Notes to Condensed Consolidated Financial
Statements
September 30, 2020
(unaudited)
Note 1: Organization and Business
Organization and Nature of Business
Genius Brands International, Inc.
(“we,” “us,” “our,” or the “Company”) is a global content and brand
management company that creates and licenses multimedia content. Led by experienced industry personnel, we distribute our
content in all formats as well as a broad range of consumer products based on our characters. In the children's media sector,
our portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as
entertainment. New intellectual property titles include the preschool property Rainbow Rangers, which debuted in
November 2018 on Nickelodeon and which was renewed for a second season and preschool property Llama Llama, which
debuted on Netflix in January 2018 and was renewed by Netflix for a second season. Our library titles include the award
winning Baby Genius, adventure comedy Thomas Edison's Secret Lab® and Warren Buffett's Secret
Millionaires Club, created with and starring iconic investor Warren Buffett, which is distributed across our Genius
Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and
Zumo as well as Connected TV. We are also developing an all-new animated series, Stan Lee’s Superhero
Kindergarten with Stan Lee’s Pow! Entertainment, Oak Productions and Alibaba. Arnold Schwarzenegger lends his
voice as the lead and is also an Executive Producer on the series. The show will be broadcast in the United States on Amazon
Prime and the Company’s wholly owned distribution outlet, Kartoon Channel!. In July, 2020, the Company entered into a
binding term sheet with POW, Inc. (“POW!”) in which we agreed to form 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” and POW! and the Company are finalizing the details of the venture.
In addition, we act as licensing agent for
Penguin Young Readers, a division of Penguin Random House LLC who owns or controls the underlying rights to Llama Llama,
leveraging our existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.
The Company commenced operations in 2006, assuming
all the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement between the Company and Genius
Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “Baby Genius,” “Kid
Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under those titles.
In 2011, the Company reincorporated in Nevada and changed its name to Genius Brands International, Inc. (the “Reincorporation”).
In connection with the Reincorporation, the Company changed its trading symbol to “GNUS.”
In 2013, the Company entered into an Agreement
and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limited liability
company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member of A Squared
(the “Parent Member”), and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“Acquisition
Sub”). Upon closing of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company.
Liquidity
Historically, the Company has incurred net
losses. For the three months ended September 30, 2020 and September 30, 2019, the Company reported net losses of $2,007,209 and
$2,555,233, respectively. For the nine months ended September 30, 2020 and September 30, 2019, the Company reported net losses
of $391,101,155 and $9,277,867, respectively. The Company reported net cash used in operating activities of $5,316,579 and $4,636,416
for the nine months ended September 30, 2020, and September 30, 2019, respectively. As of September 30, 2020, the Company had an
accumulated deficit of $458,988,674 and total stockholders’ equity of $63,136,830. At September 30, 2020, the Company had
current assets of $54,864,958, including cash and cash equivalents of $50,461,566 and current liabilities of $6,990,911. The Company
had working capital of $47,874,047 as of September 30, 2020, compared to negative working capital of $3,650,136 as of December
31, 2019.
Prior to the Company’s successful capital
raises, the Company applied for a loan pursuant to the Paycheck Protection Program (the “PPP”) established under the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as interpreted and applied by the Small Business
Administration (the “SBA”). The application was approved and on April 30,2020, the Company received a loan with a principal
amount of $366,267. The loan has an interest rate of one percent (1%) per year and matures on April 19, 2021. The loan may be eligible,
in whole or in part, for forgiveness pursuant to the PPP. The Company shall apply to the lender for loan forgiveness in accordance
with the PPP as implemented by SBA. The Company reported the proceeds from the PPP loan as debt using the effective interest rate
method.
Warrant Exercise Agreement
On January 22, 2020, the Company entered into
a private transaction (the “Private Transaction”) pursuant to a Warrant Exercise Agreement (the “Agreement”)
with the holder of the Company’s existing warrants (the “Original Warrants”). The Original Warrants were originally
issued on October 3, 2017, to purchase an aggregate of 500,000 shares of Common Stock (as defined below) at an exercise price of
$3.90 per share and were to expire in October 2022.
Pursuant to the Agreement, the holder of the
Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and the
Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (the average closing price (as reflected
on Nasdaq.com) of the Common Stock (as defined below) for the five trading days immediately preceding the signing of the Agreement)
(the “Amended Exercise Price”). The Company received $170,000 from the exercise of the Original Warrants.
Secured Convertible Note and Warrant Private Placement
On March 11, 2020, the Company and certain
accredited investors (each an “Investor” and collectively, the “Investors”) entered into a Securities Purchase
Agreement (the “SPA”) pursuant to which the Company agreed to sell and issue (1) Senior Secured Convertible Notes to
the Investors in the aggregate principal amount of $13,750,000 (each, a “Note” and collectively, the “2020 Convertible
Notes”) and $11,000,000 funding amount (reflecting an original issue discount of $2,750,000) and (2) warrants to purchase
65,476,190 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), exercisable
for a period of five years at an initial exercise price of $0.26 per share (each a “Warrant” and collectively, the
“Warrants”), for consideration consisting of (i) a cash payment of $7,000,000, and (ii) full recourse cash secured
promissory notes payable by the Investors to the Company (each, an “Investor Note” and collectively, the “Investor
Notes”) in the principal amount of $4,000,000 (the “Investor Notes Principal”) (collectively, the “Financing”).
Andy Heyward, the Company’s Chairman and Chief Executive Officer, participated as an Investor and invested $1,000,000 in
connection with the Financing, all of which was paid at the closing and not pursuant to an Investor Note.
The closing of the sale and issuance of the
2020 Convertible Notes, the Warrants and the Placement Agent Warrants (as defined below) described below in Note 10 occurred on
March 17, 2020 (the “Closing Date”). The maturity date of the 2020 Convertible Notes is September 30, 2021 and the
maturity date of the Investor Notes is March 11, 2060.
2020 Convertible Notes can be converted at
the investor’s option into Common Stock at the conversion rate of $1.375 per share to be adjusted to $0.21 per share upon
receipt of stockholder approval and subject to certain other adjustments, according to the terms of the 2020 Convertible Notes
(the “Conversion Price”). On May 15, 2020, the Company received the necessary stockholder approval in connection with
the Nasdaq proposals described below in Note 10. As a result, the Conversion Price and the exercise price of the Warrants were
each reduced to $0.21.
The 2020 Convertible Notes can be converted
at the Company’s option, provided certain conditions are met, into Common Stock at the lower of the Conversion Price and
85% of the average of the five lowest daily weighted average prices of the Company’s shares during the measuring period,
according to the terms of the 2020 Convertible Notes.
Between June 10 and June 23, 2020, the 2020
Convertible Notes were converted and repaid through the issuance of 65,476,190 shares of Common Stock.
March 2020 Securities Purchase Agreement
On March 22, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “March Investors”), pursuant to which we agreed to issue
and sell, in a registered direct offering by the Company directly to the March Investors, an aggregate of 4,000,000 shares of our
Common Stock, at an offering price of $0.2568 per share for gross proceeds of approximately $1.0 million before deducting offering
expenses.
May 2020 Securities Purchase Agreements
On May 7, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 7th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 7th Investors,
an aggregate of 8,000,000 shares of our Common Stock, at an offering price of $0.35 per share for gross proceeds of approximately
$2.8 million before deducting offering expenses.
On May 8, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 8th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 8th Investors,
an aggregate of 12,000,000 shares of our Common Stock, at an offering price of $0.454 per share for gross proceeds of approximately
$5.448 million before deducting offering expenses.
On May 18, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 18th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 18th Investors,
an aggregate of 7,500,000 shares of our Common Stock, at an offering price of $1.20 per share for gross proceeds of approximately
$9.0 million before deducting offering expenses.
On May 28, 2020, we entered into a Securities
Purchase Agreement with certain long standing investors (the “May 28th Investors”), pursuant to which
we agreed to issue and sell, in a registered direct offering by the Company directly to the May 28th Investors,
an aggregate of 20,000,000 shares of our Common Stock, at an offering price of $1.50 per share for gross proceeds of approximately
$30.0 million before deducting offering expenses.
Between May 18 and June 11, 2020, the Company
received $5,649,319, net of expenses, from the exercise of 29,666,283 warrants at an exercise price of $0.21 per share.
On June 23, 2020, the Company received $3,600,000
from the payment of the Investor Notes Principal.
Between July 21 and July 28, 2020, the Company
received $50,511, net of expenses, from the exercise of 16,670 warrants at an exercise price of $3.30 per share.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 2020 and 2019 condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAP”).
Principles of Consolidation
The accompanying condensed consolidated financial
statements include the accounts of Genius Brands International, Inc., its wholly owned subsidiaries A Squared LLC, Llama Productions
LLC, Rainbow Rangers Productions LLC and its partially owned subsidiary Stan Lee Universe 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.
Use of Estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
Cash, 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 September 30, 2020, and December 31,
2019, the Company had Cash and Cash Equivalents of $50,461,566 and $305,121, respectively.
