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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the
registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒ No
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The aggregate market value of the registrant’s
voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included
in such calculation is an affiliate) computed by reference to $1.84 as of the last business day of the registrant’s most recently
completed second fiscal quarter was $553,456,056.
This Annual Report on Form
10-K (including the section regarding Management's Discussion and Analysis and Results of Operation) contains forward-looking statements
regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations
thereof are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking
statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.
These statements include, among other things, statements regarding:
Although forward-looking statements
in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors
currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and
outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that
could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under
the heading “Risk Factors” in Item 1A. below, as well as those discussed elsewhere in this Annual Report on Form 10-K.
Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report
on Form 10-K. We file reports with the Securities and Exchange Commission (“SEC”) and our electronic filings with the SEC
(including our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these
reports) are available free of charge on the SEC’s website at http://www.sec.gov.
We undertake no obligation
to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review and consider the various disclosures made
throughout the entirety of this Annual Report on Form 10-K, which are designed to advise interested parties of the risks and factors that
may affect our business, financial condition, results of operations and prospects.
PART I
Overview
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 primarily on television
and streaming platforms and license our properties for a broad range of consumer products based on our characters. In the children's media
sector, our portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment.
New intellectual property titles include Stan Lee’s Superhero Kindergarten produced with Stan Lee’s Pow! Entertainment
and Oak Productions. Arnold Schwarzenegger lends his voice as the lead and is also an Executive Producer on the series. Another new offering
is KC! Pop Quiz, a live action game show featuring kids as contestants. The show is hosted by Casey Simpson, a prominent social
media influencer and former Nickelodeon star. Both KC! Pop Quiz and Superhero Kindergarten are being broadcast in the
United States on the Company’s wholly-owned advertiser supported video on demand (“AVOD”) distribution outlet, the Kartoon
Channel!. Other series include the preschool property Rainbow Rangers, which debuted in November 2018 on Nickelodeon, and which
was renewed for a third season and the preschool property Llama Llama, which debuted on Netflix in January 2018 and was renewed
by Netflix for a second season. Our content 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 in production on a new animated series starring Shaquille O’Neal
called Shaq’s Garage, which we expect to debut during the fourth quarter of 2022.
In addition, we act as licensing
agent for Penguin Young Readers, a division of Penguin Random House LLC which owns or controls the underlying rights to Llama Llama,
leveraging our existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.
Recent
Investments
Effective as of June 1, 2021,
we executed an Operating Agreement with POW!, Inc. (“POW!”) to form a joint venture to exploit certain rights in intellectual
property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called Stan Lee Universe, LLC (“SLU”)
and activity commenced during the fourth quarter of 2021. In exchange for a cash investment of $2.0 million, we obtained 50% ownership
in the entity as a variable interest in the Stan Lee trade name. This agreement enables SLU to assume the worldwide rights, in perpetuity,
to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing,
comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations (the “Stan Lee Assets”),
from which we plan to develop and license multiple properties each year. SLU is considered a variable interest entity in which we are
the primary beneficiary. Accordingly, the transaction was accounted for as an asset acquisition of a trade name intangible in the amount
of $4.0 million and the results of SLU are included in our consolidated financial statements, with the portion of non-controlling interest
recorded in our stockholders’ equity.
During June 2021, we started
investing our excess cash into available-for-sale marketable securities. As of December 31, 2021, we held $112.5 million of securities,
with a recorded unrealized loss on fair value of $1.3 million and received $1.2 million in interest income.
On December 1, 2021, we completed
a $6.8 million investment in Your Family Entertainment (“YFE”). In exchange for $3.4 million in cash and 2,281,269 shares
of our common stock (valued at approximately $3.4 million as of December 1, 2021), we received 3,000,500 shares of YFE’s common
stock. As of December 31, 2021, we had a 29% economic ownership interest in YFE.
On January 13, 2022, we acquired
Canadian streaming service Ameba TV and gained access to its kid-safe platform technology and 13,000 episodes of content including Casper
the Friendly Ghost, Donkey Kong Country, Gummy Bears and Rescue Heroes. We purchased 100% of Ameba’s issued and
outstanding shares for $3.5 million in cash and paid $0.3 million for the underlying software code that powers the subscription video
on demand (“SVOD”) deliveries. With the acquisition, we will launch a subscription-based streaming platform, the Kartoon
Channel! KidAverse. The platform will include all of the popular animated programs of a children’s channel, metaverse features
and it will be fully curated and child safe. The platform will also offer collectable digital cards based on many of the channel’s
popular characters, including those from the upcoming Stan Lee Universe and a digital currency for kids called Kidaverse MetaBuck$.
Additionally, we intend for the Kartoon Channel! Kidaverse to introduce child-safe messaging, podcasts, music, and additional content.
Pending Acquisition
On October 26, 2021, 1326919
B.C. LTD., a corporation existing under the laws of the Province of British Columbia and our wholly-owned subsidiary, and Wow Unlimited
Media Inc. (“WOW”), a corporation existing under the laws of the Province of British Columbia, entered into an Arrangement
Agreement to effect a transaction among the parties by way of a plan of arrangement under the arrangement provisions of Part 9, Division
5 of the Business Corporations Act, whereby we will purchase 100% of WOW’s issued and outstanding shares for $38.4 million
in cash and 11,000,000 shares of our common stock. We believe that the acquisition will allow us
to expand our audience demographic into the potentially lucrative teen and young adult marketplaces, provide additional content on the
Kartoon Channel! and provide additional brands to be licensed for consumer products and our global distribution sales networks.
Strategy
Our
over-arching strategic goal is to be a leading global producer and distributor of kids’ media. To achieve that goal, we are developing,
producing, marketing and licensing new branded children’s entertainment properties. The criteria for moving forward on a new project
include positive social messaging and fun and unique storytelling. We have invested heavily into our wholly owned worldwide distribution
system and our content is available to kids and families on a multitude of platforms and devices. We also have a licensing team to develop
and sell consumer products based on the brands we manage.
Our Products
Original Content
We own and produce original
content that is meant to entertain and enrich toddlers to tweens as well as families. It is generally a three-year cycle from the inception
of an idea, through production of the content and development and distribution of a range of consumer products to retail, creating an
inevitable lag time between the creation of the intellectual property to the realization of economic benefit of those assets. Our goal
is to maintain a robust and diverse portfolio of brands, appealing to various interests and ages, featuring evergreen topics with global
appeal. Our portfolio of intellectual property can be licensed, re-licensed, and potentially exploited for years to come, with revenue
derived from multiple sources and territories. Our portfolio of original content includes:
Content in Production
Shaq’s Garage: Shaq’s
Garage, starring and co-produced by NBA legend, Shaquille O’Neal, is a children’s animated series about the secret adventures
of Shaquille’s extraordinary collection of cars, trucks, and other unique vehicles—the Shaq Pack. Shaq’s Garage
is expected to be launched on the Kartoon Channel! during the fourth quarter of 2022.
Rainbow Rangers Season
3: From Shane Morris, the writer of Frozen, and Rob Minkoff, the director of The Lion King, Rainbow Rangers is
an animated series about the adventures of seven magical girls from Kaleidoscopia, a fantastic land on the other side of the rainbow.
The Rangers serve as Earth’s guardians and first-responders. Season 3 will be launched on the Kartoon Channel! on April 15,
2022. We are also currently negotiating broadcast agreements in several additional territories.
Already Released Content
Superhero Kindergarten:
In conjunction with Stan Lee’s POW! Entertainment and Arnold Schwarzenegger’s Oak Productions, we developed an animated pre-school
series with the current title of “Stan Lee’s Superhero Kindergarten.” Stan Lee’s Superhero Kindergarten
tells the story of a classroom, led by a former superhero/teacher voiced by Mr. Schwarzenegger, filled with kids with superpowers and
how they learn to use those powers to fight against the forces of evil while still dealing with all of the issues that come from being
six years old. Superhero Kindergarten premiered on the Kartoon Channel! during the second quarter of 2021.
KC! Pop Quiz: KC! Pop Quiz
is a quiz show for kids that is distributed by the Kartoon Channel!. The show’s mission is to entertain, inspire, and educate.
It features social media influencers as hosts and real kids who win real prizes. Having a “game show” format, it premiered
on the Kartoon Channel! during the third quarter of 2021.
Rainbow Rangers
Seasons 1 & 2: From Shane Morris, the writer of Frozen, and Rob Minkoff, the director of The Lion King, Rainbow
Rangers is an animated series about the adventures of seven magical girls from Kaleidoscopia, a fantastic land on the other side
of the rainbow. The Rangers serve as Earth’s guardians and first-responders. Viacom’s Nick Jr. licensed the series for
broadcast in the U.S. Nick Jr. ordered a second season of Rainbow Rangers and we have delivered 26 half hour episodes and the series
premiered on Nick Jr. in November 2018. We are also currently negotiating broadcast agreements in several additional
territories.
Llama Llama: We completed
production of fifteen half-hour animated episodes in 2017, which premiered on Netflix in early 2018. Llama Llama’s creators include
Oscar-winning director Rob Minkoff, director Saul Blinkoff (Doc McStuffins), showrunner Joe Purdy, art director Ruben Aquino (Frozen)
and Emmy-winning producers Jane Startz and Andy Heyward. Based on the NY Times best-selling children’s books of the same name, the
animated series centers on young Llama Llama’s first steps in growing up and facing childhood milestones. Each episode is structured
around a childhood milestone and a life lesson learned by Llama Llama and his friends, told with a sense of humor, vitality, and understanding.
In 2019, we completed production of an additional ten half-hour animated episodes which were delivered to Netflix in September 2019.
SpacePop: SpacePop
is a music and fashion driven animated property that has garnered over 17 million views and over 63,000 subscribers since its launch in
May 2016 on YouTube. With 108 three-minute webisodes produced, SpacePop had a best-in-class production team which included Steve
Banks (head writer and story editor of Sponge Bob Square Pants) as content writer; Han Lee (Pink Fizz, Bobby Jack) for original
character designs; multiple Grammy Award-winning producer and music veteran Ron Fair (Fergie, Mary J. Blige, Black Eyed Peas, Pussycat
Dolls, Christina Aguilera and more), singer-songwriter Stefanie Fair (founding member of RCA’s girl group Wild Orchid with Fergie)
for the original SpacePop theme music; and veteran music producer and composer John Loeffler (Kidz Bop, Pokemon) for original
songs. SpacePop products range from apparel and accessories, to beauty, cosmetics, candy, books and music.
Thomas Edison’s Secret
Lab: Thomas Edison’s Secret Lab is a STEM-based comedy adventure series by Emmy-nominated writer Steve Banks, multi-Emmy
Award-winning writer Jeffrey Scott (Dragon Tales), and Emmy Award-winning producer Mark Young (All Dogs Go To Heaven 2).
The series includes 52 eleven-minute episodes as well as 52 ninety-second original music videos produced by Grammy Award-winning producer
Ron Fair and premiered on public television in April 2015. The animated series follows the adventures of Angie, a 12-year-old prodigy
who, along with her young science club, discovers Thomas Edison’s secret lab.
Warren Buffett’s Secret
Millionaire’s Club: With 26 thirty-minute episodes and 26 four-minute webisodes, which premiered on public television in October
2011, this animated series features Warren Buffett who acts as a mentor to a group of entrepreneurial kids who have international adventures
that lead them to encounter neighborhood and community problems to solve. Warren Buffett’s Secret Millionaire’s Club empowers
kids by helping them learn about the business of life and the importance of developing healthy life habits at an early age.
All of our released content
can be streamed on our Kartoon Channel! platform.
Licensed Content
In addition to the wholly
owned or partially-owned properties listed above, we represent Llama Llama in the licensing and merchandising space.
Kartoon Channel! Network
In June 2020, we launched
the Kartoon Channel!, a digital family entertainment destination that delivers enduring childhood moments of humor, adventure,
and discovery and is available across multiple AVOD and over-the-top platforms, including Comcast, Cox, DISH, Sling TV, Amazon Prime,
Amazon Fire, Apple TV, Apple iOS, Android TV, Android Mobile, Google Play, Xumo, Roku, Tubi, and streaming via KartoonChannel.com, as
well as accessible via Samsung Smart TVs and LG TVs.
The Kartoon Channel!,
is available in over 170 million U.S. television households and on over 300 million devices, delivering numerous episodes of carefully
curated free family-friendly content. The channel features animated classics for little kids, including “The Wubbulous World
of Dr. Seuss,” “Babar,” “Mello Dees,” “Super Simple Songs,” and “Baby Genius,”
and content for bigger kids, such as “Pac-Man,” “Angry Birds,” “Yu-Gi-Oh,” and “Bakugan,”
to original programming like “Stan Lee’s Superhero Kindergarten,” starring Arnold Schwarzenegger. The Kartoon
Channel! also offers STEM-based content through its Kartoon Classroom!, including “Baby Einstein,” “Lil
Doc,” “Counting with Earl,” and more.
Distribution
Content
Today’s global marketplace
and the manner in which content is consumed has evolved to a point where we believe there is only one viable strategy, ubiquity. Kids
today expect to be able to watch what they want whenever they want and wherever they want. As such, content creators now must offer direct
access on multiple fronts. This includes not only linear broadcast in key territories around the world but also across a multitude of
digital platforms. We have strong relationships with and actively solicit placement for our content with major linear broadcasters, as
well as on the digital side with Netflix, Comcast’s Xfinity platform, AppleTV, Roku, Samsung TV, Amazon Fire, Amazon Prime, Netflix,
YouTube, Cox, Dish, Sling, Zumo and Connected TV. We replicate this model of ubiquity around the world defining content distribution strategies
by market that blends the best of linear, video on demand (“VOD”), and digital distribution.
Finally, we expanded our long-term
strategic partnership with Sony Pictures Home Entertainment from domestic to global in January 2017. On August 31, 2018, Sony Pictures
Home Entertainment assigned all of its rights and interest in our programs to Alliance Entertainment, LLC.
Consumer Products
A source of our revenue is
our licensing and merchandising activities from our underlying intellectual property content. We work directly in licensing properties
to a variety of manufacturers and occasionally to retailers. We currently have, across all brands, in excess of 50 licensees and hundreds
of licensed products either in development, in market or scheduled to enter the market. Products bearing our trademarks can be found in
a wide variety of retail distribution outlets reaching consumers in retailers such as Wal-Mart, Target, Barnes & Noble, Kohl’s,
Amazon.com and many more. License agreements that we enter into often include financial guarantees and commitments from the manufacturers
guaranteeing a minimum stream of revenue for us. As licensed merchandise is sold at retail, these advances and/or minimum guarantees can
earn out, at which point we could earn additional revenue.
Marketing
Our marketing mission is to
generate awareness and consumer interest in the brands of Genius via a 360-degree approach to reach audiences through all touchpoints.
Successful marketing campaigns for our brands have not only included traditional marketing tactics but now also include utilizing social
media influencers (individuals with a strong, existing social media presence who drive awareness of our brands to their followers), strategic
social media marketing, and cross-promotional consumer product campaigns. We also deploy digital and print advertising to support the
brands, as well as work with external media relations professionals to promote our efforts to both consumer and industry. We consistently
initiate grass roots marketing campaigns and strategic partnerships with brands that align and offer value to us. Our Kartoon Channel!
platform, which reaches over 170 million U.S. television households, provides reach for cross promotion of content and consumer products.
Competition
We compete against other creators
of children’s content including Disney, Nickelodeon, PBS Kids, and Sesame Street, as well as other small and large creators. In
the saturated children’s media space, we compete with these other creators for both content distribution across linear, VOD, and
digital platforms, as well as retail shelf space for our licensed products. To compete effectively, we are focused on our strategic positioning
of “content with a purpose,” which we believe is a point of differentiation embraced by the industry, as well as parents and
educators. Additionally, the Kartoon Channel! enables us to increase the awareness of our brands through an owned platform.
Customers and Licensees
For the year ended December
31, 2021, one customer accounted for 14.6% of our revenue from the licensing of our products. For the year ended December 31, 2020, two
customers accounted for 44% of our revenue from the delivery of Rainbow Rangers Season 2 to Nick Jr. and MTV Networks Latin America.
As of December 31, 2021, we have partnered with over 50 consumer products licensees. As of the same date, we licensed our content to over
60 broadcasters in over 150 countries globally as well as a number of VOD and online platforms that have a global reach. This broad cross-section
of customers includes companies such as Comcast, Netflix, Sony, YouTube, Mattel, Target, Penguin Publishing, Manhattan Toys, Roku, Apple
TV, Amazon, Google, Bertelsmann Music Group, Discovery International, and others both domestically and internationally.
Government Regulation
The FCC requires broadcast
networks to air a required number of hours of educational and informational content (E/I). We are subject to online distribution regulations,
namely the FTC’s Children’s Online Privacy Protection Act (COPPA) which regulates the collection of information of children
younger than 13 years old.
We are currently subject to
regulations applicable to businesses generally, including numerous federal and state laws that impose disclosure and other requirements
upon the origination, servicing, enforcement and advertising of credit accounts, and limitations on the maximum amount of finance charges
that may be charged by a credit provider. Although credit to some of our customers is provided by third parties without recourse to us
based upon a customer’s failure to pay, any restrictive change in the regulation of credit, including the imposition of, or changes
in, interest rate ceilings, could adversely affect the cost or availability of credit to our customers and, consequently, our results
of operations or financial condition.
Licensed toy products are
subject to regulation under the Consumer Product Safety Act and regulations issued thereunder. These laws authorize the Consumer Product
Safety Commission (the “CPSC”) to protect the public from products which present a substantial risk of injury. The CPSC can
require the manufacturer of defective products to repurchase or recall such products. The CPSC may also impose fines or penalties on manufacturers
or retailers. Similar laws exist in some states and other countries in which we plan to market our products. Although we do not manufacture
and may not directly distribute toy products, a recall of any of the products may adversely affect our business, financial condition,
results of operations and prospects.
We also maintain websites
which include our corporate website located at www.gnusbrands.com, as well as www.spacepopgirls.com, www.kidgeniustv.com, www.babygenius.com,
www.smckids.com, www.slam7.com, www.edisonsecretlab.com and www.rainbowrangers.com. These websites are subject to laws and regulations
directly applicable to internet communications and commerce, which is a currently developing area of the law. The United States has enacted
internet laws related to children’s privacy, copyrights and taxation. However, laws governing the internet remain largely unsettled.
The growth of the market for internet commerce may result in more stringent consumer protection laws, both in the United States and abroad,
that place additional burdens on companies conducting business over the internet. We cannot predict with certainty what impact such laws
will have on our business in the future. In order to comply with new or existing laws regulating internet commerce, we may need to modify
the manner in which we conduct our website business, which may result in additional expense.
Because our products are manufactured
by third parties and licensees, we are not significantly impacted by federal, state and local environmental laws and do not have significant
costs associated with compliance with such laws and regulations.
Intellectual Property
As of December 31, 2021, we
own the following properties and related trademarks: “Rainbow Rangers”, “SpacePop”, “Secret
Millionaires Club”, “Thomas Edison’s Secret Lab”, “Baby Genius”, “Kid Genius”,
“Wee Worship”, and “Kaflooey”, as well as several other names and trademarks on characters that
had been developed for our content and brands. Additionally, we have the United States trademark and various international trademarks
applications pending for Kartoon Channel!, Kartoon Channel! Jr., KC! Pop Quiz, Little Genius and Little Genius Jukebox.
As of December 31, 2021, we
hold 22 registered trademarks in multiple classes in the United States associated with the Genius brand. We also have a number of registered
and pending trademarks in Europe, Australia, China, Japan and Mexico and other countries in which our products are sold. We also jointly
hold 92 registered trademarks in multiple classes in multiple countries associated with our ownership interest in Stan Lee Universe, in
addition to 6 pending trademarks.
As of December 31, 2021, we
also hold 146 motion pictures, 13 sound recordings, and two literary work copyrights related to our video, music and written work products.
We have 50/50 ownership agreements
with the following partners and their related brands: Martha Stewart’s “Martha & Friends”; and Gisele Bündchen’s
“Gisele & the Green Team”.
In addition to the wholly-owned
or partially-owned properties listed above, we represent Llama Llama in the licensing and merchandising space.
Environmental, Social and Governance Strategy
We are attempting to shape
culture, social attitudes and societal outcomes with our animated content and consumer products that touch the lives of young people and
their families. As a global content company that reaches millions of people, we aim to be a positive force in the world.
We are committed to advancing
and strengthening our approach to environmental, social and governance (“ESG”) topics to help serve our partners, audiences,
employees and shareholders — and to enhance our success as a business.
We are committed to responsible,
ethical and inclusionary business practices as outlined below:
Human Capital Management
As of December 31, 2021, we
employed 67 full-time employees and 16 independent contractors.
We aim to build a culture
that attracts and retains the best employees and a workplace where everyone feels welcome, safe and inspired. Our human capital management
strategy is intended to address the following areas:
A Culture of Diversity, Equity and Inclusion
We seek to foster a culture
of diversity, equity and inclusion through a range of partnerships, collaborations, programs and initiatives, some of which are described
below.
We strive to be an inclusionary
workplace because we believe that it strengthens our business.
|
· |
In 2021, we created the role of Chief Diversity Officer. That role is responsible for both helping meet our hiring goals and reviewing the content we create. |
|
· |
Our board of directors is diverse: 33.3% female and with representation from people of color and the LGBTQ community. |
|
· |
Our diverse workforce is approximately 58% female. |
Preventing Harassment and Discrimination
We have enacted policies addressing
harassment, discrimination and other behaviors that could create a hostile workplace, some of which are described below.
|
· |
We make available to our employees, training on preventing sexual harassment, discrimination and retaliation. |
|
· |
We expect employees to report any violations of Company policies, including sexual harassment, they witness. Among other ways, employees can report incidents of harassment using our anonymous complaint and reporting hotline. |
Social Impact and Corporate Social Responsibility
We believe that the content
we produce, primarily directed at young people and their families, both reflects and influences how our young viewers perceive and understand
important issues. We endeavor to earn our viewers’ trust through a variety of practices, and we are focused on using our platforms
to create positive social impacts.
By way of just a few examples:
in our show Rainbow Rangers, a diverse cast of girls works to save animals and protect the environment, while demonstrating the
power of teamwork; in our Llama Llama series, we teach kindness and inclusion, and feature a differently abled character, which
we have been told is appreciated by moms and kids who deal with physical challenges. In the earliest days of the COVID-19 pandemic, we
spread public service messages to keep our audiences safe and informed with animated shorts featuring the iconic voices from our series
including Warren Buffett from The Secret Millionaires Club and Jennifer Garner, the voice of Mama Llama from the Llama Llama
series.
Our mission statement says
it all: “Content with a Purpose.” Social justice, caring about the environment and modeling appropriate and inclusionary behavior
for kids has been part of our company for many years and we are constantly seeking ways to improve on what we have already been doing.
Website Access to Our SEC Filings and Corporate
Governance Documents
On the Investors page on our
website www.gnusbrands.com we post links to our filings with the SEC, our Corporate Code of Conduct and Whistleblower Policy,
which applies to our Board of Directors, executives and all of our employees, our Company Bylaws, our Insider Trading Policy and the charters
of the committees of our Board of Directors. Our filings with the SEC are posted as soon as reasonably practical after they are electronically
filed with, or furnished to, the SEC. You can also obtain copies of these documents by writing to us at: Genius Brands International,
Inc., at 190 N. Canon Drive, 4th Floor, Beverly Hills, California 90210, Attn: Corporate Secretary or by using the “Contact”
page of our website www.gnusbrands.com/contact-us. All of these documents and filings are available free of charge. Generally,
stockholders who have questions or concerns should contact our Investor Relations department at 212-564-4700.
The contents of our website are not incorporated
in, or otherwise to be regarded as part of, this Annual Report on Form 10-K.
Risk Factor Summary
We
are providing the following summary of the risk factors contained in this Annual Report on Form 10-K to enhance the readability and accessibility
of our risk factor disclosures. We encourage you to carefully review the full risk factors contained in this Annual Report on Form 10-K
in their entirety for additional information regarding the material factors that make an investment in our securities speculative or risky.
These risks and uncertainties include, but are not limited to, the following:
Risks Relating to our Business
| · | Our business has been and may continue to be adversely affected by the COVID-19
pandemic. |
| · | We have incurred net losses since inception. |
| · | If we
are not able to obtain sufficient capital, we may not be able to continue our growth. |
| · | Our revenues and results of operations may fluctuate
from period to period. |
| · | The value of our investments is subject to significant capital markets risk related to changes in interest rates
and credit spreads as well as other investment risks, which may adversely affect our results of operations, financial condition or cash
flows. |
| · |
Changes in the United States, global or regional economic conditions could adversely affect the profitability of our business. |
| · | Inaccurately anticipating changes and trends in popular culture, media and movies, fashion, or technology can negatively affect our sales. |
| · | We face competition from a variety of content creators that sell similar merchandise and have better resources than we do. |
| · |
The production of our animated content is accomplished through third-party production and animation studios around the world, and any
failure of these third parties could negatively impact our business. |
| · | We cannot assure you that our original programming content will appeal to our distributors and viewers or that any of our original programming
content will not be cancelled or removed from our distributors’ platforms. |
| · | Failure to successfully market or advertise our products could have an adverse effect on our business, financial condition and results
of operations. |
| · | The failure of others to promote our products may adversely affect our business. |
| · | We may not be able to keep pace with technological advances. |
| · | Failure in our information technology and storage systems could significantly disrupt the operation of our business. |
| · | Our internal computer systems, or those of our collaborators or other contractors or consultants, may fail or suffer security breaches,
which could result in a material disruption and cause our business and reputation to suffer. |
| · | Loss of key personnel may adversely affect our business. |
| · | Litigation may harm our business or otherwise distract management. |
| · | Our vendors and licensees may be subject to various laws and government regulations, violation of which could subject these parties to
sanctions which could lead to increased costs or the interruption of normal business operations that could negatively impact our financial
condition and results of operations. |
| · | Protecting and defending against intellectual property claims may have a material adverse effect on our business. |
| · | Any additional future acquisitions or strategic
investments may not be available on attractive terms and would subject us to additional risks. |
| · | We are exposed to investment risk with the acquisition
of an equity interest in Your Family Entertainment AG. |
| · | We operate internationally, which exposes us
to significant risks. |
| · | We are exposed to foreign currency exchange rate risk. |
| · | A decrease in the fair values of our reporting
units may result in future goodwill impairments. |
Risks Relating to our Common Stock
| · | Our stock price may be subject to substantial volatility, and stockholders may lose all or a substantial part of their investment. |
| · |
Our failure to meet the continued listing requirements of Nasdaq Capital Market could result in a delisting of our common stock. |
| · | If our common stock becomes subject to the penny stock rules, it may be more difficult to sell our common stock. |
| · | If we fail to maintain effective internal controls over financial reporting,
the price of our common stock may be adversely affected. |
| · | We are authorized to issue “blank check” preferred stock without stockholder approval, which could adversely impact the rights
of holders of our common stock. |
| · | We do not expect to pay dividends in the future and any return on investment may be limited to the value of our common stock. |
| · | Offers or availability for sale of a substantial
number of shares of our common stock may cause the price of our common stock to decline. |
Risk Factors
The
following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding any statement
in this Form 10-K or elsewhere. The following information should be read in conjunction with Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related
notes beginning on Page F-1 of this Form 10-K.
