31,
2017
|
|
Accrued Salaries and Wages (a)
|
|
$
|
174,227
|
|
|
$
|
168,549
|
|
Disputed Trade Payables (b)
|
|
|
925,000
|
|
|
|
925,000
|
|
Other Accrued Expenses (c)
|
|
|
2,405,987
|
|
|
|
1,717,970
|
|
Total Accrued Liabilities - Current
|
|
$
|
3,505,214
|
|
|
$
|
2,811,519
|
|
|
(a)
|
Accrued Salaries and Wages represent accrued vacation payable to employees.
|
|
|
|
|
(b)
|
As part of the Merger in 2013, the Company assumed certain liabilities from a previous member of A Squared which has claimed certain liabilities totaling $925,000. The Company disputes the basis for this liability. As of March 31, 2018, the Company believes that the statute of limitations applicable to the assertion of any legal claim relating to the collection of these liabilities has expired and therefore believes this liability is uncollectible.
|
|
|
|
|
(c)
|
Other Accrued Expenses include estimates of expenses incurred but not yet recorded.
|
Note 8: Production Loan Facility
On August 8, 2016, Llama Productions
closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”)
with Bank Leumi USA to produce its animated 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 March 31, 2018, the Company was in compliance with these covenants.
As of March 31, 2018, the Company had gross
outstanding borrowing under the facility of $2,804,764 against which financing costs of $115,444 were applied resulting in net
borrowings of $2,689,320. As of December 31, 2017, the Company had gross outstanding borrowing under the facility of $4,436,528
against which financing costs of $113,885 were applied resulting in net borrowings of $4,322,643.
Note 9: Stockholders’ Equity
Common Stock
As of March 31, 2018, the total number
of authorized shares of common stock was 233,333,334.
On October 29, 2015, the Company entered
into securities purchase agreements with certain accredited investors pursuant to which the Company sold an aggregate of 1,443,362
shares of its common stock, par value $0.001 per share, and warrants to purchase up to an aggregate of 1,443,362 shares of common
stock (the “Original Warrants”) for a purchase price of $3.00 per share and the associated warrants for gross proceeds
to the Company of $4,330,000 (“2015 Private Placement”). The closing of the 2015 Private Placement occurred on November
3, 2015. Stock offering costs were $502,218. (See Note 11 for additional information about these warrants.)
On October 6, 2016, the Board of Directors
of the Company authorized a reverse stock split in preparation for the Company’s anticipated up listing on the NASDAQ Capital
Market.
On November 4, 2016, the Company filed
a certificate of change to the Company’s Articles of Incorporation with the Secretary of State of the State of Nevada to
effect a one-for-three reverse stock split of the Company’s issued and outstanding common stock. As a result of the 2016
Reverse Split, every three shares of the Company’s issued and outstanding common stock were automatically combined and reclassified
into one share of the Company’s common stock. The 2016 Reverse Split affected all issued and outstanding shares of common
stock, as well as common stock underlying stock options and warrants outstanding. No fractional shares were issued in connection
with the 2016 Reverse Split. Stockholders who would otherwise hold a fractional share of common stock will receive an increase
to their common stock as the common stock will be rounded up to a full share. The total number of authorized shares of common stock
was reduced from 700,000,000 to 233,333,334 in conjunction with the 2016 Reverse Split. The 2016 Reverse Split became effective
on November 9, 2016. All disclosures of shares and per share data in these consolidated financial statements and related notes
have been retroactively adjusted to reflect the reverse stock split for all periods presented.
On February 9, 2017, the Company entered
into a private transaction (the “Private Transaction”) pursuant to a Warrant Exercise Agreement with certain holders
of the Company’s existing warrants (the “Original Warrants”). Pursuant to the Warrant Exercise Agreement, the
holders of the Original Warrants and the Company agreed that such Original Warrant holders would exercise their Original Warrants
in full, and the Company would issue to each such holder new warrants. (See Note 11 for additional information about these warrants.)
In association with the Private Transaction, the Company issued 1,171,690 shares of common stock upon exercise of a portion of
the Original Warrants for which it received gross proceeds of $3,866,573 and recording offering costs of $465,915 for net proceeds
of $3,400,658.
On January 8, 2018, the
Company entered into the January 2018 Private Placement. Pursuant to a Securities Purchase Agreement, the Company issued to
the Investors approximately 592,000 shares of common stock at a per share price of $3.00 and warrants to purchase
approximately 592,000 shares of common stock. The warrants were immediately exercisable, will be exercisable for a period of
five years from the closing date and have an exercise price of $3.00 per share. The closing of the sale of these securities
under the Securities Purchase Agreement occurred on January 10, 2018.