Allowance for Doubtful Accounts
Accounts receivable are presented on the balance
sheets net of estimated uncollectible amounts. The Company assesses its accounts receivable balances on a quarterly basis to determine
collectability and records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses based
on historical experience and future expectations. Individual uncollectible accounts are written off against the allowance when
collection of the individual accounts appears doubtful. The Company had an allowance for doubtful accounts of $92,659 for September
30, 2020 and $0 as of December 31, 2019.
Inventory
Inventories are stated at the lower of average
cost or net realizable value and consist of finished goods such as DVDs, CDs and other products. A reserve for slow-moving and
obsolete inventory is established for all inventory deemed potentially non-saleable. The current inventory is considered properly
valued and saleable. The Company concluded that there was an appropriate reserve for slow moving and obsolete inventory of $0 at
both September 30, 2020 and December 31, 2019.
Property and Equipment
Property and equipment are recorded at cost.
Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets,
which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add to the value of the assets
nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property and
equipment are reflected in the condensed consolidated statement of operations.
Right of Use Leased Assets
In February 2016, the FASB issued Accounting
Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise
from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance
is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the
beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the
beginning of an interim or annual reporting period.
In July 2018, the FASB issued ASU 2018-11,
Leases (“Topic 842”), Targeted Improvements, which allows for an additional optional transition method where comparative
periods presented in the financial statements in the period of adoption will not be restated and instead those periods will be
presented under existing guidance in accordance with ASC 840, Leases. Management used this optional transition method. As of January
1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070,
a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase
price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance
with FASB ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful
lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise.
The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year.
To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we
have one. While we may use a variety of methods to estimate fair value for impairment testing, our primary method is discounted
cash flows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment
regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate
of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible
assets in future periods.
Other intangible assets have been acquired,
either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual amortization
of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Debt and Attached Equity-Linked Instruments
The Company measures issued debt on an amortized
cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or the straight-line
method when the latter does not lead to materially different results.
The Company accounts for the proceeds from
the issuance of convertible notes payable in accordance with FASB ASC 470-20 Debt with Conversion and Other Options. Pursuant to
FASB ASC 470-20, the intrinsic value of the embedded conversion feature (beneficial conversion interest), which is in the money
on the commitment date is included in the discount to debt and amortized to interest expense over the term of the note agreement.
When the conversion option is not separated, the Company accounts for the entire convertible instrument including debt and the
conversion feature as a liability.
The Company analyzes freestanding equity-linked
instruments including warrants attached to debt to conclude whether the instrument meets the definition of the derivative and whether
it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to Company’s stock,
it is classified as an asset or liability recorded at fair value. If the instrument considered indexed to Company’s stock,
the Company analyzes additional equity classification requirements per ASC 815-40 Contract’s in Entity’s Own Equity.
When the requirements are met the instrument is recorded as part of the Company’s equity, initially measured based on its
relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument
is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.
When required, the Company also considers the
bifurcation guidance for embedded derivatives per FASB ASC 815-15 Embedded Derivatives.
Film and Television Costs
The Company capitalizes production costs for
episodic series produced in accordance with FASB ASC 926-20 Entertainment-Films - Other Assets - Film Costs. Accordingly, production
costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment
over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenue
in the period of delivery of the episodes.
The Company capitalizes production costs for
films produced in accordance with FASB ASC 926-20 Entertainment - Films - Other Assets - Film Costs. Accordingly, production costs
are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value
of the film(s) delivered and recognized as revenue. The Company evaluates its capitalized production costs annually and limits
recorded amounts by their ability to recover such costs through expected future sales.
In March 2019, the FASB issued ASU No. 2019-02,
Entertainment-Films-Other Assets-Film Costs (“Subtopic 926-20”) and Entertainment-Broadcasters Intangibles-Goodwill
and Other (Subtopic 920-350). The update aligns the accounting for production costs of an episodic television series with the accounting
for production costs of films by removing the content distinction for capitalization. The amendments also require that an entity
reassess estimates of the use of a film in a film group and account for any changes prospectively. The amendments in this update
require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment
at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements.
For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. We have prospectively adopted ASU 2019-02. The impact to our consolidated financial
position, results of operations and cash flows were not material.
Additionally, for both episodic series and
films, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing
content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are
capitalized while routine and periodic alterations to existing products are expensed as incurred.
Revenue Recognition
On January 1, 2018, the Company adopted the
new accounting standard ASC 606 (“Topic 606”), Revenue from Contracts with Customers and all the related amendments
(“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed
as of January 1, 2018. 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”).
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 recognizes revenue related to product
sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to
pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for
future performance to directly bring about the resale of the product by the buyer.
Direct Operating Costs
Direct operating costs include costs of our
product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related to
agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with
which we are obligated to share net profits of the properties on which they have rendered services.
Share-Based Compensation
As required by FASB ASC 718 - Stock Compensation,
the Company recognizes an expense related to the fair value of our share-based compensation awards, including stock options, using
the Black-Scholes calculation as of the date of grant. The Company has elected to use the graded attribution method for awards
which are in-substance, multiple awards based on the vesting schedule.
Earnings Per Share
Basic earnings (loss) per common share (“EPS”)
is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of common
stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common shareholders by
the weighted average number of shares of common stock outstanding, plus the assumed exercise of all dilutive securities using the
treasury stock or “as converted” method, as appropriate. During periods of net loss, all common stock equivalents are
excluded from the diluted EPS calculation because they are antidilutive.
Income Taxes
Deferred income tax assets and liabilities
are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted
tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other possible
sources of realization of deferred tax assets and records a valuation allowance that reduces the deferred tax assets to an amount
that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized.
Concentration of Risk
The Company’s cash is maintained at three
financial institutions and from time to time the balances for this account exceed the Federal Deposit Insurance Corporation’s
(“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC
up to $250,000 per account. As of September 30, 2020, the Company had four accounts with an uninsured balance of $49,459,910.
For the three months ended September 30, 2020,
the Company had two customers whose total revenue exceeded 10% of the total consolidated revenue. Those customers accounted for
24% of the total revenue and 16% of accounts receivable. One other customer accounted for 70% of accounts receivable. For the nine
months ended September 30, 2020, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue.
That customer accounted for 23% of the total revenue and 0% of accounts receivable. One other customer accounted for 70% of accounts
receivable. For three and nine months ended September 30, 2019, the Company had two customers whose total revenue each exceeded
10% of the total consolidated revenue. Those customers accounted for 52% and 57% of the total revenue respectively for the three
and nine months ended September 30, 2019 respectively. The Company had three customers that represented 75% of accounts receivable
as of September 30, 2019.
Fair value of financial instruments
The carrying amounts of cash, receivables,
accounts payable, and accrued liabilities approximate fair value due to the short-term maturity of the instruments. The carrying
amount of the Facility (as defined below) approximates fair value since the debt carries a variable interest rate that is tied
to either the current Prime or LIBOR rates plus an applicable spread.
The Company adopted FASB ASC 820 as of January
1, 2008, for financial instruments measured at fair value on a recurring basis. FASB ASC 820 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level
1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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·
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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·
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Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
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·
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Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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Recent Accounting Pronouncements
In March 2019, the FASB issued ASU No. 2019-02,
Subtopic 926-20 and Subtopic 920-350. The update aligns the accounting for production costs of an episodic television series with
the accounting for production costs of films by removing the content distinction for capitalization. The amendments also require
that an entity reassess estimates of the use of a film in a film group and account for any changes prospectively. The amendments
in this update require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350
for impairment at a film group level when the film or license agreement is predominantly monetized with other films and/or license
agreements. For public business entities, the amendments in this update are effective for fiscal years beginning after December
15, 2019, and interim periods within those fiscal years. We have prospectively adopted ASU 2016-18. The impact to our consolidated
financial position, results of operations and cash flows were not material.
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
is in the process of assessing the impact of the amendments to Company’s 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 September 30, 2020 and December 31, 2019:
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September 30,
2020
|
|
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December 31,
2019
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|
Furniture and Equipment
|
|
$
|
19,419
|
|
|
$
|
19,419
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|
Computer Equipment
|
|
|
162,308
|
|
|
|
144,643
|
|
Leasehold Improvements
|
|
|
14,182
|
|
|
|
14,182
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|
Software
|
|
|
30,498
|
|
|
|
15,737
|
|
Property and Equipment, Gross
|
|
|
226,407
|
|
|
|
193,981
|
|
Less Accumulated Depreciation
|
|
|
(166,386
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)
|
|
|
(129,105
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)
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Property and Equipment, Net
|
|
$
|
60,021
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|
|
$
|
64,876
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|
During the three months ended September 30,
2020 and 2019, the Company recorded depreciation expense of $10,206 and $9,378, respectively. During the nine months ended September
30, 2020 and 2019, the Company recorded depreciation expense of $37,281 and $28,223, respectively.