You
should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report
on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the
only ones we face. Our business, financial condition and operating results can be affected by a number of factors, whether currently known
or unknown, including but not limited to those described below. Any one or more of such factors could directly or indirectly cause our
actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial
condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, results
of operations and stock price.
Because
of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance
should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
RISKS RELATING TO OUR BUSINESS
Our business has been and may continue to be adversely affected
by the COVID-19 pandemic.
We face various risks related
to health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic. The COVID-19 pandemic and the mitigation efforts
by governments to attempt to control its spread have adversely impacted the global economy, leading to reduced consumer spending and lending
activities. Our customers, and therefore our business and revenues, are sensitive to negative changes in general economic conditions.
We experienced significant revenue declines in several of our markets as a result of COVID-19, primarily due to the supply chain issues
that are affecting the toy industry and which are impacting our ChizComm Beacon Media subsidiary. We expect that the negative impacts
of the COVID-19 pandemic on our operating revenue will continue until health and economic conditions improve.
We continue to work with our
stakeholders (including customers, employees, consumers, suppliers, business partners and local communities) to responsibly address this
global pandemic. We will continue to monitor the situation and assess possible implications to our business and our stakeholders and will
take appropriate actions in an effort to mitigate adverse consequences. We cannot assure you that we will be successful in any such mitigation
efforts. The extent to which the COVID-19 pandemic will continue to negatively impact our operations will depend on future developments
which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, the emergence of new virus
variants, new information which may emerge concerning the severity of the COVID-19 pandemic, outbreaks occurring at any of our facilities,
the actions taken to control the spread of COVID-19 or treat its impact, and changes in worldwide and U.S. economic conditions. Further
deteriorations in economic conditions, as a result of the COVID-19 pandemic or otherwise, could lead to a further or prolonged decline
in demand for our products and services and negatively impact our business. It may also impact financial markets and corporate credit
markets which could adversely impact our access to financing or the terms of any such financing. We cannot at this time predict the extent
of the impact of the COVID-19 pandemic and its resulting economic impact, but it could have a material adverse effect on our business,
financial position, results of operations and cash flows. To the extent the COVID-19 pandemic adversely affects our business and financial
results, it may also have the effect of heightening many of the other risks described in this “Item 1A. Risk Factors” and
elsewhere in this Annual Report on Form 10-K, such as our ability to protect our information technology networks and infrastructure from
unauthorized access, misuse, malware, phishing and other events that could have a security impact as a result of our remote working environment
or otherwise. On March 15, 2022, we began implementing our “Return to Office” plan.
We have incurred net losses since inception.
We have a history of operating
losses and incurred net losses in each fiscal quarter since our inception. For the year ended December 31, 2021, we generated net revenues
of $7.9 million and incurred a net loss of $126.3 million, while for the previous year, we generated net revenue of $2.5 million and incurred
a net loss of $401.7 million. These losses, among other things, have had an adverse effect on our results of operations, financial condition,
stockholders’ equity, net current assets and working capital.
We will need to generate additional
revenue and/or reduce costs to achieve profitability. We are beginning to generate revenues derived from our existing properties, properties
in production, and new brands being introduced into the marketplace. However, the ability to sustain these revenues and generate significant
additional revenues or achieve profitability will depend upon numerous factors some of which are outside of our control.
If we are not able to obtain sufficient
capital, we may not be able to continue our growth.
We expect that as our business
continues to evolve and grow, we will need additional working capital. If adequate additional debt and/or equity financing is not available
on reasonable terms or at all, we may not be able to continue to expand our business, and we will have to modify our business plans accordingly.
These factors could have a material adverse effect on our future operating results and our financial condition.
Our revenues and results of operations may
fluctuate from period to period.
Cash flow and projections
for any entertainment company producing original content can be expected to fluctuate until the animated content and ancillary consumer
products are in the market and could fluctuate thereafter even when the content and products are in the marketplace. There is significant
lead time in developing and producing animated content before that content is in the marketplace. Unanticipated delays in entertainment
production can delay the release of the content into the marketplace. Structured retail windows that dictate when new products can be
introduced at retail are also out of our control. While we believe that we have mitigated this in part by creating a slate of properties
at various stages of development or production as well as representing certain established brands which contribute immediately to cash
flow, any delays in the production and release of our content and products or any changes in the preferences of our customers could result
in lower than anticipated cash flows.
As with our cash flows, our
revenues and results of operations depend significantly upon the appeal of our content to our customers, the timing of releases of our
products and the commercial success of our products, none of which can be predicted with certainty. Accordingly, our revenues and results
of operations may fluctuate from period to period. The results of one period may not be indicative of the results of any future period.
Any quarterly fluctuations that we report in the future may not match the expectations of market analysts and investors. This could cause
the price of our common stock to fluctuate.
Production cost will be amortized
according to the individual film forecasting methodology. If estimated remaining revenue is not sufficient to recover the unamortized
production costs, the unamortized production costs will be written down to fair value. In any given quarter, if we lower our previous
forecast with respect to total anticipated revenue, we would be required to adjust amortization of related production costs. These adjustments
would adversely impact our business, operating results and financial condition.
The value of our investments is subject
to significant capital markets risk related to changes in interest rates and credit spreads as well as other investment risks, which may
adversely affect our results of operations, financial condition or cash flows.
Our results of operations
are affected by the performance of our investment portfolio. Our excess cash is invested by an external investment management service
provider, under the direction of the Company’s management in accordance with the Company’s investment policy. The investment
policy defines constraints and guidelines that restrict the asset classes that we may invest in by type, duration, quality and value.
Our investments are subject to market-wide risks, and fluctuations, as well as to risks inherent in particular securities. The failure
of any of the investment risk strategies that we employ could have a material adverse effect on our financial condition, results of operations
and cash flows.
The value of our investments
is exposed to capital market risks, and our consolidated results of operations, financial condition or cash flows could be adversely affected
by realized losses, impairments and changes in unrealized positions as a result of: significant market volatility, changes in interest
rates, changes in credit spreads and defaults, a lack of pricing transparency, a reduction in market liquidity, declines in equity prices,
changes in national, state/provincial or local laws and the strengthening or weakening of foreign currencies against the U.S. dollar.
Levels of write-down or impairment are impacted by our assessment of the intent to sell securities that have declined in value as well
as actual losses as a result of defaults or deterioration in estimates of cash flows. If we reposition or realign portions of the investment
portfolio and sell securities in an unrealized loss position, we will incur an other-than-temporary impairment charge or realized losses.
Any such charge may have a material adverse effect on our results of operations and business.
For the year ended December
31, 2021, we incurred net realized and unrealized investment gains and losses, as described in Item 8, “Financial Statements and
Supplementary Data” included herein.
Changes in the United States, global or
regional economic conditions could adversely affect the profitability of our business.
A decrease in economic activity
in the United States or in other regions of the world in which we do business could adversely affect demand for our products, thus reducing
our revenue and earnings. A decline in economic conditions could reduce demand for and sales of our products. In addition, an increase
in price levels generally, or in price levels in a particular sector, could result in a shift in consumer demand away from the animated
content and consumer products we offer, which could also decrease our revenues, increase our costs, or both.
We may experience an adverse
impact on our results of operations due to the current geopolitical tensions caused by the Russian invasion of Ukraine. The governments
of the European Union, the United States, Japan and other jurisdictions have recently announced the imposition of sanctions on certain
industry sectors and parties in Russia and the regions of Donetsk and Luhansk, as well as enhanced export controls on certain products
and industries. These and any additional sanctions and export controls, as well as any counter responses by the governments of Russia
or other jurisdictions, could adversely affect, directly or indirectly, the levels of government spending or the global supply chain,
with negative implications on the availability and prices of raw materials, energy prices, and our customers, as well as the global financial
markets.
Further, the global economy
recovery from the COVID-19 pandemic will depend on many factors, including the recovery of the supply chain affecting the toy industry.
Any supply chain disruptions could result in loss of revenue, penalties due to delayed production and currency losses, or other unforeseen
costs which would negatively impact margins.
Inaccurately anticipating changes and trends
in popular culture, media and movies, fashion, or technology can negatively affect our sales.
While trends in the toddler
to tween sector change quickly, we respond to trends and developments by modifying, refreshing, extending, and expanding our product offerings
on an on-going basis. However, we operate in extremely competitive industries where the ultimate appeal and popularity of content and
products targeted to this sector can be difficult to predict. We believe our focus on “content with a purpose” serves an underrepresented
area of the toddler to tween market; however, if the interests of our audience trend away from our current properties toward other offerings
based on current media, movies, animated content or characters, and if we fail to accurately anticipate trends in popular culture, movies,
media, fashion, or technology, our products may not be accepted by children, parents, or families and our revenues, profitability, and
results of operations may be adversely affected.
We face competition from a variety of
content creators that sell similar merchandise and have better resources than we do.
The
industries in which we operate are competitive, and our results of operations are sensitive to, and may be adversely affected by, competitive
pricing, promotional pressures, additional competitor offerings and other factors, many of which are beyond our control. Indirectly through
our licensing arrangements, we compete for retailers as well as other outlets for the sale and promotion of our licensed merchandise.
Our primary competition comes from competitors such as The Walt Disney Company, Nickelodeon Studios, and the Cartoon Network.
We have sought a competitive
advantage by providing “content with a purpose” which are both entertaining and enriching for children and offer differentiated
value that parents seek in making purchasing decisions for their children. While we do not believe that this value proposition is specifically
offered by our competitors, our competitors have greater financial resources and more developed marketing channels than we do which could
impact our ability, through our licensees, to secure shelf space thereby decreasing our revenues or affecting our profitability and results
of operations.
The production of our animated content is
accomplished through third-party production and animation studios around the world, and any failure of these third parties could negatively
impact our business.
As part of our business model
to manage cash flows, we have partnered with a number of third-party production and animation studios around the world for the production
of our new content in which these partners fund the production of the content in exchange for a portion of revenues generated in certain
territories. We are reliant on our partners to produce and deliver the content on a timely basis meeting the predetermined specifications
for that product. The delivery of inferior content could result in additional expenditures by us to correct any problems to ensure marketability.
Further, delays in the delivery of the finished content to us could result in our failure to deliver the product to broadcasters to which
it has been pre-licensed. While we believe we have mitigated this risk by aligning the economic interests of our partners with ours and
managing the production process remotely on a daily basis, any failures or delays from our production partners could negatively affect
our profitability.
We cannot assure you that our original programming
content will appeal to our distributors and viewers or that any of our original programming content will not be cancelled or removed from
our distributors’ platforms.
Our business depends on the
appeal of our content to distributors and viewers, which is difficult to predict. Our business depends in part upon viewer preferences
and audience acceptance of our original programming content. These factors are difficult to predict and are subject to influences beyond
our control, such as the quality and appeal of competing programming, general economic conditions and the availability of other entertainment
activities. We may not be able to anticipate and react effectively to shifts in tastes and interests in markets. A change in viewer preferences
could cause our original programming content to decline in popularity, which could jeopardize renewal of agreements with distributors.
Low ratings or viewership for programming content produced by us may lead to the cancellation, removal or non-renewal of a program and
can negatively affect future license fees for such program. If our original programming content does not gain the level of audience
acceptance we expect, or if we are unable to maintain the popularity of our original programming, we may have a diminished negotiating
position when dealing with distributors, which could reduce our revenue. We cannot assure you that we will be able to maintain the success
of any of our current original programming content or generate sufficient demand and market acceptance for new original programming content
in the future. This could materially adversely impact our business, financial condition, operating results, liquidity and prospects.
Failure to successfully market or advertise our products could
have an adverse effect on our business, financial condition and results of operations.
Our products are marketed
worldwide through a diverse spectrum of advertising and promotional programs. Our ability to sell products is dependent in part upon the
success of these programs. If we or our licensees do not successfully market our products or if media or other advertising or promotional
costs increase, these factors could have an adverse effect on our business, financial condition, and results of operations.
The failure of others to promote our products
may adversely affect our business.
The availability of retailer
programs relating to product placement, co-op advertising and market development funds, and our ability and willingness to pay for such
programs, are important with respect to promoting our properties. In addition, although we may have agreements for the advertising and
promotion of our products through our licensees, we will not be in direct control of those marketing efforts and those efforts may not
be done in a manner that will maximize sales of our products and may have a material adverse effect on our business and operations.
We may not be able to keep pace with technological
advances.
The entertainment industry
in general, and the music and motion picture industries in particular, continue to undergo significant changes, primarily due to technological
developments. Because of the rapid growth of technology, shifting consumer tastes and the popularity and availability of other forms
of entertainment, it is impossible to predict the overall effect these factors could have on potential revenue from, and profitability
of, distributing entertainment programming. As it is also impossible to predict the overall effect these factors could have on our ability
to compete effectively in a changing market, if we are not able to keep pace with these technological advances, our revenues, profitability
and results from operations may be materially adversely affected.
Failure in our information technology and
storage systems could significantly disrupt the operation of our business.
Our ability to execute our
business plan and maintain operations depends on the continued and uninterrupted performance of our information technology (“IT”)
systems. IT systems are vulnerable to risks and damages from a variety of sources, including telecommunications or network failures, malicious
human acts and natural disasters. Moreover, despite network security and back-up measures, some of our and our vendors’ servers
are potentially vulnerable to physical or electronic break-ins, including cyber-attacks, computer viruses and similar disruptive problems.
These events could lead to the unauthorized access, disclosure and use of non-public information. The techniques used by criminal elements
to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As
a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If our computer systems
are compromised, we could be subject to fines, damages, litigation and enforcement actions, and we could lose trade secrets, the occurrence
of which could harm our business. Despite precautionary measures to prevent unanticipated problems that could affect our IT systems, sustained
or repeated system failures that interrupt our ability to generate and maintain data could adversely affect our ability to operate our
business.
Our internal computer systems, or those
of our collaborators or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption
and cause our business and reputation to suffer.
In the ordinary course of
business, our internal computer systems and those of our current and any future collaborators and other contractors or consultants are
vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical
failures. There may be an increased risk of cybersecurity attacks by state actors due to the current conflict between Russia and Ukraine.
Recently, Russian ransomware gangs have threatened to increase hacking activity against critical infrastructure of any nation or organization
that retaliates against Moscow for its invasion of Ukraine. While we do not believe that we have experienced any such material system
failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could adversely
affect our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions.
Any such access, disclosure or other loss of such information could result in legal claims or proceedings and damage our reputation.
Loss of key personnel may adversely affect our business.
Our success greatly depends
on the performance of our executive management team, including Andy Heyward, our Chief Executive Officer. The loss of the services of
any member of our core executive management team or other key persons could have a material adverse effect on our business, results of
operations and financial condition. We do not have “key man” insurance coverage for any of our employees.
Litigation may harm our business or otherwise
distract management.
Substantial, complex or extended
litigation could cause us to incur large expenditures and could distract management. For example, lawsuits by licensors, consumers, employees
or stockholders could be very costly and disrupt business. We recently had a securities class action and derivative shareholder action
filed against us. While disputes from time to time are not uncommon, we may not be able to resolve such disputes on terms favorable to
us.
Our vendors and licensees may be subject
to various laws and government regulations, violation of which could subject these parties to sanctions which could lead to increased
costs or the interruption of normal business operations that could negatively impact our financial condition and results of operations.
Our vendors and licensees
may operate in a highly regulated environment in the U.S. and international markets. Federal, state and local governmental entities and
foreign governments may regulate aspects of their businesses, including the production or distribution of our content or products. These
regulations may include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws and
revised tax law interpretations), product safety and other safety standards, trade restrictions, regulations regarding financial matters,
environmental regulations, advertising directed toward children, product content, and other administrative and regulatory restrictions.
While we believe our vendors and licensees take all the steps necessary to comply with these laws and regulations, there can be no assurance
that they are compliant or will be in compliance in the future. Failure to comply could result in monetary liabilities and other sanctions
which could increase our costs or decrease our revenue resulting in a negative impact on our business, financial condition and results
of operations.
Protecting and defending against intellectual
property claims may have a material adverse effect on our business.
Our ability to compete
in the animated content and entertainment industry depends, in part, upon successful protection of our proprietary and intellectual
property. We protect our property rights to our productions through available copyright and trademark laws and licensing and
distribution arrangements with reputable companies in specific territories and media for limited durations. Despite these
precautions, existing copyright and trademark laws afford only limited, or no, practical protection in some jurisdictions. It may be
possible for unauthorized third parties to copy and distribute our productions or portions of our productions. In addition, although
we own most of the music and intellectual property included in our products, there are some titles which the music or other elements
are in the public domain and for which it is difficult or even impossible to determine whether anyone has obtained ownership or
royalty rights. It is an inherent risk in our industry that people may make such claims with respect to any title already included
in our products, whether or not such claims can be substantiated. For example, in July 2020, we received a letter from a law firm
alleging that rights that we had licensed from POW!, LLC had already been sold to another company, Proxima. This matter was settled
by POW! in November 2021, but the settlement negotiations were costly and required diversion of management attention. If litigation
is necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could
result in substantial costs and the resulting diversion of resources could have an adverse effect on our business, operating results
or financial condition.
Any additional future acquisitions or strategic
investments may not be available on attractive terms and would subject us to additional risks.
Much of our growth is attributable
to acquisitions. In an effort to implement our business strategies, we may from time to time in the future attempt to pursue other acquisition
or expansion opportunities, including strategic investments. To the extent we can identify attractive opportunities, these transactions
could involve acquisitions of entire businesses or investments in start-up or established companies and could take several forms. These
types of transactions may present significant risks and uncertainties, including the difficulty of identifying appropriate companies to
acquire or invest in on acceptable terms, potential violations of covenants in our debt instruments, insufficient revenue acquired to
offset liabilities assumed, unexpected expenses, inadequate return of capital, regulatory or compliance issues, potential infringements,
difficulties integrating the new properties into our operations, and other unidentified issues not discovered in due diligence. In addition,
the financing of any future acquisition completed by us could adversely impact our capital structure. Except as required by law or applicable
securities exchange listing standards, we do not expect to ask our shareholders to vote on any proposed acquisition.
We are exposed to investment risk with the
acquisition of an equity interest in Your Family Entertainment AG.
During the year ended December
31, 2021, we acquired an equity interest in Your Family Entertainment AG (“YFE”). We are exposed to risk of the success of
the YFE business. We are also exposed to risk of adverse reactions to the transaction or changes to business relationships; competitive
responses; inability to maintain key personnel and changes in general economic conditions in Germany. If YFE fails to perform to our expectations,
it could have a material adverse effect on our results of operations or financial condition.
We operate internationally, which exposes
us to significant risks.
We have expanded into international
operations, including the acquisition of ChizComm, our pending acquisition of WOW and our investment in YFE. As part of our growth strategy,
we will continue to evaluate potential opportunities for further international expansion. Operating in international markets requires
significant resources and management attention, and subjects us to legal, regulatory, economic and political risks in addition to those
we face in the United States. We have limited experience with international operations, and further international expansion efforts may
not be successful.
In addition, we face risks
in doing business internationally that could adversely affect our business, including:
| · | Fluctuations in currency exchange rates, which
could increase the price of our products outside of the United States, increase the expenses of our international operations and expose
us to foreign currency exchange rate risk; |
| · | Currency control regulations, which might restrict
or prohibit our conversion of other currencies into U.S. dollars; |
| · | Restrictions on the transfer of funds; |
| · | Difficulties in managing and staffing international
operations, including difficulties related to the increased operations, travel, infrastructure, employee attrition and legal compliance
costs associated with numerous international locations; |
| · | Our ability to effectively price our products
in competitive international markets; |
| · | New and different sources of competition; |
| · | The need to adapt and localize our products for
specific countries; |
| · | Challenges in understanding and complying with
local laws, regulations and customs in foreign jurisdictions; |
| · | International trade policies, tariffs and other
non-tariff barriers, such as quotas; |
| · | The continued threat of terrorism and the impact
of military and other action, including military actions involving Russia and Ukraine; and |
| · | Adverse consequences relating to the complexity
of operating in multiple international jurisdictions with different laws, regulations and case law which are subject to interpretation
by taxpayers, including us. |
In addition, due to potential
costs from our international expansion efforts outside of the United States, our gross margin for international customers may be lower
than our gross margin for domestic customers. As a result, our overall gross margin may fluctuate as we further expand our operations
and customer base internationally.
Our failure to manage any
of these risks successfully could harm our international operations, and adversely affect our business, results of operations and financial
condition.
We are exposed to foreign currency exchange rate risk.
Because we conduct a growing
portion of our business outside the United States but report our financial results in U.S. dollars, we face exposure to adverse movements
in currency exchange rates. Our foreign operations are exposed to foreign exchange rate fluctuations as the financial results are translated
from the local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions will result in increased revenue, operating expenses and net income (or loss). If the
U.S. dollar strengthens against foreign currencies, however, the translation of these foreign currency denominated transactions will result
in decreased revenue, operating expenses and net income (or loss). As exchange rates vary, sales and other operating results, when translated,
may differ materially from expectations. We continue to review potential hedging strategies that may reduce the effect of fluctuating
currency rates on our business, but there can be no assurances that we will implement such a hedging strategy or that once implemented,
such a strategy would accomplish our objectives or not result in losses.
A decrease in the fair values of our reporting
units may result in future goodwill impairments.
When we acquire an entity,
the excess of the purchase price over the fair value of the net identifiable assets acquired is allocated to goodwill. We conduct impairment
tests on our goodwill at least annually based upon the fair value of the reporting unit to which such goodwill relates, including the
determination of expected future cash flows and/or profitability of such reporting units, and we take into account market value multiples
and/or cash flows of entities that we deem to be comparable in nature, scope or size to our reporting units. A goodwill impairment is
created if the estimated fair value of one or more of our reporting units decreases, causing the carrying value of the net assets assigned
to the reporting unit — which includes the value of the assigned goodwill — to exceed the fair value of such net assets. If
we determine such an impairment exists, we adjust the carrying value of goodwill allocated to that reporting unit by the amount of fair
value in excess of the carrying value. The impairment charge is recorded in our income statement in the period in which the impairment
is determined. If we are required in the future to record additional goodwill impairments, our financial condition and results of operations
would be negatively affected. In connection with fair value measurements and the accounting for goodwill, the use of generally accepted
accounting principles requires management to make certain estimates and assumptions. Significant judgment is required in making these
estimates and assumptions, and actual results may ultimately be materially different from such estimates and assumptions.
RISKS RELATING TO OUR COMMON STOCK
Our stock price may be subject to substantial
volatility, and stockholders may lose all or a substantial part of their investment.
Our
common stock currently trades on the Nasdaq Capital Market. There is limited public float, and trading volume historically has been low
and sporadic. As a result, the market price for our common stock may not necessarily be a reliable indicator of our fair market value.
The price at which our common stock trades may fluctuate as a result of a number of factors, including the number of shares available
for sale in the market, quarterly variations in our operating results, actual or anticipated announcements of new releases by us or competitors,
the gain or loss of significant customers, changes in the estimates of our operating performance, market conditions in our industry and
the economy as a whole.
Our failure to
meet the continued listing requirements of Nasdaq Capital Market could result in a delisting of our common stock.
If
we fail to satisfy the continued listing requirements of Nasdaq Capital Market, such as minimum financial and other continued listing
requirements and standards, including those regarding minimum stockholders’ equity, minimum share price, and certain corporate governance
requirements, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our
common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we
would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that
any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of
our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement, or prevent future non-compliance
with Nasdaq’s listing requirements.
On
March 4, 2022, we received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”)
notifying us that for the preceding 30 consecutive business days, our common stock did not maintain a minimum closing bid price of $1.00
per share (“Minimum Bid Price Requirement”) as required by Nasdaq Listing Rule 5550(a)(2). The notice had no immediate effect
on the listing or trading of our common stock, and our common stock will continue to trade on The Nasdaq Capital Market under the symbol
“GNUS” at this time.
In
accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have a grace period of 180 calendar days, or until August 31, 2022, to regain compliance
with Nasdaq Listing Rule 5550(a)(2). Compliance will be achieved automatically and without further action when the closing bid price of
our common stock is at or above $1.00 for a minimum of 10 consecutive business days at any time during the 180-day compliance period,
in which case Nasdaq will notify us of our compliance and the matter will be closed.
If,
however, we do not achieve compliance with the Minimum Bid Price Requirement by August 31, 2022, we may be eligible for additional time
to comply. In order to be eligible for such additional time, we will be required to meet the continued listing requirement for market
value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum
Bid Price Requirement, and we must notify Nasdaq in writing of its intention to cure the deficiency during the second compliance period.
There can be no guarantee that we will regain compliance with the Minimum Bid Price Requirement, that we will maintain compliance with
other Nasdaq Listing Rules, or that we will be eligible for a second compliance period.