As of March 31, 2018, and December 31,
2017, there were 8,202,794 and 7,610,794 shares of common stock outstanding, respectively. Below are the changes to the Company’s
common stock during the three months ended March 31, 2018:
Preferred Stock
The Company has 10,000,000 shares of preferred
stock authorized with a par value of $0.001 per share. The Board of Directors is authorized, subject to any limitations prescribed
by law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or more
series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications
and special or relative rights or privileges as shall be determined by our Board of Directors, which may include, among others,
dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
As of March 31, 2018, and December 31,
2017, there were 3,530 and 3,530 shares of Series A Convertible Preferred Stock outstanding, respectively.
On May 12, 2014, the Board of Directors
authorized the designation of a class of preferred stock as “Series A Convertible Preferred Stock.” On May 14, 2014,
the Company filed the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible Preferred Stock with the
Secretary of State of the State of Nevada.
Each share of the Series A Convertible
Preferred Stock is convertible into shares of the Company’s common stock, par value $0.001 per share, based on a conversion
calculation equal to the Base Amount divided by the conversion price. The Base Amount is defined as the sum of (i) the aggregate
stated value of the Series A Convertible Preferred Stock to be converted and (ii) all unpaid dividends thereon. The stated value
of each share of the Series A Convertible Preferred Stock is $1,000 and the initial conversion price is $6.00 per share, subject
to adjustment in the event of stock splits, dividends and recapitalizations. Additionally, in the event the Company issues shares
of its common stock or common stock equivalents at a per share price that is lower than the conversion price then in effect, the
conversion price shall be adjusted to such lower price, subject to certain exceptions. The Company is prohibited from effecting
a conversion of the Series A Convertible Preferred Stock to the extent that as a result of such conversion, the investor would
beneficially own more than 9.99% in the aggregate of the issued and outstanding shares of the Company’s common stock, calculated
immediately after giving effect to the issuance of shares of common stock upon conversion of the Series A Convertible Preferred
Stock. The shares of Series A Convertible Preferred Stock possess no voting rights.
On May 14, 2014, we entered into securities
purchase agreements with certain accredited investors pursuant to which we sold an aggregate of 6,000 shares of our then newly
designated Series A Convertible Preferred Stock at a price of $1,000 per share for gross proceeds to us of $6,000,000. Related
to the sale, we incurred offering costs of $620,085 resulting in net proceeds of $5,379,915. The transaction closed on May 15,
2014.
As the conversion price of the Series A
Convertible Preferred Stock on a converted basis was below the market price of the common shares on the closing date, this resulted
in a beneficial conversion feature recorded as an “imputed” dividend of $2,010,000. In addition, during the fourth
quarter of 2015, in connection with the 2015 Private Placement in which the Company’s common stock was sold at $3.00 per
share, the conversion price of the Series A Convertible Preferred Stock decreased to $3.00. This decrease resulted in an additional
beneficial conversion feature of $3,383,850 recognized as of the time of the 2015 Private Placement. In the future, issuance of
common stock or the grant of any rights to purchase our common stock or other securities convertible into our common stock for
a per share price less than the then existing conversion price of the Series A Convertible Preferred Stock would result in an adjustment
to the then current conversion price of the Series A Convertible Preferred Stock. This reduction would give rise to a beneficial
conversion feature recorded as an “imputed” dividend.
Note 10: Stock Options
On September 18, 2015, the Company adopted
the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The 2015 Plan was approved by our stockholders
in September 2015. The 2015 Plan as approved by the stockholders authorized the issuance up to an aggregate of 150,000 shares of
common stock. On December 14, 2015, the Board of Directors voted to amend the 2015 Plan to increase the total number of shares
that can be issued under the 2015 Plan by 1,293,334 from 150,000 shares to 1,443,334 shares. The increase in shares available for
issuance under the 2015 Plan was approved by stockholders on February 3, 2016. On May 18, 2017, the Board of Directors voted to
amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 223,333 shares from 1,443,334
shares to an aggregate of 1,667,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by the
stockholders on July 25, 2017.