Note 4: Right Of Use Leased Asset
Right of use asset consisted of the following
as of September 30, 2020 and December 31, 2019:
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|
September 30,
2020
|
|
|
December 31,
2019
|
|
Office Lease Asset
|
|
$
|
2,245,093
|
|
|
$
|
4,387,956
|
|
Printer Lease Asset
|
|
|
12,374
|
|
|
|
12,374
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|
Right Of Use Asset, Gross
|
|
|
2,257,467
|
|
|
|
4,400,330
|
|
|
|
|
|
|
|
|
|
|
Office Lease Accumulated Amortization
|
|
|
(223,074
|
)
|
|
|
(383,118
|
)
|
Printer Lease Accumulated Amortization
|
|
|
(9,410
|
)
|
|
|
(7,375
|
)
|
Right Of Use Asset, Net
|
|
$
|
2,024,983
|
|
|
$
|
4,009,837
|
|
During the three months ended September 30,
2020, the Company recorded amortization expense of $89,412. During the nine months ended September 30, 2020, the Company recorded
amortization expense of $307,115.
On September 15, 2020, the Company entered
into a Surrender Agreement with the landlord which terminated the lease agreement. As a result, the Company recorded decreases
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 $85,676.
Note 5: Film and Television Costs, Net
As of September 30, 2020, the Company had net
Film and Television Costs of $11,300,812, compared to $9,906,885 at December 31, 2019. The increase primarily relates to the production
costs associated with Rainbow Rangers Season 2 and development of Stan Lee’s Superhero Kindergarten offset
by the amortization of Rainbow Rangers Season 1 and Llama Llama Seasons 1 and 2.
During the three months ended September 30,
2020 and 2019, the Company recorded Film and Television Cost amortization expense of $101,716 and $1,285,237, respectively. During
the nine months ended September 30, 2020 and 2019, the Company recorded Film and Television Cost amortization expense of $395,073
and $1,907,222, respectively.
The following table highlights the activity
in Film and Television Costs of September 30, 2020 and December 31, 2019:
|
|
Total
|
|
Film and Television Costs, Net as of December 31, 2018
|
|
$
|
8,166,131
|
|
Additions to Film and Television Costs
|
|
|
3,920,013
|
|
Capitalized Interest
|
|
|
50,765
|
|
Film Amortization Expense
|
|
|
(2,230,024
|
)
|
Film and Television Costs, Net as of December 31, 2019
|
|
|
9,906,885
|
|
Additions to Film and Television Costs
|
|
|
1,789,000
|
|
Capitalized Interest
|
|
|
–
|
|
Film Amortization Expense
|
|
|
(395,073
|
)
|
Film and Television Costs, Net as of September 30, 2020
|
|
$
|
11,300,812
|
|
Note 6: Investment In Stan Lee Universe
In July 2020, the Company and POW! entered
into an agreement to form an entity “Stan Lee Universe, LLC” (the “SLU”). SLU will hold worldwide rights,
on a perpetually renewing basis, to the name, physical likeness, and physical signature of Stan Lee. Further, the SLU will have
access to the POW! catalogue of intellectual property, created by Stan Lee, to exploit in live-action and animated motion pictures,
television, online, digital, publishing, comic book, and merchandising and licensing. As currently agreed, the Company will be
the managing partner of the JV.
As part of the agreement the Company agreed
to contribute $2,000,000 in cash to SLU and $200,000 to in kind contribution of resources including office space equipment for
a 50% ownership in SKU. The $2,000,000 cash contribution is payable in monthly payments of $250,000 starting August 2020.
POW! will contribute for a 35% ownership
in SLU:
|
·
|
All right, title, and interest to the name, image, likeness, voice, signature, unique characteristics,
and other personality rights recognized under California Civil Code Section 3344.1, and similar laws, to Stan Lee.
|
|
·
|
All trademarks containing the “Stan Lee” name, including but not limited to the trademark
“Stan Lee’s Superhero Kindergarten” (U.S. Serial No. 88653662);
|
|
·
|
All copyrights and related contractual rights POW! owns in or has rights to in the work entitled,
“Stan Lee’s Superhero Kindergarten”; and
|
|
·
|
The websites and associated social media accounts operated under the name “TheRealStanLee”.
|
As an initial contribution and in exchange
for a 15% ownership in SLU, the individuals granted shall contribute certain ongoing services to the SLU.
The parties are in the process of finalizing
the SLU operating agreement.
As of September 30,2020, the Company has contributed
$500,000 to the entity.
Note 7: Goodwill and Intangible Assets,
Net
Goodwill
In 2013, the Company recognized $10,365,806
in Goodwill, representing the excess of the fair value of the consideration for the merger over net identifiable assets acquired.
Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization but is subject to annual review to determine if certain events
warrant impairment to the Goodwill asset. Through September 30, 2020, the Company has not recognized any impairment to Goodwill.
Intangible Assets, Net
The Company had the following intangible assets
as of September 30, 2020 and December 31, 2019:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Trademarks (a)
|
|
$
|
129,831
|
|
|
$
|
129,831
|
|
Other Intangible Assets (a)
|
|
|
295,028
|
|
|
|
272,528
|
|
Intangible Assets, Gross
|
|
|
424,859
|
|
|
|
402,359
|
|
Less Accumulated Amortization (b)
|
|
|
(385,427
|
)
|
|
|
(350,776
|
)
|
Intangible Assets, Net
|
|
$
|
39,432
|
|
|
$
|
51,583
|
|
|
(a)
|
Pursuant to FASB ASC 350-30-35, the Company reviews these intangible assets periodically to determine if the value should be retired or impaired due to recent events. Through September 30, 2019, the Company has not recognized any impairment expense related to these assets.
|
|
(b)
|
During the three months ended September 30, 2020 and September 30, 2019, the Company recognized $13,013 and $9,456, respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets. During the nine months ended September 30, 2020 and September 30, 2019, the Company recognized $34,651 and $28,949, respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets.
|
Expected future intangible asset amortization as of September 30,
2020 is as follows:
|
2020
|
|
|
|
12,624
|
|
|
2021
|
|
|
|
11,692
|
|
|
2022
|
|
|
|
9,195
|
|
|
2023
|
|
|
|
5,187
|
|
|
2024
|
|
|
|
734
|
|
|
Total
|
|
|
$
|
39,432
|
|
Note 8: Deferred Revenue
As of September 30, 2020, and December 31,
2019, the Company had total short term and long term deferred revenue of $5,306,007 and $5,108,953, respectively. Deferred revenue
includes both (i) variable fee contracts with licensees and customers in which the Company had collected advances and minimum guarantees
against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these contracts when all revenue
recognition criteria have been met. Included in the deferred revenue balance as of September 30, 2020 and December 31, 2019 is
the $3,370,315 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 9: Accrued Liabilities – Current
As of September 30, 2020, and December 31,
2019, the Company has the following current accrued liabilities:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Other Accrued Expenses (a)
|
|
$
|
223,767
|
|
|
$
|
124,940
|
|
Accrued Salaries and Wages (b)
|
|
|
343,442
|
|
|
|
231,481
|
|
Total Accrued Liabilities – Current
|
|
$
|
567,209
|
|
|
$
|
356,421
|
|
|
(a)
|
Represents accrued interest, insurance liability, legal fees, and commissions.
|
|
(b)
|
Represents accrued salaries and wages and accrued vacation payable to employees for the nine months ended September 30, 2020 and the year ended December 31, 2019.
|
Note 10: Secured Convertible Notes
On August 17, 2018, the Company entered into
a Securities Purchase Agreement (the “August 2018 Purchase Agreement”) with certain investors (the “Investors”),
pursuant to which the Company agreed to sell (i) an aggregate principal amount of $4.50 million in secured convertible notes, convertible
into shares of our Common Stock, at a conversion price of $2.50 per share (the “August 2018 Secured Convertible Notes”)
and (ii) warrants to purchase 1,800,000 shares of our Common Stock at an exercise price of $3.00 per share (the “Warrants,”
and, together with the August 2018 Secured Convertible Notes, the “Securities”). We received approximately $4,500,000
in gross proceeds from the Offering.
The August 2018 Secured Convertible Notes were
our senior secured obligations and were secured by certain tangible and intangible property of the Company as described in the
August 2018 Purchase Agreement.
During the three months ended March 31, 2020,
the Company recognized $7,288 of discount amortization which is included in interest expense.
In conjunction with the February 2019 Offering
(as defined below) and concurrent private placement, we entered into an amendment, waiver and consent agreement, or the “Amendment,
Waiver and Consent Agreement,” with certain holders of our August 2018 Secured Convertible Notes. Pursuant to the Amendment,
Waiver and Consent Agreement, such holders agreed to amend the August 2018 Purchase Agreement, waive any applicable rights and
remedies under the August 2018 Purchase Agreement, and consent to the February 2019 Offering and concurrent private placement.