If our common stock becomes subject to the
penny stock rules, it may be more difficult to sell our common stock.
The SEC has adopted rules
that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with
a price of less than $5.00 (other than securities registered on certain national securities exchanges or authorized for quotation on certain
automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided
by the exchange or system). The OTC Bulletin Board does not meet such requirements and if the price of our common stock is less than $5.00
and our common stock is no longer listed on a national securities exchange such as Nasdaq, our stock may be deemed a penny stock. The
penny stock rules require a broker-dealer, at least two business days prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver to the customer a standardized risk disclosure document containing specified information and to obtain from the
customer a signed and date acknowledgment of receipt of that document. In addition, the penny stock rules require that prior to effecting
any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive: (i) the purchaser’s written acknowledgment of the receipt
of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated
copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary
market for our common stock, and therefore stockholders may have difficulty selling their shares.
If we fail to maintain effective internal controls over financial
reporting, the price of our common stock may be adversely affected.
Our internal control over
financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have
an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial
reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures
regarding our business, prospects, financial condition or results of operations.
Rules adopted by the SEC pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain
issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must
be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant
documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote
resources to Section 404 compliance on an ongoing basis. In addition, we are not subject to auditor attestation of internal controls which
may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that
may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control
over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an
adverse impact on the price of our common stock.
We are authorized
to issue “blank check” preferred stock without stockholder approval, which could adversely impact the rights of holders of
our common stock.
Our Articles of Incorporation
authorize us to issue up to 10,000,000 shares of blank check preferred stock. Any additional preferred stock that we issue in the future
may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common
stock. In addition, such preferred stock may contain provisions allowing those shares to be converted into shares of common stock, which
could dilute the value of common stock to current stockholders and could adversely affect the market price, if any, of our common stock.
In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a
change in control of our company. Although we have no present intention to issue any additional shares of authorized preferred stock,
there can be no assurance that we will not do so in the future.
We do not expect
to pay dividends in the future and any return on investment may be limited to the value of our common stock.
We do not currently anticipate
paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition
and other business and economic factors affecting it at such time as our Board of Directors may consider relevant. Our current intention
is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development and marketing efforts. There
can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock, and in
any event, a decision to declare and pay dividends is at the sole discretion of our Board of Directors. If we do not pay dividends, our
common stock may be less valuable because the return on investment will only occur if its stock price appreciates.
Offers or availability for sale of a substantial
number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial
amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule 144, or shares issued
upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang”
and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have
occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related
securities in the future at a time and price that we deem reasonable or appropriate.
In general, under Rule 144,
a non-affiliated person who has held restricted shares of our common stock for a period of six months may sell into the market all of
their shares, subject to us being current in our periodic reports filed with the SEC.
As of December 31, 2021, approximately
285,646,247 shares of common stock of the 303,379,122 shares of common stock issued and outstanding are free trading. As of the same date,
there are 5,406,465 shares of common stock underlying outstanding warrants that could be sold pursuant to Rule 144 to the extent permitted
by any applicable vesting requirements as well as 40,105,500 shares of common stock underlying registered warrants. Lastly, as of December
31, 2021, there are 10,197,312 shares of common stock underlying outstanding options granted, 17,488,177 shares of common stock underlying
outstanding restricted stock units (“RSUs”) and 4,482,178 shares reserved for issuance under our Genius Brands International,
Inc. 2020 Incentive Plan.
Item 1B. |
Unresolved Staff Comments |
None.
Our principal office is located
in Beverly Hills, California, where we lease 5,838 square feet of general office space. We also lease 6,845 square feet of general office
space in Toronto, Canada and 4,765 square feet of general office space in Lyndhurst, New Jersey. We believe our existing facilities are
adequate to meet our current requirements and that suitable additional or substitute space will be available as needed to accommodate
any further physical expansion of operations and for any additional offices. See Note 24 in the Notes to our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for more information about our lease commitments.
Item 3. |
Legal Proceedings |
As of December 31, 2021, there
were no material pending legal proceedings to which the Company is a party or as to which any of its property is subject other than described
below.
On June 16, 2021, the Company
was named as a defendant in a lawsuit filed in the U.S. District Court for the Central District of California styled A Parent Media Co.
Inc. v. Genius Brands International, Inc., Case No. 2:21-CV-04897, alleging that the Company has infringed the plaintiff’s federally
registered trademarks KIDOODLE.TV, KIDOODLE and KIDOODLETV by sponsoring Google Ads in which the plaintiff’s trademarks appeared.
The parties entered into a confidential settlement agreement in November 2021, and the lawsuit was then dismissed with prejudice along
with the entry of a permanent injunction by the Court.
As previously disclosed, the
Company, its Chief Executive Officer, Andy Heyward, and its Chief Financial Officer, Robert Denton, are named as defendants in a putative
class action lawsuit filed in the U.S. District Court for the Central District of California and styled In re Genius Brands International,
Inc. Securities Litigation, Master File No. 2:20-cv-07457 DSF (RAOx). Initially, the lead plaintiffs alleged generally that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by making materially false or
misleading statements regarding the Company’s business and business prospects, artificially inflating the Company’s stock
price during an alleged class period running from March 11, 2020, through July 5, 2020. Plaintiffs sought unspecified damages on behalf
of the alleged class of persons who invested in our common stock during the alleged class period. The defendants moved to dismiss lead
plaintiffs’ amended complaint; and in a decision issued on August 30, 2021, the Court dismissed the amended complaint but granted
lead plaintiffs a further opportunity to plead a claim.
On September 27, 2021, the
lead plaintiffs filed a second amended complaint, naming the same defendants. The new complaint alleges that the Company made numerous
false or misleading statements about the Company’s business and business prospects over an alleged class period running from March
11, 2020, through March 30, 2021, which they say violated Section 10(b) and 20(a) of the Exchange Act. Lead plaintiffs also allege a “scheme
to defraud” during 2020 that involved several private placements of Company stock with an allegedly “insider” group
of investors that purportedly then issued press releases that inflated the stock price, after which these investors purportedly sold their
shares at higher prices. None of these investors (save Mr. Heyward, who is not alleged to have sold his shares) is named as a defendant
in the securities action. The lead plaintiffs again seek unspecified damages on behalf of the alleged class—persons who invested
in the Company’s common stock during the newly alleged class period. In November 2021, defendants filed a motion to dismiss the
second amended complaint, and the motion is fully briefed. Argument on the motion was scheduled for March 21, 2022, on March 18, 2022,
the judge cancelled the hearing and will rule based on the parties’ written submissions. The Company cannot predict the outcome
of the motion or the timing of a decision from the Court. Pending resolution of the motion to dismiss, neither discovery nor other substantive
proceedings are occurring nor expected.
Related to the securities
class action, the Company’s directors, Chief Executive Officer and its Chief Financial Officer have been named as defendants in
several putative shareholder derivative lawsuits. As previously disclosed, these include a consolidated proceeding pending in the U.S.
District Court for the Central District of California and styled In re Genius Brands Stockholder Derivative Litigation, Case
No. 2:20-cv-08277 DSF (RAOx); an action filed in the Los Angeles County Superior Court captioned Ly, etc. v. Heyward, et al., Case No.
20STCV44611; and an additional case pending in the U.S. District Court for the District of Nevada, styled Miceli, etc. v. Heyward, et
al., Case No. 3:21-cv-00132-MMD-WGC. While the allegations and legal claims vary somewhat among the derivative actions, they all
generally allege that the defendants breached fiduciary duties owed to the Company by, among other things, causing the Company to issue
the supposedly false and misleading statements that underlie the securities lawsuit, purportedly exposing the Company to liability and
damaging the Company in an unspecified amount. By these derivative lawsuits, the plaintiffs seek no recovery from the Company. Instead,
as a shareholder derivative action, the Company is named as a nominal defendant. The plaintiffs, all alleged stockholders of the Company,
purport to sue on behalf and for the benefit of the Company. Pursuant to agreements among the parties, the courts in all of the derivative
lawsuits have stayed proceedings pending the outcome of the motion to dismiss in the securities action.
The Company is also a nominal
defendant in an action filed January 11, 2022, in the U.S. District Court for the Southern District of New York and styled Todd Augenbaum
v. Anson Investments Master Fund LP, et al., Case No. 1:22-cv-00249 VM. The action, which purports to be brought on behalf and for the
benefit of the Company, seeks the recovery under Section 16(b) of the Exchange Act of supposed short-swing profits allegedly realized
by roughly a dozen persons and entities that participated as investors in the Company’s March 11, 2020 offering of convertible debt
securities and warrants. Plaintiff Augenbaum, who purports to be a Company stockholder, filed his lawsuit after issuing a demand to the
Company’s Board of Directors asking that the Company sue the investor defendants. The Company rejected the demand in late December
2021, and Mr. Augenbaum sued a few weeks later, as Section 16(b) permits him to do. No Company officer or director is among the defendants.
The action is currently in its very early stages, with the parties currently negotiating a date for defendants’ initial responses
to the complaint. The Company cannot predict the outcome of the lawsuit, but again notes that plaintiff seeks no relief against the Company.
On July 7, 2020, the Company
received a letter from a law firm alleging that rights that Genius Brands had licensed from POW! LLC, through its joint venture, Stan
Lee Universe, LLC, had already been sold to another company, Proxima, represented by that law firm. The law firm alleged that the Company
is, inter alia, interfering with Proxima’s contractual rights. On or about November 4, 2021, POW! and Proxima entered a binding
settlement agreement resolving all the claims made by Proxima.
On January 18, 2022, the Company
was named as a defendant in a lawsuit filed in the Supreme Court of the State of New York, County of New York styled Harold Chizick and
Jennifer Chizick v. Genius Brands International, Inc., ChizComm Ltd., Index No. 650278/2022, alleging: (1) breach of employment agreement,
(2) breach of duty of good faith, (3) constructive dismissal, (4) indemnification, (5) violation of the Employment Standards Act 2000
of Ontario, and (6) defamation. On February 25, 2022, the Company filed a Motion to Dismiss on the ground that venue is improper. In response,
Plaintiffs’ counsel has advised that they will be amending their complaint to address the arguments in the Company’s venue
motion. Plaintiffs filed their Amended Complaint on March 17, 2022. The case remains at the pleading stage and no trial date has been
set.
In all of the above-mentioned
active proceedings, the Company has denied and continues to deny any wrongdoing and intends to defend the claims vigorously.
Item 4. |
Mine Safety Disclosures |
Not applicable.
PART III
Item 10. |
Directors, Executive Officers and Corporate Governance |
Board of Directors,
Executive Officers, Promoters and Control Persons
The
following table sets forth information about our directors and executive officers as of April 4, 2022:
Name |
|
Age |
|
|
Position |
Andy Heyward |
|
73 |
|
|
Chief Executive Officer and Chairman of the Board of Directors |
Robert L. Denton |
|
62 |
|
|
Chief Financial Officer |
Michael A. Jaffa |
|
56 |
|
|
Chief Operating Officer and Corporate Secretary |
Joseph “Gray” Davis * |
|
79 |
|
|
Director |
P. Clark Hallren * |
|
60 |
|
|
Director |
Michael Klein * |
|
74 |
|
|
Director |
Margaret Loesch |
|
75 |
|
|
Director |
Lynne Segall* |
|
69 |
|
|
Director |
Anthony Thomopoulos * |
|
84 |
|
|
Director |
Dr. Cynthia Turner-Graham* |
|
67 |
|
|
Director |
_________________
* Denotes directors who are “independent”
under applicable SEC and Nasdaq rules.
Our directors hold office
until the earlier of their death, resignation or removal or until their successors have been elected and qualified.
Our Board of Directors has
reviewed the materiality of any relationship that each of our directors has with the Company, either directly or indirectly. Based upon
this review, our Board of Directors has determined that the following members of the Board of Directors are “independent directors”
as defined by the Nasdaq Marketplace Rules: Joseph “Gray” Davis, P. Clark Hallren, Michael Klein, Lynne Segall,
Anthony Thomopoulos and Dr. Cynthia Turner-Graham.
Andy Heyward, 73, has
been the Company’s Chief Executive Officer since November 2013 and the Company’s Chairman of the Board since December 2013.
Mr. Heyward co-founded DIC Animation City in 1983 and served as its Chief Executive Officer until its sale in 1993 to Capital Cities/
ABC, Inc. which was eventually bought by The Walt Disney Company in 1995. Mr. Heyward ran the company while it was owned by The Walt Disney
Company until 2000 when Mr. Heyward purchased DIC Entertainment L.P. and DIC Productions L.P, corporate successors to the DIC Animation
City business, with the assistance of Bain Capital and served as the Chairman and Chief Executive Officer of their acquiring company DIC
Entertainment Corporation, until he took the company public on the AIM. He sold the company in 2008. Mr. Heyward co-founded A Squared
Entertainment LLC in 2009 and has served as its Co-President since inception. Mr. Heyward earned a Bachelor of Arts degree in Philosophy
from UCLA and is a member of the Producers Guild of America, the National Academy of Television Arts and the Paley Center (formerly the
Museum of Television and Radio). Mr. Heyward gave the Commencement address in 2011 for the UCLA College of Humanities and was awarded
the 2002 UCLA Alumni Association’s Professional Achievement Award. He has received multiple Emmys and other awards for Children’s
Entertainment. He serves on the Board of Directors of the Cedars Sinai Medical Center. Mr. Heyward has produced over 5,000 half hour episodes
of award-winning entertainment, among them Inspector Gadget; The Real Ghostbusters; Strawberry Shortcake; Care Bears; Alvin and the Chipmunks;
Hello Kitty’s Furry Tale Theater; The Super Mario Brothers Super Show; The Adventures of Sonic the Hedgehog; Sabrina The Animated
Series; Captain Planet and the Planeteers; Liberty’s Kids, and many others. Mr. Heyward was chosen as a director because of his
extensive experience in children’s entertainment and as co-founder of A Squared Entertainment.
Robert Denton, 62,
has been the Company’s Chief Financial Officer since March 2022 and previously served as the Company’s Executive Vice President
of Finance and Accounting from December 14, 2021 through March 2022 and as Chief Financial Officer from April 2018 through December 13,
2021. He served as the Chief Financial Officer of Atlys, Inc. a next-gen media technology company from 2011 to 2018. He has over 30 years
of experience as a financial executive, specifically in the entertainment industry. He began his career in 1982 with Ernst & Young
handling filings with the SEC, including initial public offerings. He left Ernst & Young in 1990 to work as Vice President and Chief
Accounting Officer for LIVE Entertainment, Inc. In 1996, LIVE was acquired by Artisan Entertainment, Inc., and, in December 2000, Mr.
Denton was promoted to Executive Vice President of Finance and CAO. Mr. Denton also served as the COO of Artisan Home Entertainment, where
he directed all financial reporting, budgeting and forecasting, manufacturing and distribution of the Home Entertainment Division. Mr.
Denton left Artisan at the end of 2003 and joined DIC Entertainment Corporation to serve as their Chief Financial Officer. At DIC, he
directed the three-year financial audit, due diligence and preparation of the company’s Admission Documents, and he was responsible
for all monthly financial reporting to the Board of Directors as well as the semi-annual reporting to the AIM Exchange of the London Stock
Exchange. Mr. Denton left DIC in February 2009 after completing the acquisition and transition of DIC to the Cookie Jar Company. Mr. Denton
served as the Chief Financial Officer of Gold Circle Films from 2009 to 2011. From 2009 to 2014, Mr. Denton also owned and operated three
Assisted Living Facilities for the Elderly, to help better care for his mother. Mr. Denton is a Certified Public Accountant and a member
of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.
Michael Jaffa, 56,
was promoted to Chief Operating Officer and General Counsel on December 7, 2020. Previously he served as the General Counsel and Corporate
Secretary of the Company since April 2018. From January 2017 through April 2018, Mike served as Thoughtful Media Group’s (TMG) General
Counsel and Global Head of Business Affairs. TMG is a multichannel network focused on Asian markets. At TMG, Mr. Jaffa oversaw all of
TMG’s legal matters, established the framework for TMG’s continued growth in international markets, including a franchise
plan, the formation of a regional headquarters in Southeast Asia and assisted with M&A transactions. From September 2013 through
December 2016, Mr. Jaffa worked as the Head of Business Affairs for DreamWorks Animation Television, and before that served in a similar
role at Hasbro Studios from December 2009 through September 2013. Mr. Jaffa has over 20 years of experience handling licensing, production,
merchandising, complex international transactions and employment issues for large and small entertainment companies and technology startups.
Joseph “Gray”
Davis, 78, has been a Director of the Company since December 2013. Mr. Davis served as the 37th governor of California from 1998
until 2003. Mr. Davis currently serves as “Of Counsel” in the Los Angeles, California office of Loeb & Loeb LLP. Mr. Davis
has served on the Board of Directors of DIC Entertainment and is a member of the bipartisan Think Long Committee, a Senior Fellow at the
UCLA School of Public Affairs and Co-Chair of the Southern California Leadership Counsel. Mr. Davis received his undergraduate degree
from Stanford University and received his Juris Doctorate from Columbia Law School. Mr. Davis served as lieutenant governor of California
from 1995-1998, California State Controller from 1987-1995 and California State Assemblyman from 1982-1986. Mr. Davis was chosen as a
director of the Company based on his knowledge of corporate governance.
P. Clark Hallren, 59, has
been a Director of the Company since May 2014. Since August 2013, Mr. Hallren has been a realtor with HK Lane/Christie’s International
Real Estate and since August 2012, Mr. Hallren has served as an outside consultant to individuals and entities investing or operating
in the entertainment industry. From August 2012 to August 2014, Mr. Hallren was a realtor with Keller Williams Realty and from August
2009 to August 2012, Mr. Hallren founded and served as managing partner of Clear Scope Partners, an entertainment advisory company. From
1986 to August 2009, Mr. Hallren was employed by JP Morgan Securities Inc. in various capacities, including as Managing Director of the
Entertainment Industries Group. In his roles with JP Morgan Securities, Mr. Hallren was responsible for marketing certain products to
his clients, including but not limited to, syndicated senior debt, public and private subordinated debt, public and private equity, securitized
and credit enhanced debt, interest rate derivatives, foreign currency and treasury products. Mr. Hallren holds Finance, Accounting and
Economics degrees from Oklahoma State University. He also currently holds Series 7, 24 and 63 securities licenses. Mr. Hallren was chosen
as a director of the Company based on his knowledge and experience in the entertainment industry as well as in banking and finance.
Michael Klein, 73,
has been a Director of the Company since March 2019. Mr. Klein is an accomplished executive, entrepreneur, and financier with substantial
experience in media and entertainment, investment banking, professional sports, venture capital funding, and real estate. Prior to starting
Camden Capital Management, LLC (CCM), Mr. Klein, since 1996, has led Klein Investment Group after assuming 100% ownership of (and renaming)
Iacocca Capital Partners, L.P., where he was Managing Partner from 1994 to 1996. From 1984 to 1993, Mr. Klein was a managing director
at Bear Stearns & Company, where he founded and co-directed the Media-Entertainment Group, and Gruntal & Company, where he was
Senior Managing Director and a member of the Executive Committee. From 1974 to 1982, Mr. Klein supplied prime time and mini-series content
to the major television networks through his company, Michael Klein Productions. Also, during that time, he was an owner and a senior
executive officer of the San Diego Chargers, an NFL Football franchise. Mr. Klein has significant experience in the area of corporate
financings. He has executed and participated in financing deals, both public and private, ranging from $5 million to over $2 billion.
His real estate ventures in Southern California include a 600-acre development in North San Diego, which he sold in various stages. He
also has led several real estate ventures in Southern California including the Water Gardens phase two in Santa Monica. Mr. Klein was
chosen as a director of the Company based on his knowledge and experience in the entertainment industry as well as in banking and finance.
Margaret Loesch, 75, has
been the Executive Chairman of the Kartoon Channel! since June 2020, a Director of the Company since March 2015 and the Executive Chairman
of the Genius Brands Network since December 2016. Beginning in 2009 through 2014, Ms. Loesch, served as Chief Executive Officer and President
of The Hub Network, a cable channel for children and families, including animated features. The Company has, in the past, provided The
Hub Network with certain children’s programming. From 2003 through 2009 Ms. Loesch served as Co-Chief Executive Officer of The Hatchery,
a family entertainment and consumer product company. From 1998 through 2001 Ms. Loesch served as Chief Executive Officer of the Hallmark
Channel, a family related cable channel. From 1990 through 1997 Ms. Loesch served as the Chief Executive Officer of Fox Kids Network,
a children’s programming block and from 1984 through 1990 served as the Chief Executive Officer of Marvel Productions, a television
and film studio subsidiary of Marvel Entertainment Group. Ms. Loesch obtained her Bachelor of Science from the University of Southern
Mississippi. Ms. Loesch was chosen to be a director based on her 40 years of experience at the helm of major children and family programming
and consumer product channels.
Lynne Segall, 68, has
been a Director of the Company since December 2013. Ms. Segall has served as the Senior Vice President and Publisher of The Hollywood
Reporter since June 2011. From 2010 to 2011, Ms. Segall was the Senior Vice President of Deadline Hollywood. From June 2006 to May 2010,
Ms. Segall served as the Vice President of Entertainment, Fashion & Luxury advertising at the Los Angeles Times. In 2005, Ms. Segall
received the Women of Achievement Award from The Hollywood Chamber of Commerce and the Women in Excellence Award from the Century City
Chamber of Commerce. In 2006, Ms. Segall was recognized by the National Association of Women with its Excellence in Media Award. Ms. Segall
was chosen to be a director based on her expertise in the entertainment industry.
Anthony Thomopoulos, 83, has
been a Director of the Company since February 2014. Mr. Thomopoulos served as the Chairman of United Artist Pictures from 1986 to 1989
and formed Thomopoulos Pictures, an independent production company of both motion pictures and television programs in 1989 and has served
as its Chief Executive Officer since 1989. From 1991 to 1995, Mr. Thomopoulos was the President of Amblin Television, a division of Amblin
Entertainment. Mr. Thomopoulos served as the President of International Family Entertainment, Inc. from 1995 to 1997. From June 2001 to
January 2004, Mr. Thomopoulos served as the Chairman and Chief Executive Officer of Media Arts Group, a NYSE listed company. Mr. Thomopoulos
served as a state commissioner of the California Service Corps. under Governor Schwarzenegger from 2005 to 2008. Mr. Thomopoulos is also
a founding partner of Morning Light Productions. Since he founded it in 2008, Mr. Thomopoulos has operated Thomopoulos Productions and
has served as a consultant to BKSems, USA, a digital signage company. Mr. Thomopoulos is an advisor and a member of the National Hellenic
Society and holds a degree in Foreign Service from Georgetown University and sat on its Board of Directors from 1978 to 1988. Mr. Thomopoulos
was chosen as a director of the Company based on his entertainment industry experience.
Dr. Cynthia Turner-Graham,
67, has been a Director of the Company since June 15, 2021. Dr. Turner-Graham is a board-certified psychiatrist and Distinguished
Life Fellow of the American Psychiatric Association, who brings over 40 years of experience in the healthcare industry as a practicing
psychiatrist, healthcare administrator and community leader. Since 1988, Dr. Turner-Graham has been a practicing psychiatrist at an outpatient
psychiatry practice. Since 2004, Dr. Turner-Graham has served as President and Chief Executive Officer of ForSoundMind Enterprises, Inc.,
a provider of outpatient psychiatric services and developer of educational workshop experiences focused on promotion of emotional and
mental health. From February 2014 until November 2019, she served as Medical Director for Inner City Family Services in Washington, DC.
Among her accomplishments, Dr. Turner-Graham is the immediate past president of the Suburban Maryland Psychiatric Society, served as
a Director of the Washington Psychiatric Society and will take the helm of Black Psychiatrists of America as President in 2022. She has
previously served as Clinical Assistant Professor of Psychiatry at both Vanderbilt University and Howard University Schools of Medicine.
Dr. Turner-Graham was chosen as a director of the Company based on her career as a distinguished psychiatrist and her expertise with
children.
On March 17, 2022, Karen McTier
notified the Company of her intention to resign from the Board of Directors effective as of March 31, 2022.
Family Relationships
There
are no family relationships between any of our directors and our executive officers.
General
We believe that good corporate
governance is important to ensure that the Company is managed for the long-term benefit of our stockholders. This section describes key
corporate governance practices that we have adopted.
Board Leadership Structure and Role in Risk
Oversight
The Board of Directors has
responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The
primary responsibility of our Board of Directors is to oversee the management of our company and, in doing so, serve the best interests
of the company and our stockholders. The Board of Directors selects, evaluates and provides for the succession of executive officers and,
subject to stockholder election, directors. It reviews and approves corporate objectives and strategies and evaluates significant policies
and proposed major commitments of corporate resources. Our Board of Directors also participates in decisions that have a potential major
economic impact on our company. Management keeps the directors informed of company activity through regular communication, including written
reports and presentations at Board of Directors and committee meetings.
Although we have not adopted
a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined
that it is in the best interest of the Company and its shareholders to partially combine these roles. Due to the small size of the Company,
we believe it is currently most effective to have the Chairman and Chief Executive Officers positions combined.
The Company currently has
nine directors, including Mr. Heyward, its Chairman, who also serves as the Company’s Chief Executive Officer. The Chairman and
the Board are actively involved in the oversight of the Company’s day to day activities.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange
Act requires our officers, directors and any persons who own more than 10% of common stock, to file reports of ownership of, and transactions
in, our common stock with the SEC and furnish copies of such reports to us. Based solely on our reviews of the copies of such forms and
amendments thereto furnished to us and on written representations from officers, directors, and any other person whom we understand owns
more than 10% or our common stock, we found that during 2021, all Section 16(a) filings were made with the SEC on a timely basis except
that one report covering one transaction was filed late by Joseph “Gray” Davis, one report covering one transaction was filed
late by P. Clark Hallren, one report covering one transaction was filed late by Michael Klein, one report covering one transaction was
filed late by Lynne Segall, one report covering one transaction was filed late by Karen McTier, one report covering one transaction was
filed late by Anthony Thomopoulos, one report covering one transaction was filed late by Dr. Cynthia Turner-Graham, one report covering
one transaction relating to RSU vesting was filed late by Andy Heyward, one report covering one transaction relating to RSU vesting was
filed late by Michael Jaffa, one report covering one transaction relating to RSU vesting was filed late by Robert Denton, one Form 3 was
filed late by Harold Chizick, and a Form 3 and one report covering one transaction was filed late by Zrinka Dekic.