The following table summarizes the changes
in the Company’s stock option plan during the three months ended March 31, 2018:
|
|
Options Outstanding Number of Shares
|
|
|
Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
|
Weighted Average Exercise Price per Share
|
|
Balance at December 31, 2017
|
|
|
1,294,045
|
|
|
$
|
2.82 - 12.00
|
|
|
|
2.99 years
|
|
|
$
|
–
|
|
|
$
|
8.14
|
|
Options Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
|
1,294,045
|
|
|
$
|
2.82 - 12.00
|
|
|
|
2.74 years
|
|
|
$
|
–
|
|
|
$
|
8.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2017
|
|
|
1,070,869
|
|
|
$
|
2.82 - 9.00
|
|
|
|
2.96 years
|
|
|
$
|
–
|
|
|
$
|
7.44
|
|
Exercisable March 31, 2018
|
|
|
1,070,869
|
|
|
$
|
2.82 - 9.00
|
|
|
|
2.72 years
|
|
|
$
|
–
|
|
|
$
|
7.44
|
|
During the year ended December 31, 2015,
the Company granted options to purchase 1,407,775 shares of common stock to officers, directors, employees, and consultants. These
stock options generally vest between one and three years, while a portion vested upon grant. The fair value of these options was
determined to be $2,402,460 using the Black-Scholes option pricing model based on the following assumptions:
Exercise Price
|
$2.82 - $12.00
|
Dividend Yield
|
0%
|
Volatility
|
100% - 137%
|
Risk-free interest rate
|
0.89% - 1.25%
|
Expected life of options
|
2.5 - 3.5 years
|
During the three months ended March 31,
2018, the Company recognized $47,852 in share-based compensation expense. The unvested share-based compensation as of March 31,
2018, was $80,417 which will be recognized through the second quarter of 2019 assuming the underlying grants are not cancelled
or forfeited.
Note 11: Warrants
The Company has warrants outstanding to
purchase up to 4,099,389 and 3,414,389 shares as of March 31, 2018 and December 31, 2017, respectively.
In connection with the sale of the Company’s
Series A Convertible Preferred Stock in May 2014, Chardan Capital Markets LLC (“Chardan”) acted as sole placement agent
in consideration for which it received a cash fee of $535,000 and a warrant to purchase up to 100,002 shares of the Company’s
common stock. These warrants are exercisable immediately, have an exercise price of $6.00 per share, and have a five-year term.
In connection with the 2015 Private Placement,
the Company issued to accredited investors the Original Warrants to purchase up to an aggregate of 1,443,362 shares of common stock
for a purchase price of $3.00 per share. The Original Warrants are exercisable into shares of common stock for a period of five
(5) years from issuance at an initial exercise price of $3.30 per share, subject to adjustment in the event of stock splits, dividends
and recapitalizations. The Original Warrants are exercisable immediately. The Company is prohibited from effecting an exercise
of the warrants to the extent that as a result of such exercise, the holder would beneficially own more than 4.99% (subject to
increase up to 9.99% upon 61 days’ notice) in the aggregate of the issued and outstanding shares of common stock, calculated
immediately after giving effect to the issuance of shares of common stock upon exercise of the warrant.
In connection with the 2015 Private Placement,
Chardan acted as sole placement agent in consideration for which it received a cash fee of $300,000 and a warrant to purchase up
to 141,668 shares of the Company’s common stock. These warrants are exercisable immediately, have an exercise price of $3.60
per share, and have a five-year term.
On February 9, 2017, the
Company entered into the Private Transaction pursuant to the Warrant Exercise Agreement with certain holders of the
Original Warrants. Pursuant to the Warrant Exercise Agreement, the holders of the Original Warrants and the Company agreed
that such Original Warrant holders would exercise their Original Warrants in full, and the Company would issue to each such
holder new warrants, with the new warrants being identical to the Original Warrants except that the termination date of such
new warrants is February 10, 2022 (the “Reload Warrants”). In addition, depending on the number of Original
Warrants exercised by all holders of the Original Warrants, the Company also agreed to issue to the holders another new
warrant, identical to the Original Warrant except that the exercise price of such warrant is $5.30 and such warrant is not
exercisable until August 10, 2017 (the “Market Price Warrants” and together with the Reload Warrants, the
“New Warrants”).
The Company received gross proceeds
of $3,866,573 from the exercise of the Original Warrants and issued Reload Warrants to purchase an aggregate of 799,991
shares of the Company’s common stock and Market Price Warrants to purchase an aggregate of 371,699 shares of the
Company’s common stock. In association with the Private Transaction, the Company recorded warrant exchange expense of
$1,402,174 representing the difference in the fair market value of the Original Warrants and the New Warrants, as an
adjustment to additional paid - capital.
Chardan acted as financial advisor on
the Private Transaction in consideration for which Chardan received $363,617 and Chardan and its designees were New Warrants for
115,000 shares of the Company’s common stock.
On October 3, 2017, the Company sold,
in a registered direct offering, 1,647,691 shares of common stock at an offering price of $3.90 per share and, in a concurrent
private placement, warrants to purchase an aggregate of 1,647,691 shares of common stock for gross proceeds of approximately $6,425,995
before deducting the placement agent fee and related offering expenses.
On January 10, 2018, the
Company issued warrants for 592,000 shares of the Company’s common stock in connection with the January 2018 Private Placement. The warrants were issued to the parties who purchased the Company’s common stock, as well as to Chardan and
its designees who acted as placement agents of the deal. The warrants expire in five years and were exercisable immediately
at an exercise price of $3.00 per share.
