The accompanying notes are an integral part of
these financial statements.
The accompanying notes are an integral part of
these financial statements.
The accompanying notes are an integral part of
these financial statements.
The accompanying notes are an integral part of
these financial statements.
The accompanying notes are an integral part of
these financial statements.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(unaudited)
Note 1: Organization and Business
Organization and Nature of Business
Genius Brands International,
Inc. (“we,” “us,” “our,” or the “Company”) is a publicly traded (NASDAQ:GNUS) global content
and brand management company that creates, produces, licenses, and broadcasts timeless and educational, multimedia animated content for
children. Led by experienced industry personnel, the Company distributes its content primarily on streaming platforms and television and
licenses its properties for a broad range of consumer products based on the Company’s characters. The Company is a leading “work
for hire” producer for many of the streaming outlets and IP holders. In the children’s media sector, the Company’s portfolio
features “content with a purpose” for toddlers to tweens, providing enrichment as well as entertainment. The Company’s
programs, along with those programs it acquires and/or licenses, are being broadcast in the United States on the Company’s wholly-owned
advertisement supported video on demand (“AVOD”) service, Kartoon Channel!, and its subscription video on demand (“SVOD”)
distribution outlets, Kartoon Channel! Kidaverse, and Ameba TV. These streaming services are available on Apple TV, Apple
iOS, Android TV, Android mobile, Amazon Prime, Amazon Fire, Tubi, Roku, Comcast, Cox, Dish/Sling, Zumo, Pluto, Samsung Smart TVs, LG Smart
TVs, as well as YouTube, among other popular platforms. The Company’s in-house owned and produced shows include Stan Lee’s
Superhero Kindergarten starring Arnold Schwarzenegger, Llama Llama starring Jennifer Garner, Rainbow Rangers, KC Pop Quiz,
and the upcoming Shaq’s Garage starring Shaquille O’Neal, scheduled to debut in the fourth quarter of 2022. 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.
The Company also licenses
its programs to other services worldwide, in addition to the operation of its own channels, including but not limited to Netflix, HBO
Max, Paramount+, Nickelodeon, and satellite, cable and terrestrial broadcasters around the world.
Through the Company’s
recent investment in Germany’s Your Family Entertainment (“YFE”), a publicly traded company on the Frankfurt
Exchange (RTV-Frankfurt), it has gained access to one of the largest animation catalogues in Europe with over 3,000 titles, and a global
distribution network, which currently covers over 60 territories worldwide and, which the Company is currently in process of rebranding
as Kartoon Channel! Worldwide.
The Company also recently
acquired WOW Unlimited Media Inc. (“Wow”), and through that acquisition, established an affiliate relationship with Mainframe
Studios, which is one of the largest animation producers in the world. In addition, Wow owns Frederator Networks Inc. (“Frederator”)
and its Channel Frederator Network, the largest animation focused multi-channel network on YouTube, with over 2,500 content
creators and currently averages over 1 billion views per month.
The Company owns a select
amount of valuable IP, including among them a controlling interest in Stan Lee Universe (“SLU”), through which it controls
the name, likeness, signature, and all consumer product and IP rights to Stan Lee (the “Stan Lee Assets”). The Company plans
to launch a Stan Lee Centennial program of merchandise set to coincide with Stan Lee’s 100th birthday on December 28,
2022.
The Company also owns Beacon
Media, the largest media buying service for children in North America. Beacon represents over 30 major toy companies, including Playmobile,
Bandai Toys, Bazooka, Moose Toys, and JAKKS Pacific.
In addition, the Company recently
acquired the Canadian company Ameba TV (“Ameba”), which distributes a profitable SVOD channel for kids and is now expected
to become the backbone of the newly launched SVOD channel of Kartoon Channel!, Kartoon Channel! Kidaverse.
The combination of the Company,
its investment in YFE, its acquired companies Wow, Ameba and Beacon Media provide the Company with world class animation production studios,
a catalogue representing thousands of hours of premium global content for children, a broadcast system for delivering that content and
an in-house Consumer Products Licensing infrastructure to fully exploit the content.
Recent
Investments
On January 13, 2022, the Company
completed its acquisition of the issued and outstanding shares of Ameba and gained access to its kid-safe SVOD platform technology and
13,000 episodes of content. Refer to Note 3 for additional details.
On April 6, 2022, the Company
completed its acquisition of Wow. On October 26, 2021, the Company’s wholly-owned subsidiary, 1326919 B.C. LTD., a corporation existing
under the laws of the Province of British Columbia and Wow, entered into an Arrangement Agreement to effect a plan of arrangement under
the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. The Company purchased 100% of Wow’s issued
and outstanding shares for approximately $38.3 million in cash and 11,057,000 shares of the Company’s common stock. Refer to Note
3 for additional details.
Following the initial equity
investment in YFE during the fourth quarter of 2021, the Company participated in a mandatory tender offer for the remaining publicly traded
shares held by YFE shareholders. Upon the expiration of the offer on February 14, 2022, the Company purchased an additional 2,637,717
shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders were converted
into 2,574,000 shares of YFE common stock, 304,631 of which were purchased by the Company, at 2.00 EUROS per share or $0.6 million. On
April 5, 2022, the Company exercised its subscription rights to purchase an additional 914,284 shares of YFE’s common stock at 3.00
EUROS per share, or $2.7 million, increasing the number of YFE’s outstanding shares to 6,857,132. As of September 30, 2022, the
Company’s ownership in YFE is 48.0%.
Liquidity
During the nine months ended
September 30, 2022, the Company’s cash, cash equivalents and restricted cash decreased by $3.0 million. The decrease was primarily
due to cash used in investment activities, inclusive of the Wow and Ameba acquisitions and the YFE investments, totaling $35.9 million,
$24.2 million used for operational activities, offset by $57.4 million of financing from the margin loan, production facilities and bank
indebtedness assumed in the Wow Acquisition.
As of September 30,
2022, the Company held marketable securities with a fair value of $89.9
million as available-for-sale, a decrease of $22.7
million as compared to December 31, 2021 primarily due to the Company selling $8.8 million of its held securities during the
period, a decrease in fair value of $6.4 million recorded as an unrealized loss, additional prepayment proceeds of $6.4 million on
principals for certain mortgage-backed securities, a realized loss of $0.2 million and $0.8 million of continued amortization of
premiums during the period. The available-for-sale securities consist principally of corporate and government debt securities and
are also available as a source of liquidity.
The Company borrowed an
additional $63.2
million from its investment margin account during the nine months ended September 30, 2022 and repaid $7.8
million with cash received from sales and/or redemptions of its marketable securities. During the nine months ended September
30, 2022, the borrowed amounts were used to finance the Company’s additional investments in YFE and the closing of the
acquisitions of Ameba and Wow, in each case pledging certain of its marketable securities as collateral. During the three months
ended September 30, 2022, the additional borrowings of $4.2
million related to quarterly operational costs. 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 2.65%
on an average margin loan balance of $61.2
million during the three months ended September 30, 2022. The weighted average interest rate was 1.54%
on an average margin loan balance of $43.4
million during the nine months ended September 30, 2022. The Company incurred interest expense of $0.6
million during the nine months ended September 30, 2022. 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 condensed consolidated balance sheets.
Upon the acquisition of Wow,
the Company assumed certain credit facilities (the “Facilities”) with a Canadian bank. The Facilities are comprised of: (i)
a $5.0 million CAD ($3.9 million USD) revolving demand facility, (ii) an $8.0 million CAD ($6.2 million USD) equipment lease line, (iii)
a treasury risk management facility of up to $0.5 million CAD ($0.4 million USD) for foreign exchange forward contracts, and (iv) interim
financing facilities for specific production titles. The Facilities are guaranteed by the Company and the security reflects substantially
all of the tangible and intangible assets of the Company and its subsidiary guarantors subject to permitted encumbrances, including a
combination of federal and provincial tax credits, other government incentives, production service agreements, and license agreements.
The Facilities are generally repayable on demand and are subject to customary affirmative and negative covenants, default provisions,
representations and warranties and other terms and conditions. Refer to Note 14 for additional details.
Historically, the Company
has incurred net losses. For the three months ended September 30, 2022 and 2021, the Company reported net losses of $11.2 million and
$9.3 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company reported net losses of $29.1 million and
$92.9 million, respectively. The Company reported net cash used in operating activities of $22.8 million and $16.0 million for the nine
months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the Company had an accumulated deficit of $624.9 million
and total stockholders’ equity of $128.5 million. As of September 30, 2022, the Company had current assets of $143.6 million, including
cash and cash equivalents of $7.1 million and current liabilities of $111.2 million. The Company had working capital of $32.4 million
as of September 30, 2022, compared to working capital of $115.1 million as of December 31, 2021.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed
consolidated balance sheet as of December 31, 2021 has been derived from audited statements. The accompanying unaudited condensed consolidated
financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles (“US GAAP”)
for complete financial statements and should be read in conjunction with the audited financial statements and related footnotes included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission
on April 6, 2022.
The accompanying condensed
consolidated financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and
reclassifications) necessary to state fairly the Condensed 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 the Beacon Media Group (formerly “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 23 for additional information.
Principles of Consolidation and Basis of Presentation
The Company’s condensed
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 non-controlling 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 accounts for transactions
that are classified as business combinations in accordance with the Financial Accounting Standards Boards’ (“FASB”)
Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). Once a business
is acquired, the Company allocates the fair value of the purchase consideration 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. As required, preliminary fair values are determined upon acquisition, with the final determination
of the fair values being completed within the one-year measurement period from the date of acquisition. 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 (as defined below) and that requires additional
financial support from the Company to continue operations. The Company’s total net cash investment in SLU as of September 30, 2022,
is $0.8 million. In addition, the Company has incurred $0.4 million of costs incurred for marketing and operational services. 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 the Company’s 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 the Company’s 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 operations. 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 September 30, 2022 and December
31, 2021, the Company had cash and cash equivalents of $7.1 million and $2.1 million, respectively.