In consideration for such Amendment, Waiver and Consent Agreement, we agreed to issue such holders warrants to purchase up to an
aggregate amount 1,800,000 shares of our Common Stock. Such warrants have an exercise price of $2.55 per share, will become exercisable
commencing six months and one day from the date of issuance and will expire five (5) years from the date of issuance. The issuance
of the warrants resulted in a modification of debt in accordance with ASC 470 and is characterized as an extinguishment of debt
in accordance with ASC-470-50-40. In accordance with ASC-470-50-40-2 the Company derecognized the existing debt as if it was extinguished
and recorded the new debt, with the difference between the reacquisition price of the new debt and the net carrying amount of the
extinguished debt, $2,064,193 being recorded as a loss on the extinguishment of debt.
On March 16, 2020, the holders of the August
2018 Secured Convertible Notes were repaid in full including interest.
Note 11: Senior Secured Convertible Notes
On March 11, 2020, the Company and the Investors
entered into the SPA pursuant to which the Company agreed to sell and issue (1) the 2020 Convertible Notes and $11,000,000 funding
amount (reflecting an original issue discount of $2,750,000) and (2) the Warrants, for consideration consisting of (i) a cash payment
of $7,000,000, and (ii) the Investor Notes in the principal amount of $4,000,000. Andy Heyward, the Company’s Chairman and
Chief Executive Officer, participated as an Investor and invested $1,000,000 in connection with the Financing, all of which was
paid at the closing and not pursuant to an Investor Note.
The closing of the sale and issuance of the
2020 Convertible Notes, the Warrants and the Placement Agent Warrants occurred on March 17, 2020. The maturity date of the 2020
Convertible Notes is September 30, 2021 and the maturity date of the Investor Notes is March 11, 2060.
The SPA contains certain representations and
warranties, covenants and indemnities customary for similar transactions.
In addition, pursuant to the terms of the SPA,
the 2020 Convertible Notes and the Warrants, the Company agreed that the following will apply or become effective only following
Stockholder Approval: (1) the conversion price of the 2020 Convertible Notes shall be reduced to $0.21 per share and may be further
reduced to any amount and for any period of time deemed appropriate by the board of directors of the Company (the “Board
of Directors”), (2) the exercise price of the Warrants shall be immediately reduced to $0.21 per share and may be further
reduced to any amount and for any period of time deemed appropriate by the Board of Directors, (3) the 2020 Convertible Notes and
Warrants shall each have full ratchet anti-dilution protection for subsequent financings (subject to certain exceptions), (4) existing
warrant holders that are participating in the Financing (representing warrants to purchase an aggregate of 8,715,229 shares of
Company Common Stock) will have their existing warrants’ exercise prices reduced to $0.21 and (5) the investors shall have
a most favored nations right which provides that if the Company enters into a subsequent financing, then the Investors (together
with their affiliates) at their sole discretion shall have the ability to exchange their 2020 Convertible Notes on a $1 for $1
basis into securities issued in the new transaction. Additionally, in the event that any warrants or options (or any similar security
or right) issued in a subsequent financing include any terms more favorable to the holders thereof (less favorable to the Company)
than the terms of the Warrants, the Warrants shall be automatically amended to include such more favorable terms.
On May 15, 2020, the Company received necessary
Stockholder Approval in connection with the Nasdaq proposals described above. As a result, the conversion price of the 2020 Convertible
Notes and the exercise price of the Warrants were each reduced to $0.21. In addition, existing warrant holders that participated
in the Financing (representing warrants to purchase an aggregate of 9,172,463 shares of Common Stock) also had their existing warrants’
exercise prices reduced to $0.21.
Amortization of Principal
The 2020 Convertible Notes provide that the
Company will repay the principal amount of 2020 Convertible Notes in equal monthly installments of 1/12th of the principal amount
of the 2020 Convertible Notes beginning October 31, 2020 and the last business day of each calendar month anniversary thereafter
(each an “Installment Date”). On each Installment Date, assuming the Equity Conditions described below are met and
Stockholder Approval has been obtained, all or some of the Installment Amount (as defined in the 2020 Convertible Notes) shall
be converted into shares of Common Stock, provided however that the Company may elect prior to any Installment Date to pay all
or a portion of the installment amount in cash, under certain conditions in the SPA.
Any holder of a 2020 Convertible Note may,
by notice to the Company, accelerate future installment payments to any applicable Installment Date, in which case the Company
will deliver shares of Common Stock for the conversion of such accelerated payments (the “Accelerated Amount”), regardless
of whether the Installment Amount scheduled to be paid on such applicable Installment Date shall be paid in cash, shares of Common
Stock or a combination thereof. In the event that the Investor delivers one or more such notices of acceleration, the aggregated
Accelerated Amount shall not be greater than six (6) times such Investor’s pro rata amount.
If the Company fails to redeem the Company
Redemption Amount on the applicable Installment Date by payment of the Company Installment Redemption Price on such date, then
at the option of the Investor designated in writing to the Company (any such designation shall be deemed a “Conversion Notice”
pursuant to the 2020 Convertible Notes), (i) the Investor shall have the rights set forth in the 2020 Convertible Notes as if the
Company failed to pay the applicable Company Installment Redemption Price and all other rights as an Investor in the 2020 Convertible
Notes (including, without limitation, such failure constituting an Event of Default described in the 2020 Convertible Notes) and
(ii) the Investor may require the Company to convert all or any part of the Company Redemption Amount at the Company Conversion
Price as in effect on the applicable Installment Date.
Subject to certain beneficial ownership limitations,
until the Company Installment Redemption Price is paid in full, the Company Redemption Amount may be converted, in whole or in
part, by the Investor into Common Stock. In the event the Investor elects to convert all or any portion of the Company Redemption
Amount prior to the applicable Installment Date as set forth in the immediately preceding sentence, the Company Redemption Amount
so converted shall be deducted in reverse order starting from the final Installment Amount to be paid on the final Installment
Date, unless the Investor otherwise indicates and allocates among any Installment Dates in the applicable Conversion Notice.
Payment of Investor’s Notes
The Company will receive the applicable portion
of the Investor Notes Principal due upon each voluntary or mandatory prepayment of the Investor Notes. The Investors may, at their
option and at any time, voluntarily prepay the Investor Notes, in whole or in part. The Investor Notes are also subject to mandatory
prepayment, in whole or in part, upon the occurrence of one or more of the mandatory prepayment events. The Company may require
an investor to prepay the Investor Notes provided certain conditions are met including but not limited to the following: Stockholder
Approval has been obtained, and no Event of Default as defined in the terms of the 2020 Convertible Notes took place.
The Investor Notes also contain certain offset
rights of the Company and the Investors, which if exercised, would reduce the amount outstanding under 2020 Convertible Notes and
the Investor Notes by the same amount and, accordingly, the cash proceeds received by the Company from the investors. These offset
rights are triggered by specific occurrences that could jeopardize an Investor’s investment.
On the maturity date of the 2020 Convertible
Notes, the outstanding principal amount owed by an Investor to the Company under such Investor Note shall be satisfied and cancelled
in exchange for the cancellation of an equal amount owed the Company to such Investor under the related 2020 Convertible Notes.
The Company reports the Investor Notes and
the respective portion of the Convertible Notes that may be offset against the Investor Notes on a “gross” basis, i.e.
as an asset and a liability, respectively.
Optional Redemption at Company’s Election
At any time after the date of issuance of the
2020 Convertible Notes, the Company will have the right to redeem a portion or all of the 2020 Convertible Notes in cash at prices
depending on certain conditions as described in the SPA.
Conversion of the 2020 Convertible Notes
Each 2020 Convertible Note is convertible,
at the option of the holder, into shares of Common Stock at an initial conversion price of $1.375, subject to adjustment as provided
in the 2020 Convertible Notes; provided, however, upon receipt of Stockholder Approval, the conversion price shall be $0.21, subject
to adjustment as provided in the 2020 Convertible Notes.
On or after the date Stockholder Approval is
obtained, if the Company issues or sells, or the Company publicly announces the issuance or sale of, any shares of Common Stock,
or convertible securities or options issuable or exchangeable into Common Stock (a “New Issuance”), under which such
Common Stock is sold for a consideration per share less than the Conversion Price then in effect, the Conversion Price of the 2020
Convertible Notes will be adjusted to the New Issuance price in accordance with the formulas provided in the 2020 Convertible Notes.
Any such adjustment will not apply with respect to the issuance of Excluded Securities (as defined in the 2020 Convertible Notes).
Upon Stockholder Approval, the Conversion Price may be further reduced to any amount and for any period of time deemed appropriate
by the Board of Directors.
The Company classified the detachable warrants
as derivative financial liabilities that are recorded at fair value on a recurring basis separately from debt. The Company classified
investors’ and Company’s conversion options as a compound embedded derivative liability recorded separately from the
debt. The amount of debt discount arising from the separate accounting of the above financial instruments at March 17, 2020 was
$10,729,852.
On May 15, 2020 stockholders of the Company
approved the reduction of the Conversion Price to $0.21. During the three months ended June 30, 2020 the Investors converted their
2020 Convertible Notes in accordance with the terms of the agreement. $105,000 of the 2020 Convertible Notes were converted on
June 6, 2020 with the remainder of $13,645,000 converted on June 23, 2020. As part of the conversion accounting, the Company increased
the equity by the sum of the carrying amounts of the debt and separated conversion option liabilities, with no gain or loss recognized.