The following table summarizes the changes
in the Company’s outstanding warrants during the three months ended March 31, 2018:
|
|
Warrants Outstanding Number of Shares
|
|
|
Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price per Share
|
|
|
Aggregate Intrinsic Value
|
|
Balance at December 31, 2017
|
|
|
3,414,389
|
|
|
$
|
3.30 – 6.00
|
|
|
|
4.21 years
|
|
|
$
|
3.92
|
|
|
$
|
–
|
|
Warrants Granted
|
|
|
685,000
|
|
|
$
|
3.00
|
|
|
|
4.78 years
|
|
|
|
3.00
|
|
|
|
–
|
|
Warrants Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrants Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Balance at March 31, 2018
|
|
|
4,099,389
|
|
|
$
|
3.00 – 6.00
|
|
|
|
4.10 years
|
|
|
$
|
3.77
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2017
|
|
|
3,414,389
|
|
|
$
|
3.30 – 6.00
|
|
|
|
4.21 years
|
|
|
$
|
3.92
|
|
|
$
|
–
|
|
Exercisable March 31, 2018
|
|
|
4,099,389
|
|
|
$
|
3.00 – 6.00
|
|
|
|
4.10 years
|
|
|
$
|
3.77
|
|
|
$
|
–
|
|
Note 12: Income Taxes
The Company accounts for income
taxes in accordance with Accounting Standards Codification Topic 740 Income Taxes (“Topic 740”), which requires the recognition of
deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that
have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred
tax asset to an amount that is more likely than not to be realized.
Topic 740 provides guidance on the
accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company
to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the
technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position
to determine the amount to recognize in the financial statements.
The Company includes interest and penalties
arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of March 31,
2018, and December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions.
On December 22, 2017, the United States
federal government enacted the Tax Cuts and Jobs Act (the “2017 Act”). The 2017 Act will have pervasive financial reporting
implications for all companies with U.S. operations, including reduction of the U.S. federal corporate tax rate from 35 percent
to 21 percent. We reviewed and incorporated the new tax bill implications through 2017 financial statements. We remeasured
the deferred taxes at new corporation rate of 21%, which reduced the net deferred tax assets, before valuation allowance, by approximately
$2,809,700. Due to full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance.
The 2017 Act has no significant impact on the financial statements for the three months ended March 31, 2018 or for the year ended
Decembert 31, 2017.
Due to the complexities of the 2017
Act, the SEC issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not
have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the 2017 Act. During the measurement period, impacts of the law are expected to be recorded at
the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted
as information becomes available, prepared, or analyzed. Any subsequent adjustment to these amounts will be recorded to current
tax expense in 2018 when the analysis is complete.
The Company files income tax returns in
the U.S. federal jurisdiction and in the state of California and Massachusetts. The Company is currently subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
Note 13: Lease Commitments
Rental expenses incurred for operating
leases during the three months ended March 31, 2018 and March 31, 2017 were $35,160 and $35,007, respectively.
During the first quarter of 2015, the Company
entered into an agreement for new office space to which it relocated its operations upon the expiration of its prior lease. Effective
May 1, 2015, the Company began leasing approximately 3,251 square feet of general office space at 301 North Canon Drive, Suite
305, Beverly Hills, California 90210 pursuant to a 35-month sub-lease that commenced on May 1, 2015. The Company will pay $136,542
annually subject to annual escalations of 3%.
On February 6, 2018, the Company entered
into lease for approximately 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212
pursuant to a 91-month leave that commences on May 25, 2018. The Company will pay rent of approximately $364,130 annually, subject
to annual escalations of 3.5%.
The following is a schedule of future minimum
lease payments required by the non-cancelable operating lease agreement:
Year
|
|
|
Amount
|
|
|
2018
|
|
|
$
|
198,617
|
|
|
2019
|
|
|
|
371,082
|
|
|
2020
|
|
|
|
384,070
|
|
|
2021
|
|
|
|
397,512
|
|
|
2022
|
|
|
|
411,425
|
|
|
Thereafter
|
|
|
|
1,322,708
|
|
|
|
|
|
$
|
3,085,414
|
|
Note 14: Commitment and Contingencies
In the normal course of its business, the
Company enters into various agreements which call for the potential future payment of royalties or “profit” participations
associated with its individual properties. These profit participations can be for the use of third party intellectual property,
such as the case with
Stan Lee and the Mighty 7
and
Llama Llama
among others, in which the Company is obligated to
share net profits with the underlying rights holders on a certain basis as defined in the respective agreements.
In addition, in the normal course of its
business, the Company enters into agreements with various service providers such as animation studios, post-production studios,
writers, directors, musicians or other creative talent. Pursuant to these agreements, the Company is obligated to share with these
service providers a portion of the net profits of the properties on which they have rendered services, as defined in each respective
agreement.