Tax Credits Receivable
The Federal and certain Provincial
governments in Canada provide programs that are designed to assist film and television production in the form of refundable tax credits
or other incentives.
Estimated amounts receivable
in respect of refundable tax credits are recorded as an offset to the related production operating cost, or to investment in film and
television programming when the conditions for eligibility of production assistance based on the government’s criteria are met,
the qualifying expenditures are made and there is reasonable assurance of realization. Determination of when and if the conditions of
eligibility have been met is based on management’s judgment, and the amount recognized is based on management’s estimates
of qualifying expenditures. The ultimate collection of previously recorded estimates is subject to ordinary course audits from the Canada
Revenue Agency (“CRA”) and Provincial agencies. Changes in administrative policies by the CRA or subsequent review of eligibility
documentation may impact the collectability of these estimates. The Company continuously reviews the results of these audits to determine
if any circumstances arise that in management’s judgment would result in a previously recognized amount to be considered no longer
collectible.
The Company classifies the
tax credits receivable as current based on their normal operating cycle. Government assistance, in the form of refundable tax credits,
is relied upon as a key component of production financing. These amounts are claimed from the CRA through the submission of income tax
returns and can take up to 18 to 24 months from the date of the first tax credit dollar being earned to being received. As this financing
is fundamental to the Company’s ability to produce animated productions and generate revenue in the normal course of business, the
normal operating cycle for such assets is considered to be a 12-to-24-month period, or the time it takes for the CRA to assess and refund
the tax credits earned.
As of September 30,
2022, the Company had recorded $26.4
million in current tax credit receivables related to Wow’s film and television productions on its condensed
consolidated balance sheet. The Company does not have an allowance on tax credits receivable as of September 30, 2022, based on
historical experience and future expectations.
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 condensed
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. Classified within Other Receivables on the condensed consolidated balance sheets,
approximately $0.4
million in interest income was receivable as of September 30, 2022 and December 31, 2021.
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 carrying amounts of trade accounts receivable and unbilled accounts
receivable represents the maximum credit risk exposure of these assets. The Company evaluates its accounts receivable balances on a quarterly
basis to determine collectability based on an assessment of past events, current economic conditions, and forecasts of future events.
The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible
accounts are written off against the allowance when collection of the individual accounts appears doubtful.
The Company limits its exposure
to this credit risk through a credit approval process and credit monitoring procedures. In addition, Wow’s contracts with customers
usually require upfront and milestone payments throughout the production process. The Company’s customer base is mainly comprised
of major Canadian, American, and worldwide studios, distributors, broadcasters, toy companies and AVOD and SVOD platforms that have been
customers for several years.
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 ten 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 statements of operations.
Right of Use Leased Assets
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 under FASB ASC 842, Leases (“ASC 842”). 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 lease
right of use (“ROU”) assets and operating lease liabilities and finance leases are reflected as finance lease ROU assets and
finance lease liabilities in the consolidated balance sheets.
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 operating
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 on the lease commencement date or for
leases existing upon the date of initial adoption of ASC 842, the date of adoption. The implicit rates within the Company’s existing
finance leases are determinable and therefore used to determine the present value of finance lease payments.
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 statements 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-computation 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 for productions in development
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.
These write-downs are included
in amortization expense within Direct Operating Expenses on the Company’s condensed consolidated statements of operations. There
were no events or changes in circumstances that would indicate a change in fair value of productions and therefore the Company has not
recorded any impairment charges during the nine months ended September 30, 2022 or 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.
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 FASB 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.
Treasury stock
The Company records the repurchase
of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction
to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.
Borrowing Costs
Borrowing costs relate
to the issuance of Wow’s interim production financing and are recorded as a reduction to the carrying amount of interim
production financing and measured at amortized cost using the effective interest method. Borrowing costs are recognized as part of
interest expense in the condensed consolidated statements of operations in the period in which they are incurred. Borrowing costs
directly attributable to the acquisition or production of qualifying assets, which are assets that necessarily take a substantial
period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time the assets are
substantially ready for their intended use or sale. Upon the acquisition of Wow, the Company recorded $0.3
million and $0.6 million related to production financing during the three and nine months ended September 30, 2022, respectively.
Revenue Recognition
The Company accounts for revenue
according to standard FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”).
Revenue is measured based
on the consideration specified in a contract with a customer. Revenue is recognized when a customer obtains control of the products or
services in a contract. Judgment is required in determining the timing of whether the transfer of control occurs at a point in time or
over time and is discussed below. The Company evaluates each contract to identify separate performance obligations as a contract with
a customer may have one or more performance obligations. Consideration in a contract with multiple performance obligations is allocated
to the separate performance obligations based on their stand-alone selling prices. If a stand-alone selling price is not determinable,
the Company estimates the stand-alone selling price using an adjusted market assessment approach. The Company’s main sources of
revenue are derived from animation production services provided to third parties, the sale of licenses for the distribution of films and
television programs, advertising revenues, and merchandising and licensing sales.
Gross versus Net Revenue Presentation
The Company evaluates individual
arrangements with third parties to determine whether the Company acts as principal or agent under the terms. To the extent that the Company
acts as the principal in an arrangement, revenues are reported on a gross basis, resulting in revenues and expenses being classified in
their respective financial statement line items. To the extent that the Company acts as the agent in an arrangement, revenues are reported
on a net basis, resulting in revenues being presented net of any expenses incurred in providing agency services. Determining whether the
Company acts as principal or agent is based on an evaluation of which party has substantial risks and rewards of ownership under the terms
of an arrangement. The most significant factors that the Company considers include identification of the primary obligor, as well as which
party has credit risk, general and inventory risk and the latitude or ability in establishing prices.
The Company has identified
the following material and distinct performance obligations.
|
· |
Provide animation production services. |
|
|
|
|
· |
License rights to exploit Functional Intellectual Property (“functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability be played or aired. Functional IP derives a substantial portion of its utility from its significant standalone functionality). |
|
· |
License rights to exploit Symbolic Intellectual Property (“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. |
|
|
|
|
· |
Fixed and variable fee advertising and subscription-based revenue generated from the Genius Brands Kartoon Channel! and the Frederator owned and operated YouTube channels. |
|
|
|
|
· |
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). |
Production Services
Animation Production Services
For revenue from animation
production services, the customer controls the output throughout the production process. Each production is made to an individual customer’s
specifications and if the contract is terminated by the customer, the Company is entitled to be reimbursed for any costs incurred to date,
and for any prepaid commitments made, plus the agreed contractual mark-up. Revenue and the associated costs of such contracts are recognized
over time on a percentage of completion basis - i.e. as the project is being produced, prior to it being delivered to the customer. The
percentage-of-completion is calculated based upon the proportion of costs incurred cumulatively to total expected costs. Changes in revenue
recognized as a result of adjustments to total expected costs are recognized in profit or loss on a prospective basis. Invoices related
to these projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between
contractual payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds
milestone billings, the Company recognizes this difference as unbilled accounts receivable. Unbilled accounts receivable is transferred
to accounts receivable when the Company has an unconditional right to consideration.
When the outcome of an arrangement
cannot be estimated reliably, revenue is recognized only to the extent of the expenses incurred that are recoverable.
Content Distribution
Film and Television Licensing
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.
Invoices related to these
projects are issued based on the achievement of milestones during the project or other contractual terms. The difference between contractual
payments received and revenue recognized is recorded as deferred revenue when receipts exceed revenue. When revenue exceeds milestone
billings, the Company recognizes this difference as unbilled accounts receivable. Unbilled accounts receivables are transferred to accounts
receivable when the Company has an unconditional right to consideration.
Advertising revenues
The Company sells advertising
and subscriptions on its wholly-owned AVOD service, Kartoon Channel!, and its SVOD distribution outlets, Kartoon Channel! Kidaverse,
and Ameba TV. Advertising sales are generated in the form of either flat rate promotions or advertising impressions served. For
flat rate promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under 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. For subscription-based revenue, the Company recognizes revenue when a customer downloads the mobile
device application and their credit card is charged.
Upon the acquisition of Wow, the Company generates
advertising revenue from Frederator’s owned and operated YouTube channels as well as revenues generated from the operation
of its multi-channel network on YouTube. Revenue is recognized when services are provided in accordance with the Company’s
agreement with YouTube, the price is fixed or determinable, and collection of the related receivable is probable. Receivables are usually
collectable within 30 days.
Licensing & Royalties
Merchandising and licensing
The Company enters into merchandising
and licensing agreements that allow customers to produce merchandise utilizing certain of the Company’s intellectual property. For
minimum guaranteed amounts that make up a contract, revenue is recognized over time, over the term of the license period commencing on
the date at which the customer can use and benefit from the licensed content. Variable consideration in excess of non-refundable guaranteed
amounts, such as royalties and other contractual payments are recognized as revenue when the amounts are known and become due provided
collectability is reasonably assured. Invoices are issued based on the contractual terms of an agreement and are usually payable within
30-45 days.
Product Sales
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.
Media Advisory & Advertising
Services
Media and Advertising Services
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.
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. Upon the acquisition of Wow, the Company also includes salaries and related service production employee
costs as part of its direct operating costs.
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 unvested 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-Merton (“BSM”) 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
share of common stock (“EPS”) is calculated by dividing net income (loss) applicable to common stockholders 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 stockholders 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 September 30, 2022, the Company had fifteen accounts with an uninsured balance in bank deposit accounts of $3.0
million. 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 the Company’s investments
in marketable securities of $89.9
million and $112.5
million as of September 30, 2022 and December 31, 2021, respectively. The brokerage account did not hold a material amount of
the Company’s cash as of September 30, 2022 or December 31, 2021. Assets in the managed 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 September 30, 2022 and December 31, 2021, the Company has not had account balances held at this financial institution
that exceeded the insured balances.