Code of Conduct and Ethics
We have adopted a Corporate
Code of Conduct and Ethics and Whistleblower Policy that applies to all of our officers, directors and employees. A copy of the Code of
Conduct and Ethics and Whistleblower Policy can be obtained, free of charge by submitting a written request to the Company or on our website
at www.gnusbrands.com. Disclosure regarding any amendments to, or waivers from, provisions of the code of conduct and ethics that
apply to our directors, principal executive and financial officers will be posted on the “Investor Relations-Corporate Governance”
section of our website at www.gnusbrands.com or included in a Current Report on Form 8-K within four business days following the
date of the amendment or waiver.
Board Committees
During 2021, our Board of
Directors held 4 meetings.
The following table sets forth
the three standing committees of our Board and the members of each committee and the number of meetings held by our Board of Directors
and the committees during 2021:
Director |
|
Board |
|
Audit
Committee |
|
Compensation
Committee |
|
Nominating Committee |
|
Investment Committee |
Andy Heyward |
|
Chair |
|
|
|
|
|
|
|
|
Joseph “Gray” Davis |
|
X |
|
|
|
|
|
X |
|
X |
P. Clark Hallren |
|
X |
|
Chair |
|
X |
|
|
|
X |
Margaret Loesch |
|
X |
|
|
|
|
|
|
|
|
Lynne Segall |
|
X |
|
|
|
|
|
Chair |
|
|
Anthony Thomopoulos |
|
X |
|
X |
|
Chair |
|
|
|
|
Michael Klein |
|
X |
|
X |
|
|
|
X |
|
X |
Dr. Cynthia Turner-Graham (1) |
|
X |
|
|
|
|
|
|
|
|
Meetings in 2021: |
|
4 |
|
4 |
|
2 |
|
1 |
|
1 |
___________________
|
(1) |
Effective June 15, 2021, Dr. Turner-Graham was elected as a member of our Board of Directors. |
The Board of Directors has
adopted a policy under which each member of the Board of Directors makes every effort, but is not required, to attend each annual meeting
of our stockholders.
To assist it in carrying out
its duties, the Board of Directors has delegated certain authority to an Audit Committee, a Compensation Committee, a Nominating Committee and an Investment Committee as the functions of each are described below.
Audit Committee
Messrs.
Hallren, Klein, and Thomopoulos serve on our Audit Committee. Our Audit Committee’s main function is to oversee our accounting and
financial reporting processes, internal systems of control, independent auditor relationships and the audits of our financial statements.
The Audit Committee’s responsibilities include:
|
· |
selecting, hiring, and compensating our independent auditors; |
|
· |
evaluating the qualifications, independence and performance of our independent auditors; |
|
· |
overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; |
|
· |
approving the audit and non-audit services to be performed by our independent auditor; |
|
· |
reviewing with the independent auditor the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies; and |
|
· |
preparing the report that the SEC requires in our annual proxy statement. |
The Board of Directors has
adopted an Audit Committee Charter and the Audit Committee reviews and reassesses the adequacy of the Charter on an annual basis. The
Audit Committee members meet Nasdaq’s financial literacy requirements and are independent under applicable SEC and Nasdaq rules,
and the board has further determined that Mr. Hallren (i) is an “audit committee financial expert” as such term is defined
in Item 407(d) of Regulation S-K promulgated by the SEC and (ii) also meets Nasdaq’s financial sophistication requirements.
A copy of the Audit Committee’s
written charter is publicly available on our website at www.gnusbrands.com.
Compensation Committee
Messrs.
Thomopoulos and Hallren serve on the Compensation Committee and are independent under the applicable SEC and Nasdaq rules. Our Compensation
Committee’s main functions are assisting our Board of Directors in discharging its responsibilities relating to the compensation
of outside directors, the Chief Executive Officer and other executive officers, as well as administering any stock incentive plans, we
may adopt. The Compensation Committee’s responsibilities include the following:
|
· |
reviewing and recommending to our board of directors the compensation of our Chief Executive Officer and other executive officers, and the outside directors; |
|
· |
conducting a performance review of our Chief Executive Officer; |
|
· |
reviewing our compensation policies; and |
|
· |
if required, preparing the report of the Compensation Committee for inclusion in our annual proxy statement. |
The Board of Directors has
adopted a Compensation Committee Charter and the Compensation Committee reviews and reassesses the adequacy of the Charter on an annual
basis.
The Compensation Committee’s
policy is to offer our executive officers competitive compensation packages that will permit us to attract and retain highly qualified
individuals and to motivate and reward these individuals in an appropriate fashion aligned with the long-term interests of our Company
and our stockholders.
Compensation Committee Risk Assessment
We have assessed our compensation
programs and concluded that our compensation practices do not create risks that are reasonably likely to have a material adverse effect
on us.
A copy of the Compensation
Committee’s written charter is publicly available on our website at www.gnusbrands.com.
Nominating Committee
Ms.
Segall and Messrs. Davis and Klein serve on our Nominating Committee. The Nominating Committee’s responsibilities include:
|
· |
identifying qualified individuals to serve as members of our Board of Directors; |
|
· |
review the qualifications and performance of incumbent directors; |
|
· |
review and consider candidates who may be suggested by any director or executive officer or by a stockholder of the Company; and |
|
· |
review considerations relating to board composition, including size of the board, term and age limits, and the criteria for membership of the board. |
The Board of Directors has
adopted a nominating committee charter and the Nominating Committee reviews and reassesses the adequacy of the Charter on an annual basis.
For all potential candidates, the Nominating Committee may consider all factors it deems relevant, such as a candidate’s personal
integrity and sound judgment, business and professional skills and experience, independence, knowledge of the industry in which we operate,
possible conflicts of interest, diversity, the extent to which the candidate would fill a present need on the Board of Directors, and
concern for the long-term interests of our stockholders.
The Nominating Committee considers
issues of diversity among its members in identifying and considering nominees for director, and strives, where appropriate, to achieve
a diverse balance of backgrounds, perspectives and experience on the board and its committees.
A copy of the Nominating Committee’s
written charter is publicly available on our website at www.gnusbrands.com.
Investment Committee
Messrs.
Davis, Hallren and Klein serve on our Investment Committee. The primary purpose of the Investment Committee is to assist the Board in
reviewing our Investment Policy and strategies and in overseeing our capital and financial resources. A material investment on behalf
of the Company may not be made without the Committee’s approval or the approval of a delegate of the Committee pursuant to an appropriate
delegation of the Committee’s authority. In order to carry out its mission and function, and subject to the terms of the Company’s
Certificate of Incorporation, the Committee has the authority to:
| · | review the investment policy, strategies, transactions
and programs of the Company and its subsidiaries to ensure they are consistent with the goals and objectives of the Company; |
| · | evaluate and approve or disapprove each proposed
material investment on behalf of the Company; |
| · | determine whether the investment policy is consistently
followed and that procedures are in place to ensure that the Company’s investment portfolio is managed in compliance with its policies; |
| · | review the performance of the investment portfolios
of the Company and its subsidiaries; and |
| · | approve and revise as appropriate, the Company’s
investment policies and guidelines. |
Stockholder Communications to the Board
Generally, stockholders who
have questions or concerns should contact our Investor Relations department at 212-564-4700. However, any stockholders who wish to address
questions regarding our business directly with the Board of Directors, or any individual director, should direct his or her questions
in writing to Genius Brands International, Inc., at 190 N. Canon Drive, 4th Floor, Beverly Hills, California 90210, Attn: Corporate Secretary
or by using the “Contact” page of our website www.gnusbrands.com/contact-us. Communications will be distributed to the Board,
or to any individual director or directors as appropriate, depending on the facts and circumstances outlined in the communications. Items
that are unrelated to the duties and responsibilities of the Board may be excluded, such as:
|
· |
junk mail and mass mailings; |
|
· |
resumes and other forms of job inquiries; |
|
· |
surveys; and |
|
· |
solicitations or advertisements. |
In addition, any material
that is unduly hostile, threatening, or illegal in nature may be excluded, provided that any communication that is filtered out will be
made available to any outside director upon request.
Item 11. |
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION |
This section describes the
material elements of compensation awarded to, earned by or paid to each of our named executive officers. Our compensation committee will
review and approve the compensation of our executive officers and oversee our executive compensation programs and initiatives.
Summary Compensation Table
The following table provides
information regarding the total compensation for services rendered in all capacities that was earned during the fiscal year indicated
by our named officers for fiscal year 2021 and 2020.
Name and Principal Position | |
Year | | |
Salary ($) | | |
Bonus ($) | | |
Stock Awards ($) (1) | | |
Option Awards ($) (1) | | |
All Other Compensation ($) | | |
Total ($) | |
Andy Heyward (2) | |
| 2021 | | |
| 440,000 | | |
| 212,987 | | |
| – | | |
| – | | |
| 543,750 | | |
| 1,196,737 | |
Chief Executive Officer | |
| 2020 | | |
| 311,717 | | |
| 73,528 | | |
| 10,425,500 | | |
| 5,750,000 | | |
| 880,959 | | |
| 17,441,204 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Robert L. Denton (3) | |
| 2021 | | |
| 300,663 | | |
| 25,000 | | |
| – | | |
| – | | |
| – | | |
| 325,663 | |
Chief Financial Officer | |
| 2020 | | |
| 261,158 | | |
| 150,000 | | |
| 660,250 | | |
| 1,092,500 | | |
| – | | |
| 2,163,908 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Michael A. Jaffa (4) | |
| 2021 | | |
| 326,326 | | |
| 25,000 | | |
| – | | |
| – | | |
| – | | |
| 351,326 | |
Chief Operating Officer, General Counsel and Corporate Secretary | |
| 2020 | | |
| 261,880 | | |
| 150,000 | | |
| 695,000 | | |
| 1,150,000 | | |
| – | | |
| 2,256,880 | |
_________________________
(1) |
The aggregate fair value of the stock awards and stock option awards on the date of grant was computed in accordance with FASB ASC Topic 718. |
(2) |
Mr. Heyward entered into a five-year employment agreement on November 16, 2018. Under such employment agreement, Mr. Heyward was entitled to an annual salary of $300,000. Mr. Heyward entered into a new five-year employment agreement on December 7, 2020. Under his new employment agreement, Mr. Heyward is entitled to an annual salary of $440,000. |
|
|
|
During 2021, Mr. Heyward was paid $543,750 in producer fees. |
(3) |
Effective April 18, 2018, the Company entered
into an employment agreement with Mr. Denton, whereby Mr. Denton agreed to serve as the Company’s Chief Financial Officer (“CFO”)
for a period of two years, with a mutual option for an additional one-year period, in consideration for an annual salary of $225,000.
On December 7, 2020, Mr. Denton entered into a new one-year employment agreement, with a mutual option for two additional one-year periods.
Under his new employment agreement, Mr. Denton is entitled to an annual salary of $300,000 the first year, $325,000 the second year and
$350,000 the third year and an annual signing bonus of $50,000 each year.
On March 7, 2022, Mr. Denton entered into an amendment
to his employment agreement which extends the term until December 20, 2023 and increased his annual salary to $350,000 for year two and
$375,000 for year three.
On December 7, 2020, the Company granted 950,000
stock options to Mr. Denton with a strike price of $1.39 and a term of 10 years. 380,000 of the options vested on the grant date with
the remaining options vesting 190,000 each of the next three years. On December 7, 2020, the Company also granted 475,000 RSUs to Mr.
Denton. The RSUs vest 155,000 on the first anniversary, 158,000 on the second anniversary and 162,000 on the third anniversary.
|
(4) |
Effective April 16, 2018, the Company entered
into an employment agreement with Mr. Jaffa, whereby Mr. Jaffa agreed to serve as the Company’s General Counsel and Senior Vice
President of Business Affairs for a period of year in consideration for an annual salary of $225,000. On June 7, 2018, Mr. Jaffa was elected
as the Company’s Corporate Secretary. Mr. Jaffa entered into a new three-year employment agreement on December 7, 2020. Under his
new employment agreement, Mr. Jaffa is entitled to an annual salary of $325,000 the first year, $350,000 the second year and $375,000
the third year and an annual signing bonus of $50,000 each year.
On December 7, 2020, the Company granted
1,000,000 stock options to Mr. Jaffa with a strike price of $1.39 and a term of 10 years. 400,000 of the options vested on the grant
date with the remaining options vesting 200,000 each of the next three years. On December 7, 2020, the Company also granted 500,000 RSUs
to Mr. Jaffa. The RSUs vest 166,666 on the first anniversary, 166,666 on the second anniversary and 166,668 on the third anniversary. |
Narrative Disclosure to Summary Compensation
Base Salary. In
2021, the Company paid $440,000 to Andy Heyward, $300,663 to Robert L. Denton and $326,326 to Michael A. Jaffa. In 2020, the Company paid
$311,717 to Mr. Heyward, $261,158 to Mr. Denton and $261,880 to Mr. Jaffa. Base salaries are used to recognize experience, skills, knowledge
and responsibilities required of all of our employees, including our executive officers.
All Other Compensation. Pursuant
to his employment agreement dated December 7, 2020, Mr. Heyward is entitled to an Executive Producer fee of $12,500 per one-half hour
episode for each episode for which he provides services as an executive producer. During 2021, Mr. Heyward was paid $543,750 in producer
fees.
Bonus Compensation. Our
named executive officers are expected to be eligible to receive an annual bonus award in accordance with their employment agreements and/or
management incentive program then in effect with respect to such executive officer and based on an annualized target of base salary, as
specified in their respective employment agreements, if applicable. In fiscal 2020 Mr. Heyward was paid a bonus of $73,528 and Mr. Denton
and Mr. Jaffa were each paid two bonuses totaling $150,000. In fiscal 2021 Mr. Heyward was paid a bonus of $212,978 and Mr. Denton and
Mr. Jaffa were each paid a bonus of $25,000.
Equity Based Incentive
Awards. We believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership
culture and help to align the interests of our executives and our stockholders. In addition, we believe that equity grants with a time-based
vesting feature promote executive retention because this feature incentivizes our named executive officers to remain in our employment
during the vesting period. Accordingly, our compensation committee and Board periodically review the equity incentive compensation of
our named executive officers and from time to time may grant additional equity incentive awards to them in the form of stock options or
other awards. As of December 31, 2020, no options granted to our named executive officers have been modified or repriced.
On December 7, 2020, Mr. Heyward
received 5,000,000 options with a value of $5,750,000 and 7,500,000 RSUs with a value of $10,425,000. Mr. Heyward also received 7,500,000
performance-based RSUs, however, the performance conditions, therefore a grant date were not yet established on December 7, 2020. The
7,500,000 performance-based RSUs were not yet earned as of December 31, 2021.
On December 7, 2020, Mr. Denton
received 950,000 options with a value of $1,092,500 and 475,000 RSUs with a value of $660,250.
On December 7, 2020, Mr. Jaffa
received 1,000,000 options with a value of $1,150,000 and 500,000 RSUs with a value of $695,000.
Employment Agreements
CEO Employment Agreement
On November 16, 2020, the
Company entered into an amended and restated employment agreement with Andy Heyward (the “CEO Employment Agreement”), whereby
Mr. Heyward agreed to serve as the Company’s Chief Executive Officer for a period of five years, subject to renewal, in consideration
for an annual salary of $440,000, and an award of 5,000,000 stock options and 15,000,000 RSUs. Mr. Heyward is also eligible to be paid
a producing fee equal to $12,500 per one-half hour episode for each series produced, controlled and distributed by the Company, and for
which he provides material production services provided as the executive producer for up to 52 one-half hour episodes. Additionally, under
the terms of the CEO Employment Agreement, Mr. Heyward shall be eligible for a quarterly discretionary bonus of $55,000 per fiscal quarter
if the Company meets certain criteria, as established by the Board of Directors. Mr. Heyward shall be entitled to reimbursement of reasonable
expenses incurred in connection with his employment and the Company may take out and maintain during the term of his tenure a life insurance
policy in the amount of $1,000,000. During the term of his employment and under the terms of the CEO Employment Agreement, Mr. Heyward
shall be entitled to be designated as composer on all music contained in the programming produced by the Company and to receive composer’s
royalties from applicable performing rights societies. The Options granted to Mr. Heyward were fully vested on the date of grant. One-half
of the RSUs granted to Mr. Heyward vest over time subject to Mr. Heyward’s continued employment, and one-half vest in equal installments
on the first, second, third and fourth anniversaries of the date of grant, subject to the achievement of certain performance criteria,
to be determined by the Compensation Committee, and subject to Mr. Heyward’s continued employment. In the event of Mr. Heyward’s
death or resignation, all compensation then currently due would be payable to his estate.
The CEO Employment Agreement
also entitles Mr. Heyward to separation payments in certain circumstances. In the event Mr. Heyward’s employment terminates due
to his death or retirement, in addition to accrued amounts, he is entitled to receive (i) any unpaid quarterly bonus for the fiscal quarter
preceding the fiscal quarter in which such termination occurs and (ii) if earned, a pro-rated quarterly bonus for the fiscal quarter in
which such termination occurs. In the event Mr. Heyward’s employment terminates due to his permanent disability, in addition to
accrued amounts, he is entitled to receive (i) any unpaid quarterly bonus for the fiscal quarter preceding the fiscal quarter in which
such termination occurs, (ii) if earned, a pro-rated quarterly bonus for the fiscal quarter in which such termination occurs and (iii)
six monthly payments equal to the amount, if any, of his monthly base salary in excess of any disability benefits being received by Mr.
Heyward.
On June 23, 2021, the Compensation
Committee of the Board of Directors amended such RSU awards so that 3,750,000 of such RSUs shall continue to vest in four equal installments
on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued employment and the remaining 11,250,000
RSUs shall vest as follows: (i) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.00 per
share or the Company’s market capitalization equals or exceeds $903,000,000 for 20 consecutive trading days; (ii) 3,750,000 RSUs
vest when the Company’s common stock closing sale price equals or exceeds $3.50 per share or the Company’s market capitalization
equals or exceeds $1,053,500,000 for 20 consecutive trading days, and (iii) 3,750,000 RSUs vest when the Company’s common stock
closing sale price equals or exceeds $3.75 per share or the Company’s market capitalization equals or exceeds $1,128,750,000 for
20 consecutive trading days. In addition to the stock price and market capitalization vesting conditions set forth above, such 11,250,000
RSUs may also vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, based on achievement
of certain operating performance-based vesting conditions established by the Compensation Committee and subject to his continued employment
and also subject to pro rata adjustment for vesting pursuant to the stock price or market capitalization vesting conditions.
CFO Employment Agreement
On December 7, 2020, the Company
entered into an amended and restated agreement with Robert L. Denton (as amended, the “CFO Employment Agreement”), whereby
Mr. Denton agreed to serve as the Company’s Chief Financial Officer, effective as of December 7, 2020, for a period of one year
with a mutual option for two additional one-year periods. Under the terms of the CFO Employment Agreement, Mr. Denton shall be entitled
to an annual discretionary bonus based on his performance. The CFO Employment Agreement may be terminated either (i) upon the end of the
term, (ii) at any time by the Company for “Cause” (as defined in the CFO Employment Agreement) or (iii) upon an event of retirement,
death or disability. Upon the termination or expiration of Mr. Denton’s employment with the Company and for a period of three years
thereafter, certain amounts paid to Mr. Denton, including any discretionary bonus and stock-based compensation, but excluding his base
salary and reimbursement of certain expenses, will be subject to the Company’s claw back right upon the occurrence of certain events
which are adverse to the Company, including a restatement of financial statements. In the event of Mr. Denton’s death or resignation,
all compensation then currently due would be payable to his estate.
The CFO Employment Agreement provides Mr. Denton
with, during the three-year term of the CFO Employment Agreement (i) an annualized base salary of $300,000 for the first year of the term,
$350,000 for the second year of the term, and $375,000 for the third year of the term; (ii) discretionary annual bonuses determined in
the sole discretion of the Compensation Committee; and (iii) eligibility to receive renewal bonuses of $50,000 beginning within 60 days
following the effective date of the Amended Employment Agreement and continuing on each anniversary thereafter during the term, subject
to Mr. Denton’s continued employment. The agreement granted Mr. Denton 975,000 stock options and 475,000 RSUs. The Options granted
to Mr. Denton were partially vested on the date of grant, and vest with respect to the unvested amounts in substantially equal installments
on the first three anniversaries of the grant date, subject to continued employment. The RSUs granted to Mr. Denton vest in three equal
installments on the first three anniversaries of the date of grant, subject to continued employment. Only unvested Options or RSUs that
would have otherwise vested during the then current term of the CFO Employment Agreement will vest upon Mr. Denton’s termination
of employment without Cause or resignation for Good Reason, each as defined in the Form Option Grant and Form RSU Grant.
The CFO Employment Agreement
also entitles Mr. Denton to separation payments in certain circumstances. In the event Mr. Denton’s employment terminates due to
his death or retirement, in addition to accrued amounts, he is entitled to receive any unpaid annual bonus for the fiscal year preceding
the fiscal year in which such termination occurs. In the event Mr. Denton’s employment terminates due to his permanent disability,
in addition to accrued amounts, he is entitled to receive (i) any unpaid annual bonus for the fiscal year preceding the fiscal year in
which such termination occurs, and (ii) two monthly payments equal to the amount, if any, of his monthly base salary in excess of any
disability benefits being received by Mr. Denton.
On March 7, 2022, Mr. Denton
entered into an amendment to his employment agreement which extends the term until December 20, 2023 and increased his annual salary to
$350,000 for year two and $375,000 for year three.
COO and General Counsel Employment Agreement
On December 7, 2020, the Company
entered into an amended and restated agreement (the “COO and General Counsel Employment Agreement”) with Michael A. Jaffa
in which Mr. Jaffa would assume the role of Chief Operating Officer and General Counsel commencing on December 7, 2020. The term of the
agreement is three years. In addition, Mr. Jaffa will be entitled to an annual discretionary bonus based on his performance. In the event
of Mr. Jaffa’s death or resignation, all compensation then currently due would be payable to his estate.
The COO and General Counsel
Employment Agreement provides Mr. Jaffa with, during the three year term of the General Counsel Employment Agreement (i) an annualized
base salary of $325,000 for the first year of the term, $350,000 for the second year of the term and $375,000 for the third year of the
term, (ii) discretionary annual bonuses determined in the sole discretion of the Compensation Committee of the Board of Directors of the
Company (the “Compensation Committee”), and (iii) eligibility to receive renewal bonuses of $50,000 beginning within 60 days
following the effective date of the COO and General Counsel Employment Agreement and each anniversary thereafter during the term, subject
to Mr. Jaffa’s continued employment. The agreement granted Mr. Jaffa 1,000,000 stock option and 500,000 RSUs. The Options granted
to Mr. Jaffa were partially vested on the date of grant, and vest with respect to the unvested amounts in substantially equal installments
on the first three anniversaries of the grant date, subject to continued employment. The RSUs granted to Mr. Jaffa vest in three equal
installments on the first three anniversaries of the date of grant, subject to continued employment. Any unvested Options or RSUs held
by Mr. Jaffa will vest upon his termination of employment without Cause or resignation for Good Reason, each as defined in the Option
Grant and RSU Grant agreement.
The COO and General Counsel
Employment Agreement also entitles Mr. Jaffa to separation payments in certain circumstances. In the event Mr. Jaffa’s employment
terminates due to his death or retirement, in addition to accrued amounts, he is entitled to receive any unpaid annual bonus for the fiscal
year preceding the fiscal year in which such termination occurs. In the event Mr. Jaffa’s employment terminates due to his permanent
disability, in addition to accrued amounts, he is entitled to receive (i) any unpaid annual bonus for the fiscal year preceding the fiscal
year in which such termination occurs, and (iii) two monthly payments equal to the amount, if any, of his monthly base salary in excess
of any disability benefits being received by Mr. Jaffa.
Additionally, the COO and
General Counsel Employment Agreement contains certain restrictive covenants regarding confidential information, intellectual property,
non-competition and non-solicitation. This summary of the COO and General Counsel Employment Agreement is qualified in its entirety by
reference to the full text of the General Counsel Employment Agreement, which is attached hereto as Exhibit 10.2 and incorporated herein
by reference.
Retirement Benefits
As of December 31, 2021, the
Company did not provide any retirement plans to its executive officers or employees.