Note 15: Related Party Transactions
On April 21, 2016, the Company entered
into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward,
the Company’s Chief Executive Officer. The Company entered into a customary merchandise license agreement with AHAA for the
use of characters and logos related to Warren Buffett’s
Secret Millionaires Club
and
Stan Lee’s Mighty 7
in connection with certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry,
and the Company earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. No amounts
were earned during the three months ended March 31, 2018, under this agreement.
On July 25, 2016, the Company entered into
a consulting agreement with Foothill Entertainment, Inc. (“Foothill”), an entity whose Chairman is Gregory Payne, our
corporate secretary. The Company has engaged Foothill Entertainment, Inc. for a term of six months to assist in the distribution
and commercial exploitation of its audiovisual content as well as for the preparation and attendance on behalf of the Company at
the MIPJR and MIPCOM markets in Cannes. Foothill receives $12,500 per month for these services. This agreement was extended on
a month to month basis through and terminated on January 31, 2018. As of March 31, 2018, Foothill owed the Company $17,784 that
Foothill collected on the Company’s behalf for a content license. Greg Payne owed the Company $2,939 for expenses. These
amounts were repaid on April 30, 2018.
On October 1, 2016, Llama Productions LLC
entered into an animation production services agreement with Mr. Heyward for services as a producer for which he is to receive
$186,000 through the course of production of the Company’s animated series
Llama Llama.
From October 1, 2016 through
December 31, 2017, Mr. Heyward has been paid $186,000. No amounts were paid during the three months ended March 31, 2018 under
this agreement.
Note 16: Subsequent Events
Pursuant to FASB ASC 855, Management has
evaluated all events and transactions that occurred from March 31, 2018 through the date of issuance of these financial statements.
During this period, we did not have any significant subsequent events, except as disclosed below:
|
|
|
|
·
|
On May 14, 2018 the Company issued 277,508 shares of common stock valued at $2.81 per share to a vendor for production services rendered.
|
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis
of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial
statements and related notes for the three months ended March 31, 2018 and 2017. Certain statements made or incorporated by reference
in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made
by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and
are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates
or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting
us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions
are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although
we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of
future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various
factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors”
in our Annual Report on Form 10-K filed on April 2, 2018 and elsewhere in this report, as well as other factors that may affect
our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date
hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless
otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as
a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that
the forward-looking statements contained in this report will, in fact, transpire.
Overview
The management’s discussion and analysis
is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires us to make certain estimates and judgments that
affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management
bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
Our Business
Genius Brands International, Inc. (“we,”
“us,” “our,” or the “Company”) is a global content and brand management company that creates
and licenses multimedia content. Led by proven industry leaders, the Company distributes its content in all formats
as well as a broad range of consumer products based on its characters. In the children's media sector, the Company’s portfolio
features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment, including
the award-winning
Baby Genius,
new preschool property
Rainbow Rangers
, debuting November 5, 2018 on Nickelodeon;
preschool property
Llama Llama
; that debuted on Netflix in December 2017 and has already been picked up by Netflix for
a second season; tween music-driven brand
SpacePop
; adventure comedy
Thomas Edison's Secret Lab®
, available
on, public broadcast stations and the Company’s Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku,
Amazon Fire ,You Tube and Amazon Prime; Warren Buffett's
Secret Millionaires Club,
created with and starring iconic
investor Warren Buffett. The Company is also has a partnership with Stan Lee's Pow! Entertainment which it manages for
creation, production, licensing and management of original Stan Lee superhero programs.
In addition, we act as licensing
agent for Llama Llama, leveraging our existing licensing infrastructure to expand this brand into new product categories, new retailers,
and new territories.
Recent Developments
January 2018 Private Placement
On January 8, 2018, we entered into a Securities
Purchase Agreement with certain accredited investors pursuant to which we sold approximately $1,800,000 of common stock and warrants
to such investors (the “January 2018 Private Placement”). We issued and sold to such investors warrants to purchase
592,000 shares of common stock at an exercise price of $3.00 per share.
Results of Operations
Our summary results for the three months
ended March 31, 2018, and March 31, 2017 are below.