Overall amount credited to equity per the above accounting treatment was 1,990,413 on June 6, 2020 and 169,845,316 on June 23,
2020.
The Company estimated that the fair value of
the investor’s conversion options and the fair value of Company’s conversion options at March 17, 2020 and March 31,
2020 were immaterial. The estimated fair value of the investor’s conversion options associated with $105,000 of debt immediately
before the conversion on June 6, 2020 was 1,990,408. The estimated fair value of the investor’s conversion options associated
with $13,645,000 of debt immediately before the conversion on June 12, 2020 was $169,845,321. The Company estimated that the fair
value of Company’s conversion option on both conversion dates was immaterial. During the three months ended June 30, 2020,
the Company recognized a revaluation loss of $171,835,729 associated with the 2020 Convertible Notes conversion options. Additionally,
the Company recognized revaluation loss associated with detachable warrants of $208,760,698. During the three months ended September
30, 2020 the Company recognized a revaluation gain of $1,556,574 associated with the remaining detachable warrants.
Company’s interest expense associated
with the 2020 Convertible Notes was $0 and $ 1,033,666, respectively for the three and nine months ended September 30, 2020. The
interest expense included $631,852 excess of discount over the 2020 Convertible Notes’ principal. The discount is mainly
attributable to detachable warrants and 20% original issuance discount. The amount of unamortized discount at September 30, 2020
is $0. The Company recognizes interest expense associated with 2020 Convertible Notes using the effective interest rate method.
On June 23, 2020, the Company received $3,600,000,
net of expenses, from the payment of the Investor Notes Principal.
Between June 10 and June 23, 2020, the 2020
Convertible Notes were converted and repaid through the issuance of 65,476,190 shares of Common Stock.
Note 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 September 30, 2020, the Company was in compliance with these covenants.
On September 28, 2018, Llama entered into a
Loan and Security Agreement (the “Loan and Security Agreement”) with the Lender, pursuant to which the Lender agreed
to make a secured loan in an aggregate amount not to exceed $4,231,989 to Llama (the “Loan”). The proceeds of the Loan
will be used to pay the majority of the expenses of producing, completing and delivering two 22-minute episodes and sixteen 11-
minute episodes of the second season of the animated series Llama Llama to be initially exhibited on Netflix. To secure
payment of the Loan, Llama has granted to the Lender a continuing security interest in and against, generally, all of its tangible
and intangible assets, which includes all seasons of the Llama Llama animated series.
Under the Loan and Security Agreement, Llama
can request revolving loan advances under (a) the Prime Rate Loan facility and (b) the LIBOR Loan facility, each as further described
in the Loan and Security Agreement attached as an exhibit hereto. Prime Rate Loan advances shall bear interest, on the outstanding
balance thereof, at a fluctuating per annum rate equal to 1.0% plus the Prime Rate (as such term is defined in the Loan and Security
Agreement), provided that in no event shall the interest rate applicable to Prime Rate Loans be less than 4.0% per annum. LIBOR
Loan advances shall bear interest, on the outstanding balance thereof, for the period commencing on the funding date and ending
on the date which is one (1), three (3) or six (6) months thereafter, at a per annum rate equal to 3.25% plus the LIBOR determined
for the applicable Interest Period (as such terms are defined in the Loan and Security Agreement), provided that in no event shall
the interest rate applicable to LIBOR Loans be less than 3.25% per annum. The Maturity Date of the Prime Rate Loan facility and
LIBOR Loan facility is March 31, 2021. Interest rates on advances under the Loan and Security Agreement were between 3.48% and
4.25% as of September 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 September 30, 2020, the Company had gross
outstanding borrowing under the facility of $1,506,519. As of December 31, 2019, the Company had gross outstanding borrowing under
the facility of $3,091,739.
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: Stockholders’ Equity
Common Stock
As of September 30, 2020, the total number
of authorized shares of Common Stock was 400,000,000.
On January 8, 2020, the Company issued 43,077
shares of Common Stock valued at $0.65 per share to a provider for investor relations services.
On January 15, 2020, the Company issued 3,171,428
shares of Common Stock in exchange for 667 shares of Preferred Stock at a conversion price of $0.21 per share.
On January 22, 2020, the Company entered into
the Private Transaction pursuant to the Agreement with the holder of the Original Warrants. The Original Warrants were originally
issued on October 3, 2017, to purchase an aggregate of 500,000 shares of Common Stock, at an exercise price of $3.90 per share
and were to expire in October 2022.
Pursuant to the Agreement, the holder of the
Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and the
Company would amend the Original Warrants to reduce the exercise price thereof to the Amended Exercise Price. The Company received
approximately $170,000 from the exercise of the Original Warrants.
On March 22, 2020, the Company entered into
the Purchase Agreement with the Investors, pursuant to which the Company agreed to issue and sell, in the Registered Offering,
an aggregate of 4,000,000 shares Common Stock at an offering price of $0.2568 per share for gross proceeds of approximately $1.0
million before deducting offering expenses. The Registered Offering closed on March 25, 2020.
On May 7, 2020, we entered into a Securities
Purchase Agreement with the May 7th Investors, pursuant to which we agreed to issue and sell, in a registered direct
offering by the Company directly to the May 7th Investors, an aggregate of 8,000,000 shares of our Common Stock,
at an offering price of $0.35 per share for gross proceeds of approximately $2.8 million before deducting offering expenses.
On May 8, 2020, we entered into a Securities
Purchase Agreement with the May 8th Investors, pursuant to which we agreed to issue and sell, in a registered direct
offering by the Company directly to the May 8th Investors, an aggregate of 12,000,000 shares of our Common Stock,
at an offering price of $0.454 per share for gross proceeds of approximately $5.448 million before deducting offering expenses.
On May 18, 2020, we entered into a Securities
Purchase Agreement with the May 18th Investors, pursuant to which we agreed to issue and sell, in a registered
direct offering by the Company directly to the May 18th Investors, an aggregate of 7,500,000 shares of our Common
Stock, at an offering price of $1.20 per share for gross proceeds of approximately $9.0 million before deducting offering expenses.
On May 28, 2020, we entered into a Securities
Purchase Agreement with the May 28th Investors, pursuant to which we agreed to issue and sell, in a registered
direct offering by the Company directly to the May 28th Investors, an aggregate of 20,000,000 shares of our Common
Stock, at an offering price of $1.50 per share for gross proceeds of approximately $30.0 million before deducting offering expenses.
Between May 18 and June 11, 2020, the Company
received $5,649,319, net of expenses, from the exercise of 29,666,283 warrants at an exercise price of $0.21 per share.
Between May 15 and June 19, 2020 certain warrant
holders exercised 50,014,895 warrants in cashless transactions resulting in the issuance of 45,000,428 shares of Common Stock.
Between May 18 and June 24, 2020, the Company
issued 1,571,430 shares of Common Stock in exchange for 330 shares of Preferred Stock at a conversion price of $0.21 per share.
On June 22, 2020, the Company issued 49,610
shares of Common Stock valued at $3.85 per share to a provider for investor relations services.
Between June 10 and June 23, 2020, the 2020
Convertible Notes were converted and repaid through the issuance of 65,476,190 shares of Common Stock.
On July 15, 2020, the Company issued 32,609
shares of Common Stock valued at $2.30 per share to a provider for marketing services.
On July 21, 2020, the Company received $55,011,
net of expenses, from the exercise of 16,670 warrants at an exercise price of $0.454.
On July 22, 2020, the Company issued 124,451
shares of Common Stock valued at $2.30 per share to a provider for marketing services
As of September 30, 2020, and December 31,
2019, there were 219,029,900 and 21,877,724 shares of Common Stock outstanding, respectively.
Preferred Stock
The Company has 10,000,000 shares of preferred
stock authorized with a par value of $0.001 per share (the “Preferred Stock”). The Board of Directors is authorized,
subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares
of Preferred Stock in one or more series. Each series of Preferred Stock will have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as shall be determined by our Board of Directors, which
may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
As of September 30, 2020, and December 31,
2019, there were 100 and 1,097 shares of Series A Convertible Preferred Stock outstanding, respectively.
On February 19, 2019, the Company entered into
a Securities Purchase Agreement with a certain accredited investor pursuant to which we sold 945,894 shares of Common Stock and
warrants to purchase up to 945,894 shares of our Common Stock at 2.12 per share. As a result, the conversion price of the Series
A Convertible Preferred Stock decreased to $2.12. This decrease resulted in a beneficial conversion feature of $322,240 which was
recognized February 19, 2019.
Between
October 4, 2019 and October 22, 2019, the Company issued 296,053 shares of Common Stock in exchange for 225 shares of Series A
Convertible Preferred Stock at a conversion price of $0.76 per share.