The Company also has an
account with a German bank that manages its foreign transactions with YFE. The cash balance as of September 30, 2022 held at the
German institution was $2.7
million. Deposits in German banks are subject to a mandatory basic security amount up to $100,000 EURO. In addition, the
institution is a member of the deposit protection fund for the German private banking industry that currently insures $5.5
million of each customer’s deposit account. As of September 30, 2022 and December 31, 2021, the Company has not had account
balances held at this financial institution that exceeded 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 the three months
ended September 30, 2022, the Company had four customers, whose total revenue exceeded 10% of total consolidated revenue. These customers
accounted for 83% of total revenue.
For the nine months ended
September 30, 2022, the Company had four customers whose total revenue exceeded 10% of total consolidated revenue. These customers accounted
for 74% of total revenue. As of September 30, 2022, the Company had two customers whose total accounts receivable exceeded 10% of total
accounts receivable. These customers accounted for 28% of the total accounts receivable as of September 30, 2022.
For the three months ended
September 30, 2021, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. This customer accounted
for 13% of total revenue.
For the nine months ended
September 30, 2021, the Company had one customer, whose total revenue exceeded 10% of total consolidated revenue. This customer accounted
for 22% of total revenue. As of September 30, 2021, the Company had three customers whose accounts receivable exceeded 10% of total accounts
receivable. Those customers accounted for 59% 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. As of September 30, 2022 and December 31, 2021, the Company recorded
an allowance for bad debt of $87,710 and $22,080, 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. FASB ASC 820, Fair Value Measurement (“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:
|
· |
Level 1 - Observable inputs such as quoted prices for identical instruments in active markets; |
|
|
|
|
· |
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 |
|
|
|
|
· |
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. |
Financial instruments that
are not measured at fair value on the condensed consolidated statements of operations are represented by cash, receivables, payables, accrued
liabilities, bank indebtedness, the Company’s margin loan and interim production financing.
The carrying amounts of cash,
restricted cash, receivables, payables, accrued liabilities, bank indebtedness and the Company’s margin loan approximate fair value
due to the short-term nature of the instruments. The fair values of the Company’s liability-classified derivative warrants are revalued
at the end of each reporting period determined using the BSM model (Level 2) with standard valuation inputs. Refer to Note 19 for additional
details. The investment in YFE is also revalued at the end of each reporting period based on the trading price of YFE (Level 1). Refer
to Note 5 for additional details. Upon acquisition of Wow, the Company assumed foreign currency forward contracts that are not traded
in active markets. These are fair valued using observable forward exchange rates at the measurement dates and interest rates corresponding
to the maturity of the contracts.
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 September 30, 2022 (in thousands):
Schedule of marketable security measured at fair value | |
| | | |
| | | |
| | |
| |
Level 1 | | |
Level 2 | | |
Total Fair Value | |
Marketable investments: | |
| | | |
| | | |
| | |
Corporate Bonds | |
$ | 30,530 | | |
$ | 11,324 | | |
$ | 41,854 | |
U.S. Treasury | |
| 19,485 | | |
| – | | |
| 19,485 | |
Mortgage-Backed | |
| – | | |
| 5,525 | | |
| 5,525 | |
U.S. agency and government sponsored securities | |
| – | | |
| 11,621 | | |
| 11,621 | |
U.S. states and municipalities | |
| – | | |
| 10,830 | | |
| 10,830 | |
Asset-Backed | |
| – | | |
| 558 | | |
| 558 | |
Total | |
$ | 50,015 | | |
$ | 39,858 | | |
$ | 89,873 | |
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 FASB ASC 320, Investments – Debt and Equity Securities. There were no impairment charges recorded
for the marketable securities. Refer to Note 6 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 and
include the Company’s contingent earn-out liability, goodwill and film and television costs as of September 30, 2022. There were
no significant events that occurred or circumstances that resulted in an adjustment to the fair value of those assets and liabilities
measured on a non-recurring basis during the nine months ended September 30, 2022.
Recent Accounting Pronouncements
In June 2016, the FASB issued
Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326).
ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's
measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime
credit loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1)
financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes,
but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not
apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure
credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions
in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and
loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating
the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13
for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022,
including interim periods within those fiscal periods. Early adoption is permitted for interim and annual reporting periods. The Company
is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements but does not expect that the
adoption of this standard will have a material impact.
In October 2021, the FASB
issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers" (“ASU 2021-08”). The standard requires an acquirer in a business combination to recognize and measure
contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, “Revenue from Contracts
with Customers,” as if it had originated the contracts. The standard is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company adopted this ASU during the second quarter of
2022 and has incorporated this guidance in its evaluation of the accounting for the acquisition of Wow.
Note 3: Acquisitions
Ameba
On January 13, 2022, the Company
completed the acquisition of Ameba, pursuant to a Stock Purchase Agreement (the “SPA”) by and between the Company and Tony
Havelka, a resident of the Province of Manitoba (the “Seller”), in which the Company acquired from the Seller all of the issued
and outstanding equity interests of Ameba. Concurrently, pursuant to an Asset Purchase Agreement (the “APA”) by and among
the Company, the Seller and Tek Gear Inc., a corporation owned by the Seller, the Company acquired from the Seller a proprietary software
platform (the “Technology”) that powers the Ameba SVOD deliveries. The transactions contemplated by the SPA and the APA are
referred to as the “Ameba Acquisition.”
Consideration paid by the
Company in the transaction at closing consisted of $3.8 million in cash, inclusive of $0.3 million
for a net working capital adjustment (the “NWC Adjustment”) pursuant to the SPA and $0.3 million in cash pursuant to the APA,
for total consideration of $4.1 million, or $3.9 million net of cash acquired, excluding transaction costs and subject to as described
in more detail below.
Transaction
costs incurred relating to the Ameba Acquisition, including legal and accounting, totaled $0.1 million, which are included in general and
administrative expenses on the statements of operations. The agreement provided for an adjustment to the purchase price based on an adjusted
net working capital (“NWC”) as defined in the agreement.
The
Ameba acquisition facilitates the Company’s expansion into SVOD with its technology and content essential to the launch of the ad-free
subscription-based Kartoon Channel! Kidaverse platform. The acquisition provides immediate benefit recognized through the content
available on the SVOD Ameba channel app, available for download on Amazon Fire TV, Roku, Xbox 360, Xumo, LG Smart TV, TiVo, VEWD, CINEMOOD
and iOS and Android devices.
The
Company has determined that the Ameba Acquisition constitutes a business acquisition as defined by ASC 805. 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
preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based
on the requirements of ASC 820 and represents managements best estimates.
The
following table summarizes the consideration paid, including the Net Working Capital Adjustment (in thousands):
Total purchase price consideration paid | |
| | |
| |
Amount | |
SPA cash consideration at closing | |
$ | 3,500 | |
APA cash consideration at closing | |
| 300 | |
Net working capital adjustment | |
| 269 | |
Total | |
$ | 4,069 | |
The net working capital
calculation was finalized as $268,657
and paid to the acquiree during the three months ended June 30, 2022, as determined by the Company and agreed upon by the
acquiree.
As of September 30, 2022,
the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets.
The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent
quarters.
The preliminary purchase price
allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company on January 13,
2022 as follows (in thousands):
Assets acquired and liabilities assumed | |
| | |
Cash | |
$ | 176 | |
Accounts Receivable | |
| 238 | |
Prepaids Expenses | |
| 25 | |
Trade Name | |
| 23 | |
Digital Network | |
| 2,804 | |
Technology | |
| 300 | |
Goodwill | |
| 673 | |
Accounts Payable and Accrued Expenses | |
| (140 | ) |
Tax Liability | |
| (30 | ) |
Total Consideration | |
$ | 4,069 | |
The identifiable intangible
assets acquired of $3.1 million is comprised of $2.8 million for the Digital Network, Ameba TV, with a remaining economic life of 18 years,
$23,000 for Ameba’s trade name with a useful life of 3 years and $0.3 million for the SVOD technology with a remaining useful life
of approximately 3 years. The $0.7 million in goodwill arising from the acquisition consists largely of the synergies expected from the
combined businesses, including the Company’s build-out of its technology for the expansion of the Kartoon Channel! platform.
The goodwill was recorded to the Content Production & Distribution reporting unit and is not
deductible for tax purposes.
The valuation and allocation
of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially
with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the
acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.
Valuation Methodology
The
digital network was valued by performing a discounted cash flow analysis. This method includes discounting the projected cash flows associated
with the current digital network content, based primarily upon historical revenue and projections over its expected life and considers
the operating expenses and contributory asset charges associated with servicing such network. Projected cash flows attributable to the
digital network was discounted to the present value at a rate commensurate with the perceived risk. The useful life of the digital network
is estimated based primarily upon the present value of cash flows attributable to the digital network.
The
Ameba trade name was 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. The useful life of the trade name is based on the estimated
time it will take for the Company to rebrand the Ameba trade name and logo with the Company branded Kartoon Channel! Kidaverse trade
name.
The technology was valued
at cost as the Company determined that the cost approximated the fair value.
The
assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:
|
· |
Historical performance including sales and profitability. |
|
|
|
|
· |
Expense estimates. |
|
|
|
|
· |
Contributory asset charges. |
|
|
|
|
· |
Estimated economic life of asset. |
|
|
|
|
· |
Acquisition of new customers. |
|
|
|
|
· |
Attrition of existing customers. |
Wow Unlimited Media
On April 6, 2022, the Company
completed the acquisition of Wow. On October 26, 2021, the Company’s wholly-owned subsidiary, 1326919 B.C. LTD., a corporation existing
under the laws of the Province of British Columbia and Wow, entered into an Arrangement Agreement to effect a plan of arrangement under
the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. The Company purchased 100% of issued and outstanding
shares of Wow for $38.3 million in cash and 11,057,085 shares of the Company’s common stock, including Wow’s subsidiary Frederator.