Revenues
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
% Change
|
|
Television & Home Entertainment
|
|
$
|
3,754
|
|
|
$
|
43,373
|
|
|
$
|
(39,619
|
)
|
|
|
(91)%
|
|
Licensing & Merchandising
|
|
|
66,812
|
|
|
|
153,213
|
|
|
|
(86,401
|
)
|
|
|
(56)%
|
|
Kid Genius Networks
|
|
|
22,009
|
|
|
|
1,505
|
|
|
|
20,504
|
|
|
|
1362%
|
|
Product Sales
|
|
|
638
|
|
|
|
–
|
|
|
|
638
|
|
|
|
N/A
|
|
Total Revenue
|
|
$
|
93,213
|
|
|
$
|
198,091
|
|
|
$
|
(104,878
|
)
|
|
|
(
53)%
|
|
Television & Home Entertainment revenue
is generated from distribution of our properties for broadcast on television, VOD, or SVOD in domestic and international markets
and the sale of DVDs for home entertainment through our partners. Fluctuations in Television & Home Entertainment revenue occur
period over period based on the achievement of revenue recognition criteria such as the start of a license period and the delivery
of the content to the customer. During the three months ended March 31, 2018, compared to March 31, 2017, Television & Home
Entertainment revenue decreased $39,619 or 91% primarily due to the cumulative effect adjustment made as a result of adopting new
accounting standard ASC 606. The impact of the adoption reduced revenues for the three months ended March 31, 2018 by $68,184.
Licensing and royalty revenue includes
items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as
a licensing agent. During the three months ended March 31, 2018, compared to March 31, 2017, this licensing and royalty revenue
decreased $86,401 or 56% primarily due to decreases in revenues from our
SpacePop
property that was launched in June of
2016. There was no comparable title released during 2017.
Advertising sales are generated on the
Kid Genius Cartoon Channel in the form of either flat rate promotions or advertising impressions served. Advertising sales increased
by $20,504 during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to increased advertising
impressions served and additional ad campaigns in 2018 as we continue to grow this area of the business.
Total Expenses
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
Change
|
|
|
% Change
|
|
Marketing and Sales
|
|
$
|
60,980
|
|
|
$
|
89,504
|
|
|
$
|
(28,524
|
)
|
|
|
(32)%
|
|
Direct Operating Costs
|
|
|
(26,749
|
)
|
|
|
23,069
|
|
|
|
(49,818
|
)
|
|
|
(216)%
|
|
General and Administrative
|
|
|
1,322,452
|
|
|
|
1,400,925
|
|
|
|
(78,473
|
)
|
|
|
(6)%
|
|
Total Operating Expenses
|
|
$
|
1,356,683
|
|
|
$
|
1,513,498
|
|
|
$
|
(156,815
|
)
|
|
|
(10)%
|
|
Marketing and sales expenses decreased
$28,524 for the three months ended March 31, 2018 compared to March 31,2017 primarily due to fewer new releases in 2018.
Direct operating costs include costs
of our product sales, unamortizable post-production costs, film and television cost amortization expense, and participation
expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other
creative talent with which we are obligated to share net profits of the properties on which they have rendered services.
During the three months ended March 31, 2018, we recorded film and television cost amortization expense of $26,738 and
participation expense of $3,472 compared to March 31, 2017 expenses of $4,604 and $12,667, respectively. This increase in
amortization expense is related to adjustments made to certain film ultimates which increased the amortization rate. The
decrease in participation expense is directly related to decreased Television & Home Entertainment and Licensing and
Merchandising revenue in the current period compared to the prior period. In March of 2018, we negotiated a $120,000
reduction in the dubbing costs for the Llama Llama series which were accrued during the fourth quarter of 2017 when the
series was delivered to Netflix. This reduction resulted in a partial reversal of the accrual during the three months ended
March 31, 2018.
General and administrative expenses consist
primarily of salaries, employee benefits, share-based compensation related to stock options, insurances, rent, depreciation and
amortization as well as other professional fees related to finance, accounting, legal and investor relations. General and administrative
costs for three months ended March 31, 2018 decreased $78,473 compared to the same period in 2017. This decrease includes: (i)
decreases in share-based compensation expense of $174,140 related to the grant of options to officers, directors, employees and
consultants in the fourth quarter of 2015 and in 2016; and (ii) decreases in professional fees of $61,069. These decreases were
partially offset by increases in other general and administrative expenses of $150,136.
Liquidity and Capital Resources
Working Capital
As of March 31, 2018, we had current assets
of $8,854,964, including cash, cash equivalents, and restricted cash of $6,223,310, and current liabilities of $4,258,470, including
certain trade payables of $925,000 to which we dispute the claim, resulting in working capital of $4,596,494, compared to working
capital of $7,116,279 as of December 31, 2017.
Net working capital decreased
$2,519,785. Working capital increased as a result of the $1,800,000 of proceeds received for the sale of common stock and
warrants to accredited investors in connection with the January 2018 Private Placement. We issued and sold
warrants to purchase 592,000 shares of common stock at an exercise price of $3.00 per share. The increase was more
than offset by production costs of Rainbow Rangers and general overhead incurred during the three months ended March 31,
2018 including the lease deposits of $358,103.