On November 20, 2019, we entered into a settlement
agreement and release (“Settlement Agreement”) with certain holders of our Series A Convertible Preferred Stock (each,
a “Preferred Holder” and collectively, the “Preferred Holders”) constituting 58% of the outstanding Series
A Preferred Stock in connection with a dispute that arose between the parties with respect to certain rights under the Certificate
of Designations. Pursuant to the Settlement Agreement, we agreed to adjust the conversion price of the Series A Convertible Preferred
Stock to $0.21 and the parties agreed to terminate and deem null and void that certain Securities Purchase Agreement, dated as
of May 14, 2014, by and among the Preferred Holders and the other parties signatories thereto, with respect to the Preferred Holders.
The Preferred Holders, constituting the holders of at least a majority of the outstanding Preferred Shares (the “Required
Holders”), agreed and consented to an amendment and restatement of the Certificate of Designations. The parties also agreed
to customary releases and a covenant not to sue as further contained in the Settlement Agreement. Accordingly, on November 21,
2019, we filed an Amended and Restated Certificate of Designation (the “Amended and Restated Certificate”) for our
Series A Convertible Preferred Stock. The amendments, among other things, had the effect of setting the conversion price of the
Series A Convertible Preferred Stock at $0.21.
On January 9, 2020, the Company issued 3,171,428 shares of the Common stock in exchange for 667 shares of Series A Convertible Preferred Stock at a conversion price of $0.21
per share.
Between May 18 and June 24, 2020, the Company
issued 1,571,428 shares of Common Stock in exchange for 330 shares of Series A Convertible Preferred Stock at a conversion price
of $0.21 per share.
Note 15: Stock Options
On September 18, 2015, the Company adopted
the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The 2015 Plan was approved by the Company’s
stockholders in September 2015. The 2015 Plan as approved by the stockholders authorized the issuance up to an aggregate of 150,000
shares of Common Stock. On December 14, 2015, the Board of Directors voted to amend the 2015 Plan to increase the total number
of shares that can be issued under the 2015 Plan by 1,293,334 from 150,000 shares to 1,443,334 shares. The increase in shares available
for issuance under the 2015 Plan was approved by stockholders on February 3, 2016. On May 18, 2017, the Board of Directors voted
to amend the 2015 Plan to increase the total number of shares that can be issued under the 2015 Plan by 223,333 shares from 1,443,334
shares to an aggregate of 1,667,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by the
stockholders on July 25, 2017. On September 6, 2018, the Board of Directors voted to amend the 2015 Plan to increase the total
number of shares that can be issued under the 2015 Plan by 500,000 shares from 1,667,667 shares to an aggregate of 2,167,667 shares.
The increase in shares available for issuance under the 2015 Plan was approved by the Company’s stockholders on October 2,
2018.
On June 25, 2020, the Company granted options
to purchase 185,000 shares of Common Stock to certain employees and granted options to purchase 445,000 shares of Common Stock
to consultants for services. These stock options generally vest in three years. The fair value of these options was determined
to be $2,649,379 using the Black-Scholes option pricing model based on the following assumptions:
Exercise Price
|
$2.61 - $10.00
|
Dividend Yield
|
0%
|
Volatility
|
122%
|
Risk-free interest rate
|
0.31%
|
Expected life of options
|
5.0 years
|
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.
The following table summarizes the changes
in the Company’s stock option plan during the nine months ended September 30, 2020:
|
|
Options Outstanding Number Of Shares
|
|
|
Exercise Prices Per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Aggregate Intrinsic Value
|
|
Balance at December 31, 2019
|
|
|
1,289,866
|
|
|
$
|
1.99 - 12.00
|
|
|
|
6.49 years
|
|
|
$
|
7.18
|
|
|
|
–
|
|
Options Granted
|
|
|
630,000
|
|
|
$
|
2.61 - 10.00
|
|
|
|
4.74 years
|
|
|
$
|
5.08
|
|
|
|
–
|
|
Options Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Options Cancelled
|
|
|
2,000
|
|
|
$
|
1.99
|
|
|
|
3.44 years
|
|
|
$
|
1.99
|
|
|
|
–
|
|
Options Expired
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Balance at September 30, 2020
|
|
|
1,917,866
|
|
|
$
|
1.99 - 10.00
|
|
|
|
2.01 years
|
|
|
$
|
3.49
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2019
|
|
|
1,176,416
|
|
|
$
|
1.99 - 9.00
|
|
|
|
6.25 years
|
|
|
$
|
7.67
|
|
|
|
–
|
|
Exercisable September 30, 2020
|
|
|
1,321,142
|
|
|
$
|
1.99 - 3.17
|
|
|
|
0.87 years
|
|
|
$
|
2.69
|
|
|
|
–
|
|
During the nine months ended September 30,
2019, the Company granted options to purchase 81,000 shares of Common Stock to certain officers and employees. These stock options
vest on December 31, 2019. The fair value of these options was determined to be $117,797 using the Black-Scholes option pricing
model based on the following assumptions:
Exercise Price
|
$1.99
|
Dividend Yield
|
0%
|
Volatility
|
125%
|
Risk-free interest rate
|
2.44%
|
Expected life of options
|
3 years
|
During the nine months ended September 30,
2020, the Company recognized $764,136 in share-based compensation expense. The unvested share-based compensation as of September
30, 2020 was $2,028,123, which will be recognized through the second quarter of 2023 assuming the underlying grants are not cancelled
or forfeited.
Note 16: Warrants
The Company has warrants outstanding to purchase
up to 5,257,538 and 11,124,405 shares as of September 30, 2020 and December 31, 2019, respectively.
On February 19, 2019, the Company entered into
a securities purchase agreement with a certain accredited investor pursuant to which we sold 945,894 shares of Common Stock and
warrants to purchase up to 945,894 shares of our Common Stock, or the registered warrants, to such investor (the “February
2019 Offering”). The Company received $1,757,552 in net proceeds from this offering. Each share of Common Stock was accompanied
by a registered warrant to purchase one share of Common Stock at an exercise price of $2.12. Each share of Common Stock and accompanying
registered warrant were sold at a combined purchase price of $2.12. The shares of Common Stock and registered warrants were purchased
together and were issued separately and were immediately separable upon issuance. In a concurrent private placement, the Company
also sold to the purchaser in the February 2019 Offering, warrants to purchase up to 945,894 shares of our Common Stock, or the
private warrants.
In connection with the February 2019 Offering
and concurrent private placement, we entered into the Amendment, Waiver and Consent Agreement with certain holders of our August
2018 Secured Convertible Notes. Pursuant to the Amendment, Waiver and Consent Agreement, such holders agreed to amend the notes
purchase agreement, waive any applicable rights and remedies under the notes purchase agreement, and consent to the February 2019
Offering and concurrent private placement. In consideration for such Amendment, Waiver and Consent Agreement, we agreed to issue
such holders warrants to purchase up to an aggregate amount of 1,800,000 shares of our Common Stock. Such warrants have an exercise
price of $2.55 per share, will become exercisable commencing six months and one day from the date of issuance and will expire five
(5) years from the date of issuance.
The allocation of carrying basis between the
Warrants issued and the August 2018 Secured Convertible Notes was determined based on relative valuation. The carrying basis attributable
to the Warrants to acquire Common Stock was $1,287,962 and was calculated using the Black-Scholes option pricing model.
On July 22, 2019, the Company entered into
an amendment, waiver and consent agreement (the “Amendment, Waiver and Consent”) with certain holders constituting
(i) a majority-in-interest of the holders of the August 2018 Secured Convertible Notes and (ii) 51% in interest of the shares of
Common Stock issued pursuant to a securities purchase agreement, dated as of January 8, 2018, by and among the Company and the
purchasers identified on the signature pages thereto (the “January 2018 Purchase Agreement”). Pursuant to the Amendment,
Waiver and Consent, such holders have agreed to (i) amend the definition of “Exempt Issuance” in each of the August
2018 Purchase Agreement and January 2018 Purchase Agreement to include an agreement to issue or announce the issuance or proposed
issuance of Common Stock or Common Stock Equivalents (as that term is defined in each of the August 2018 Purchase Agreement and
January 2018 Purchase Agreement) in a public offering for an effective per share purchase price of Common Stock of less than $2.50
(the “Offering”), (ii) waive any applicable rights and remedies under the August 2018 Purchase Agreement and January
2018 Purchase Agreement, and (iii) consent to the Offering. In consideration for the Amendment, Waiver and Consent, the Company
agreed to reduce the conversion price of the Notes from $2.50 per share of Common Stock to $1.515 (the “Note Amendment”)
and issue all of the purchasers under the August 2018 Purchase Agreement warrants to purchase up to an aggregate of 1,800,000 shares
of our Common Stock (the “Waiver Warrants”). The Waiver Warrants will have an exercise price of $1.14 per share, will
become exercisable commencing six months and one day from the date of issuance and will expire five (5) years from the date of
issuance.