Potential Payments upon Termination or Change-in-Control
As of December 31, 2021, the
Company did not provide for any potential payments upon termination or change of control.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth
outstanding equity awards as of December 31, 2021 to each of the named executive officers.
|
|
Option Awards |
|
Stock Units Awards |
|
Name |
|
Number of securities underlying unexercised options (#) exercisable |
|
Number of securities underlying unexercised options (#) unexercisable |
|
|
Option exercise price ($) |
|
|
Option expiration date |
|
Equity incentive plan awards: Number of securities underlying unearned Restricted Stock Units (#) |
|
Market Value
of Shares |
|
Andy Heyward |
|
|
5,000,000 |
(1) |
|
|
– |
|
|
|
1.39 |
|
|
12/07/30 |
|
|
14,062,500 |
(2) |
|
$ |
14,765,625 |
|
Robert L. Denton |
|
|
85,088 |
(3) |
|
|
– |
|
|
|
2.09 |
|
|
04/18/23 |
|
|
|
|
|
|
|
|
|
|
|
15,000 |
(3) |
|
|
– |
|
|
|
1.99 |
|
|
03/07/24 |
|
|
|
|
|
|
|
|
|
|
|
570,000 |
(4) |
|
|
380,000 |
|
(4) |
|
1.39 |
|
|
12/07/30 |
|
|
320,000 |
(5) |
|
$ |
336,000 |
|
Michael A. Jaffa |
|
|
85,088 |
(3) |
|
|
– |
|
|
|
2.09 |
|
|
04/16/23 |
|
|
|
|
|
|
|
|
|
|
|
15,000 |
(3) |
|
|
– |
|
|
|
1.99 |
|
|
03/07/24 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
(6) |
|
|
400,000 |
|
(6) |
|
1.39 |
|
|
12/07/30 |
|
|
333,334 |
(7) |
|
$ |
350,000 |
|
______________________
| (1) | Mr. Heyward’s options vested upon the grant date. |
| (2) | 937,500 of Mr. Heyward’s RSUs vested on the first anniversary date of December 20, 2021. On June
23, 2021, the Compensation Committee amended service-based awards granted to the Mr. Heyward, such that 3,750,000 of such RSUs shall continue
to vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued
employment and the remaining 3,750,000 RSUs shall be modified to vest based on performance or market conditions. The previously issued
7,500,000 performance-based awards, along with the 3,750,000 modified service-based awards, shall vest as follows: (i) 3,750,000 RSUs
vest when the closing sale price of the common stock equals or exceeds $3.00 per share or the Company’s market capitalization equals
or exceeds $903,000,000 for 20 consecutive trading days; (ii) 3,750,000 RSUs vest when the closing sale price of the common stock equals
or exceeds $3.50 per share or the Company’s market capitalization equals or exceeds $1,053,500,000 for 20 consecutive trading days,
and (iii) 3,750,000 RSUs vest when the closing sale price of the common stock equals or exceeds $3.75 per share or the Company’s
market capitalization equals or exceeds $1,128,750,000 for 20 consecutive trading days (the “market conditions”). In addition
to the stock price and market capitalization vesting conditions set forth above, such 11,250,000 RSUs may also vest in four equal installments
on the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain operating performance-based
vesting conditions established by the Compensation Committee on June 23, 2021 and subject to his continued employment, adjusted pro-ratably
for vesting pursuant to the market conditions. |
| (3) | Mr. Denton’s and Mr. Jaffa’s options vested as of December 31, 2021. |
| (4) | Mr. Denton’s options vested 380,000 upon grant and 190,000 vested on the first anniversary date
of December 7, 2021. 190,000 options will vest annually on each anniversary date for the next 2 years. |
| (5) | 155,000 of Mr. Denton’s RSUs vested on the first anniversary date of December 7, 2021. 158,000 will
vest on the second anniversary date and 162,000 will vest on the third anniversary date. |
| (6) | Mr. Jaffa’s options vested 400,000 upon grant and 200,000 vested on the first anniversary date of
December 7, 2021. 200,000 options will vest annually on each anniversary date for the next 2 years. |
| (7) | 166,666 of Mr. Jaffa’s RSUs vested on the first anniversary date of December 7, 2021. 166,666 will
vest on the second anniversary date and 166,668 will vest on the third anniversary date. |
Director Compensation
The following table sets forth
with respect to each of our non-employee directors, compensation information inclusive of equity awards and payments earned for the year
ended December 31, 2021.
Name | |
Year | | |
Fees Earned or Paid in Cash ($) (1) | | |
Option Awards ($) (2) | | |
All Other Compensation ($) | | |
Total ($) | |
| |
| | |
| | |
| | |
| | |
| |
Joseph “Gray” Davis (3) | |
| 2021 | | |
| 55,000 | | |
| 54,600 | | |
| – | | |
| 109,600 | |
P. Clark Hallren (4) | |
| 2021 | | |
| 75,000 | | |
| 54,600 | | |
| – | | |
| 129,600 | |
Margaret Loesch (5) | |
| 2021 | | |
| 45,000 | | |
| 54,600 | | |
| 90,000 | | |
| 189,600 | |
Lynne Segall (6) | |
| 2021 | | |
| 55,000 | | |
| 54,600 | | |
| – | | |
| 109,600 | |
Anthony Thomopoulos (7) | |
| 2021 | | |
| 65,000 | | |
| 54,600 | | |
| – | | |
| 119,600 | |
Michael Klein (8) | |
| 2021 | | |
| 45,000 | | |
| 54,600 | | |
| – | | |
| 99,600 | |
Dr. Cynthia Turner-Graham (9) | |
| 2021 | | |
| 30,000 | | |
| 29,600 | | |
| – | | |
| 59,600 | |
______________________
(1) |
Directors, other than Mr. Heyward, earn $10,000 for each quarterly meeting attended.
Directors, other than Mr. Heyward, also earn $10,000 as appointed Chairmen and $5,000 as members of the Company’s Compensation,
Audit, Investment and Nominating Committees. |
|
|
(2) |
Represents the grant date fair value in accordance with FASB
ASC Topic 718. The assumptions applied in determining the fair value of the awards are discussed in the Notes to our audited consolidated
financial statements for the year ended December 31, 2021, in the Form 10-K.
|
|
|
(3) |
Mr. Davis was paid $40,000 for services on the Board for 2021 and $5,000
in arrears for services on the Board for 2020, $5,000 as a member the Company’s Nominating Committee and $5,000 as a member of the
Company’s Investment Committee.
|
|
|
(4) |
Mr. Hallren was paid $40,000 for services on the Board for 2021, $5,000
in arrears for services on the Board for 2020. Mr. Hallren was also paid $10,000 as Chair of the Company’s Audit Committee, $5,000
as a member of the Company’s Compensation Committee, $10,000 as Chair of the Company’s Investment Committee and $5,000 for
other consulting services.
|
|
|
(5) |
Ms. Loesch was paid $40,000 for services on the Board for 2021, $5,000 in arrears for services on the Board in 2020 and $90,000 for services as Executive Chairperson of the Kartoon Channel! |
|
|
(6) |
Ms. Segall was paid $40,000 for services
on the Board for 2021, $5,000 in arrears for services on the Board in 2020 and $10,000 as the Chair of the Company’s Nominating
Committee.
|
|
|
(7) |
Mr. Thomopoulos was paid $40,000 for services
on the Board for 2021, $5,000 in arrears for services on the Board in 2020, $10,000 as Chair of the Company’s Compensation Committee
$5,000 as a member of the Company’s Audit Committee and $5,000 for other consulting services. |
|
|
(8) |
Mr. Klein was paid $30,000 for services on the Board, $5,000 as a member
of the Company’s Audit Committee, $5,000 as a member the Company’s Nominating Committee and $5,000 as a member of the Company’s
Investment Committee. |
|
|
(9) |
Effective June 15, 2021, Dr. Turner-Graham was elected as a member of our Board of Directors. Dr. Turner-Graham was paid $30,000 for services on the Board
for 2021. |
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and Related Stockholder Matters |
The following table
shows the beneficial ownership of shares of our common stock as of April 4, 2022, known by us through transfer agent and
other records held by: (i) each person who beneficially owns 5% or more of the shares of common stock then outstanding; (ii) each of
our directors; (iii) each of our named executive officers; and (iv) all of our current directors and executive officers as a
group.
The information in this
table reflects “beneficial ownership” as defined in Rule 13d-3 of the Exchange Act. To our knowledge and unless
otherwise indicated, each stockholder has sole voting power and investment power over the shares listed as beneficially owned by
such stockholder, subject to community property laws where applicable. Percentage ownership is based on 304,368,966 shares of common
stock outstanding as of April 4, 2022. Unless otherwise indicated in the footnotes to the following table, each person named
in the table has sole voting and investment power and that person’s address is c/o 190 N. Canon Drive, Floor 4, Beverly Hills,
CA 90210.
Name of Beneficial Owner |
|
|
Amount and Nature of Beneficial Ownership (1) |
|
|
Percent of
Class (1) |
|
Directors and Named Executive Officers |
|
|
|
|
|
|
|
Andy Heyward |
|
|
19,924,994 |
|
(2) |
6.44% |
|
Michael Jaffa |
|
|
783,422 |
|
(3) |
* |
|
Robert L. Denton |
|
|
747,588 |
|
(4) |
* |
|
Michael Klein |
|
|
239,600 |
|
(5) |
* |
|
Anthony Thomopoulos |
|
|
20,115 |
|
(6) |
* |
|
Joseph (Gray) Davis |
|
|
20,000 |
|
(7) |
* |
|
P. Clark Hallren |
|
|
20,000 |
|
(7) |
* |
|
Margaret Loesch |
|
|
20,000 |
|
(7) |
* |
|
Lynne Segall |
|
|
20,000 |
|
(7) |
* |
|
Karen McTier |
|
|
20,000 |
|
(7) |
* |
|
Dr. Cynthia Turner-Graham |
|
|
20,000 |
|
(7) |
* |
|
All current executive officers and directors as a group (consisting of 11 persons) |
|
|
21,835,719 |
|
|
7.02% |
|
|
|
|
|
|
|
|
|
5% Stockholders
BlackRock, Inc. |
|
|
19,645,121 |
|
|
6.45% |
|
_______________________
* Indicates ownership less than 1%
(1) |
Applicable percentage ownership is based on 304,368,966 shares of common stock
outstanding as of April 4, 2022, together with securities exercisable or convertible into shares of common stock within 60 days of April
4, 2022. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power
with respect to securities. Shares of common stock that a person has the right to acquire beneficial ownership of upon the exercise or
conversion of options, convertible stock, warrants or other securities that are currently exercisable or convertible or that will become
exercisable or convertible within 60 days of April 4, 2022 are deemed to be beneficially owned by the person holding such securities for
the purpose of computing the number of shares beneficially owned and percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person. |
|
|
(2) |
Consists of (i) 990,728 shares of common stock held by A Squared Holdings LLC
over which Andy Heyward holds sole voting and dispositive power; (ii) 13,933,032 shares of common stock held by Andy Heyward or issuable
upon vested RSUs; (iii) 1,234 shares held by Heyward Living Trust; (iv) 5,000,000 options to acquire shares of common stock issuable upon
the exercise of stock options. |
|
|
(3) |
Consists of 83,334 shares of common stock held and 700,088 shares of common stock issuable upon exercise of stock options granted to Mr. Jaffa. |
(4) |
Consists of 77,500 shares of common stock held and 670,088 shares of common stock issuable upon exercise of stock options granted to Mr. Denton. |
|
|
(5) |
Consists of 99,600 shares of common stock, 20,000 shares of common
stock issuable upon exercise of stock options granted and 120,000 shares of common stock issuable upon the exercise of warrants
granted to Mr. Klein that will become exercisable within 60 days of December 31, 2021. |
|
|
(6) |
Consists of 115 shares of common stock held and 20,000 shares of common stock issuable upon exercise of stock options granted to Mr. Thomopoulos that will become exercisable within 60 days of December 31, 2021. |
|
|
(7) |
Consists of 20,000 shares of common stock
issuable upon exercise of stock options granted to each Board Member that will become exercisable within 60 days of December 31,
2021. Ms. McTier resigned from the Board effective as of March 31, 2022.
|
(8) |
This information is based solely on a Schedule 13G filed with the SEC on February 4, 2022. |
Equity Compensation Plan Information
On September 18, 2015, the
Company adopted the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The 2015 Plan was approved by
our stockholders in September 2015. The 2015 Plan as approved by the stockholders authorized the issuance up to an aggregate of 150,000
shares of common stock. On December 14, 2015, the Board of Directors voted to amend the 2015 Plan to increase the total number of shares
that can be issued under the 2015 Plan by 1,293,334 from 150,000 shares to 1,443,334 shares. The increase in shares available for issuance
under the 2015 Plan was approved by stockholders on February 3, 2016. On May 18, 2017, the Board of Directors voted to amend the 2015
Plan to increase the total number of shares that can be issued under the 2015 Plan by 223,333 shares from 1,443,334 shares to an aggregate
of 1,667,667 shares. The increase in shares available for issuance under the 2015 Plan was approved by the stockholders on July 25, 2017.
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 August 4, 2020, the Board
of Directors voted to adopt the Genius Brands International, Inc 2020 Incentive Plan (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 reflects,
as of December 31, 2021, compensation plans pursuant to which we are authorized to issue options, warrants, restricted stock units, or
other rights to purchase shares of its common stock, including the number of shares issuable under outstanding options, warrants and rights
issued under the plans and the number of shares remaining available for issuance under the plans.
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Plan category |
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
|
|
Weighted-average exercise price of outstanding options, warrants and rights |
|
|
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|
Equity compensation plans approved by shareholders |
|
|
27,685,489 |
|
|
$ |
1.80 |
|
|
|
4,482,178 |
|
Equity compensation plans not approved by shareholders |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Total |
|
|
27,685,489 |
|
|
$ |
1.80 |
|
|
|
4,482,178 |
|
Item 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, and Director Independence |
Certain Relationships and Related Transactions
SEC regulations define the
related person transactions that require disclosure to include any transaction, arrangement or relationship in which the amount involved
exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years in which we
were or are to be a participant and in which a related person had or will have a direct or indirect material interest. A related person
is: (i) an executive officer, director or director nominee of the Company, (ii) a beneficial owner of more than 5% of our common stock,
(iii) an immediate family member of an executive officer, director or director nominee or beneficial owner of more than 5% of our common
stock, or (iv) any entity that is owned or controlled by any of the foregoing persons or in which any of the foregoing persons has a substantial
ownership interest or control. Described below are certain transactions or relationships between us and certain related persons.
Pursuant to his employment agreements dated December 7, 2020, Mr. Heyward is
entitled to an Executive Producer fee of $12,500 per one-half hour episode for each episode he provides services as an executive producer.
During the year ended December 31, 2021, Mr. Heyward was paid $543,750 in producer fees.
On July 21, 2020, the Company
entered into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward,
the Company’s Chief Executive Officer. The Company entered into a customary merchandise license agreement with AHAA for the use
of characters and logos related to Warren Buffett’s Secret Millionaires Club and Stan Lee’s Mighty 7 in connection
with certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry, and the Company
earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. During the year ended December
31, 2021, the Company earned $0 in royalties from this agreement.
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.
Review, Approval or Ratification of Transactions
with Related Persons
Pursuant
to the written charter of our Audit Committee, the Audit Committee is responsible for reviewing and approving all transactions both in
which (i) we are a participant and (ii) any parties related to us, including our executive officers, our directors, beneficial owners
of more than 5% of our securities, immediate family members of the foregoing persons and any other persons whom our Board of Directors
determines may be considered related parties under Item 404 of Regulation S-K, has or will have a direct or indirect material interest.
All the transactions described in this section occurred prior to the adoption of the Audit Committee’s charter.
Corporate Governance
General
We
believe that good corporate governance is important to ensure that the Company is managed for the long-term benefit of our stockholders.
This section describes key corporate governance practices that we have adopted.
Independence of the Board of Directors
Our determination of the
independence of our directors is made using the definition of “independent” contained in the listing standards of the
Nasdaq Capital Market. On the basis of information solicited from each director, the board has determined that each of Messrs.
Davis, Hallren, Klein, and Thomopoulos as well as each of Mss. Segall and Turner-Graham are independent directors within
the meaning of such rules.
Item 14. |
Principal Accounting Fees and Services |
Principal Accountant Fees and Services
The following table sets forth
fees billed to us by our independent registered public accounting firm for the years ended December 31, 2021 and 2020 for (i) services
rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered
that are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees,
and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.
| |
2021 | | |
2020 | |
Audit Fees | |
$ | 255,700 | | |
$ | 123,000 | |
Audit-Related Fees | |
| 9,650 | | |
| 38,000 | |
Tax Fees | |
| 64,645 | | |
| 8,490 | |
Other Fees | |
| – | | |
| – | |
Total Fees | |
$ | 329,995 | | |
$ | 169,490 | |
Our policy is to pre-approve
all audit and permissible non-audit services performed by the independent registered public accounting firm. These services may include
audit services, audit-related services, tax services and other services, as follows:
|
· |
Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards. |
|
· |
Audit-Related services are for assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements. |
|
· |
Tax services include all services performed by the independent auditor’s tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice. |
|
· |
Other Fees are those associated with services not captured in the other categories. The Company generally does not request such services from the independent auditor. |
Under our policy, pre-approval
is generally provided for particular services or categories of services, including planned services, project-based services and routine
consultations. In addition, the Board of Directors may also pre-approve particular services on a case-by-case basis. Our Board of Directors
approved all services that our independent registered public accounting firm provided to us in the past three fiscal years.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 2021
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, the Company distributes its content primarily on
television and streaming platforms and license its properties for a broad range of consumer products based on the Company’s characters.
In the children's media sector, the Company’s portfolio features “content with a purpose” for toddlers to tweens, which
provides enrichment as well as entertainment. New intellectual property titles include Stan Lee’s Superhero Kindergarten produced
with Stan Lee’s Pow! Entertainment and Oak Productions. Arnold Schwarzenegger lends his voice as the lead and is also an Executive
Producer on the series. Another new offering is KC! Pop Quiz, a live action game show featuring kids as contestants. The show is
hosted by Casey Simpson, a prominent social media influencer and former Nickelodeon star. Both KC! Pop Quiz and Superhero Kindergarten are
being broadcast in the United States on the Company’s wholly-owned advertisement supported video on demand (“AVOD”)
distribution outlet, the Kartoon Channel!. Other newer series include, the preschool property Rainbow Rangers, which debuted
in November 2018 on Nickelodeon, and which was renewed for a third season and preschool property Llama Llama, which debuted on
Netflix in January 2018 and was renewed by Netflix for a second season. The Company’s library titles include the award-winning Baby
Genius, adventure comedy Thomas Edison's Secret Lab® and Warren Buffett’s Secret Millionaires Club, created
with and starring iconic investor Warren Buffett, which is distributed across the Company’s Genius Brands Network on Comcast’s
Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and Zumo, as well as Connected TV. The Company
is in production on a new animated series starring Shaquille O’Neal called Shaq’s Garage which the Company expects
to debut during the fourth quarter of 2022.
In addition, the Company acts
as licensing agent for Penguin Young Readers, a division of Penguin Random House LLC which owns or controls the underlying rights to Llama
Llama, leveraging the Company’s existing licensing infrastructure to expand this brand into new product categories, new retailers,
and new territories.
The Company commenced operations
in 2006, assuming all the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement between the Company
and Genius Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “Baby Genius,”
“Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions
under those titles. In 2011, the Company reincorporated in Nevada and changed its name to Genius Brands International, Inc. (the “Reincorporation”).
In connection with the Reincorporation, the Company changed its trading symbol to “GNUS.”
In 2013, the Company entered
into an Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limited
liability company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member of A Squared
(the “Parent Member”), and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“Acquisition Sub”).
Upon closing of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company.
On February 1, 2021, the Company,
through GBI Acquisition LLC, a New Jersey limited liability company, and 2811210 Ontario Inc., a company organized under the laws of the
Province of Ontario, two wholly-owned subsidiaries of the Company, purchased the outstanding equity
interests of ChizComm Ltd., a corporation organized in Canada, and ChizComm USA Corp., a New Jersey corporation (collectively “ChizComm”).
Liquidity
During the year ended December
31, 2021, the Company’s cash and cash equivalents and marketable security positions increased by $14.1 million. Cash in excess
of immediate requirements is invested in accordance with the Company’s investment policy, primarily with a view for liquidity and
capital preservation. Accordingly, available-for-sale securities, consisting principally of corporate and government debt securities, are also available as a source of liquidity.
As of December 31, 2021, the Company held marketable securities with a fair value of $112.5 million as available-for-sale.
Historically, the Company
has incurred net losses. For the years ended December 31, 2021, and December 31, 2020, the Company reported net losses of $126.3
million and $401.7 million, respectively.
The Company reported net cash used in operating activities of $23.7
million and $8.1 million for the years ended December 31, 2021, and December 31, 2020, respectively. As of December 31, 2021,
the Company had an accumulated deficit of $595.8 million and total stockholders’ equity of $144.7 million. As of December 31, 2021,
the Company had current assets of $136.2 million,
including cash and cash equivalents of $2.1
million and marketable securities of $112.5
million, and current liabilities of $21.1
million. The Company had working capital of $115.1
million as of December 31, 2021, compared to working capital of $101.4
million as of December 31, 2020.
On January 28, 2021, the Company
entered into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to exercise
certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of the Company’s
common stock at their original exercise price of $1.55 per share (the “Exercise”). The Company received approximately $61.6
million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent
and received a cash fee of approximately $4.3 million. In consideration for the exercise of the Existing Warrants for cash, the exercising
holders received new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”)
at an exercise price of $2.37 per share, exercisable immediately, with an exercise period of five years from the initial issuance date.
Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends
and other language typical for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise
if no resale registration statement covering the common stock underlying the New Warrants is effective after six months). The Company
was required to register the resale of the shares of common stock issuable upon exercise of the New Warrants.
During December 2021, the
Company borrowed from its investment margin account the aggregate amount of $6.4
million for its investments in YFE and future closing of its pending acquisition of WOW, in each case pledging certain of its
marketable securities as collateral. The interest rate for these investment margin account borrowings fluctuates based on the Federal
Funds Rate plus 0.65%
with interest only payable monthly. The weighted average interest rate during the year ended December 31, 2021, was 0.72% and the average
balance of the borrowings was $5.9 million as of December 31, 2021. These investment margin account borrowings do not mature but are
payable on demand and recorded as a current liability on the Company’s consolidated balance sheets. As of December 31, 2021, the
Company had the ability to borrow up to 66% of the balance held in marketable securities, with the option to increase its borrowing capacity,
if needed.
Recent
Investments
Effective as of June 1, 2021,
the Company executed an Operating Agreement with POW!, Inc. (“POW!”) to form a joint venture to exploit certain rights in
intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called Stan Lee Universe, LLC (“SLU”)
and activity commenced during the fourth quarter of 2021. In exchange for a cash investment of $2.0 million, the Company obtained 50%
ownership in the entity as a variable interest in the Stan Lee trade name. This agreement enables the Company to assume the worldwide
rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online,
digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations (the “Stan
Lee Assets”), from which Genius Brands plans to develop and license multiple properties each year. SLU is considered a variable
interest entity in which the Company is the primary beneficiary. Accordingly, the transaction was accounted for as an asset acquisition
of the Stan Lee Assets in the amount of $4.0 million and the results of SLU are included in the Company’s consolidated financial
statements, with the portion of non-controlling interest recorded in stockholders’ equity.
On December 1, 2021, the Company
completed a $6.8 million investment in Your Family Entertainment (“YFE”). In exchange for $3.4 million in cash and 2,281,269
shares of the Company’s common stock (valued at approximately $3.4 million), the Company received 3,000,500 shares of YFE’s
common stock. As of December 31, 2021, the Company has a 29% economic ownership interest in YFE.
On January 13, 2022, the Company
acquired Canadian streaming service Ameba TV and gained access to its kid-safe platform technology and 13,000 episodes of content including
Casper the Friendly Ghost, Donkey Kong Country, Gummy Bears and Rescue Heroes. The Company purchased 100% of Ameba’s
issued and outstanding shares for $3.5 million in cash and paid $0.3 million for the underlying software code that powers the subscription
video on demand (“SVOD”) deliveries.
Pending Acquisition
On October 26, 2021, 1326919
B.C. LTD., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of the Company and
Wow Unlimited Media Inc. (“WOW”), a corporation existing under the laws of the Province of British Columbia, entered into
an Arrangement Agreement to effect a transaction among the parties by way of a plan of arrangement under the arrangement provisions of
Part 9, Division 5 of the Business Corporations Act, whereby the Company will purchase 100% of WOW’s issued and outstanding
shares for $38.4 million in cash and 11,000,000 shares of the Company’s common stock. The
Company has not completed its initial accounting for the business combination which will be accounted for using the acquisition method
of accounting. The fair value of the assets and liabilities are still to be determined. The acquisition is expected to be completed during
the second quarter of 2022.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”).
The accompanying consolidated
financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications)
necessary to state fairly the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Loss, Statements of Stockholders'
Equity, and Statements of Cash Flows for all periods presented.
Certain prior period amounts
have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results
of operations.
Segments
The Company determined
its operating segments on the same basis that it assesses performance and makes operating decisions. The Company principally
operates in two distinct business segments: the Content Production & Distribution Segment which produces and distributes
children’s content, and the Media Advisory & Advertising Services Segment which provides media and advertising services.
These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating
results for the purposes of allocating resources and assessing performance. The Company has identified its Chief Executive Officer
as the CODM. The segments are organized around the products and services provided to customers and represent the
Company’s reportable segments. Prior to the acquisition of ChizComm, the Company’s
operations were comprised of a single segment.
The accounting policies for
each segment are the same as for the Company as a whole. Refer to Note 26 for additional information.
Principles of Consolidation and Basis of Presentation
The Company’s consolidated
financial statements include the accounts of Genius Brands International, Inc., and its wholly-owned subsidiaries. The Company consolidates
all majority-owned subsidiaries, investments in entities in which it has controlling influence and variable interest entities where the
Company has been determined to be the primary beneficiary. Minority interests are recorded as noncontrolling interests. Non-consolidated
investments are accounted for using the equity method or the fair value option when the Company has the ability to significantly influence
the operating decisions of the investee. When the Company does not have the ability to significantly influence the operating decisions
of an investee, these equity securities are classified as either marketable investment securities or other investments and recorded at
fair value with changes recognized within other Income (expense) on the consolidated statements of operations and comprehensive income
(loss). All significant intercompany accounts and transactions have been eliminated in consolidation.
Business Combinations
The
Company allocates the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible
assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these
identifiable assets and liabilities is recorded as goodwill. The valuation of acquired assets and assumed liabilities requires significant
judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets requires that the Company use
valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes
discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and
other costs, and discount rates. The Company estimates the fair value based upon assumptions management believes to be reasonable, but
which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with
the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.
Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed
as incurred.
Variable Interest Entities
The Company holds an interest
in Stan Lee University (“SLU”), an entity that is considered a variable interest entity (“VIE”). The variable
interest relates to 50% ownership in the entity that is comprised of the Stan Lee Assets and that requires additional financial support
from the Company to continue operations. The Company’s total cash investment in SLU was $2.0 million as of December 31,
2021. The Company is considered the primary beneficiary and is required to consolidate the VIE.
In evaluating whether the
Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers
the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and the Company’s decision-making
role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest
holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s
future performance and the exercise of professional judgment in deciding which decision-making rights are most important.