The plan of arrangement and final agreement, together with the acquisition of Wow’s Mainframe
Studios and its subsidiary Frederator, are referred to as the “Wow Acquisition.”
Final consideration paid by
the Company in the transaction at closing consisted of $38.3 million in cash and 11,057,085
shares of the Company’s common stock, including 691,262 Exchangeable Shares, with a fair value of $11.6 million, 2,409,515 options
granted to employees of Wow with a fair value of previously vested options of $1.2 million, included in the purchase price, and $0.3 million
for future services and $1.6 million in severance and bonuses to executives, for total consideration
of $52.7 million, or $50.1 million net of cash acquired, excluding transaction costs as described in more detail below.
Transaction
costs incurred relating to the Wow Acquisition, including banks, legal and accounting, totaled $3.1 million, which is included in general
and administrative expenses on the statements of operations for the nine months ended September 30, 2022. The Company will also expense
the unvested replacement options, with a fair value of $0.3 million, as stock-based compensation expense over the remaining requisite
service period specified in the agreements.
The
Wow Acquisition facilitates the Company’s expansion as a global animation and children’s digital media company. With Wow’s
content, ongoing production projects and the addition of two studios that can also be leveraged for in-house production of the Company’s
properties, will drive cost synergies, facilitate further expansion into the global children’s entertainment market and strengthen
financial growth. Frederator, with its owned and operated channels on YouTube, will provide a distribution platform to facilitate
the global growth of Kartoon Channel!.
The
Company has determined that the Wow Acquisition constitutes a business acquisition as defined by ASC 805. 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
preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based
on the requirements of ASC 820 and represents managements best estimates.
The
following table summarizes the consideration paid:
Schedule of total purchase price consideration paid | |
| | |
| |
Amount | |
Cash | |
$ | 38,310 | |
Genius Common Stock Issued | |
| 10,832 | |
Shares Issued Exchangeable for Genius Common Stock | |
| 722 | |
Stock Option Value of Replacement Options- Pre-Combination Vested Options | |
| 1,213 | |
Severance Payments | |
| 1,044 | |
Bonuses | |
| 529 | |
Total | |
$ | 52,650 | |
As of September 30, 2022,
the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets.
The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent
quarters.
The preliminary purchase price
allocation is based upon the estimate of the fair value of the assets acquired and the liabilities assumed by the Company on April 6,
2022 as follows (in thousands):
Schedule of fair value of the assets acquired and the liabilities assumed | |
| | |
Cash and cash equivalents | |
$ | 2,573 | |
Accounts Receivable | |
| 34,237 | |
Other Receivables | |
| 78 | |
Prepaid Expenses and Other | |
| 1,245 | |
Property and Equipment | |
| 1,936 | |
ROU Assets | |
| 10,311 | |
IP (In-Process) | |
| 4,600 | |
IP (Proprietary Productions) | |
| 5,684 | |
Tradename | |
| 7,631 | |
Customer Relationships | |
| 16,064 | |
Networks and Platforms | |
| 803 | |
Goodwill | |
| 21,399 | |
Accounts Payable | |
| (1,547 | ) |
Participations Payable | |
| (1,380 | ) |
Bank Debt | |
| (1,475 | ) |
Accrued Liabilities | |
| (3,825 | ) |
Interim Production Facilities | |
| (16,930 | ) |
Deferred Revenue | |
| (18,080 | ) |
Lease Liabilities | |
| (10,614 | ) |
Other Liabilities | |
| (60 | ) |
Total Consideration | |
$ | 52,650 | |
The identifiable intangible
assets acquired of $34.8 million is comprised of $16.1 million for Customer Relationships, with remaining economic lives of 8 years, $10.3
million for IP Content including completed productions and productions in progress, that is included as part of Film and Television costs
on the condensed consolidated balance sheet and will be amortized as such, Tradenames for $7.6 million, with an indefinite life and Networks
and Platforms of $0.8 million, with a remaining economic life of 16 years. The goodwill of $21.4 million arising from the acquisition
consists largely of the synergies expected from the combined businesses, including the Company’s ability to produce its content
in-house utilizing the acquired studios and expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content
Production & Distribution reporting unit and is not deductible for tax purposes.
The valuation and allocation
of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially
with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the
acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.
Valuation Methodology
The
Networks and Platforms were valued by performing a discounted cash flow analysis, specifically the multi-period excess earnings method.
This method involves quantifying the amount of residual (or excess) cash flows generated by the current digital network content, based
primarily upon historical revenue and projections over its expected life, and considers the operating expenses and contributory asset
charges associated with servicing such network. Projected cash flows attributable to the networks are discounted to present value at a
rate commensurate with the perceived risk. The significant assumptions used in this model included the customer attrition rate, acquisition
rate of new customers, weighted average cost of capital, and expense estimates. The useful life of the networks is estimated based primarily
upon the present value of cash flows attributable to the digital network. The significant assumptions used in this method included the
royalty rate and weighted average cost of capital.
The
Tradenames were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income approach
wherein estimates of a company’s earnings attributable to the intangible asset are 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.
Supplemental Pro Forma Information
The following unaudited supplemental
pro forma information summarizes the Company’s results of operations as if the acquisitions were completed at the beginning of
the periods presented (in thousands, except for share and per share data):
Supplemental pro forma information | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended | |
| |
Genius Brands Consolidated
(including Wow and Ameba results) | | |
Wow | | |
Ameba | |
| |
September 30,
2022 | | |
September 30,
2021 | | |
September
30, 2021(1) | | |
September 30,
2021 | |
| |
| | |
| | |
| | |
| |
Total Revenues | |
$ | 19,679 | | |
$ | 18,091 | | |
$ | 16,033 | | |
$ | 186 | |
| |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) | |
$ | (11,218 | ) | |
$ | (8,338 | ) | |
$ | 833 | | |
$ | 82 | |
| |
| | | |
| | | |
| | | |
| | |
Net Loss per Share of Common Stock (Basic and Diluted) | |
$ | (0.04 | ) | |
$ | (0.03 | ) | |
$ | – | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares Outstanding (Basic and Diluted) | |
| 317,282,770 | | |
| 300,321,658 | | |
| – | | |
| – | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Nine months Ended | |
| |
Genius Brands Consolidated (including Wow and Ameba results) | | |
Wow | | |
Ameba | | |
Wow | | |
Ameba | |
| |
September 30, 2022 | | |
September 30, 2021 | | |
September 30, 2022(1) | | |
September 30, 2022 | | |
September 30, 2021(1) | | |
September 30, 2021 | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Total Revenues | |
$ | 61,346 | | |
$ | 48,927 | | |
$ | 53,242 | | |
$ | 1,274 | | |
$ | 43,130 | | |
$ | 519 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) | |
$ | (28,144 | ) | |
$ | (90,388 | ) | |
$ | 158 | | |
$ | (22 | ) | |
$ | 2,272 | | |
$ | 247 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Loss per Share of Common Stock (Basic and Diluted) | |
$ | (0.09 | ) | |
$ | (0.31 | ) | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares Outstanding (Basic and Diluted) | |
| 312,243,439 | | |
| 296,001,742 | | |
| – | | |
| – | | |
| – | | |
| – | |
(1) The unaudited historical financial statements of Wow
are not adjusted for conversion to U.S. GAAP from International Financial Reporting Standards, as the adjustments are immaterial to the
periods presented.
Note 4: Variable Interest Entity
In July 2020, the
Company entered into a binding term sheet with POW, Inc. (“POW!”) in which the Company agreed to form an entity with
POW! to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The
entity is called “Stan Lee Universe, LLC” (“SLU”). POW! and the Company executed an Operating Agreement for
the joint venture, effective as of June 1, 2021, with activity commencing during the fourth quarter of 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% non-controlling 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.
During the three and nine
months ended September 30, 2022, SLU generated $46,947 and $2.3 million in net income, respectively. During the nine months ended September
30, 2022, the Company distributed $1.2 million to POW as their share of the non-controlling interest in SLU. The Company’s investment
in SLU, net of the cash received from a distribution of $1.2 million, is $0.8 million as of September 30, 2022. In addition, the Company
has incurred $0.4 million of costs incurred for marketing and operational services.
There were no changes in facts
and circumstances that occurred during the three or nine months ended September 30, 2022 that would result in a re-evaluation of the VIE
assessment.
Note 5: Investment in Equity Interest
On December 1, 2021, the Company
completed a $6.8 million investment in 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 3,000,000 shares of YFE’s common stock.
Following the initial equity
investment in YFE during the fourth quarter of 2021, the Company participated in a mandatory tender offer for the remaining publicly
traded shares held by YFE shareholders. Upon the expiration of the offer on February 14, 2022, the Company purchased an additional 2,637,717
shares of YFE at 2.00 EUROS per share or $5.7 million in the aggregate. On March 9, 2022, bonds held by YFE shareholders, were
converted into 2,574,000
shares of YFE common stock, 304,631
of which were purchased by the Company at 2.00 EUROS per share, or $0.6 million. On April 5, 2022, the Company exercised its subscription
rights to purchase an additional 914,284
shares of YFE’s common stock at 3.00 EUROS per share, or $2.7
million, increasing the number of YFE’s outstanding shares to 6,857,132.
As of September 30, 2022 and December 31, 2021, the Company’s ownership in YFE was 48.0%
and 29.0%,
respectively.
The Company has elected to
apply the fair value option for its investment in YFE (Level 1) as YFE is a publicly traded company on the Frankfurt Exchange, therefore
its trading price is readily available and relied upon by investors. 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 revalues the investment
in YFE securities as of the end of each reporting period. During the three and nine months ended September 30, 2022, the Company recorded
a total loss of $5.4 million and $3.8 million, respectively, within other income (expense) on the Company’s condensed consolidated
statements of operations. The total loss includes $1.3 million and $2.6 million due to the change in the foreign currency translation rate
during the three and nine months ended September 30, 2022, respectively.