On September 18, 2019, the Company entered
into a private transaction (the “2019 Private Transaction”) pursuant to the Agreement with the holder of the Original
Warrants. The Original Warrants were originally issued on February 19, 2019, to purchase an aggregate of 945,894 shares of Common
Stock at an exercise price of $2.12 per share and expired on February 19, 2020.
Pursuant to the Agreement, the holder of the
Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and the
Company would amend the Original Warrants to reduce the exercise price thereof to $0.76. The Company received $718,879 from the
exercise of the Original Warrants before paying the placement agent fee of $50,321. The induced exercise resulted in the Company
recognizing and recording an “imputed dividend” of $181,884.
In connection with a private placement, the
Company issued to the Investor warrants exercisable for one share of Common Stock for an aggregate of 477,474 shares of Common
Stock at an exercise price of $0.76 per share. Each Warrant will be immediately exercisable on the date of its issuance and will
expire five years from the date it becomes exercisable. Subject to limited exceptions, a holder of a Warrant will not have the
right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of
4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such exercise. The Special Equities
Group, LLC, a division of Bradley Woods & Co. LTD, acted as placement agent and received a cash fee of $35,280 and warrants
to purchase 46,421 shares at an exercise price of $0.836 per share.
On December 16, 2019, the Company entered into
Warrant Exercise Agreements (the “Exercise Agreements”) with certain of the holders of the Existing Warrants to purchase
an aggregate of 3,646,135 shares of Common Stock (the “Exercising Holders”). Pursuant to the Exercise Agreements, the
Exercising Holders and the Company agreed that, subject to any applicable beneficial ownership limitations, the Exercising Holders
would exercise their Existing Warrants (the “Investor Warrants”) for shares of Common Stock underlying such Existing
Warrants (the “Exercised Shares”) at a reduced exercise price of $0.21 per share of Common Stock. In order to induce
the Exercising Holders to cash exercise the Investor Warrants, the Exercise Agreements provide for the issuance of new warrants
to purchase up to an aggregate of approximately 3,646,135 shares of Common Stock (the “New Warrants”), with such New
Warrants to be issued in an amount equal to the number of the Exercised Shares underlying any Investor Warrants. The New Warrants
are exercisable six months and one day after issuance and terminate on the date that is five years following the initial exercise
date. The New Warrants have an exercise price per share of $0.3004, which was the Nasdaq Official Closing Price on December 13,
2019.
On January 22, 2020, the Company entered into
the Private Transaction pursuant to the Agreement with the holder of the Company’s Original Warrants. The Original Warrants
were originally issued on October 3, 2017, to purchase an aggregate of 500,000 shares of Common Stock, at an exercise price of
$3.90 per share and were to expire in October 2022.
Pursuant to the Agreement, the holder of the
Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and the
Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (the average closing price of the Common
Stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the Agreement). The Company received
approximately $170,000 from the exercise of the Original Warrants.
The placement agent received warrants to purchase
50,000 shares at an exercise price of $0.34 per share.
Pursuant to the SPA described in Note 10, the
Company issued to the note holders warrants to purchase 65,476,191 shares of Common Stock, exercisable for a period of five years
at an initial exercise price of $0.26 per share.
The placement agent received warrants to purchase
6,547,619 shares at an exercise price of $0.26 per share.
On May 15, 2020 stockholders of the Company
approved the reduction in warrants exercise price for the 2020 Convertible Notes holders to $0.21. During the three months ended
September 30, 2020, certain warrant holders exercised warrants for 29,000,526 shares of Common Stock at $0.21 per share in cash.
Certain other warrant holders exercised 41,508,189, warrants on a cashless basis, resulting in the issuance of 37,449,140 shares
of Common Stock.
Estimated fair value of the exercised warrants
immediately before the exercise was $219,034,621. Estimated fair value of warrants outstanding at September 30, 2020 was $1,622,995.
During the three months ended September 30, 2020 the Company recognized revaluation gain associated with all warrants issued to
the note holders and placement agent of $1,556,574.
The fair values of derivative warrants attached
to the 2020 Convertible Notes were determined based on Level 3 inputs, using the Black-Scholes-Merton model with standard
valuation inputs. The valuation inputs used to value the warrants at March 31, 2020 included expected volatility of 89.91%,
and annual interest rate of 0.37%. The valuation inputs for the warrants outstanding at September 30, 2020 included expected volatility
of 112.83%, and annual risk-free interest rate of .26%.
On May 15, 2020 stockholders of the Company
approved the reduction of all previously issued warrants held by the 2020 Convertible Notes holders exercise price to $0.21. The
repricing of the warrants resulted in a deemed dividend of $1,840,384, which was charged to additional paid in capital for warrants
issued in connection with prior equity instruments and a warrant repricing loss of $744,321 recorded in Company’s consolidated
statements of operations, if the warrants were issued in connection with prior debt transaction. All warrants were repriced using
standard Black-Scholes-Merton valuation model. The valuation inputs for warrant repricing exercise included expected volatility
varying between 98.56% and 203.81% and annual risk-free interest rate of approximately 0.2%.
During the three months ended September 30,
2020, certain warrant holders exercised 16,670 warrants for shares of Common Stock at $3.30 per share in cash.
On May 25, 2020, the Company issued to an individual
and his management company 2,284,172 warrants to purchase shares of Common Stock at $1.39 per share for his involvement with the
production and distribution of a television series being developed by the Company. The warrants have a 10-year term and are fully
vested upon issuance. The warrants become immediately exercisable in whole upon the earlier of May 21, 2021 or the first date the
series is exhibited on television or is otherwise available for viewing through a streaming service or otherwise on the internet.
The Company anticipates the warrants will become exercisable by December 31, 2020. The warrants were valued at $3,174,806 using
the Black-Scholes option pricing model. The warrants were issued as an advance payment against participation amounts that will
become due to the individual upon the performance of the series. The warrants are being accounted as non-employee compensation
expense which has been recorded as prepaid participation expense over the expected exercise period. During the three and nine months
ended September 30, 2020, the Company recorded $1,327,646 and $1,847,160 as prepaid participation expense. The valuation inputs
for the warrants included expected volatility of 253.01%, and annual risk-free interest rate of 0.7%.
The following table summarizes the changes
in the Company’s outstanding warrants during the nine months ended September 30, 2020:
|
|
Warrants Outstanding Number Of Shares
|
|
|
Exercise Prices
Per Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price Per Share
|
|
Balance at December 31, 2019
|
|
|
11,124,405
|
|
|
$
|
3.30 - 6.00
|
|
|
|
4.37 years
|
|
|
$
|
1.74
|
|
Warrants Granted
|
|
|
74,357,982
|
|
|
$
|
0.21 - 1.39
|
|
|
|
4.63 years
|
|
|
$
|
0.25
|
|
Warrants Exercised
|
|
|
80,224,849
|
|
|
$
|
0.21 - 5.30
|
|
|
|
4.37 years
|
|
|
$
|
0.25
|
|
Warrants Expired
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Balance at September 30, 2020
|
|
|
5,257,538
|
|
|
$
|
0.21 - 5.30
|
|
|
|
6.43 years
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2019
|
|
|
7,176,620
|
|
|
$
|
0.76 - 6.00
|
|
|
|
3.77 years
|
|
|
$
|
2.52
|
|
Exercisable September 30, 2020
|
|
|
2,973,366
|
|
|
$
|
0.21 - 5.30
|
|
|
|
3.50 years
|
|
|
$
|
1.56
|
|
Note 17: Income Taxes
The Company accounts for income taxes in accordance
with Accounting Standards Codification Topic 740 Income Taxes (“Topic 740”), which requires the recognition of deferred
tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included
in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount
that is more likely than not to be realized.
Topic 740 provides guidance on the accounting
for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether
it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.
If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the
financial statements.
The Company includes interest and penalties
arising from the underpayment of income taxes in the consolidated statements of operation in the provision for income taxes. As
of September 30, 2020, and December 31, 2019, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the
U.S. federal jurisdiction and in the state of California and Massachusetts. The Company is currently subject to U.S. federal, state
and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
Note 18: Commitment and Contingencies
In February 2016, the FASB issued Accounting
Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise
from leases on the balance sheet. For practically all leases, a lessee should recognize in the statement of financial position
a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying
asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018.
In July 2018, the FASB issued Topic 842, Targeted
Improvements, which allows for an additional optional transition method where comparative periods presented in the financial statements
in the period of adoption will not be restated and instead those periods will be presented under existing guidance in accordance
with ASC 840, Leases. Management will use this optional transition method. As of January 1, 2019, management recorded lease liability
of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070, a reversal of previously recorded deferred
rent of $37,920 and the increase in accumulated deficit of $4,306.
As of September 30, 2020, weighted-average
lease term for operating leases equals to 81.91 months. Weighted-average discount rate equals to 10%.
On February 6, 2018, the Company entered into
an operating lease for 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant
to a 91-month lease that commenced on May 25, 2018. We pay rent of $364,130 annually, subject to annual escalations of 3.5%.
On September 11, 2020, the parties to the lease
entered into a surrender agreement whereby the lease was terminated, and the office was turned back over to the landlord. Per the
terms of the surrender agreement, the lease deposit of $325,000 was forfeited and the Company paid $25,000. The surrender resulted
in a loss of $85,676.
