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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission file number: 001-37950

 

 

 

GENIUS BRANDS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   20-4118216
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
190 N Canon Dr.    
Beverly Hills, California   90210
(Address of principal executive offices)   (Zip Code)

 

310-273-4222

(Registrant’s telephone number, including area code)

 

________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share GNUS The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 300,967,436 shares of common stock, par value $0.001 per share, were outstanding as of August 16, 2021.

 

 

 

   

 

 

GENIUS BRANDS INTERNATIONAL, INC.

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2021

 

Table of Contents

 

PART I - FINANCIAL INFORMATION 1
   
Item 1. Financial Statements. 1
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 31
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 38
   
Item 4. Controls and Procedures. 38
   
PART II - OTHER INFORMATION 39
   
Item 1. Legal Proceedings. 39
   
Item 1A. Risk Factors. 39
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 40
   
Item 3. Defaults Upon Senior Securities. 40
   
Item 4. Mine Safety Disclosures. 40
   
Item 5. Other Information. 40
   
Item 6. Exhibits. 40
   
SIGNATURES 41

 

 

 

 

 i 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Genius Brands International, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2021, and December 31, 2020

 

           
ASSETS  June 30, 2021   December 31, 2020 
   (unaudited)     
Current Assets:          
Cash and Cash Equivalents  $58,372,335   $100,456,324 
Investment in Marketable Securities (amortized cost of $80,902,119)   80,392,494     
Accounts Receivable, net   5,986,844    1,731,373 
Prepaid Expenses and Other Assets   7,769,963    6,378,392 
Total Current Assets   152,521,636    108,566,089 
           
Property and Equipment, net   333,898    95,828 
Right of Use Assets, net   2,299,230    1,972,364 
Film and Television Costs, net   14,972,446    11,828,494 
Lease Deposits   78,739    43,001 
Investment in ChizComm       300,798 
Investment in Stan Lee Universe, LLC   1,500,000    1,000,000 
Intangible Assets, net   9,518,769    28,694 
Goodwill   19,995,036    10,365,806 
Total Assets  $201,219,754   $134,201,074 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts Payable  $8,413,030   $785,526 
Accrued Expenses   151,345    408,459 
Participations Payable   3,823,742    3,160,016 
Deferred Revenue   775,996    684,129 
Payroll Protection Program       366,267 
Warrant Derivative Liability   1,513,883    1,197,068 
Lease Liability   219,858    146,099 
Due to Related Party   139,006    2,420 
Accrued Salaries and Wages   470,240    428,922 
Total Current Liabilities   15,507,100    7,178,906 
           
Long Term Liabilities:          
Deferred Revenue   3,181,941    3,748,248 
Lease Liability   2,499,633    2,052,530 
Production Facility, net   274,365    1,099,713 
Contingent Earn Out   7,210,000     
Disputed Trade Payable   925,000    925,000 
Total Liabilities   29,598,039    15,004,397 
           
Stockholders’ Equity          
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020        
Common Stock, $0.001 par value, 400,000,000 shares authorized 300,791,335 and 258,438,514 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively   300,792    258,439 
Additional Paid in Capital   724,924,857    588,500,680 
Accumulated Deficit   (553,200,246)   (469,557,324)
Accumulated Other Comprehensive Loss   (403,688)   (5,118)
Total Stockholders' Equity   171,621,715    119,196,677 
           
Total Liabilities and Stockholders’ Equity  $201,219,754   $134,201,074 

 

The accompanying notes are an integral part of these financial statements. 

 

 1 

 

 

Genius Brands International, Inc.

Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2021 and June 30, 2020

(unaudited)

 

                     
   Three Months Ended   Six Months Ended 
   June 30, 2021   June 30, 2020   June 30, 2021   June 30, 2020 
Revenues:                
Licensing & Royalties  $1,236,156   $162,759   $1,406,616   $366,124 
Media Advisory & Advertising Services   971,324        1,724,712     
Television & Home Entertainment   67,959    326,244    151,430    378,461 
Advertising Sales   66,102    70,357    122,564    149,014 
Product Sales   664    1,319    1,146    1,819 
Total Revenues   2,342,205    560,679    3,406,469    895,418 
                     
Operating Expenses:                    
Marketing and Sales   1,540,882    128,556    2,142,710    241,256 
Direct Operating Costs   1,269,301    440,015    1,517,767    667,521 
General and Administrative   7,106,151    2,368,834    14,039,979    4,131,416 
Total Operating Expenses   9,916,334    2,937,405    17,700,456    5,040,193 
                     
Loss from Operations   (7,574,129)   (2,376,726)   (14,293,988)   (4,144,775)
                     
Other Income (Expense):                    
Interest Income   84,701    28,342    131,885    28,342 
Loss on Foreign Exchange   (4,809)       (7,968)    
Warrant Revaluation Expense   119,062   (208,760,698)   (316,814)   (212,228,659)
Warrant Incentive Expense           (69,138,527)    
Conversion Option Revaluation Expense       (171,835,729)       (171,835,729)
Sub-Lease Income       117,415        238,484 
Interest Expense   (8,803)   (430,606)   (17,509)   (1,151,609)
Net Other Income (Expense)   190,151    (380,881,276)   (69,348,933   (384,949,171)
                     
Loss Before Income Tax Expense   (7,383,978)   (383,258,002)   (83,642,921)   (389,093,946)
                     
Income Tax Expense                
                     
Net Loss Applicable to Common Shareholders  $(7,383,978)  $(383,258,002)  $(83,642,921)  $(389,093,946)
                     
Net Loss per Common Share (Basic and Diluted)  $(0.02)  $(4.88)  $(0.28)  $(15.76)
                     
Weighted Average Shares Outstanding (Basic and Diluted)   300,646,819    78,503,414    293,969,462    24,690,154 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 2 

 

 

Genius Brands International, Inc.

Condensed Consolidated Statements of Comprehensive Loss

Three and Six Months Ended June 30, 2021 and June 30, 2020

(unaudited)

 

                     
   Three Months Ended   Six Months Ended 
   June 30, 2021   June 30, 2020   June 30, 2021   June 30, 2020 
Net Loss  $(7,383,978)  $(383,258,002)  $(83,642,921)  $(389,093,946)
Unrealized Loss on Marketable Securities   (509,625)       (509,625)    
Foreign Currency Translation Adjustment   111,330        111,055     
Comprehensive Net Loss  $(7,782,273)  $(383,258,002)  $(84,041,491)  $(389,093,946)

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 3 

 

 

Genius Brands International, Inc.

Consolidated Statements of Stockholders' Equity

Three and Six Months Ended June 30, 2021 and June 30, 2020

(unaudited)

 

                                                 
    Common Stock     Preferred Stock    

Additional

Paid-In

  Accumulated   Other Comprehensive        
    Shares     Amount     Shares     Amount     Capital     Deficit     Loss     Total  
Balance, December 31, 2020     258,438,514     $ 258,439           $     $ 588,500,680     $ (469,557,324 )   $ (5,118 )   $ 119,196,677  
                                                                 
Shares Issued for ChizComm acquisition     1,980,658       1,981                   3,525,046                   3,527,027  
Proceeds From Warrant Exchange, net     39,740,500       39,740                   57,224,916                   57,264,656  
Issuance of Common Stock for Services     161,986       162                   240,838                   241,000  
Share Based Compensation                             2,573,148                   2,573,148  
Warrant Incentive                             69,138,527                   69,138,527  
Foreign Currency Translation Adjustment                                         (275 )     (275 )
Net Loss                                   (76,258,943 )           (76,258,943 )
                                                                 