Wow has a 63% membership interest
in Ratchet Productions, LLC (“RPLLC”), a privately-owned company registered in Colorado. Wow accounts for its interest using
the equity method of accounting. Prior to the Wow Acquisition, in 2016, Wow determined that its investment in RPLLC was impaired and reduced
its investment to $0. As the investment has been $0, and remains as such, there has been no impact on the Company’s financial statements
for the membership interest in RPLLC.
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 $97.5 million and a market value of $89.9 million as of September 30, 2022. The balances consisted
of the following securities (in thousands):
Summary of investment in marketable security | |
| | | |
| | | |
| | |
| |
Adjusted Cost | | |
Unrealized Gain/(Loss) | | |
Fair Value | |
Corporate Bonds | |
$ | 44,822 | | |
$ | (2,968 | ) | |
$ | 41,854 | |
U.S. Treasury | |
| 20,922 | | |
| (1,437 | ) | |
| 19,485 | |
Mortgage-Backed | |
| 6,285 | | |
| (760 | ) | |
| 5,525 | |
U.S. agency and government sponsored securities | |
| 13,116 | | |
| (1,495 | ) | |
| 11,621 | |
U.S. states and municipalities | |
| 11,818 | | |
| (988 | ) | |
| 10,830 | |
Asset-Backed | |
| 567 | | |
| (9 | ) | |
| 558 | |
Total | |
$ | 97,530 | | |
$ | (7,657 | ) | |
$ | 89,873 | |
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. The balances consisted of the
following securities (in thousands):
| |
| | |
| | |
| |
| |
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 holds sixty-two available-for-sale securities, all of which are in an unrealized loss position as
of September 30, 2022. The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position
for a period greater than 12 months as of September 30, 2022 are as follows (in thousands):
Schedule of unrealized losses and fair values of available for sale securities | |
| | |
| |
| |
Gross
Unrealized Loss | | |
Fair Value | |
Corporate Bonds | |
$ | (2,375 | ) | |
$ | 34,365 | |
U.S. Treasury | |
| (1,456 | ) | |
| 19,489 | |
Mortgage-Backed | |
| (829 | ) | |
| 5,528 | |
U.S. agency and government sponsored securities | |
| (1,493 | ) | |
| 11,625 | |
U.S. states and municipalities | |
| (781 | ) | |
| 8,020 | |
Asset-Backed | |
| (10 | ) | |
| 558 | |
Total | |
$ | (6,944 | ) | |
$ | 79,585 | |
As of December 31, 2021, the Company had not yet held marketable securities
in an unrealized loss position for greater than twelve months. A net realized loss of $36,332
and $159,624 related to the prepayment of principals for certain mortgage-backed securities was recorded in earnings during the three
and nine months ended September 30, 2022, respectively.
The contractual maturities
of the Company’s marketable investments as of September 30, 2022 were as follows (in
thousands):
Summary of contractual maturity | |
| |
| |
Fair Value | |
Due within 1 year | |
$ | 8,889 | |
Due after 1 year through 5 years | |
| 70,060 | |
Due after 5 years through 10 years | |
| 3,752 | |
Due after 10 years | |
| 7,172 | |
Total | |
$ | 89,873 | |
The Company may sell certain
of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit
risk, duration and asset allocation.
The Company did not sell any
securities during the three or nine months ended September 30, 2022 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 | |
| | | |
| | |
| |
September 30,
2022 | | |
December 31,
2021 | |
Furniture and Equipment | |
$ | 221 | | |
$ | 181 | |
Computer Equipment | |
| 290 | | |
| 173 | |
Leasehold Improvements | |
| 2,008 | | |
| 44 | |
Software | |
| 254 | | |
| 177 | |
Production Equipment | |
| 23 | | |
| 23 | |
Property and Equipment, Gross | |
| 2,796 | | |
| 598 | |
| |
| | | |
| | |
Less Accumulated Depreciation | |
| (416 | ) | |
| (149 | ) |
Property and Equipment, Net | |
$ | 2,380 | | |
$ | 449 | |
During the three months ended
September 30, 2022 and 2021, the Company recorded depreciation expense of $86,980 and $23,665, respectively. During the nine months ended
September 30, 2022 and 2021, the Company recorded depreciation expense of $0.2 million and $53,494, respectively.
Note 8: Right of Use Leased Assets
Right of use assets consisted
of the following (in thousands):
Schedule of right of use asset | |
| | | |
| | |
| |
September 30,
2022 | | |
December 31,
2021 | |
Office Lease Assets | |
$ | 9,683 | | |
$ | 3,351 | |
Equipment Lease Assets | |
| 3,056 | | |
| 13 | |
Right of Use Assets, Gross | |
| 12,739 | | |
| 3,364 | |
| |
| | | |
| | |
Accumulated Amortization | |
| (1,917 | ) | |
| (579 | ) |
Right of Use Assets, Net | |
$ | 10,822 | | |
$ | 2,785 | |
During the three months ended
September 30, 2022 and 2021, the Company recorded ROU asset amortization expense of $0.7 million and $0.1 million, respectively. During
the nine months ended September 30, 2022 and 2021, the Company recorded ROU asset amortization expense of $1.3 million and $0.2 million,
respectively.
Note 9:
During the nine months
ended September 30, 2022, Film and Television Costs increased by $12.0
million, net of amortization expense, as compared to December 31, 2021. Excluding the $7.3 million from the Wow Acquisition,
Film and Television Costs increased $4.4
million during the nine months ended September 30, 2022, primarily due to the production of Shaq’s Garage. The
increase is partially offset by amortization of Rainbow Rangers and Superhero Kindergarten.
During the three months ended
September 30, 2022 and 2021, the Company recorded Film and Television Cost amortization expense of $2.8 million and $0.2 million, respectively.
During the nine months ended September 30, 2022 and 2021, the Company recorded Film and Television Cost amortization expense of $5.1 million
and $1.1 million, respectively.
The following table highlights
the activity in Film and Television Costs as of September 30, 2022 and December 31, 2021 (in thousands):
Schedule of film and television costs activity | |
| | |
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 | |
Additions to Film and Television Costs | |
| 17,708 | |
Disposals | |
| (11 | ) |
Film Amortization Expense | |
| (5,100 | ) |
Foreign Currency Translation Adjustment | |
| (555 | ) |
Film and Television Costs, Net as of September 30, 2022 | |
$ | 14,982 | |
Note 10: Intangible Assets, Net and Goodwill
Intangible Assets, Net
The Company had the following
intangible assets (in thousands) with their weighted average remaining amortization period (in years):
Intangible Assets, Net
Schedule of intangible assets | |
| | |
| | |
| |
| |
Weighted Average Remaining Amortization Period | | |
September 30, 2022 | | |
December 31, 2021 | |
Customer Relationships | |
| 9 | | |
$ | 22,199 | | |
$ | 6,120 | |
Digital Networks | |
| 17 | | |
| 3,537 | | |
| – | |
Trade names | |
| 69 | | |
| 11,654 | | |
| 4,000 | |
Technology | |
| 2 | | |
| 293 | | |
| – | |
Non-Compete | |
| 2 | | |
| 60 | | |
| 60 | |
Other Intangible Assets (a) | |
| 2 | | |
| 322 | | |
| 301 | |
Intangible Assets, Gross | |
| | | |
| 38,065 | | |
| 10,481 | |
| |
| | | |
| | | |
| | |
Less Accumulated Amortization | |
| | | |
| (2,364 | ) | |
| (772 | ) |
Foreign Currency Translation Adjustment | |
| | | |
| (1,927 | ) | |
| 24 | |
Intangible Assets, Net | |
| | | |
$ | 33,774 | | |
$ | 9,733 | |
__________________
|
(a) |
Represents the remaining unamortized logo and website intangible assets related to the merger with A Squared. |
During the three months ended
September 30, 2022 and 2021, the Company recorded amortization expense of $0.7 million and $0.1 million, respectively. During the nine
months ended September 30, 2022 and 2021, the Company recorded amortization expense of $1.7 million and $0.4 million, respectively.
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. There were no changes in events or circumstances during the nine months ended September 30,
2022 that would indicate an impairment of the intangible assets. As of December 31, 2021, the Company decided to discontinue the use
of the trade name acquired as part of the acquisition of Beacon Media Group (formerly ChizComm), resulting in a write-down of the full
book value of $3.4 million.
Expected future intangible asset amortization as
of September 30, 2022 is as follows (in thousands):
Expected future intangible asset amortization | |
| |
Fiscal Year: | |
| |
2022 | |
$ | 684 | |
2023 | |
| 2,733 | |
2024 | |
| 2,709 | |
2025 | |
| 2,602 | |
2026 | |
| 2,597 | |
Thereafter | |
| 22,449 | |
Total | |
$ | 33,774 | |
Goodwill
In 2013, the Company recognized
$10.4 million in goodwill, as a result of the merger with A Squared. During the first quarter of 2021, the Company recognized $9.7 million
in goodwill, as a result of the acquisition of the Beacon Media Group (formerly ChizComm), which was subsequently determined to be impaired
as of December 31, 2021, resulting in an impairment charge of $4.8 million and a goodwill balance of $4.9 million.
As a result of the Ameba Acquisition
during the first quarter of 2022, the Company recorded goodwill of $0.7 million as determined to be the amount in excess of the fair value
of the assets acquired and liabilities assumed in the acquisition. The goodwill recorded for the Ameba Acquisition was allocated to the
Content Production and Distribution reportable segment.