In determining whether the
Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, the Company
evaluates all of its economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual
arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure,
contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, as
well as other contractual arrangements that have the potential to be economically significant. The evaluation of each of these factors
in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional
judgment. The Company continuously assesses whether it is the primary beneficiary of a variable interest entity as changes to existing
relationships or future transactions may result in the Company consolidating its collaborators or partners.
Use of Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
Foreign Currency
The Company considers the
U.S. dollar to be its functional currency for its United States based operations. The Company considers the Canadian dollar to be its
functional currency for its Canada based operation. Accordingly, the financial information is translated from the Canadian dollar to the
U.S. dollar for inclusion in the Company’s consolidated financial statements. Revenue and expenses are translated at average exchange
rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting
translation adjustments are included as a component of accumulated other comprehensive income (loss), net in stockholders’ equity.
Foreign exchange transaction
gains and losses are included in other income (expense), net in the condensed consolidated statements of operations.
Cash and Cash Equivalents
The Company considers all
highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of December 31, 2021, and December
31, 2020, the Company had cash and cash equivalents of $2.1 million and $100.5 million, respectively.
Restricted Cash
The Company holds restricted
cash of $8.0 million in an escrow account for the future commitment of financing related to our investment in YFE.
Marketable Debt Securities
The Company purchases high
quality, investment grade securities from diverse issuers. Management determines the appropriate classification of securities at
the time of purchase and reevaluates such designation as of each balance sheet date. Currently, the Company classifies its investments
in marketable securities as “available-for-sale” and records these investments at fair value. The securities are available
to support current operations and, accordingly, the Company classifies the investments as current assets without regard to their contractual
maturity.
Unrealized gains or losses
on available-for-sale securities for which the Company expects to fully recover the amortized cost basis are recognized in accumulated
other comprehensive (loss) income, a component of stockholders’ equity. If the Company intends to sell a debt security, or it is
more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference
between the security's amortized cost basis and its fair value at the balance sheet date would be recognized as a loss in the consolidated
statements of operations.
The Company reports accrued
interest receivable separately from the available-for-sale securities and has elected not to measure an allowance for credit losses for
accrued interest receivables. Uncollectible accrued interest is written off when the Company determines that no additional interest payments
will be received. Approximately $0.4 million in interest income was receivable as of December 31, 2021, classified within Other Receivables
on the consolidated balance sheets.
Interest earned on investment
securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums accounted
for by the level yield method with no pre-payment anticipated.
Equity-Method Investments
When the Company does
not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial
policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing
the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the
entity’s common stock or in-substance common stock.
In general, the Company
accounts for investments acquired at fair value. See Note 5 for further information about the Company’s investment in YFE’s
equity securities accounted for under the fair value option.
Allowance for Doubtful Accounts
Accounts receivable are presented
on the balance sheets net of estimated uncollectible amounts. The 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.
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 consolidated statement of operations.
Right of Use Leased Assets
Effective January 1, 2019,
the Company adopted ASC 842, Leases, using the modified retrospective transition method applied at the effective date of the standard.
The Company determines at
contract inception whether the arrangement is a lease based on its ability to control a physically distinct asset and determines the classification
of the lease as either operating or finance. For all leases, the Company combines all components of the lease including related nonlease
components as a single component. Operating leases are reflected as operating right of use (“ROU”) assets and operating lease
liabilities in the consolidated balance sheets. The Company does not have any finance leases.
Operating lease ROU assets
and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s
leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement
date in determining the present value of lease payments. The Company estimates the incremental borrowing rate to reflect the profile of
collateralized borrowing over the expected term of the leases based on the information available at the later of the initial date of adoption,
or the lease commencement date.
The operating lease ROU asset
also includes any lease payments made prior to lease commencement date and excludes lease incentives. Lease terms may include options
to extend or terminate the lease when the Company is reasonably certain that it will exercise the option. Lease expense is recognized
on a straight-line basis over the lease term in the consolidated statement of operations. Lease incentives are recognized as a reduction
to the lease expense on a straight-line basis over the underlying lease term.
Film and Television Costs
The Company capitalizes production
costs for episodic series produced in accordance with FASB ASC 926-20, Entertainment-Films - Other Assets - Film Costs. Accordingly,
production costs are capitalized at actual cost and amortized using the individual-film-forecast method, whereby these costs are amortized,
and participations costs are accrued based on the ratio of the current period’s revenues to management’s estimate of
ultimate revenue expected to be recognized from each production.
Due to the inherent uncertainties
involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and
are likely to differ to some extent in the future from actual results. In addition, in the normal course of the Company’s business,
some titles are more successful or less successful than anticipated. Management reviews its ultimate revenue and cost estimates on a title-by-title
basis, when an event or change in circumstances indicates that the fair value of the production may be less than its unamortized cost.
This may result in a change in the rate of amortization of film costs and participations and/or a write-down of all or a portion of the
unamortized costs of the film or television production to its estimated fair value. An impairment charge is recorded in the amount by
which the unamortized costs exceed the estimated fair value. These write-downs are included in amortization expense within Direct Operating
Expenses on the Company’s consolidated statements of operations. See further discussion in Note 9 for impairment charges recorded
during the year ended December 31, 2021.
The Company expenses all capitalized
costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes. Additionally, for episodic series,
from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing content. After
the initial release of the episodic series, the costs of significant improvement to existing products are capitalized while routine and
periodic alterations to existing products are expensed as incurred.
Goodwill and Intangible Assets
Goodwill represents the excess
of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the acquisition method.
In accordance with FASB ASC 350, Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite
useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise.
The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test
for goodwill impairment, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that
the fair value of a reporting unit, of which the Company has two, is less than its carrying value. If impairment is indicated in the qualitative
assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach.
The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds
its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value,
an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed
the total amount of goodwill allocated to that reporting unit.
Changes in future results,
assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in
future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable,
thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.
Further, continued adverse market conditions could result in the recognition of additional impairment if the Company determines that the
fair values of its reporting units have fallen below their carrying values.
The Company has performed
its annual impairment test on its goodwill and indefinite-lived intangible asset during the fourth quarter of the year ended December
31, 2021. Refer to Note 10 for details.
Other intangible assets have
been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual
amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.
Debt and Attached Equity-Linked Instruments
The Company measures issued
debt on an amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method
or the straight-line method when the latter does not lead to materially different results.
The Company analyzes freestanding
equity-linked instruments including warrants attached to debt to conclude whether the instrument meets the definition of the derivative
and whether it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to the Company’s
stock, it is classified as an asset or liability recorded at fair value. If the instrument is considered indexed to the Company’s
stock, the Company analyzes additional equity classification requirements per ASC 815-40, Contract’s in Entity’s Own Equity.
When the requirements are met, the instrument is recorded as part of the Company’s equity, initially measured based on its relative
fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument is recorded as an
asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.
When required, the Company
also considers the bifurcation guidance for embedded derivatives per ASC 815-15, Embedded Derivatives.
Revenue Recognition
The Company accounts for revenue
according to standard FASB ASC 606, Revenue from Contracts with Customers. The Company has identified the following seven material
and distinct performance obligations:
|
· |
License rights to exploit Functional Intellectual Property (“Functional Intellectual Property” or “functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability be played or aired. Functional Intellectual Property derives a substantial portion of its utility from its significant standalone functionality). |
|
· |
License rights to exploit Symbolic
Intellectual Property (“Symbolic Intellectual Property” or “symbolic IP” is intellectual property that is not
functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association
with the entity’s past or ongoing activities, including its ordinary business activities, such as the Company’s licensing
and merchandising programs associated with its animated content).
|
|
· |
Provide media and advertising services
to clients.
|
|
· |
Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future). |
|
· |
Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future). |
|
· |
Fixed fee advertising revenue generated from the Genius Brands Kartoon Channel! |
|
· |
Variable fee advertising revenue generated from the Genius Brands Kartoon Channel! |
The Company recognizes revenue
related to licensed rights to exploit functional IP in two ways; for minimum guarantees, the Company recognizes fixed revenue upon delivery
of content and the start of the license period and for functional IP contracts with a variable component, the Company estimates revenue
such that it is probable there will not be a material reversal of revenue in future periods. The Company recognizes revenue related to
licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition pattern from
functional IP, the valuation method is substantially the same, depending on the nature of the license.
The Company sells advertising
on its App and OTT based “Kartoon Channel!” in the form of either flat rate promotions or impressions served. For flat
rate promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under FASB ASC 606 are met.
For impressions served, the Company delivers a certain minimum number of impressions on the channel to the advertiser for which the advertiser
pays a contractual CPM per impression. Impressions served are reported to the Company on a monthly basis, and revenue is reported in the
month the impressions are served.
The Company provides media
and advertising services to clients. Revenue is recognized when the services are performed. When the Company purchases advertising for
clients on linear and across digital and streaming platforms and receives a commission, the commissions are recognized as revenue in the
month the advertising is displayed.
The Company recognizes revenue
related to product sales when the Company completes its performance obligation, which is when the goods are transferred to the buyer.
Direct Operating Costs
Direct operating costs include
costs of the Company’s product sales, non-capitalizable film costs, film and television cost amortization expense, impairment expenses
related to film and television costs, and participation expense related to agreements with various animation studios, post-production
studios, writers, directors, musicians or other creative talent with which the Company is obligated to share net profits of the properties
on which they have rendered services.
Share-Based Compensation
The Company issues stock-based
awards to employees and non-employees that are generally in the form of stock options or restricted stock units (“RSUs”).
Share-based compensation cost is recorded for all options and awards of non-vested stock based on the grant-date fair value of the award.
The fair value of stock options
is estimated at the date of grant using the Black-Scholes option pricing model, which requires management to make assumptions with respect
to the fair value on the grant date. The assumptions are as follows: (i) the expected term assumption of the award is based on the Company’s
historical exercise and post-vesting behavior (ii) the expected volatility assumption is based on historical and implied volatilities
of the Company’s common stock calculated based on a period of time generally commensurate with the expected term of the award; (iii)
the risk-free interest rates are based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent expected
term; (iv) and the expected dividend yields of the Company’s stock are based on history and expectations of future dividends payable.
In the case of RSUs the fair value is calculated based on the Company’s underlying common stock on the date of grant.
The Company recognizes compensation
expense over the requisite service period ratably, using the graded attribution method, which is in-substance, recognizing multiple awards
based on the vesting schedule. The Company has elected to account for forfeitures when they occur. The Company issues authorized shares
available for issuance under the Company’s 2015 Incentive Plan and the Company’s 2020 Incentive Plan upon employees’
exercise of their stock options.
Earnings Per Share
Basic earnings (loss) per
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 maintains its
cash in bank deposit accounts which, at times, may exceed the Federal Deposit Insurance Corporation’s (“FDIC”) or the
Canadian Deposit Insurance Corporation’s (“CDIC”) insured amounts. Balances on interest bearing deposits at banks in
the United States are insured by the FDIC up to $250,000 per account and deposits in banks in Canada are insured by the CDIC up to $100,000
CAD. As of December 31, 2021, the Company had four accounts with an uninsured balance in bank deposit accounts of $1.1 million.
The Company has a managed
account and a brokerage account with a financial institution. The managed account maintains our investments in marketable securities of
$112.5 million as of December 31, 2021. The brokerage account does not have a balance as of December 31, 2021. Assets in the managed account
and brokerage account are protected by the Securities Investor Protection Corporation (“SIPC”) up to $500,000 (with a limit
of $250,000 for cash). In addition, the financial institution provides additional “excess of SIPC” coverage which insures
up to $1 billion. As of December 31, 2021, the Company has not had account balances held at this financial institution that exceed the
insured balances.
The Company’s investment
portfolio consists of investment-grade securities diversified among security types, industries and issuers. The Company’s policy
limits the amount of credit exposure to any one security issue or issuer and the Company believes no significant concentration of credit
risk exists with respect to these investments.
For fiscal year 2021, the
Company had one customer, as reported in the Content Production & Distribution operating segment, whose total revenue exceeded 10%
of total consolidated revenue. This customer accounted for 14.6% of total revenue. The Company had two customers whose total accounts
receivable exceeded 10% of total accounts receivable. These customers accounted for 29.9% of the total accounts receivable as of December
31, 2021. For fiscal year 2020, the Company had two customers whose total revenue exceeded 10% of the total consolidated revenue. These
customers accounted for 44% of total revenue and represented 22% of accounts receivable.
There is significant financial
risk associated with a dependence upon a small number of customers. The Company periodically assesses the financial strength of these
customers and establishes allowances for any anticipated bad debt. At December 31, 2021 and 2020, the Company recorded an allowance for
bad debt of $22,080 and $43,676, respectively.
Fair value of Financial Instruments
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements)
and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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Level 1 - Observable inputs such as quoted prices for identical instruments in active markets; |
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Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
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Level 3 - Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The carrying amounts of cash,
restricted cash, receivables, payables, accrued liabilities and the margin loan approximate fair value due to the short-term maturity
of the instruments.
The fair values of the available-for-sale
securities are generally based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing
services, which generally use Level 1 or Level 2 inputs for the determination of fair value to facilitate fair value measurements and
disclosures. Level 2 securities primarily include corporate securities, securities from states, municipalities and political subdivisions,
mortgage-backed securities, United States Government securities, foreign government securities, and certain other asset-backed securities.
For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or a variety of valuation
techniques, incorporating inputs that are currently observable in the markets for similar securities.
The following table summarizes
the marketable securities measured at fair value by level within the fair value hierarchy as of December 31, 2021 (in thousands):
Schedule of marketable security measured at fair value | |
| | | |
| | | |
| | |
| |
Level 1 | | |
Level 2 | | |
Total Fair Value | |
Marketable investments: | |
| | | |
| | | |
| | |
Corporate Bonds | |
$ | 31,099 | | |
$ | 16,236 | | |
$ | 47,335 | |
U.S. Treasury | |
| 24,153 | | |
| – | | |
| 24,153 | |
Mortgage-Backed | |
| – | | |
| 7,361 | | |
| 7,361 | |
U.S. agency and government sponsored securities | |
| – | | |
| 14,588 | | |
| 14,588 | |
U.S. states and municipalities | |
| – | | |
| 11,682 | | |
| 11,682 | |
Asset-Backed | |
| – | | |
| 6,406 | | |
| 6,406 | |
Commercial paper | |
| – | | |
| 998 | | |
| 998 | |
Total | |
$ | 55,252 | | |
$ | 57,271 | | |
$ | 112,523 | |
Fair values were determined
for each individual security in the investment portfolio. The Company’s marketable securities are considered to be available-for-sale
investments as defined under ASC 320, Investments – Debt and Equity Securities. There were no impairment charges recorded
for the marketable securities. Refer to Note 6 for additional details. The fair values of the derivative warrants attached to the 2020
Convertible Notes were determined using the Black-Scholes-Merton model (Level 2) with standard valuation inputs. Refer to Note 22 for
additional details. The investment in YFE is valued based on the trading price of YFE (Level 1). Refer to Note 5 for additional details.
Financial and nonfinancial
assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The
Company’s financial and nonfinancial assets and liabilities measured at fair value on a non-recurring basis as of December
31, 2021 include the contingent earn-out liability (refer to Note 3), the indefinite-lived intangible asset and goodwill related to the
ChizComm acquisition (refer to Note 10) and the Film and Television Costs (refer to Note 9).
Recent Accounting Pronouncements
In June 2016, the FASB issued
Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326).
ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management’s
measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit
loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial
assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but
is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply
to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit
losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the
amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans.
ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the
allowance for loan and lease losses. On November 16, 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses, Effective
Dates approving a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying
the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption
is permitted for interim and annual reporting periods. The Company is currently evaluating the effect that the ASU will have on its consolidated
financial statements and related disclosures.
In August 2020, the FASB issued
ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update simplifies the
accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt—Debt with Conversion and
Other Options, for convertible instruments. As part of the amendment, the embedded conversion features are no longer separated from
the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under
Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. The FASB has eliminated
the cash conversion and beneficial conversion feature models. The FASB has also modified accounting rules relating to application of the
scope exception from derivative accounting. The amendments revise the guidance in ASC 815-40-25-10, to remove three out of seven conditions
from the settlement guidance, referred to as additional equity classification requirements. Following the above amendments, more convertible
debt instruments will be accounted for as a single liability measured at its amortized cost and more convertible preferred stock will
be accounted for as a single equity instrument measured at its historical cost, as long as no features require bifurcation and recognition
as derivatives. The amendments are effective for public business entities, excluding smaller reporting companies, for fiscal years beginning
after December 15, 2021, including interim periods within those fiscal years. For all other entities, including smaller reporting companies
the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.
Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those
fiscal years. The Company has early adopted ASU No. 2020-06 starting January 1, 2021 on a modified retrospective basis. The impact to
the Company’s consolidated financial position, results of operations and cash flows was not material as the Company does not have
any convertible instruments outstanding as of the beginning of the fiscal year.
In May 2021, the FASB issued
ASU No. 2021-04, Modification of Equity-Classified Written Call Options. The update requires the issuer to treat a modification
of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant
for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant
or as termination of the original warrant and issuance of a new warrant. Under the amendments, an issuer should measure the effect of
a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before
modification. The recognition of the modification depends on the nature of the transaction in which a warrant is modified, i.e., in connection
with equity issuance, debt origination, debt modification, or other. For example, if a warrant is modified in connection with an equity
issuance, the issuer should recognize the increase (and disregard any decrease) in the warrant’s fair value as an equity issuance
cost, which should be charged against the gross proceeds of the offering. The amendments are effective for public business entities for
fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including
interim periods within those fiscal years. The amendment would be applied prospectively to modifications that occur after the date of
initial application. The Company will apply the amendment during the interim periods of fiscal year 2022 to any prospective modifications.
In October 2021, the FASB
issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers. ASU 2021-08 requires the recognition and measurement of contract assets and contract liabilities acquired in a business
combination in accordance with ASC 606, Revenue from Contracts with Customers. Considerations to determine the amount of contract
assets and contract liabilities to record at the acquisition date include the terms of the acquired contract, such as timing of payment,
identification of each performance obligation in the contract and allocation of the contract transaction price to each identified performance
obligation on a relative standalone selling price basis as of contract inception. The amendments are effective for public business entities
for fiscal years beginning after December 15, 2022. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after
the effective date of the amendments. Early adoption of the proposed amendments would be permitted, including adoption in an interim period.
The Company is currently evaluating the effect that the ASU will have on its consolidated financial statements and related disclosures.
Various other accounting pronouncements
have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific
industries and are not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.
Note 3: Acquisition of ChizComm Entities
On February 1, 2021, the Company
through GBI Acquisition LLC, a New Jersey limited liability company, and 2811210 Ontario Inc., a company organized under the laws of the
Province of Ontario, two wholly-owned subsidiaries of the Company, closed its previously announced acquisition of the issued and outstanding
equity interests of ChizComm Ltd., a corporation organized in Canada (“ChizComm Canada”), and ChizComm USA Corp., a New Jersey
corporation (“ChizComm USA” and, together with ChizComm Canada, “ChizComm”) (the “ChizComm Acquisition”).
The
following table summarizes the fair value of the purchase price consideration paid to acquire ChizComm (in thousands):
Total purchase price consideration paid | |
| | |
| |
Amount | |
Cash consideration at closing | |
$ | 8,500 | |
Equity consideration at closing | |
| 3,527 | |
Fair value of Earn-Out shares | |
| 7,210 | |
Total | |
$ | 19,237 | |
Total consideration paid by
the Company in the transaction at closing consisted of $8.5 million in cash and 1,980,658 shares (the “Closing Shares”) of
the Company’s common stock with a value of approximately $3.5 million, both as subject to certain purchase price adjustments. Of
the Closing Shares, 674,157 shares of common stock, with a value of approximately $1.2 million, were deposited into an escrow account
to cover potential post-closing indemnification obligations of Sellers under the Purchase Agreement. Additionally, the Purchase Agreement
also provides for the issuance of additional shares of common stock with an aggregate value of up to $8.0 million that may be issued to
the Sellers if certain EBITDA and performance levels are achieved within a four-year period commencing on the date of the Purchase Agreement
(Earn-Out).
The
ChizComm Acquisition was approved by the board of directors of each company. Transaction costs incurred relating to this acquisition including
legal and accounting totaled $0.5 million, which is included in general and administrative expenses on the statement of operations. The
ChizComm Acquisition expands the Company’s revenue streams into media and advertising services.
The
Company has determined that the ChizComm Acquisition constitutes a business acquisition as defined by ASC 805, Business Combinations.
Accordingly, the assets acquired and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values,
while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance
with ASC 805. The Company’s purchase price allocation was based on an evaluation of the appropriate fair values and represent managements
best estimate based on available data. Fair values are determined based on the requirements of ASC 820, Fair Measurements and Disclosures.
The
Earn-Out arrangement meets the liability classification criteria outlined in ASC 815-40, Derivatives and Hedging: Contracts in
Entity’s Own Equity. Liability classified contingent consideration is measured initially at the fair value on the
acquisition date and is remeasured at each reporting period. Subsequent differences between the estimated fair value of the Earn-Out
recorded at the acquisition date and the remeasurement date will be reflected as a charge or credit, as applicable, in the statement
of operations. As of December 31, 2021, due to an update in the assumptions used to value the contingent consideration during the
fourth quarter of 2021, a credit was recorded as other income in the Company’s statement of operations, in the amount of
$5.9 million.
The
Company completed and finalized the purchase price allocation during the year ended December 31, 2021. The Company recorded assets acquired
and liabilities assumed at their respective fair values. The following table summarizes the final fair value of assets acquired and liabilities
assumed (in thousands):
Assets acquired and liabilities assumed | |
| | |
Cash | |
$ | 711 | |
Accounts Receivable | |
| 6,151 | |
Prepaid Expenses | |
| 56 | |
Lease Deposits | |
| 12 | |
Fixed Assets | |
| 148 | |
Trade Name | |
| 3,430 | |
Customer Relationships | |
| 6,140 | |
Non-Compete Agreements | |
| 60 | |
Goodwill | |
| 9,607 | |
Accounts Payable and Accrued Expenses | |
| (7,006 | ) |
Payroll Tax Liability | |
| (72 | ) |
| |
| | |
Total Consideration | |
$ | 19,237 | |
The identifiable
intangible assets acquired of $9.6
million was composed of $3.4
million for ChizComm’s trade name with an indefinite economical life, $6.1
million for ChizComm’s customer base with a useful life of approximately 12
years, and $60,000
for ChizComm’s non-compete agreements with an economic life of 3
years. The goodwill arising from the acquisition consists largely of the synergies expected from combining the operations
of ChizComm and the Company and was recorded to the Media Advisory & Advertising Services reporting unit.
Valuation Methodology
Customer
relationships for ChizComm were valued by performing a discounted cash flow analysis using the multiperiod excess earnings method. This
method includes discounting the projected cash flows associated with existing customers based primarily upon customer turnover data over
its expected life and considers the operating expenses and contributory asset charges associated with servicing such existing customers.
Projected cash flows attributable to the customer relationships were discounted to their present value at a rate commensurate with the
perceived risk. The useful lives of customer relationships are estimated based primarily upon the present value of cash flows attributable
to the customer relationships.
Trademarks
and trade names for ChizComm were valued using the relief-from-royalty method. This method is an income approach that estimates the portion
of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset
if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible
asset. The resulting annual royalty payments are tax-affected and then discounted to present value.
Non-compete
agreements were valued using a with and without method. Under this method, estimated prospective financial information (“PFI”)
is calculated with the existence and ownership of an intangible asset and compared to the PFI in the absence of the ownership of the intangible
asset. The after-tax differential PFI attributable to the intangible asset is then discounted to its present value.
Assumptions
used in forecasting cash flows for each of the identified intangible assets included consideration of the following:
|
· |
Historical performance including sales and profitability. |
|
· |
Business prospects and industry expectations. |
|
· |
Estimated economic life of asset. |
|
· |
Acquisition of new customers. |
|
· |
Attrition of existing customers. |
The acquisition was treated
for tax purposes as a nontaxable transaction and as such, the historical tax basis of the acquired assets, net operating loss, and other
tax attributes of ChizComm will carryover. As a result, no new goodwill for tax purposes was created in connection with the acquisition
as there is no step-up to the fair value of the underlying tax bases of the acquired net assets.
The following supplemental
pro forma information summarize the Company’s results of operations for the current reporting period, as if the Company completed
the acquisition as of the beginning of the annual reporting period.
Supplemental pro forma information
is as follows (in thousands):
Supplemental pro forma information | |
| | | |
| | |
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
Total Revenues | |
$ | 9,225 | | |
$ | 9,464 | |
| |
| | | |
| | |
Net Loss | |
| (126,918 | ) | |
| (400,477 | ) |
| |
| | | |
| | |
Net Loss per Common Share (Basic and Diluted) | |
$ | (0.43 | ) | |
$ | (2.81 | ) |
| |
| | | |
| | |
Weighted Average Shares Outstanding (Basic and Diluted) | |
| 297,513,373 | | |
| 142,452,393 | |
Note 4: Variable Interest Entity
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.”
POW! and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021. The purpose of the acquisition
was to enable the Company to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action
and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over
100 original Stan Lee creations (the “Stan Lee Assets”), from which Genius Brands plans to develop and license multiple properties
each year.
The Company contributed $2.0 million to obtain
50% of SLU’s voting equity and POW, for the remaining 50%, contributed the specified intangible assets associated with the Stan
Lee Assets. POW will retain certain rights in the transferred intangible assets, namely existing the rights/obligations arising from current
licensing agreements. Under ASC 805, the Company determined that the value of SLU was wholly attributable to the Stan Lee Assets and would
be accounted for as an asset acquisition. The acquisition cost of $2.0 million was equivalent to the value of the Stan Lee Assets contributed
by POW. Therefore, the fair value of the consideration paid by the entity of $2.0 million and the fair value of the 50% noncontrolling
interest approximated a total of $4.0 million.