Credit Facility
On August 8, 2016, Llama Productions LLC,
our wholly-owned subsidiary, closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the
“Facility”) with Bank Leumi USA to produce our animated series
Llama Llama
(the “Series”). The Series
is configured as fifteen half-hour episodes comprised of thirty 11 minute programs to be delivered to Netflix in Fall 2017. The
Facility is secured by the license fees we will receive from Netflix for the delivery of the Series as well as our copyright in
the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1% or one, three, or six month LIBOR
plus 3.25%. As a condition of the loan agreement with Bank Leumi, we deposited $1,000,000 into a cash account to be used solely
for the production of the series. During the fourth quarter of 2017, the facility was reduced from $5,295,000 to $4,843,416 and
a portion of the collateral was released to use, leaving $583,673 in restricted cash as of December 31, 2017. During the three
months ended March 31, 2018 the facility was repaid $1,125,000 and the remaining collateral was released and used to further pay
down the loan. The facility net balance as of March 31, 2018 is $2,689,320.
Comparison of Cash Flows for the Three
Months Ended March 31, 2018, and March 31, 2017
Our total cash, cash equivalents, and restricted
cash was $6,223,310 and $5,227,097 at March 31, 2018, and 2017, respectively.
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
Change
|
|
Cash used in operations
|
|
$
|
(1,214,107
|
)
|
|
$
|
(2,346,210
|
)
|
|
$
|
1,132,103
|
|
Cash used in investing activities
|
|
|
(23,672
|
)
|
|
|
–
|
|
|
|
(23,672
|
)
|
Cash (used in) provided by financing activities
|
|
|
(36,983
|
)
|
|
|
4,685,386
|
|
|
|
(4,722,369
|
)
|
(Decrease) Increase in cash
|
|
$
|
(1,274,762
|
)
|
|
$
|
2,339,176
|
|
|
$
|
(3,613,938
|
)
|
During the three months ended March 31,
2018, our primary sources of cash were the $1,596,340 in net proceeds from the sale of securities under a Securities Purchase Agreement
and collections of $1,125,000 from the Llama Llama broadcast agreement. During the three months ended March 31, 2017, our primary
sources of cash were the gross proceeds of $3,866,573 from the Private Placement Transaction coupled with $1,284,728 in proceeds
from the Llama Llama production facility.
Operating Activities
Cash used in operating activities for the
three months ended March 31, 2018 was $1,214,107 as compared to cash used in operating activities of $2,346,210 during the prior
period. The decrease in cash used in operating activities is primarily the result of decreases in accounts receivable due to collections
associated with the delivery of Llama Llama in December of 2017.
Investing Activities
Cash used in investing activities for the
three months ended March 31, 2018 was $23,672 as compared to a use of $0 for the development of certain intangible assets during
the comparable period in 2017.
Financing Activities
Cash used in financing activities for
the three months ended March 31, 2018 was $36,983 as compared to $4,685,386 generated in the comparable period in 2017. During
the three months ended March 31, 2018, the sources of cash generated from financing activities were the $1,596,340 in net proceeds
from the sale of securities under a Securities Purchase Agreement offset with payments made on the Llama Llama production loan
of $1,633,323. During the three months ended March 31, 2017, the sources of cash generated from financing activities were the
$3,400,658 in net proceeds from the Private Transaction coupled with the $1,284,728 in proceeds from the
Llama Llama
production
facility.
Capital Expenditures
As of March 31, 2018, we do not have any
material commitments for capital expenditures.
Critical Accounting Policies
Our accounting policies are described in
the notes to the financial statements. Below is a summary of the critical accounting policies, among others, that management believes
involve significant judgments and estimates used in the preparation of its financial statements.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared and Llama Productions
as well as its interest in Stan Lee Comics, LLC (“Stan Lee Comics”). All significant inter-company balances and transactions
have been eliminated in consolidation.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase
price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance
with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful
lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise.
We complete the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test
for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we have one.
While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted cash flows.
We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment regarding
the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the
fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets
in future periods.
Other intangible assets have been acquired,
either individually or with a group of other assets, and were initially recognized and measured based on fair value. In accordance
with FASB ASC 350 Intangible Assets, the costs of new product development and significant improvement to existing products are
capitalized while routine and periodic alterations to existing products are expensed as incurred. Annual amortization of these
intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Film and Television Costs
We capitalize production costs for episodic
series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs
are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment
over the period of commitment. We expense all capitalized costs that exceed the initial market firm commitment revenue in the period
of delivery of the episodes.
We capitalize production costs for films
produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are
capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value
of the film(s) delivered and recognized as revenue. We evaluate its capitalized production costs annually and limits recorded amounts
by their ability to recover such costs through expected future sales.