As a result of the Wow Acquisition
during the second quarter of 2022, the Company recorded goodwill of $21.4 million as determined to be the amount in excess of the fair
value of the assets acquired and liabilities assumed in the acquisition. The goodwill recorded for the Wow Acquisition was allocated to
the Content Production and Distribution reportable segment.
As Beacon Communications and
Wow are incorporated as Canadian companies with CAD being their functional currency, goodwill will change each period due to currency
exchange differences.
The Company will perform its
annual review of goodwill during the fourth quarter of 2022. There were no events or changes in circumstances that would indicate an impairment
in goodwill during the nine months ended September 30, 2022.
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, 2021 | |
$ | 10,366 | | |
$ | 4,861 | | |
$ | 15,227 | |
Acquisition of Ameba | |
| 673 | | |
| – | | |
| 673 | |
Acquisition of Wow | |
| 21,398 | | |
| – | | |
| 21,398 | |
Foreign Currency Translation Adjustment | |
| (1,546 | ) | |
| (4 | ) | |
| (1,550 | ) |
Goodwill as of September 30, 2022 | |
$ | 30,891 | | |
$ | 4,857 | | |
$ | 35,748 | |
Note 11: Deferred Revenue
As of September 30, 2022 and
December 31, 2021, the Company had total short term and long term deferred revenue of $14.2 million and $3.9 million, respectively. Included
in the deferred revenue balance as of September 30, 2022 is $10.6 million the Company assumed in the Wow Acquisition. The deferred revenue
balance assumed represents cash received from customers for productions in progress. Revenue is fully recognized upon production completion.
Deferred revenue also 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.
Note 12: Supplemental Financial Statement
Information
Other Income (Expense), Net
Components of other income (expense), net are
summarized as follows (in thousands):
Schedule of other income (expense) | |
| | |
| | |
| | |
| |
| |
Three Months Ended | | |
Nine months Ended | |
| |
September 30, 2022 | | |
September 30, 2021 | | |
September 30, 2022 | | |
September 30, 2021 | |
| |
| | |
| | |
| | |
| |
Gain (Loss) on Warrant Revaluation (a) | |
$ | 166 | | |
$ | 420 | | |
$ | 434 | | |
$ | 103 | |
Loss on Foreign Exchange (b) | |
| (1,336 | ) | |
| 5 | | |
| (2,596 | ) | |
| (3 | ) |
Loss on Marketable Securities Investments (c) | |
| (36 | ) | |
| (25 | ) | |
| (160 | ) | |
| (25 | ) |
Gain (Loss) on Revaluation of Equity Investment in YFE(d) | |
| (4,071 | ) | |
| – | | |
| (1,170 | ) | |
| – | |
Interest Income (e) | |
| 257 | | |
| 183 | | |
| 759 | | |
| 314 | |
Warrant Incentive Expense (f) | |
| – | | |
| – | | |
| – | | |
| (69,139 | ) |
Interest Expense (g) | |
| (782 | ) | |
| (2 | ) | |
| (1,256 | ) | |
| (20 | ) |
Net Other Income (Expense) | |
$ | (5,802 | ) | |
$ | 581 | | |
$ | (3,989 | ) | |
$ | (68,770 | ) |
|
(a) |
The gain 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. |
|
(b) |
For the three and nine months ended September 30, 2022 loss on foreign exchange primarily relates to the foreign exchange loss on the investment in YFE’s equity securities accounted for under the fair value option. For the three and nine months ended September 30, 2021 loss on foreign exchange related to foreign currency denominated monetary transactions. |
|
(c) |
The Company started investing in marketable securities during the three months ended June 30, 2021. The net realized loss on marketable securities recognized during the three and nine months ended September 30, 2022 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. |
|
(d) |
The loss on revaluation of the equity investment in YFE is the change in fair value recognized on the Company’s investments in YFE accounted for using the fair value option. The loss is a result of the change in YFE’s stock price at the end of the current reporting period. |
|
(e) |
Interest Income received during the three and nine months ended September 30, 2022 and 2021 primarily consists of cash interest received on the investments in marketable securities, net amortization of premiums. |
|
(f) |
The Warrant Incentive Expense is related to the fair value of new warrants that were issued in 2021 to certain existing warrant holders in exchange for previously issued outstanding warrants. |
|
(g) |
Interest expense during the three and nine months ended September 30, 2022 primarily consists of $0.4 million and $0.6 million, respectively, of interest incurred on the Company’s margin loan collateralized by its marketable security investments and $0.3 million and $0.6 million, respectively, of interest incurred on its production facilities loan and bank indebtedness assumed as part of the Wow Acquisition. |
Note 14: Bank Indebtedness and Production Facilities
The Company assumed the following bank indebtedness
instruments and production facilities as part of the Wow Acquisition.
Revolving Demand Facility
Draws
under the $5.0 million CAD revolving demand facility can be made in Canadian or US dollars at the option of the Company by way of bank
prime rate loans, Canadian Bankers’ Acceptances, USD LIBOR, or letters of credit and can be repaid at any time without penalty and
without notice and are generally repayable on demand. Canadian or US dollar bank prime borrowings
bear interest at a rate equal to bank prime plus 2.00% per annum. For other draws under the revolving facility, the respective loans bear
interest at a rate equal to Canadian Bankers’ Acceptances or USD LIBOR plus 3.75% per annum. As of September 30, 2022, the Company
had an outstanding balance of $2.1 million USD on the revolving demand facility, included as Bank Indebtedness within current liabilities
on the Company’s condensed consolidated balance sheet.
As
of September 30, 2022, the Company was in compliance with all covenants under the revolving demand facility.
Equipment Lease Line
Each
transaction under the $8.0 million CAD equipment lease line has specific financing terms in respect of the leased equipment such as
term, finance amount, rate, and payment terms. The finance rates for these equipment leases range from 4%- 4.5% with remaining lease
terms of 17-31 months as of the Wow Acquisition date. The Company has recorded right of use assets and lease liabilities for the
leased equipment acquired in respect of these draws. The Company has drawn down a total of $7.9 million CAD ($6.0 million USD), with
an outstanding balance as of September 30, 2022 of $2.2 million CAD ($1.6 million USD), net of repayments, included within current
and noncurrent finance lease liabilities on the Company’s condensed consolidated balance sheet.
Treasury Risk Management Facility
Advances under the treasury
risk management facility are subject to market rates as determined by the lender’s treasury department or derivatives group at the
time of the drawdown request. The maximum term for foreign exchange forward contracts and interest rate swaps is one year.
As
of September 30, 2022, there were no outstanding amounts drawn under the treasury risk management facility.
Interim
Financing Facilities
The Company’s interim
financing facilities for specific productions bear interest at rates ranging from bank prime plus 1.25% - 1.75% per annum. The interim
production financing facilities are generally repayable on demand and are generally secured by a combination of federal and provincial
tax credits, other government incentives, production service agreements and license agreements. As of September 30, 2022, the Company
had an outstanding balance of $19.3 million USD recorded as Production Facilities, net within current liabilities on the Company’s
condensed consolidated balance sheet.
Note 15: Margin Loan
The Company borrowed an
additional $63.2
million from its investment margin account during the nine months ended September 30, 2022 and repaid $7.8
million with cash received from sales and/or redemptions of its marketable securities. During the nine months ended September
30, 2022, the borrowed amounts were used to finance the Company’s additional investments in YFE and the closing of the
acquisitions of Ameba and Wow, in each case pledging certain of its marketable securities as collateral. During the three months
ended September 30, 2022, the additional borrowings of $4.2 million were used for quarterly operational costs. 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 2.65% on an average margin loan balance of $61.2 million during the three months
ended September 30, 2022. The weighted average interest rate was 1.54% on an average margin loan balance of $43.4 million during the
nine months ended September 30, 2022. The Company incurred interest expense of $0.6
million during the nine months ended September 30, 2022. 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 condensed consolidated balance sheets.
Note 16: Stockholders’ Equity
Common Stock
As of September 30, 2022,
the total number of authorized shares of common stock was 400,000,000.
As of September 30, 2022,
and December 31, 2021, there were 318,097,275 and 303,379,122 shares of common stock outstanding, respectively.
On February 18, 2022, the
Company issued 350,000 shares of the Company’s common stock valued at $0.3 million to a nonemployee for productions services.
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 April 7, 2022, the Company
issued 10,365,823 shares of the Company’s common stock valued at $10.8 million related to the Wow Acquisition, as part of the purchase
price. Also included as part of the Wow Acquisition, the Company has issued 691,262 shares, valued at $0.7 million, which will be exchanged
at a future redemption date upon tender of ExchangeCo (as defined below) shares as specified in the agreement. See additional information
on the ExchangeCo shares below under “Preferred Stock.”
During the nine months ended
September 30, 2022, the Company issued 2,538,205 shares of the Company’s common stock valued at $1.6 million representing delivery
of vested RSUs.
Preferred Stock
The Company has 10,000,001
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 the Company’s 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 the Company’s Board of Directors, which may
include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
In connection with the Company’s
acquisition of Wow, certain eligible Canadian shareholders, noteholders and optionholders of Wow elected to receive the Exchangeable Shares
in the capital of the Wow Exchange Co. Inc. (“ExchangeCo”) instead of shares of the Company’s common stock to which
they were otherwise entitled.
The shares of ExchangeCo are
exchangeable into shares of the Company’s common stock in accordance with their terms. Holders of the ExchangeCo shares are entitled
to defined voting rights (the “Voting Rights”) in the Company pursuant to a voting and exchange trust agreement (the “Voting
Agreement”) dated April 6, 2022 between the Company, ExchangeCo, 1329258 B.C. Ltd. and Computershare Trust Company of Canada (the
“Voting Trustee”). The Voting Trustee holds a single share of Series B Preferred Stock in the capital of the Company (the
“Special Voting Share”), which grants the Voting Trustee that number of votes at the meetings of the Company’s shareholders
as is equal to the number of shares of the Company’s common stock that at such time have not been delivered pursuant to the tender
of ExchangeCo shares. The Voting Trustee is required to exercise each vote attached to the Special Voting Share only as directed by the
relevant holder of the underlying Company shares of common stock and, in the absence of any instructions, will not exercise voting rights
with respect to the applicable shares.