Pursuant to the guidance under ASC 810, the Company
concluded that SLU qualifies as a variable interest entity (“VIE”). The Company consolidates the results of SLU as it was
determined that the Company is the primary beneficiary due to having the power through the collaboration to direct the activities that
most significantly impact the entity’s economic performance and the Company is required to fund over half of the economic support
of the entity. Accordingly, the Company recorded the total fair value of the Stan Lee Assets in SLU of $4.0 million, as an intangible
asset to be amortized over the duration of 70 years, the life of the publicity rights related to Stan Lee’s name, likeness, voice,
physical characteristics, etc.
On an ongoing basis, the Company will re-evaluate
the VIE assessment based on changes in facts and circumstances.
Note 5: Investment in Equity Interest
On December 1, 2021, the Company
completed a $6.8 million investment in Your Family Entertainment AG (“YFE”). In exchange for $3.4 million in cash and 2,281,269
shares of the Company’s common stock (valued at approximately $3.4 million), the Company received 3,000,500 shares of YFE’s
common stock. As of December 31, 2021, the Company has a 29% economic ownership interest in YFE. The Company has elected to apply the
fair value option for its investment in YFE (Level 1) as it is believed that investors value this investment based on the trading price
of YFE. The Company recognizes changes in the fair value of its investment in YFE as unrealized gains (losses), net in the accompanying
consolidated statements of operations with other income (loss), net.
The Company revalued the investment
in YFE’s securities on December 31, 2021 and recorded a loss of $105,654 within other income (loss), net on the Company’s
consolidated statement of operations.
Following the acquisition
of YFE’s shares, the Company participated in a mandatory tender offer for the remaining publicly traded shares held by shareholders.
In addition, the Company committed to providing YFE between EURO 4.0 million to EURO 7.0 million by way of additional equity or by providing
shareholder loans that have terms comparable to those of the converted bonds.
Note 6: Marketable Securities
The Company classifies and accounts for its marketable
debt securities as available-for-sale and the securities are stated at fair value.
The investments in marketable
securities had an adjusted cost basis of $113.8 million and a market value of $112.5 million as of December 31, 2021 are as follows (in
thousands):
Summary of Investment in marketable security | |
| | | |
| | | |
| | |
| |
Adjusted Cost | | |
Unrealized Gain/(Loss) | | |
Fair Value | |
Corporate Bonds | |
$ | 47,864 | | |
$ | (529 | ) | |
$ | 47,335 | |
U.S. Treasury | |
| 24,410 | | |
| (257 | ) | |
| 24,153 | |
Mortgage-Backed | |
| 7,504 | | |
| (143 | ) | |
| 7,361 | |
U.S. agency and government sponsored securities | |
| 14,675 | | |
| (87 | ) | |
| 14,588 | |
U.S. states and municipalities | |
| 11,871 | | |
| (189 | ) | |
| 11,682 | |
Asset-Backed | |
| 6,456 | | |
| (50 | ) | |
| 6,406 | |
Commercial paper | |
| 998 | | |
| – | | |
| 998 | |
Total | |
$ | 113,778 | | |
$ | (1,255 | ) | |
$ | 112,523 | |
The Company reported the net
unrealized losses in accumulated other comprehensive (loss) income, a component of stockholders' equity. The decline in fair value is
largely due to changes in interest rates and other market conditions and is expected to recover as the securities approach maturity. The
Company has evaluated these securities and determined that no allowance is necessary based on the credit quality and the low risk of loss
due to the security type. The Company has not yet held marketable securities in an unrealized loss position for greater than twelve months.
A net realized loss of $70,260 related to the prepayment of principals for certain mortgage-backed securities was recorded in earnings
during the year ended December 31, 2021.
The contractual maturities of the Company’s
marketable investments as of December 31, 2021 were as follows (in thousands):
Summary of contractual maturity | |
| | |
| |
Fair Value | |
Due after 1 year through 5 years | |
$ | 95,881 | |
Due after 5 years through 10 years | |
| 6,443 | |
Due after 10 years | |
| 10,199 | |
Total | |
$ | 112,523 | |
The Company may sell certain
of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit
risk, duration and asset allocation.
The Company did not sell any securities during
the year ended December 31, 2021, that resulted in material gains or losses.
Note 7: Property and Equipment, Net
The Company has property
and equipment as follows (in thousands):
Schedule of property and equipment, net | |
| | | |
| | |
| |
As of December 31, | |
| |
2021 | | |
2020 | |
Furniture and Equipment | |
$ | 181 | | |
$ | 20 | |
Computer Equipment | |
| 173 | | |
| 168 | |
Leasehold Improvements | |
| 44 | | |
| 14 | |
Software | |
| 177 | | |
| 68 | |
Production Equipment | |
| 23 | | |
| – | |
Property and Equipment, Gross | |
| 598 | | |
| 270 | |
| |
| | | |
| | |
Less Accumulated Depreciation | |
| (149 | ) | |
| (174 | ) |
Property and Equipment, Net | |
$ | 449 | | |
$ | 96 | |
During the years ended December
31, 2021 and December 31, 2020, the Company recorded depreciation expense of $93,983 and $44,942. During the year ended December 31, 2021,
the Company disposed of computer equipment that was replaced in the normal course of business, resulting in the removal of $118,502 from
accumulated depreciation and $117,005 from gross property and equipment.
Note 8: Right of Use Leased Asset
Right of use asset consisted
of the following (in thousands):
Schedule of right of use asset | |
| | | |
| | |
| |
As of December 31, | |
| |
2021 | | |
2020 | |
Office Lease Asset | |
$ | 3,351 | | |
$ | 2,245 | |
Printer Lease Asset | |
| 13 | | |
| 12 | |
Right Of Use Asset, Gross | |
| 3,364 | | |
| 2,257 | |
| |
| | | |
| | |
Accumulated Amortization | |
| (579 | ) | |
| (285 | ) |
Right Of Use Asset, Net | |
$ | 2,785 | | |
$ | 1,972 | |
During the years ended December
31, 2021 and December 31, 2020, the Company recorded ROU asset amortization of $298,258 million and $285,103, respectively.
Note 9: Film and Television Costs, Net
As of December 31, 2021, the
Company had net Film and Television Costs of $2.9 million, compared to $11.8 million as of December 31, 2020. The decrease in Film and
Television Costs was primarily due to production cost impairments of $18.2 million as described below, amortization of Rainbow Rangers
Seasons 1 & 2 and Llama Llama Seasons 1 & 2, offset by an increase primarily related to the production costs associated
with Stan Lee’s Superhero Kindergarten and KC! Pop Quiz.
During the years ended December
31, 2021 and December 31, 2020, the Company recorded Film and Television Cost amortization expense of $19.5 million and $0.98 million,
respectively. As of December 31, 2021, the amortization includes an impairment expense of $18.2 million. The production cost impairments
were due to management’s periodic assessment of the ultimate revenues expected to be recognized on each episodic series, in conjunction
with historical performance and current market conditions and determined the estimated future cash flows were not sufficient to recover
the entire unamortized asset.
The following table
highlights the activity in Film and Television Costs as of December 31, 2021 and 2020 (in thousands):
Schedule of film and television costs activity | |
| | |
Film and Television Costs, Net as of December 31, 2019 | |
$ | 9,907 | |
Additions to Film and Television Costs | |
| 2,901 | |
Film Amortization Expense | |
| (980 | ) |
Film and Television Costs, Net as of December 31, 2020 | |
| 11,828 | |
Additions to Film and Television Costs | |
| 10,650 | |
Film Amortization Expense | |
| (19,538 | ) |
Film and Television Costs, Net as of December 31, 2021 | |
$ | 2,940 | |
Note 10: Goodwill and Intangible Assets,
Net
Goodwill
In 2013, the Company recognized
$10.4 million in goodwill, representing the excess of the fair value of the consideration for the merger with A Squared over net identifiable
assets acquired. As a result of the ChizComm acquisition, the consideration exceeded the fair value of the assets acquired by $9.6 million.
Accordingly, this amount was recorded as goodwill at the time of the acquisition. As ChizComm Ltd. is a Canadian company with CAD being
its functional currency, goodwill will change each period due to currency exchange differences.
The Company has performed
its annual review of goodwill and its indefinite lived intangible asset during the fourth quarter of 2021. Goodwill on the Company’s
consolidated financial statements relates to both the Content Production & Distribution reporting unit and the Media Advisory &
Advertising Services reporting unit. The Company performed a qualitative assessment of the Content Production & Distribution reporting
unit and determined that an impairment was not indicated. Due to a decrease in projected cash flows, the Company elected to initially
perform a quantitative assessment on its Media Advisory & Advertising Services segment.
The fair value of the Media
Advisory & Advertising Services reporting unit in accordance with the goodwill impairment test was determined using the income and
market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated
by market participants and then adjusted for time value of money factors and requires management to make significant estimates and assumptions
related to forecasts of future revenues, operating margins, and discount rates. The market approach utilizes an analysis of comparable
publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues,
earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted
revenues and EBITDA estimates.
The carrying value of the
Media Advisory & Advertising Services reporting unit, which is comprised of the ChizComm operations, exceeded its fair value, resulting
in an impairment of goodwill of $4.8 million.
The following table summarizes
the changes in the carrying amount of goodwill by reportable segment (in thousands):
Schedule of Goodwill | |
| | | |
| | | |
| | |
| |
Content Production & Distribution | | |
Media Advisory & Advertising Services | | |
Total | |
Goodwill as of December 31, 2020 | |
$ | 10,366 | | |
$ | – | | |
$ | 10,366 | |
Acquisition of ChizComm Entities | |
| – | | |
| 9,607 | | |
| 9,607 | |
Goodwill Impairment | |
| | | |
| (4,778 | ) | |
| (4,778 | ) |
Foreign Currency Translation Adjustment | |
| – | | |
| 32 | | |
| 32 | |
Goodwill as of December 31, 2021 | |
$ | 10,366 | | |
$ | 4,861 | | |
$ | 15,227 | |
Intangible Assets, Net
The Company had the following
intangible assets (in thousands):
Intangible Assets, Net
Schedule of Intangible Asset | |
| | | |
| | |
| |
As of December 31, | |
| |
2021 | | |
2020 | |
Trademarks (a) | |
$ | 130 | | |
$ | 130 | |
Customer Relationships (b) | |
| 6,132 | | |
| – | |
Non-Compete (c) | |
| 48 | | |
| – | |
Trade names (d) | |
| 4,000 | | |
| – | |
Other Intangible Assets (a) | |
| 303 | | |
| 299 | |
Intangible Assets, Gross | |
| 10,613 | | |
| 429 | |
| |
| | | |
| | |
Foreign Currency Translation Adjustment | |
| 24 | | |
| – | |
Less Accumulated Amortization | |
| (904 | ) | |
| (400 | ) |
Intangible Assets, Net | |
$ | 9,733 | | |
$ | 29 | |
__________________
|
(a) |
During the years ended December 31, 2021 and December
31, 2020, the Company recognized, $16,277 and $49,388, respectively, in amortization expense related to the Trademarks, Product Masters,
and Other Intangible Assets.
|
|
(b) |
Amount represents the fair value of the ChizComm
and ChizComm Beacon Media Customer Relationships with a useful life of 12 years. Amortization expense for the year ended December 31,
2021 was $0.5 million.
|
|
(c) |
Amount represents the fair value of the Non-Compete
agreements as part of the ChizComm acquisition. The Non-Compete agreements have a useful life of 3 years. Amortization expense for the
year ended December 31, 2021 was $18,345.
|
|
(d) |
Amount represents the fair value of the Stan
Lee Assets acquired through the consolidation of the Stan Lee Universe variable interest entity. The assets have been determined to have
a useful life of 70 years. The amortization expense was deemed immaterial during the fourth quarter of 2021. |
Pursuant to ASC 350-30, General
Intangibles Other than Goodwill, the Company reviews these intangible assets periodically to determine if the value should be retired
or impaired due to recent events.
During the fourth quarter
ended December 31 2021, the Company decided to discontinue the use of the ChizComm trade name acquired as part of the acquisition
of ChizComm in February 2021. In connection with the initial accounting for the Acquisition, $3.4 million of the purchase price was allocated
to the indefinite-lived trade name. As no future cash flows will be attributed to the impacted trade name, the entire book value
was written-off, resulting in a non-cash impairment charge of $3.4 million as of December 31, 2021 recorded in
the Company's consolidated statements of operations. No impairment
existed as of December 31, 2021 or December 31, 2020 with respect to the company's other identifiable intangible assets.
Expected future intangible asset amortization
as of December 31, 2021 is as follows (in thousands):
Expected future intangible asset amortization | |
| | |
Fiscal Year: | |
| |
2022 | |
$ | 542 | |
2023 | |
| 538 | |
2024 | |
| 532 | |
2025 | |
| 532 | |
2026 | |
| 532 | |
Thereafter | |
| 7,057 | |
Total | |
$ | 9,733 | |
Note 11: Deferred Revenue
As of December 31, 2021, and
2020, the Company had total short term and long term deferred revenue of $3.9 million and $4.4 million, 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 December 31, 2021 is $3.4 million which is the remaining balance
from the total $3.5 million advance against future royalty that Sony paid to the Company for both the foreign and domestic distribution
rights.
Note 12: Supplemental Financial Statement
Information
Accrued Expenses
The Company had the following
current accrued liabilities (in thousands):
Schedule of other accrued liabilities | |
| | | |
| | |
| |
As of December 31, | |
| |
2021 | | |
2020 | |
Accrued Production Costs (a) | |
$ | 1,733 | | |
$ | – | |
Other Accrued Expenses (b) | |
| 535 | | |
| 408 | |
Accrued Salaries and Wages (c) | |
| 799 | | |
| 429 | |
Total Accrued Liabilities – Current | |
$ | 3,067 | | |
$ | 837 | |
__________________
|
(a) |
Represents production costs accrued for Rainbow Rangers Season 3 and KC! Pop Quiz. |
|
(b) |
Primarily represents external consulting services and legal fees. |
|
(c) |
Represents accrued salaries and wages and accrued vacation payable to employees. |
Other Income (Expense), Net
Components of other income (expense), net, are
summarized as follows (in thousands):
Schedule of Other Operating Cost and Expense, by Component | |
| | | |
| | |
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
Gain on Contingent Consideration Revaluation | |
$ | 5,846 | | |
$ | – | |
Gain (Loss) on Warrant Revaluation | |
| 342 | | |
| (210,895 | ) |
Loss on Foreign Exchange | |
| (26 | ) | |
| – | |
Loss on Marketable Securities Investments | |
| (70 | ) | |
| – | |
Loss on Equity Investment | |
| (106 | ) | |
| – | |
Interest Income | |
| 559 | | |
| 145 | |
Warrant Incentive Expense | |
| (69,139 | ) | |
| – | |
Loss on Conversion Option Revaluation | |
| – | | |
| (171,836 | ) |
Loss on Lease Termination | |
| – | | |
| (339 | ) |
Sublease Income | |
| – | | |
| 317 | |
Net Other Expense | |
$ | (62,594 | ) | |
$ | (382,608 | ) |
The gain on contingent consideration
revaluation is related to the change in fair value of the liability recorded for the earn-out arrangement with the sellers of the ChizComm
entity acquired during 2021. The favorable decrease in the liability is based on the Company’s updated assumptions utilized to value
the contingency.
The gain (loss) on warrant
revaluation is related to the change in fair value of outstanding warrants that were determined to be derivative liabilities attached
to previously issued and converted convertible notes.
The foreign exchange gains
and losses are due to foreign currency denominated transactions, including the investment in YFE’s equity securities accounted for
under the fair value option, in which the Company also realized a loss due to a decrease in fair value.
The Company started investing
in marketable securities during the year ended December 31, 2021. The net realized loss on marketable securities recognized during the
year ended December 31, 2021, reflects the loss in the investments in available-for-sale securities that will not be recovered due to
prepayments of principals on certain mortgage-backed securities.
Interest Income, net during
the year ended December 31, 2021, primarily consists of cash interest received of $1.2 million on the investments in marketable securities,
net of $0.6 million for amortization of premiums.
The Warrant Incentive Expense
is related to the fair value of new warrants issued in 2021 to certain existing warrant holders in exchange for previously issued outstanding
warrants.
As of December 31, 2020 all
notes were converted and repaid, therefore a revaluation on conversion options was not performed in 2021. In addition, as of December
31, 2020 the Company terminated the lease that generated sublease income, resulting in a loss on lease termination that did not occur
during the year ended December 31, 2021.
Note 13: Secured Convertible Notes
On March 11, 2020, the Company
entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (each an “Investor”
and collectively, the “Investors”) pursuant to which the Company agreed to sell and issue (1) Senior Secured Convertible Notes
to the Investors in the aggregate principal amount of $13.75 million (each, a “Note” and collectively, the “2020 Convertible
Notes”) and $11.0 million funding amount (reflecting an original issue discount of $2.75 million) and (2) warrants to purchase 65,476,190
shares of the Company’s common stock exercisable for a period of five years at an initial exercise price of $0.26 per share (each
a “Warrant” and collectively, the “Warrants”), for consideration consisting of (i) a cash payment of $7.0 million,
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 $4.0 million (the “Investor Notes Principal”) (collectively,
the “Financing”). Andy Heyward, the Company’s Chairman and Chief Executive Officer, participated as an Investor and
invested $1.0 million in connection with the Financing, all of which was paid at the closing and not pursuant to an Investor Note. The
Special Equities Group, LLC, a division of Bradley Woods & Co. LTD, acted as placement agent and received warrants to purchase 6,547,619
shares at an exercise price of $0.26 per share (the “Placement Agent Warrants”).
The closing of the sale and
issuance of the 2020 Convertible Notes, the Warrants and the Placement Agent Warrants occurred on March 17, 2020 (the “Closing Date”).
The maturity date of the 2020 Convertible Notes was September 30, 2021 and the maturity date of the Investor Notes was March 11, 2060.
The Company held a stockholder
meeting to approve the issuance of shares of common stock issuable under the 2020 Convertible Notes and pursuant to the terms of the SPA
for the purposes of compliance with the stockholder approval rules of The Nasdaq Stock Market (“Stockholder Approval”).
In addition, pursuant to the
terms of the SPA, the 2020 Convertible Notes and the Warrants, the Company agreed that the following will apply or become effective only
following Stockholder Approval: (1) the conversion price of the 2020 Convertible Notes shall be reduced to $0.21 per share and may be
further reduced to any amount and for any period of time deemed appropriate by the board of directors of the Company (the “Board
of Directors”), (2) the exercise price of the Warrants shall be immediately reduced to $0.21 per share and may be further reduced
to any amount and for any period of time deemed appropriate by the Board of Directors, (3) the 2020 Convertible Notes and Warrants shall
each have full ratchet anti-dilution protection for subsequent financings (subject to certain exceptions), (4) existing warrant holders
that are participating in the Financing (representing warrants to purchase an aggregate of 8,715,229 shares of Company common stock) will
have their existing warrants’ exercise prices reduced to $0.21 and (5) the investors shall have a most favored nations right which
provides that if the Company enters into a subsequent financing, then the Investors (together with their affiliates) at their sole discretion
shall have the ability to exchange their 2020 Convertible Notes on a $1 for $1 basis into securities issued in the new transaction. Additionally,
in the event that any warrants or options (or any similar security or right) issued in a subsequent financing include any terms more favorable
to the holders thereof (less favorable to the Company) than the terms of the Warrants, the Warrants shall be automatically amended to
include such more favorable terms. On March 16, 2020, the holders of the August 2018 Secured Convertible Notes were repaid in full including
any outstanding interest.
On May 15, 2020, the Company
received the necessary Stockholder Approval in connection with the Nasdaq proposals described above. As a result, the Conversion Price
of the 2020 Convertible Notes and the exercise price of the Warrants were each reduced to $0.21. In addition, existing warrant holders
that participated in the Financing (representing warrants to purchase an aggregate of 9,172,463 shares of common stock) also had their
existing warrants’ exercise prices reduced to $0.21.
On June 23, 2020, the Company
received $3.6 million, net of expenses, from the payment of the Investor Notes Principal.
Between June 19 and June
23, 2020, the Convertible Notes were converted and repaid through the issuance of 65,476,190
shares of common stock. As of December 31, 2020 and 2021, there were no outstanding convertible
notes.
Note 14: 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. As a condition
of the loan agreement with Bank Leumi, the Company deposited $1.0 million into a cash account to be used solely to produce the Series.
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 $4.2 million to Llama (the “Loan”). The proceeds of the
Loan were used to pay the majority of the expenses of producing, completing and delivering two 22-minute episodes and nineteen 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 could 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. The Maturity Date of the Prime Rate Loan facility and LIBOR Loan facility was June
30, 2021.
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 $1.8 million, 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 December 31, 2020, the
Company had gross outstanding borrowings under the facility of $1.1 million. The outstanding borrowings were repaid on July 14, 2021.
Note 15: 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, 2021, the Company believes that the statute of limitations applicable
to the assertion of any legal claim relating to the collection of these liabilities has expired, and therefore believes this liability is not owed.
Note 16: Payroll Protection Program Loan
On April 30, 2020, the Company
received loan proceeds in the amount of $366,267 under the Paycheck Protection Program which was established as part of the Coronavirus
Aid, Relief and Economic Security Act and is administered through the Small Business Administration. The Company repaid the outstanding
balance, including interest of $3,452 on April 28, 2021.
Note 17: Note Payable
On February 1, 2021, as part
of the ChizComm Acquisition, the Company assumed a $200,000 business loan that was entered into on October 15, 2019. The loan matures
on September 15, 2026, with payments of $2,999, plus interest at a rate of Prime plus 2.85% per annum, due monthly. As of December 31,
2021, the Company has an outstanding balance of $110,000, classified as a note payable within current and noncurrent liabilities on its
consolidated balance sheets.
Note 18: Margin Loan
During December 2021, the
Company borrowed an aggregate amount of $6.4 million from its investment margin account with the custodian of the Company’s
marketable debt security investment account. The borrowed amounts were used to finance the Company’s investments in YFE and the
future closing of its pending acquisition of WOW, in each case pledging certain of its marketable securities as collateral. The interest
rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 0.65% with interest only payable
monthly. The weighted average interest rate was 0.72% and the average balance of the borrowings was $5.9 million as of December 31, 2021.
The interest incurred as of December 31, 2021 was immaterial. The investment margin account borrowings do not mature
but are payable on demand as the custodian can issue a margin call at any time, therefore the margin loan is recorded as a current liability
on the Company’s consolidated balance sheets. As of December 31, 2021, the Company had the ability to borrow up to 66% of the balance
held in marketable securities, with the option to increase its borrowing capacity, if needed.
Note 19: Stockholders’ Equity
Common Stock
As of December 31, 2021, the
total number of authorized shares of common stock was 400,000,000.
On March 22, 2020, the Company
entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain long-standing investors (the “Investors”),
pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the
“Registered Offering”), an aggregate of 4,000,000 shares of common stock at an offering price of $0.2568 per share for gross
proceeds of approximately $1.0 million before deducting offering expenses. The Registered Offering closed on March 25, 2020.
As of December 31, 2021 and
December 31, 2020, there were 303,379,122 and 258,438,514 shares of common stock outstanding, respectively.
On January 6, 2021, the Company
issued 25,000 shares of the Company’s common stock valued at $1.40 per share for marketing services.
On January 21, 2021, the Company
issued 136,986 shares of the Company’s common stock valued at $1.46 per share for marketing services.
On February 1, 2021, the Company
issued 1,932,163 shares of the Company’s common stock valued at $1.78 per share as partial consideration for the ChizComm acquisition.
On February 4, 2021, the Company
issued 48,495 shares of the Company’s common stock valued at $1.81 per share as partial consideration for the ChizComm acquisition.
On May 14, 2021, the Company
issued 469,677 shares of the Company’s common stock valued at $1.55 per share for production services.
On October 27, 2021, we issued
176,101 shares of common stock valued at $1.59 per share for production services.
On December 1, 2021, we issued
2,281,269 shares of common stock valued at $1.49 per share in partial consideration for 3,000,000 shares of YFE.
Preferred Stock
The Company has 10,000,000
shares of preferred stock authorized with a par value of $0.001 per share. The Board of Directors is authorized, subject to any limitations
prescribed by law, without further vote or action by our stockholders, to issue from time-to-time shares of preferred stock in one or
more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications
and special or relative rights or privileges as shall be determined by our Board of Directors, which may include, among others, dividend
rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
There were no shares of preferred
stock outstanding as of December 31, 2021 and December 31, 2020.
Note 20: Stock Options
On September 18, 2015, the
Company adopted the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The total number of shares that
can be issued under the 2015 Plan is 2,167,667 shares.
On September 1, 2020, the
Company adopted the Genius Brands International, Inc. 2020 Incentive Plan (the “2020 Plan”). On August 4, 2020, the Board
of Directors voted to adopt the 2020 Plan. The shares available for issuance under the 2020 Plan was approved by stockholders on August
27, 2020. The 2020 Plan as approved by the stockholders increased the maximum number of shares available for issuance up to an aggregate
of 32,167,667 shares of common stock.
During the three months ended
March 31, 2021, the Company granted options to purchase 520,000 shares of common stock to employees and granted to each of the members
of the Board of Directors 20,000 options to purchase shares of the Company’s common stock with an option price of $3.06 per share.
The options vest on January 27, 2022 and have a five-year term.
During the three months ended
June 30, 2021, the Company granted options to purchase 253,636 shares of common stock to employees that fully vest on January 24, 2024
and have a five-year term. The Company also granted 20,000 options to purchase shares of common stock to a new member of the Board of
Directors that vest on June 24, 2022 and have a five-year term. The shares have an option price of $1.98 per share.
During the three months ended
December 31, 2021, the Company granted options to purchase 312,500 shares of common stock to employees that fully vest on December 9,
2026 and have a five-year term. The shares have an option price of $1.20 per share.