On December 28, 2018, the Company entered into
a lease for 5,765 square feet of general office space at 8383 Wilshire Blvd., Suite 412, Beverly Hills, CA 90211 pursuant to a
6-month lease that commenced January 28, 2019. We paid rent of $24,501 monthly through August 31, 2019.
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 will pay us rent of $422,321 annually,
subject to annual escalations of 3.5%. Since on or about April 2020, the subtenant has failed to make any rent payments. Consequently,
the Company, which had been passing through the subtenant’s rental payments to the landlord declined to pay the rent due.
On September 11, 2020, the parties to the lease
entered into a surrender agreement whereby the lease was terminated, and the office was turned back over to the landlord. Per the
terms of the surrender agreement, the sublease deposit of $131,000 was forfeited. The surrender resulted in a loss of $256,384.
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, 4th FL, Beverly Hills, CA 90210
pursuant to a 96-month lease that commenced on September 1, 2019. We pay rent of $392,316 annually, subject to annual escalations
of 3.5%. Due to government mandated “work-from-home” orders pertaining to non-essential businesses, we are currently
in discussions with our landlord with regard to rent payments and have not paid rent since March 2020.
In addition, the Company has contractual commitments
for employment agreements of certain employees.
Rental expenses incurred for operating leases
during the three months ended September 30, 2020 and September 30, 2019 were $141,962 and $210,062, respectively. Rental expenses
incurred for operating leases during the nine months ended September 30, 2020 and September 30, 2019 were $557,640 and $531,519,
respectively. During the three months ended September 30, 2020, we received sub-lease income of $78,277. During the nine months
ended September 30, 2020, we received sub-lease income of $316,762.
The following is a schedule of future minimum contractual obligations
as of September 30, 2020, under the Company’s operating leases and employment agreements:
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
Thereafter
|
|
|
Total
|
|
Operating Leases
|
|
$
|
170,255
|
|
|
$
|
347,785
|
|
|
$
|
429,984
|
|
|
$
|
447,183
|
|
|
$
|
465,071
|
|
|
$
|
1,330,866
|
|
|
$
|
3,191,144
|
|
Employment Contracts
|
|
$
|
309,494
|
|
|
$
|
421,629
|
|
|
$
|
322,950
|
|
|
$
|
282,581
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,336,654
|
|
Consulting Contracts
|
|
$
|
265,000
|
|
|
$
|
323,333
|
|
|
$
|
150,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
738,333
|
|
|
|
$
|
744,749
|
|
|
$
|
1,092,747
|
|
|
$
|
902,934
|
|
|
$
|
729,764
|
|
|
$
|
465,071
|
|
|
$
|
1,330,866
|
|
|
$
|
5,266,131
|
|
Note 19: 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. The agreement
was renegotiated and executed on more favorable terms to the Company on July 22, 2020. No amounts were earned during the three
and nine months ended September 30, 2020 and 2019, under this agreement as there were no revenue generated during the periods.
On August 31, 2018, Llama entered into an animation
production services agreement with Mr. Heyward for services as a producer for which he is to receive $124,000 through the course
of production of the Company’s animated series Llama Llama Season 2. As of December 31, 2019, Mr. Heyward was paid
$124,000. No further amounts are due or paid during the nine months ended September 30, 2020.
Pursuant to his employment agreement dated
November 16, 2018, Mr. Heyward is entitled to an Executive Producer fee of $12,400 per half hour episode for each episode he provides
services as an executive producer. The first identified series under this employment agreement is Rainbow Rangers. As of
December 31, 2019, 26 half hours had been delivered and accordingly Mr. Heyward was owed $322,400, which is included in the Due
To Related Party line item on our consolidated balance sheet. The second identified series under this employment agreement is Rainbow
Rangers Season 2. As of December 31, 2019, 13 half hours had been delivered and accordingly Mr. Heyward was owed $161,200,
which is included in the Due To Related Party line item on our consolidated balance sheet. Both of these amounts were paid on March
17, 2020. As of September 30, 2020, 4 additional half hours had been delivered and accordingly Mr. Heyward was owed $50,000, which
is included in the Due To Related Party line item on our consolidated balance sheet.
On September 17, 2019, Mr. Heyward purchased
$500,000 of the August 2018 Secured Convertible Notes from another holder. The Company did not receive any proceeds from this transaction.
The note and interest of $7,260 was repaid in March of 2020.
On October
2, 2019, Mr. Heyward purchased 1,000,000 shares of Common Stock for an aggregate purchase price of $760,000, or $0.76 per share.
On March 11, 2020, Mr. Heyward purchased $1,000,000
of the 2020 Convertible Notes with an original discount of $250,000.
On June 19, 2020, Mr. Heyward received 5,658,474
shares of Common Stock upon the cashless exercise of 6,119,048 warrants.
On June 23, 2020, Mr. Heyward received
5,952,381 shares of Common Stock upon conversion of $1,250,000 of 2020 Convertible Notes.
As of September 30, 2020, Andy Heyward is owed
$101,451 for reimbursable expenses which are included in the Due To Related Parties line item on our condensed consolidated balance
sheet.
Note 20: Subsequent Events
On October 15, 2020, the
Company issued to an individual and his management company $500,000 in cash, 1,000,000 shares of the Company’s common
stock at $1.44 per share and 1,000,000 warrants to purchase shares of Common Stock at $1.39 per share for his involvement
with the production and distribution of a television series being developed by the Company. The shares become freely
tradable, 50% upon the six-month anniversary of issuance and 50% upon one year of issuance. The cash and 50% of the share
value are being paid an issued as an advance payment against participation amounts that will become due the individual upon
performance of the series. The warrants have a 10-year term and. The warrants become immediately exercisable in whole upon
the earlier of May 21, 2021 or the first date the series is exhibited on television or is otherwise available for viewing
through a streaming service or otherwise on the internet. The Company anticipates the warrants will become exercisable by
December 31, 2020. The warrants were valued at $1,260,269 using the Black-Scholes option pricing model. The warrants were
issued as an advance payment against participation amounts that will become due to the individual upon the performance of the
series. The warrants are being accounted as non-employee compensation expense which will be recorded as prepaid publicity
expense over the expected exercise period.
On October 28, 2020, the Company, entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with certain 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 “Offering”), an aggregate of 37,400,000 shares (the “Shares”) of Common Stock, and warrants (“Investor
Warrants”) to purchase up to 37,400,000 shares of our Common Stock (“Investor Warrant Shares”). The purchase
price was $1.55 per fixed combination of one share of common stock and a warrant to purchase one share of common stock, for gross
proceeds of approximately $57.9 million before deducting the placement agent fees and offering expenses. The Company intends to
use the net proceeds of the Offering for certain accretive future acquisitions, and for our operations, including, but not limited
to, the development, production, distribution and marketing of animated content, including the recently announced Shaq’s
Garage, and associated licensed merchandise and general working capital.
The Investor Warrants have an exercise
price of $1.55 per share and are exercisable immediately on the date of issuance, and at any time thereafter up to five years from
the initial issuance date. A holder will not have the right to exercise any portion of the Investor Warrant if the holder would
beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the outstanding Common Stock immediately after
exercise, except that upon notice from the holder to the Company, the holder may increase or decrease the beneficial ownership
limitation up to 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as
such percentage ownership is determined in accordance with the terms of the Investor Warrants, provided that any increase in such
beneficial ownership limitation shall not be effective until 61 days following notice from the holder to the Company.
The Offering closed on October 30, 2020.
The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as placement agent and will receive (i) a cash fee
of approximately $4.1 million and (ii) warrants (“Placement Agent Warrants” and together with Investor Warrants, the
“Warrants”) to purchase 2,618,000 shares of Common Stock. The Placement Agent Warrants have the same form and terms
as the Investor Warrants. In addition, the Company will pay the placement agent a cash fee equal to 7% of the aggregate gross proceeds
from the exercise of any Warrants. The Company also reimbursed the lead Investor for $25,000 of its legal fees and expenses incurred
in connection with the Offering.
On November 15,
2020, the Company entered into a binding letter of intent (the “Letter of Intent”) with 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 Company expects to acquire 100% of the equity interests of ChizComm
in exchange for (i) $8.5 million in cash and (ii) $3.5 million of shares of the Company’s unregistered common stock, at a
per share price equal to the closing price of the Company’s common stock on the day prior to the closing of the acquisition,
for a total $12 million transaction value (the “Transaction Value”). As detailed in the Letter of Intent, $2 million
of the Transaction Value would be allocated to the acquisition of 2 million new subscribers for the Company’s Kartoon Channel!.
Further, ChizComm would be entitled to additional consideration of up to $8 million if the Company meets certain milestones following
the acquisition, as set out in the Letter of Intent. The Company expects to negotiate and execute definitive agreements with ChizComm
and to consummate the transactions contemplated in the Letter of Intent in the first fiscal quarter of 2021.