As of September 30, 2022
and December 31, 2021, there were 0 shares of Series A Convertible Preferred Stock outstanding. As of September 30, 2022 and
December 31, 2021, there was 1 share of Series B Preferred Stock outstanding.
Treasury Stock
During the three months ended
September 30, 2022, 6,993 shares of common stock were withheld to cover withholding taxes owed by certain employees, all of which were
taken into treasury stock.
In addition, during the three
months ended September 30, 2022, the Company agreed to settle the lawsuit, Harold Chizick and Jennifer Chizick v. Genius Brands International,
Inc., ChizComm Ltd, pursuant to a settlement agreement (the “Settlement Agreement”) dated October 6, 2022 (the “Settlement
Date”). Pursuant to the Settlement Agreement, the Company agreed to purchase the 419,336 non-escrow shares of common stock (the
“Settlement Shares”) that the Chizicks held as of the Settlement Date. The Settlement Shares were purchased at the market
price of $0.68 per share, plus a premium of $1.31 per share, for a total purchase price of $834,479. As of September 30, 2022, the Company
recorded a liability within other current liabilities on the Company’s condensed consolidated balance sheet for the total purchase
price, and the Company recorded the cost based on the market price on the Settlement Date of $285,148 to additional paid in capital for
the share repurchase yet to be settled as of the balance sheet date. The Company recorded the amount in excess of cost of $549,330 as
a legal expense within general and administrative expenses on the Company’s condensed consolidated statements of comprehensive income
(loss).
Note 17: 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, which does not include shares that the Company may issue related to acquisitions.
During the nine months ended
September 30, 2022, the Company granted options to purchase 1,985,294
shares of common stock to employees with a fair market value of $1.3
million. The options vest evenly over three years and expire five to ten years from grant date.
In addition, as part of
the Wow Acquisition, the Company granted replacement options to purchase 1,733,100
shares of the Company’s common stock to Wow employees who would continue to provide services to the Company. 676,415
options to purchase common stock were also granted to certain departing Wow shareholders to replace their previously vested Wow
options. These options were cancelled after 30 days of the grant date if not exercised. The fair market value of $1.5
million was determined utilizing assumptions as of the replacement date of April 6, 2022 and were valued using the BSM option
pricing model. The number of shares granted was determined by using an exchange ratio calculated by a third party based on the
intrinsic value of the Wow common stock purchased as part of the acquisition and the value of the Company’s common stock as of
the agreement date. The vesting terms of the replacement options remained the same as the Wow options for which they were exchanged.
All shares that replaced previously vested Wow shares were included as part of the purchase price based on the calculated fair value
on the acquisition date of $1.2
million for 1,967,528
shares. The remaining options to vest with a fair value of $0.3
million will be expensed over the remaining requisite period. The options expire within 3 years from the replacement option
grant date or the original Wow option, whichever is greater.
The fair value of the options
granted during the nine months ended September 30, 2022 were calculated using the BSM option pricing model based on the following assumptions:
Schedule of assumptions used | |
| | |
| | |
| | |
| |
| |
3/17/2022
Options | | |
4/6/22
Replacement
Options | | |
6/23/22
Options | | |
7/11/22
Options | |
Exercise Price | |
$ | 0.90 | | |
| $0.51-$1.66 | | |
$ | 0.78 | | |
$ | 0.68 | |
Dividend Yield | |
| 0% | | |
| 0% | | |
| 0% | | |
| 0% | |
Volatility | |
| 104% | | |
| 114%-123% | | |
| 113% | | |
| 99.9% | |
Risk-free interest rate | |
| 0.41% | | |
| 2.67%-2.70% | | |
| 3.14% | | |
| 3.05% | |
Expected life of options | |
| 5.0 years | | |
| 3.0-4.3 years | | |
| 5.0 years | | |
| 5.0 years | |
The following table summarizes
the stock option activity during the nine months ended September 30, 2022:
Schedule of stock option activity | |
| | |
| | |
| |
| |
Number of Shares | | |
Weighted- Average Remaining Contractual Life | | |
Weighted- Average Exercise Price | |
Outstanding at December 31, 2021 | |
| 10,197,312 | | |
| 7.96 | | |
$ | 1.75 | |
Granted | |
| 4,394,809 | | |
| 4.74 | | |
$ | 1.06 | |
Exercised | |
| – | | |
| – | | |
$ | – | |
Forfeited/Cancelled | |
| (1,082,915 | ) | |
| 3.06 | | |
$ | 1.62 | |
Expired | |
| – | | |
| – | | |
$ | – | |
Outstanding at September 30, 2022 | |
| 13,509,206 | | |
| 6.74 | | |
$ | 1.51 | |
| |
| | | |
| | | |
| | |
Unvested at September 30, 2022 | |
| 4,361,195 | | |
| 6.61 | | |
$ | 1.33 | |
Vested and exercisable at September 30, 2022 | |
| 9,148,011 | | |
| 6.80 | | |
$ | 1.60 | |
During the three months ended
September 30, 2022 and 2021, the Company recognized $0.5 million and $0.9 million, respectively, in share-based compensation expense related
to stock options. During the nine months ended September 30, 2022 and 2021, the Company recognized $1.3 million and $2.8 million, respectively,
in share-based compensation expense related to stock options. The unrecognized share-based compensation expense related to stock options
at September 30, 2022 of $1.8 million will be recognized through the third quarter of 2025 based on the remaining vesting periods, assuming
the options are not cancelled or forfeited. As of September 30, 2022, there was $0 of aggregate intrinsic value related to outstanding
unvested options. The weighted average fair value per option granted during the three months ended September 30, 2022 was $0.64.
Note 18: Restricted Stock Units
During the nine months ended
September 30, 2022, the Company granted 1,086,667
fully vested RSUs to nonemployees with a fair market value of $1.0
million and 500,000 RSUs to an employee with a fair market value of $390,000
that vest evenly over three years. The RSUs expire five years from date of grant.
Per terms of the restricted
stock agreements, for certain employees the Company paid the employee’s related taxes associated with the employee’s vested
stock and decreased the freely tradable shares issued to the employee by a corresponding value, resulting in a share issuance net of taxes
to the employee. The value of the shares netted for employee taxes represents treasury stock repurchased. An aggregate of 4,426,064 shares
of common stock were issued as a result of vested RSUs, of which, 6,993 shares of common stock were withheld to pay employee taxes upon
such vesting. The Company recorded the cost of the withheld shares of $2,553 as treasury stock as of September 30, 2022.
The following table summarizes the Company’s
RSU activity during the nine months ended September 30, 2022:
Schedule of restricted stock units | |
| | |
| | |
| |
| |
Restricted Stock Units | | |
Weighted- Average Remaining Contractual Life | | |
Weighted- Average Grant Date Fair Value per Share | |
Unvested at December 31, 2021 | |
| 15,383,234 | | |
| 4.34 | | |
$ | 1.40 | |
Granted | |
| 1,886,667 | | |
| 4.53 | | |
$ | 0.88 | |
Vested | |
| (4,088,301 | ) | |
| 3.96 | | |
$ | 1.26 | |
Forfeited/Cancelled | |
| – | | |
| – | | |
$ | – | |
Unvested at September 30, 2022 | |
| 13,181,600 | | |
| 3.62 | | |
$ | 1.37 | |
During the three months ended
September 30, 2022 and 2021, the Company recognized $0.3 million and $4.6 million, respectively, in share-based compensation expense related
to RSUs. During the nine months ended September 30, 2022 and 2021, the Company recognized $8.7 million and $8.3 million, respectively,
in share-based compensation expense related to RSUs. The unrecognized share-based compensation expense related to RSUs at September 30,
2022 of $2.2 million will be recognized through the second quarter of 2025 based on the remaining vesting periods, assuming the underlying
grants are not cancelled or forfeited.
Note 19: Warrants
The Company had warrants outstanding
to purchase up to 44,843,429 shares and 45,511,965 of the Company’s common stock as of September 30, 2022 and December 31, 2021,
respectively with a total value of $74.1 million, a weighted average exercise price of $2.24 and a weighted average remaining term of
3.4 years as of September 30, 2022.
As of September 30, 2022,
892,857 liability classified derivative warrants to purchase shares of the Company’s common stock remained outstanding and are revalued
each reporting period. As of September 30, 2022, the warrants were revalued at $0.4 million, resulting in a decrease of $0.4 million in
liability as compared to December 31, 2021. The change in value is recorded within net other income (expense) on the condensed consolidated
statements of operations. The valuation inputs as of September 30, 2022 included an expected volatility of 99.97% and an annual interest
rate of 4.23%.
On August 11, 2022, 668,536
warrants expired.
Note 20: Income Taxes
The Company accounts for income
taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the recognition of deferred tax liabilities
and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial
statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than
not to be realized.
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 September
30, 2022 and 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 and will start filing in New York.
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.
The Company is subject to
US income taxes on a stand-alone basis. The Company, the Beacon Media Group (formerly ChizComm) and Wow file separate stand-alone tax
returns in each jurisdiction in which they operate. Beacon Communications, Wow and Ameba are corporations operating in Canada and are
subject to Canadian income taxes on its stand-alone taxable income.