The fair value of the options
granted was calculated using a Black-Scholes option-pricing model with the following assumptions:
Schedule of assumptions used | |
| | |
| |
| |
Year
Ended December 31, | |
| |
2021 | | |
2020 | |
Exercise Price | |
$1.20 - $3.06 | | |
$1.39 - $10.00 | |
Dividend Yield | |
| 0% | | |
| 0% | |
Volatility | |
| 99% - 143% | | |
| 121% - 122% | |
Risk-free interest rate | |
| 0.41% - 1.26% | | |
| 0.31% - 0.39% | |
Expected life of options | |
| 5.0 years | | |
| 5.0 years | |
The following table summarizes the stock option
activity during the years ended December 31, 2021 and December 31, 2020:
Schedule of stock option activity | |
| | | |
| | | |
| | |
| |
Number of Shares | | |
Weighted- Average Remaining Contractual Life | | |
Weighted- Average Exercise Price | |
Outstanding at December 31, 2019 | |
| 1,289,866 | | |
| 6.49 | | |
$ | 7.18 | |
Granted | |
| 8,880,000 | | |
| 9.91 | | |
$ | 1.66 | |
Exercised | |
| – | | |
| – | | |
$ | – | |
Forfeited/Cancelled | |
| (2,000 | ) | |
| 3.18 | | |
$ | 1.99 | |
Expired | |
| (1,051,690 | ) | |
| – | | |
$ | 2.71 | |
Outstanding at December 31, 2020 | |
| 9,116,176 | | |
| 9.84 | | |
$ | 1.69 | |
Granted | |
| 1,246,136 | | |
| 4.38 | | |
$ | 2.36 | |
Exercised | |
| – | | |
| – | | |
$ | – | |
Forfeited/Cancelled | |
| (165,000 | ) | |
| 3.73 | | |
$ | 2.79 | |
Expired | |
| – | | |
| – | | |
$ | – | |
Outstanding at December 31, 2021 | |
| 10,197,312 | | |
| 7.96 | | |
$ | 1.75 | |
| |
| | | |
| | | |
| | |
Unvested at December 31, 2021 | |
| 2,877,804 | | |
| 6.48 | | |
$ | 2.41 | |
Vested and exercisable December 31, 2021 | |
| 7,319,508 | | |
| 8.54 | | |
$ | 1.49 | |
During the years ended December
31, 2021 and December 31, 2020, the Company recognized $3.7 million and $8.4 million, respectively in share-based compensation expense
related to stock options. The unrecognized share-based compensation expense as of December 31, 2021 was $1.6 million and will be recognized
over a weighted average remaining contractual life of 6.4 years. The outstanding shares as of December 31, 2021 have an aggregated intrinsic
value of $0. The weighted average fair values per option granted for the year ended December 31, 2021 was determined to be $1.36.
Note 21: Restricted Stock Units
On December 7, 2020, the Company
granted 9,075,000 shares of Restricted Stock Units (RSUs) with a fair market value of $12.6 million to certain employees and officers.
Of such RSUs, 7,500,000 were issued to Andy Heyward, the Company’s Chief Executive Officer (“CEO”) and were to vest
in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued employment
(the “service-based awards”). The CEO also received an additional 7,500,000 RSUs that vested in four equal installments on
the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain performance goals (the “performance-based
awards”), which have not been established at the time the CEO and the Company entered into the arrangement, and subject to his continued
employment. As the performance conditions have not been established for the performance-based awards, a grant date was not yet established.
On February 1, 2021, the Company
issued 53,763 RSUs with a fair market value of $74,193.
On June 23, 2021, the Compensation
Committee of the Board of Directors amended the service-based awards granted to the CEO, such that 3,750,000 of such RSUs shall continue
to vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued
employment and the remaining 3,750,000 RSUs shall be modified to vest based on performance or market conditions. The previously issued
7,500,000 performance-based awards, along with the 3,750,000 modified service-based awards, shall vest as follows: (i) 3,750,000
RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.00 per share or the Company’s market capitalization
equals or exceeds $903,000,000 for 20 consecutive trading days; (ii) 3,750,000 RSUs vest when the Company’s common stock closing
sale price equals or exceeds $3.50 per share or the Company’s market capitalization equals or exceeds $1,053,500,000 for 20 consecutive
trading days, and (iii) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.75 per share
or the Company’s market capitalization equals or exceeds $1,128,750,000 for 20 consecutive trading days (the “market conditions”).
In addition to the stock price and market capitalization vesting conditions set forth above, such 11,250,000 RSUs may also vest in four
equal installments on the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain operating
performance-based vesting conditions established by the Compensation Committee on June 23, 2021 and subject to his continued employment,
adjusted pro-ratably for vesting pursuant to the market conditions. As a result of these modifications, the RSUs subject to the market
conditions were valued at $15.6 million with a derived service period of 12 months, using a Monte-Carlo simulation model.
On June 24, 2021, the Company
issued 213,636 shares of RSUs with a fair market value of $0.4 million.
The following table summarizes
the Company’s RSU activity during the years ended December 31, 2021 and December 31, 2020:
Schedule of restricted stock units | |
| | | |
| | | |
| | |
| |
Restricted Stock Unites | | |
Weighted-
Average Remaining Contractual Life | | |
Weighted-
Average Grant Date Fair Value per Share | |
Unvested at December 31, 2019 | |
| – | | |
| – | | |
$ | – | |
Granted | |
| 9,075,000 | | |
| 4.94 | | |
$ | 1.39 | |
Vested | |
| – | | |
| – | | |
$ | – | |
Forfeited/Cancelled | |
| – | | |
| – | | |
$ | – | |
Unvested at December 31, 2020 | |
| 9,075,000 | | |
| 4.94 | | |
$ | 1.39 | |
| |
| | | |
| | | |
| | |
Granted | |
| 8,413,177 | | |
| 4.47 | | |
$ | 1.42 | |
Vested | |
| 2,104,943 | | |
| 4.09 | | |
$ | 1.44 | |
Forfeited/Cancelled | |
| – | | |
| – | | |
$ | – | |
Unvested at December 31, 2021 | |
| 15,383,234 | | |
| 4.34 | | |
$ | 1.40 | |
During the years ended December
31, 2021 and December 31, 2020, the Company recognized $12.75 million and $0.6 million, respectively in share-based compensation expense
related to RSU awards. The unvested share-based compensation as of December 31, 2021 is $10.2 million which will be recognized through
the fourth quarter of 2024 assuming the underlying grants are not cancelled or forfeited. The total fair value of shares vested during
the year ended December 31, 2021 was $3.0 million.
Note 22: Warrants
The Company has warrants outstanding
to purchase up to 45,511,965 shares as of December 31, 2021 and 2020.
On January 22, 2020, the Company
entered into a private transaction (the “Private Transaction”) pursuant to a Warrant Exercise Agreement (the “Agreement”)
with the holder of the Company’s existing warrants (the “Original Warrants”). The Original Warrants were issued on October
3, 2017, to purchase an aggregate of 500,000 shares of common stock, at an exercise price of $3.90 per share and were to expire in October
2022.
Pursuant to the Agreement,
the holder of the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full
and the Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (the average closing price of the common
stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the Agreement) (the “Amended Exercise
Price”). The Company received approximately $170,000 from the exercise of the Original Warrants.
The placement agent received
warrants to purchase 50,000 shares at an exercise price of $0.34 per share.
Pursuant to the SPA
described in Note 13, the Company issued to the note holders warrants to purchase 65,476,191
shares of common stock, exercisable for a period of 5 five years at an initial exercise price of $0.26
per share.
The placement agent received
warrants to purchase 6,547,619 shares at an exercise price of $0.26 per share. The fair values of derivative warrants attached to the
2020 Convertible Notes and Notes conversion option were determined using the Black-Scholes-Merton option pricing model with standard valuation
inputs. The valuation inputs as of March 17, 2020 included expected volatility of 89%, and annual interest rate of 0.66%. The warrants
were determined to be liability classified and adjusted to fair value as of each reporting period. As of December 31, 2021, warrants to
purchase 892,857 shares were outstanding and re-valued at $0.85 million, resulting in a net decrease in liability of $0.3 million, as
compared to December 31, 2020. The change in value is recorded within Net Other Income (Expense) on the consolidated statement of operations.
The valuation inputs as of December 31, 2021 included expected volatility of 106%, and annual interest rate of 1.02%.
On January 28, 2021, the
Company entered into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors
to exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of
the Company’s common stock at their original exercise price of $1.55
per share (the “Exercise”). The Company received approximately $61.6
million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation
agent and received a cash fee of $4.3 million. In consideration for the exercise of the Existing Warrants for cash, the exercising holders
received new unregistered warrants to purchase up to an aggregate of 39,740,500
shares of common stock (the “New Warrants”) at an exercise price of $2.37 per share, exercisable immediately, with
an exercise period of five years from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially
in the form of the Existing Warrants (except for customary legends and other language typical for an unregistered warrant, including
the ability for the holder of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock
underlying the New Warrants is effective after six months). The Company registered the resale of the shares of common stock issuable
upon exercise of the New Warrants. The fair value of these warrants was determined to be $69.1 million using the Black-Scholes option
pricing model and was recorded within Net Other Income (Expense) on the consolidated statement of operations, based on the following
assumptions:
Schedule of assumptions for warrant activity | |
| | |
Exercise Price | |
$ | 2.37 | |
Dividend Yield | |
| 0% | |
Volatility | |
| 144% | |
Risk-free interest rate | |
| 0.42% | |
Expected life of options | |
| 5.0 years | |
The following table summarizes
the changes in the Company’s outstanding warrants during the years ended December 31, 2021 and December 31, 2020:
Schedule of warrant activity | |
| | | |
| | | |
| | | |
| | |
| |
Warrants Outstanding Number of Shares | | |
Exercise Prices Per Share | | |
Weighted Average Remaining Contractual Life | | |
Weighted Average Exercise Price Per Share | |
Balance at December 31, 2019 | |
| 11,124,405 | | |
$ | 0.21 - 5.30 | | |
| 4.37 | | |
$ | 0.84 | |
Granted | |
| 115,375,982 | | |
$ | 0.21 – 1.55 | | |
| 4.61 | | |
$ | 0.71 | |
Exercised | |
| (80,820,087 | ) | |
$ | 0.21 - 5.30 | | |
| 4.62 | | |
$ | 0.25 | |
Expired | |
| (168,335 | ) | |
$ | 3.30 – 3.60 | | |
| – | | |
$ | 3.50 | |
Balance at December 31, 2020 | |
| 45,511,965 | | |
$ | 0.21
- 5.30 | | |
| 5.19 | | |
$ | 1.55 | |
| |
| | | |
| | | |
| | | |
| | |
Granted | |
| 39,740,500 | | |
$ | 2.37 | | |
| 4.58 | | |
$ | 2.37 | |
Exercised | |
| (39,740,500 | ) | |
$ | 1.55 | | |
| 4.76 | | |
$ | 1.55 | |
Expired | |
| – | | |
| – | | |
| – | | |
$ | – | |
Balance at December 31, 2021 | |
| 45,511,965 | | |
$ | 0.21
- 5.30 | | |
| 4.91 | | |
$ | 2.27 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable December 31, 2020 | |
| 7,176,620 | | |
$ | 0.76 - 6.00 | | |
| 3.77 | | |
$ | 2.52 | |
Exercisable December 31, 2021 | |
| 44,511,965 | | |
$ | 0.21 - 5.30 | | |
| 4.77 | | |
$ | 2.29 | |
Note 23: Income Taxes
Deferred taxes are provided
on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit
carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist
of the following components (in thousands):
Schedule of deferred tax assets and liabilities | |
| | | |
| | |
| |
As of December 31, | |
| |
2021 | | |
2020 | |
Deferred tax assets: | |
| | | |
| | |
NOL Carryover | |
$ | 22,452 | | |
$ | 11,946 | |
Lease Liability | |
| 869 | | |
| 615 | |
Stock Compensation | |
| 2,058 | | |
| 722 | |
Warrants | |
| 239 | | |
| 335 | |
Marketable Securities | |
| 351 | | |
| – | |
Deferred Revenue | |
| – | | |
| 457 | |
Other | |
| 291 | | |
| 82 | |
Subtotal | |
| 26,260 | | |
| 14,157 | |
Valuation Allowance | |
| (23,931 | ) | |
| (13,603 | ) |
Deferred tax liabilities: | |
| | | |
| | |
Right of Use Assets | |
| (788 | ) | |
| (552 | ) |
Intangible Assets | |
| (1,541 | ) | |
| – | |
Other | |
| – | | |
| (2 | ) |
Net Deferred Tax Asset | |
$ | – | | |
$ | – | |
The income tax provision
differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax income from continuing operations due
to the following (in thousands):
Schedule of effective income tax rate reconciliation | |
| | | |
| | |
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
Income Tax Expense Computed at the Statutory Federal Rate | |
$ | (26,521 | ) | |
$ | (84,351 | ) |
State Income Taxes, Net of Federal Tax Effect | |
| (3,057 | ) | |
| (872 | ) |
Stock Compensation | |
| 2,421 | | |
| 1,333 | |
Conversion Option Revaluation | |
| – | | |
| 36,086 | |
Contingent Earn Out | |
| (1,228 | ) | |
| – | |
Goodwill Impairment | |
| 1,003 | | |
| – | |
Secured Convertible Notes | |
| – | | |
| 217 | |
Warrants | |
| 14,519 | | |
| 44,037 | |
Other | |
| 305 | | |
| 16 | |
Non-U.S. operations | |
| (106 | ) | |
| – | |
Valuation Allowance | |
| 12,664 | | |
| 3,534 | |
Income Tax Expenses | |
$ | – | | |
$ | – | |
At December 31, 2021, the
Company had Federal, state, and foreign net operating loss carry forwards of approximately $80,508, $78,827, and $151, respectively, that
may be offset against future taxable income and will begin to expire in 2028, if not utilized. No tax benefit has been reported in the
December 31, 2021 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
Due to the change in ownership
provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax reporting purposes are subject to annual
limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.
The Company accounts for income
taxes in accordance with ASC 740, Income Taxes, 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.
ASC 740 provides guidance
on the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to
determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of
the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize
in the financial statements.
The Company includes interest
and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of December
31, 2021, 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 states of California, Massachusetts, and New Jersey. The Company is currently subject
to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.
Genius Brands International,
Inc. is subject to U.S. income taxes on a stand-alone basis. Genius Brands International, Inc. and ChizComm Canada file separate stand-alone
tax returns in each jurisdiction in which they operate. ChizComm Canada is a corporation operating in Canada and is subject to Canadian
income taxes on its stand-alone taxable income.
Note 24: Commitments and Contingencies
The following is a schedule of future minimum
contractual obligations as of December 31, 2021 (in thousands):
Schedule of future minimum lease payments | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Thereafter | | |
Total | |
Operating Leases | |
$ | 655 | | |
$ | 640 | | |
$ | 665 | | |
$ | 686 | | |
$ | 703 | | |
$ | 582 | | |
$ | 3,931 | |
Employment Contracts | |
| 3,213 | | |
| 2,656 | | |
| 1,232 | | |
| 427 | | |
| – | | |
| – | | |
| 7,528 | |
Consulting Contracts | |
| 722 | | |
| 138 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 860 | |
Debt | |
| 6,420 | | |
| 22 | | |
| 22 | | |
| 22 | | |
| 16 | | |
| – | | |
| 6,502 | |
| |
$ | 11,010 | | |
$ | 3,456 | | |
$ | 1,919 | | |
$ | 1,135 | | |
$ | 719 | | |
$ | 582 | | |
$ | 18,821 | |
The Company has not included
any amounts that may be required related to its pending acquisition of WOW or its subsequent acquisition of Ameba TV as described in Note
27.
Leases
Commencing February 4, 2019, the Company entered
into an 83-month sublease for the 6,969 square feet of general office space leased by the Company at 131 South Rodeo Drive, Suite 250,
Beverly Hills, CA 90212. The subtenant paid the Company rent of $0.4 million annually, subject to annual escalations of 3.5%. On September
11, 2020, the Company entered into a Surrender Agreement with the landlord which terminated the lease agreement. As a result, the Company
recorded a decrease in the right-of-use asset, accumulated amortization, and the lease liability of $2.1 million, $0.5 million and $1.8
million respectively. The termination of the lease resulted in a loss of $0.3 million. Simultaneously, as part of the Surrender Agreement
the Sublease was terminated.
On January 30, 2019, the Company
entered into an operating lease for 5,838 square feet of general office space at 190 N. Canon Drive, Suite 400, Beverly Hills, CA 90210
pursuant to a 96-month lease that commenced on August 1, 2019. The Company pays rent of $0.4 million annually, subject to annual escalations
of 3.5%.
On February 1, 2021, as part
of the ChizComm Acquisition, the Company assumed an operating lease that was entered into on May 19, 2019 for 6,845 square feet of general
office space located at 245 Fairview Mall Drive, Suites 202 and 301, Toronto, Ontario M2J 4T1 pursuant to an 84-month lease which commenced
on October 1, 2019. The Company pays rent of $95,830 annually, subject to annual escalations 5% to 7%. Also, as part of the ChizComm Acquisition,
the Company assumed an operating lease that was entered into on April 30, 2019 for 3,379 square feet of general office space located at
One International Boulevard, 11th Floor, Mahawh, New Jersey pursuant to a 24-month lease which ended on May 1, 2021. The
Company paid rent of $74,338 annually.
On March 2, 2021, the Company
entered into an operating lease for 4,765 square feet of general office space located at 1050 Wall Street West, Suite 665, Lyndhurst NJ,
07071 pursuant to an 89-month lease which commenced on October 1, 2021. The Company will pay $0.1 million annually subject to annual escalations
of 2.5%.
As of December 31, 2021, the
weighted-average lease term for operating leases was 70 months. The weighted-average discount rate on the leases was 24.9%.
Rental expenses incurred for
operating leases during the years ended December 31, 2021 and December 31, 2020 were $0.5 million and $0.7 million, respectively. During
the years ended December 31, 2021 and December 31, 2020, the Company received sub-lease income of $0 and $0.3 million, respectively.
Other Funding Commitments
The Company enters into various
agreements associated with its individual properties. Some of these agreements call for the potential future payment of royalties or “profit”
participations for either (i) the use of third party intellectual property, in which the Company is obligated to share net profits with
the underlying rights holders on a certain basis as defined in the respective agreements or (ii) services rendered by animation studios,
post-production studios, writers, directors, musicians or other creative talent for which the Company is obligated to share with these
service providers a portion of the net profits of the properties on which they have rendered services, as defined in each respective agreement.
Following the equity investment
in YFE, the Company participated in a mandatory tender offer for the remaining publicly traded shares held by shareholders. Upon the expiration
of the offer on February 14, 2022, the Company purchased 2,637,717 additional shares of YFE, increasing the Company’s ownership
of YFE to 53.9%. However, on March 9, 2022, including 304,631 additional shares acquired by the Company, bonds convertible into YFE’s
common stock were converted into 2,574,000 shares, increasing the number of outstanding shares and resulting in a dilution of the Company’s
ownership in YFE to 45.6%.
On October 26, 2021, 1326919
B.C. LTD., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of the Company and
Wow Unlimited Media Inc. (“WOW”), a corporation existing under the laws of the Province of British Columbia, entered into
an Arrangement Agreement to effect a transaction among the parties by way of a plan of arrangement under the arrangement provisions of
Part 9, Division 5 of the Business Corporations Act, whereby the Company will purchase 100% of WOW’s issued and outstanding
shares for $38.4 million in cash and 11,000,000 shares of the Company’s common stock. The transaction is expected to be completed
during the second quarter of 2022.
Note 25: Related Party Transactions
Pursuant to his employment
agreements dated December 7, 2020, Andy Heyward, the Company’s CEO, is entitled to an Executive Producer fee of $12,500 per one-half
hour episode for each episode he provides services as an executive producer. During the year ended December 31, 2021, Mr. Heyward
earned $543,750 in producer fees and is owed $63,000 as of December 31, 2021, which is included in Due to Related Party on the Company’s
consolidated balance sheets.
On July 21, 2020, the
Company entered into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal
is Andy Heyward. The Company entered into a customary merchandise license agreement with AHAA for the use of characters and logos
related to Warren Buffett’s Secret Millionaires Club and Stan Lee’s Mighty 7 in connection with
certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry, and the Company
earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. During the year ended
December 31, 2021, the Company earned $0
in royalties from this agreement.
On September 30, 2021, the
Company entered into a Loan Agreement and Promissory Note with POW! in the amount of $1,250,000, accruing simple interest at the annualized
rate of 9%. The entire principal sum was required to be remitted to POW!’s client trust account of POW!’s legal counsel within
5 days of the effective date. The principal, plus interest must be repaid by no later than November 1, 2022. Within the Loan Agreement,
it is stated that the proceeds of $1,000,000 are required to be used by POW! to settle the arbitration against Stan Lee Studios (aka Proxima
Studios) and $250,000 shall be used to solely pay for the payment of legal costs and fees. The principal amount was transferred to POW!
on October 12, 2021 and on or about November 4, 2021, POW and Proxima entered into a binding settlement agreement resolving all the claims
made by Proxima. The loan has accrued interest of $26,221 as of December 31, 2021 and is recorded as a Note Receivable from Related Party
on the Company’s consolidated balance sheet.
During the year ended December
31, 2021, the Company issued 160,000 stock options to its Board Members for services with a grant date fair value of $411,800.
Note 26: Segment Reporting
The Company’s CODM uses
revenue and net earnings to evaluate the profitability and performance of each operating segment. All other financial information is reviewed
by the CODM on a consolidated basis. The CODM does not evaluate the operating segments using asset information and it is therefore
not disclosed. All expenses directly attributable to each reportable segment is included in operating results for each segment. However,
the CODM does not evaluate the expenses by operating segment and, therefore, it is not separately presented.
Prior to the acquisition
of ChizComm during the year ended December 31, 2021, the Company only operated in one reportable segment. The following table presents
the revenue and net earnings within the two operating segments at the year ended December 31, 2021 (in
thousands):
Segment information
by revenues and net earnings | |
| | |
Total Revenues: | |
| |
Content Production & Distribution | |
$ | 2,707 | |
Media Advisory & Advertising Services | |
| 5,166 | |
Total Revenue | |
$ | 7,873 | |
| |
| | |
Net Loss: | |
| | |
Content Production & Distribution | |
$ | (122,944 | ) |
Media Advisory & Advertising Services | |
| (3,347 | ) |
Total Operating Loss | |
$ | (126,291 | ) |
Geographic Information
The following table provides
information about disaggregated revenue by geographic area at year ended December 31, 2021 (in
thousands):
Schedule of segments by geographic area | |
| | |
United States | |
$ | 5,567 | |
Canada | |
| 2,306 | |
Total Revenue | |
$ | 7,873 | |
Note 27: Subsequent Events
On January 13, 2022, the Company
acquired Canadian streaming service Ameba TV and gained access to its kid-safe platform technology and 13,000 episodes of content including
Casper the Friendly Ghost, Donkey Kong Country, Gummy Bears and Rescue Heroes. The Company purchased 100% of Ameba’s
issued and outstanding shares for $3.5 million in cash and paid $0.3 million for the underlying software code that powers the SVOD deliveries.
During the first quarter of
2022, the Company has borrowed an additional $51.4 million, net of pay-downs from its investment margin account.
On February 24, 2022, the
Company issued 36,196 shares of the Company’s common stock valued at $65,515 which were held in escrow as part of the ChizComm acquisition.
On March 2, 2022, the Company issued 350,000 shares
of the Company’s common stock valued at $0.3 million to a consultant for advisory services.
During the first quarter of 2022, the Company issued
603,648 shares of the Company’s common stock valued at $0.6 million which represented delivery of vested RSUs.
Following the equity investment
in YFE, the Company participated in a mandatory tender offer for the remaining publicly traded shares held by shareholders. Upon the expiration
of the offer on February 14, 2022, the Company purchased 2,637,717 additional shares of YFE, increasing the Company’s ownership
of YFE to 53.9%. However, on March 9, 2022, including 304,631 additional shares acquired by the Company, bonds convertible into YFE’s
common stock were converted into 2,574,000 shares, increasing the number of outstanding shares and resulting in a dilution of the Company’s
ownership in YFE to 45.6%.
On March 24, 2022,
the Board of Directors of Genius Brands International, Inc. accepted the resignation of Ms. Zrinka Dekic who has served as Chief Financial
Officer and Head of Strategy and Mergers and Acquisitions since December 13, 2021. Ms. Dekic voluntarily resigned for personal reasons.
The Board re-appointed Robert Denton as the Company’s Chief Financial Officer, to serve as the Company’s principal financial
officer and principal accounting officer.
Mr. Denton previously
served as Chief Financial Officer and principal financial officer and principal accounting officer of the Company from April 2018 to December
2021. Since December 2021, Mr. Denton has served as Executive Vice President of Finance and Accounting for the Company. Additional information
required by Items 401(b), (d), and (e) and Item 404(a) of Regulation S-K regarding Mr. Denton was previously reported in the Company’s
Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders on Schedule 14A filed with the Securities and Exchange Commission
(“SEC”) on August 24, 2021, and which information is incorporated by reference herein. On March 8, 2022, the Company and Mr.
Denton entered into an amendment to his Amended and Restated Employment Agreement, dated as of December 7, 2020, which increased the term
of his employment to three years from March 7, 2022 (the “Effective Date”) unless earlier terminated and provided for a base
salary at the rate of (a) $300,000 concluding on the first anniversary of the Effective Date, (b) $350,000 beginning on the first anniversary
of the Effective Date and concluding on the second anniversary thereof, and (c) $375,000 beginning on the second anniversary of the Effective
Date and concluding on the third anniversary thereof.
The foregoing summary
of the material terms of the amendment to the Amended and Restated Employment Agreement with Mr. Denton described above does not purport
to be complete and is qualified in its entirety by reference to the full text of his employment agreement, which will be filed with the
Company’s Quarterly Report on Form 10-Q for the fiscal quarter ending March 31, 2022.