Additionally, for both episodic series
and films, from time to time, we develop additional content, improved animation and bonus songs/features for its existing content.
After the initial release of the film or episodic series, the costs of significant improvement to existing products are capitalized
while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
On January 1, 2018, we adopted
the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new
revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January
1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts
are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, (Topic 605).
Accordingly, on January 1, 2018 we
recorded a cumulative effect adjustment to beginning Accumulated Deficit in the amount of $173,112. The impact to our financial
statements for the three months ended March 31, 2018 resulting from the adoption of Topic 606 as of January 1, 2018 was a reduction
of revenue in the amount $68,184 and a corresponding reduction in costs in the amount of $10,099 from the amounts reported. The
amounts prior to adoption were not recognized pursuant to Topic 606 and would have been reported pursuant to Topic 605.
Changes to the opening balances in prepaid
and other assets, film and television costs, total assets, accrued expenses, deferred revenue and total liabilities resulting from
the adoption of the new guidance were as follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
Impact of
Adoption
|
|
|
January 1,
2018
|
|
Prepaid and Other Assets
|
|
$
|
265
|
|
|
$
|
(15
|
)
|
|
$
|
250
|
|
Film and Television Costs, net
|
|
|
2,777
|
|
|
|
(219
|
)
|
|
|
2,558
|
|
Total assets
|
|
|
27,713
|
|
|
|
(234
|
)
|
|
|
27,479
|
|
Accrued Expenses
|
|
|
1,718
|
|
|
|
2
|
|
|
|
1,720
|
|
Deferred Revenue
|
|
|
5,085
|
|
|
|
(409
|
)
|
|
|
4,676
|
|
Total liabilities
|
|
|
12,673
|
|
|
|
(407
|
)
|
|
|
12,266
|
|
We performed an analysis of our existing
revenue contracts and completed our new revenue accounting policy documentation under the new standard. The Company has identified
the following six material and distinct performance obligations:
|
·
|
License rights to exploit Functional Intellectual Property (Functional Intellectual Property
or “functional IP” is defined as intellectual property that has significant standalone functionality for example
ability be played or aired. Functional intellectual property derives a substantial portion of its utility from its
significant standalone functionality.)
|
|
·
|
License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or
“symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and
substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing
activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs
associated with its animated content.)
|
|
·
|
Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for our current contracts, it could become significant in the future.)
|
|
·
|
Options on future seasons of content at fixed terms. (While this performance obligation is not significant for our current contracts, it could become significant in the future.)
|
|
·
|
Fixed fee advertising revenue generated from the Genius Brands Network
|
|
·
|
Variable fee advertising revenue generated from the Genius Brands Network
|
As a result of the change, beginning January
1, 2018, we began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees,
we will recognize fixed revenue upon delivery of content and the start of the license period. For functional IP contracts with
a variable component, we will estimate revenue such that it is probable there will not be a material reversal of revenue in future
periods. Revenue under these types of contracts was previously recognized when royalty statements were received. We began recognizing
revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different
recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.
We sell advertising on our Kid Genius
channel in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, we recognize
revenue when all five revenue recognition criteria under FASB ASC 606 are met. For impressions served, we deliver a certain minimum
number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM per impression. Impressions
served are reported to us on a monthly basis, and revenue is reported in the month the impressions are served.
We recognize revenue related to product
sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to
pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for
future performance to directly bring about the resale of the product by the buyer.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise
from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease
payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.
The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments
should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application
permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the potential impact
of adopting this guidance on our consolidated financial statements.
In November 2016, the FASB issued
Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task
Force.” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the
statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning
after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. We have prospectively adopted
ASU 2016-18. The impact to our consolidated financial position, results of operations and cash flows is minimal.
In
January 2017, the FASB issued Accounting Standards
Update 2017-04, “Simplifying
the
Test for Goodwill Impairment,” which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill
impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the
total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under
which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the
carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted.
We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
I
n May 2017,
the FASB issued Accounting Standard Update 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting,”
which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification
(equity or liability) of the new award are different from the original award immediately before the original award is modified.
The standard is effective beginning January 1, 2018, with early adoption permitted. We are currently evaluating the potential impact
of adopting this guidance on our consolidated financial statements.
Various other accounting pronouncements
have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific
industries and are not expected to have a material effect on our financial position, results of operations, or cash flows.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We carried out an evaluation, under the
supervision and with the participation of our management, including our chief executive officer and chief financial officer, of
the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures
include, without limitation, controls and procedures that are designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management,
including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are effective for the period ended March 31, 2018, in ensuring that
information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control
over financial reporting that occurred during the quarter ended March 31, 2018, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Inherent Limitations over Internal Controls
Internal control over financial reporting
cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the
possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control
system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.