Note 21: Commitment and Contingencies
The following is a schedule of future minimum contractual
obligations as of September 30, 2022 (in thousands):
Schedule of future minimum lease payments | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Thereafter | | |
Total | |
Operating Leases | |
$ | 435 | | |
$ | 1,629 | | |
$ | 1,692 | | |
$ | 1,741 | | |
$ | 1,758 | | |
$ | 6,040 | | |
$ | 13,295 | |
Finance Leases | |
| 460 | | |
| 1,499 | | |
| 456 | | |
| – | | |
| – | | |
| – | | |
| 2,415 | |
Employment Contracts | |
| 1,692 | | |
| 3,311 | | |
| 971 | | |
| 427 | | |
| – | | |
| – | | |
| 6,401 | |
Consulting Contracts | |
| 1,467 | | |
| 482 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 1,949 | |
Debt | |
| 64,470 | | |
| 19,057 | | |
| 24 | | |
| 24 | | |
| 18 | | |
| – | | |
| 83,593 | |
| |
$ | 68,524 | | |
$ | 25,978 | | |
$ | 3,143 | | |
$ | 2,192 | | |
$ | 1,776 | | |
$ | 6,040 | | |
$ | 107,653 | |
Leases
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 pays rent of $74,338 annually.
On March 2, 2021, the Company
entered into an operating lease for 4,765 square feet of general office space located at 1050 Wall Street West, Suite 665, Lyndhurst NJ,
07071 pursuant to an 89-month lease which commenced on October 1, 2021. The Company pays rent of $0.1 million annually subject to annual
escalations of 2.5%.
On April 6, 2022, as part
of the Wow Acquisition, the Company assumed an operating lease for 45,119 square feet of general office space located at 2025 West Broadway,
Suite 200, Vancouver, B.C., V6J 1Z6. The right of use asset and lease liability were revalued on the acquisition date based on the remaining
lease term of 117 months with payments of $81,769 per month, subject to escalations of 7% each of the third and fifth years. The lease
liability and right of use asset were determined to be $6.6 million, utilizing a discount rate of 11.5%. As part of the assumed office
lease, the Company also assumed a parking lease for 80 parking spaces. The parking lease was also revalued utilizing the 11.5% discount
rate. With a remaining lease term of 117 months, paying $6,091 per month, the ROU asset and lease liability were determined to be $0.5
million as of the acquisition date.
Also, as part of the Wow
Acquisition, the Company assumed various equipment finance leases, the majority of which are under Master Line of Credit Agreements
with certain banking institutions. As the rates were implicit in the leases, the Company determined that the carrying value of the
leases as of the acquisition date equaled the fair value. As determined by utilizing the implicit rate in the leases that ranged
from 3.7%- 14.5% with remaining lease terms of 10-33 months and monthly payments of
$1,346-$57,362 as of the Wow Acquisition date. The remaining finance lease obligations of $3.5
million as of the acquisition date was included as part of the Company’s existing current and noncurrent finance lease
liabilities on the Company’s condensed consolidated balance sheet upon consolidation.
As of September 30,
2022, the weighted-average lease term for the Company’s operating leases are 95
months and the weighted-average discount rate on the leases was 10.39%. As of September 30, 2022, the weighted-average lease term for the Company’s
finance leases are 27 months and the weighted-average discount rate on the leases was 5.11%.
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 and finance leases during the three months ended September 30, 2022 and 2021 were $0.9 million and $0.1 million, respectively.
Rental expenses incurred for operating and finance leases during the nine months ended September 30, 2022 and 2021 were $2.0 million and
$0.4 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.
Note 22: 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 nine months
ended September 30, 2022, Mr. Heyward earned and the Company paid $0.6
million in producer fees. During the nine months ended September 30, 2021, Mr. Heyward earned $0.2 million in producer fees.
Mr. Heyward has also earned $55,000
as part of his quarterly discretionary bonus in each of the quarters of 2022 and 2021.
Pursuant to his employment
agreement dated April 7, 2022, whereas Michael Hirsh was appointed as the CEO of Wow and its Frederator and Mainframe Studio subsidiaries,
a member of the Company’s Executive Committee and a member of the Company’s Board of Directors, is entitled to an Executive
Producer fee of $12,400 per one-half hour for each episode of any audio-visual production produced by Wow and any of its subsidiaries
during the term of his employment, up to 52 episodes per year. During the nine months ended September 30, 2022, Mr. Hirsh did not
yet earn any producer fees under the employment agreement.
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. Since execution of the agreement, the
Company has 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 $78,660
and $26,221 as of September 30, 2022 and December 31, 2021, respectively, recorded with the principal balance within Note Receivable
from Related Party on the Company’s condensed consolidated balance sheets. In addition, pursuant to its joint venture with POW!
and formation of the entity Stan Lee Universe, LLC, the Company included within Note Receivable from Related Party, the amount owed
to the Company related to the 50% non-controlling interest held by POW!.
During the three months ended
September 30, 2022, the Company and YFE completed an asset exchange transaction pursuant to a License and Distribution Agreement (the
“Agreement”) signed on June 27, 2022. The Agreement includes multiple elements, including (i) broadcast rights and (ii) distribution
rights. Stefan Piëch, a member of the Company’s Board of Directors since June 23, 2022, is the chief executive officer of YFE.
The Company currently has a 48.0% economic ownership interest in YFE and Mr. Piech has a 28.2% economic ownership interest in YFE. Pursuant
to the Agreement, the Company granted YFE the right to use certain of the Company’s programs to broadcast on YFE’s channels
in certain territories and in exchange, the Company shall be entitled to receive a flat fee of EUR 1,000,000 upon delivery of the programs.
In addition, YFE granted the Company the right to use certain of YFE’s programs to broadcast on the Company’s channels in
certain territories and in exchange, YFE shall be entitled to receive a flat fee of EUR 1,000,000 upon YFE’s delivery of the programs.
The rights between the parties were exchanged and invoices were generated and marked as paid without cash actually being exchanged between
the parties as it was agreed that the physical transfer of cash was unnecessary. The EUR 1,000,000 was treated as an asset exchange and
was not included as part of revenue generated by the Company. Each party granted to the other distribution rights to those same titles.
The distribution rights grant the Company the right to license the YFE titles to third parties within specific territories and YFE the
right to license the Company’s titles to third parties worldwide. Each party will earn a commission of 30% from gross receipts of
titles distributed and reimbursement of up to 5% of expenses incurred.
On July 19, 2022, the Company
entered into a Shareholder Loan Agreement with YFE in the amount of USD $1.3 million, accruing interest at the fixed annualized rate of
5%, with successive interest periods of three months due on the last day of each calendar quarter. The entire principal sum was required
to be remitted to YFE within 5 days of the effective date. The principal, plus interest must be repaid by no later than June 30, 2026.
The loan has accrued interest of USD $11,639 as of September 30, 2022 recorded with the principal balance within Note Receivable from
Related Party on the Company’s condensed consolidated balance sheet.
Note 23: 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.
The following table presents
the revenue and net earnings within the Company’s two operating segments for the three and nine months ended September 30, 2022
and 2021 (in thousands):
Segment information by revenues and net earnings | |
| | |
| | |
| | |
| |
| |
Three Months Ended | | |
Nine months Ended | |
| |
September 30,
2022 | | |
September 30,
2021 | | |
September 30,
2022 | | |
September 30,
2021 | |
Total Revenues: | |
| | | |
| | | |
| | | |
| | |
Content Production & Distribution | |
$ | 18,481 | | |
$ | 690 | | |
$ | 39,978 | | |
$ | 2,371 | |
Media Advisory & Advertising Services | |
| 1,198 | | |
| 1,182 | | |
| 3,266 | | |
| 2,907 | |
Total Revenue | |
$ | 19,679 | | |
$ | 1,872 | | |
$ | 43,244 | | |
$ | 5,278 | |
| |
| | | |
| | | |
| | | |
| | |
Net Loss: | |
| | | |
| | | |
| | | |
| | |
Content Production & Distribution | |
| (10,831 | ) | |
| (8,872 | ) | |
| (27,735 | ) | |
| (91,702 | ) |
Media Advisory & Advertising Services | |
| (387 | ) | |
| (381 | ) | |
| (1,353 | ) | |
| (1,205 | ) |
Total Net Operating Loss | |
$ | (11,218 | ) | |
$ | (9,253 | ) | |
$ | (29,088 | ) | |
$ | (92,907 | ) |
Geographic Information
The following table provides
information about disaggregated revenue by geographic area for the three and nine months ended September 30, 2022 and 2021 (in
thousands):
Schedule of segments by geographic area | |
| | |
| | |
| | |
| |
| |
Three Months Ended | | |
Nine months Ended | |
| |
September 30,
2022 | | |
September 30,
2021 | | |
September 30,
2022 | | |
September 30,
2021 | |
Total Revenues: | |
| | | |
| | | |
| | | |
| | |
United States | |
$ | 14,451 | | |
$ | 1,210 | | |
$ | 31,267 | | |
$ | 3,690 | |
Canada | |
| 4,690 | | |
| 662 | | |
| 10,464 | | |
| 1,588 | |
United Kingdom | |
| 538 | | |
| – | | |
| 1,513 | | |
| – | |
Total Revenue | |
$ | 19,679 | | |
$ | 1,872 | | |
$ | 43,244 | | |
$ | 5,278 | |
Note 24: Subsequent Events
On October 4, 2022, Andy Heyward
was paid $55,000 for his third quarter discretionary bonus.
On October 6, 2022, pursuant
to the Settlement Agreement, 419,336 shares of the Company’s common stock were purchased at the market price of $0.68 per share,
plus a premium of $1.31 per share, for a total purchase price of $834,479. The cost of $285,148 was recorded as treasury stock.
On October 10, 2022, the Company
received a notification of exercise from a holder of certain warrants with a put option exercisable on October 25, 2022. The put option
was exercisable for a fixed rate of $250,000 for the 500,000 warrants held. The Company paid the amount on October 10, 2022.
On October 21, 2022, the Company
issued 100,000 shares of common stock to a nonemployee for vested RSUs valued at $62,000.
On November 1, 2022, Andy
Heyward was paid $50,000 for producer fees.