Balance, March 31, 2021     300,321,658     $ 300,322           $     $ 721,203,155     $ (545,816,267 )   $ (5,393 )   $ 175,681,817  
                                                                 
Issuance of Common Stock for Services     469,677       470                   727,530                   728,000  
Share Based Compensation                             2,994,172                   2,994,172  
Unrealized Loss on Marketable Securities                                         (509,625)       (509,625)  
Foreign Currency Translation Adjustment                                         111,330       111,330  
Net Loss                                   (7,383,978 )           (7,383,978 )
                                                                 
Balance, June 30, 2021     300,791,335     $ 300,792           $     $ 724,924,857     $ (553,200,246 )   $ (403,688 )   $ 171,621,715  
                                                                 
                                                                 
                                                                 
Balance, December 31, 2019   21,877,724   $21,878    1,097   $1   $75,117,076   $(66,047,135)  $(5,118)  $9,086,702 
                                         
Value of Preferred Stock Conversion   3,171,428    3,172    (667)   (1)   (3,171)            
Proceeds from Securities Purchase Agreement, Net   4,000,000    4,000            911,296            915,296 
Proceeds From Warrant Exchange, net   500,000    500            169,500            170,000 
Issuance of Common Stock for Services   43,077    43            27,957            28,000 
Share Based Compensation                   23,814            23,814 
Net Loss                       (5,835,944)       (5,835,944)
                                         
Balance, March 31, 2020   29,592,229   $29,593    430   $   $76,246,472   $(71,883,079)  $(5,118)  $4,387,868 
                                         
Proceeds from Securities Purchase Agreement, Net   47,500,000    47,500            43,792,875            43,840,375 
Issuance of Common Stock for Services   49,610    50            190,950            191,000 
Share Based Compensation                   328,497            328,497 
Value of Preferred Stock Conversion   1,571,430    1,571    (330)       (1,571)            
Derivative Liability Adjustment                   171,835,729            171,835,729 
Note Conversion   65,476,190    65,476            (120,662)           (55,186)
Warrant Exercise   74,666,711    74,667            8,159,358    (1,840,384)       6,393,641 
Warrant Revaluation                   219,034,621            219,034,621 
Warrants Issued for Services                   519,513            519,513 
Net Loss                       (383,258,002)       (383,258,002)
                                         
Balance, June 30, 2020   218,856,170   $218,857    100   $   $519,985,782   $(456,981,465)  $(5,118)  $63,218,056 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 4 

 

 

Genius Brands International, Inc.

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2021 and June 30, 2020

(unaudited)

 

           
   June 30, 2021   June 30, 2020 
Cash Flows from Operating Activities:          
Net Loss  $(83,642,921)  $(389,093,946)
           
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Amortization of Film and Television Costs   759,989    292,362 
Depreciation and Amortization Expense   392,861    266,417 
Accretion of Discount on Secured Convertible Notes       (7,288)
Bad Debt   (11,164)   99,792 
Stock Issued for Services   41,000    219,000 
Share Based Compensation Expense   5,567,320    352,311 
Warrant Revaluation Expense   316,814    212,228,659 
Lease Modification   (66,859)    
Conversion Option Revaluation Expense       171,835,729 
Debt Discount in Excess of the Principal       1,031,852 
Warrant Inducement Expense   69,138,527     
           
Decrease (Increase) in Operating Assets:          
Accounts Receivable, net   1,906,261    974,524 
Inventory, net       9,277 
Prepaid Expenses & Other Assets   (1,134,977)   (300,662)
Lease Deposits   (23,348)    
Film and Television Costs, net   (3,175,941)   (381,777)
           
Increase (Decrease) in Operating Liabilities:          
Accounts Payable   921,952    126,144 
Accrued Salaries & Wages   41,318    69,800 
Deferred Revenue   (474,440)   62,290 
Participations Payable   663,726    282,406 
Due to Related Party   136,586    (493,309)
Accrued Expenses   (329,479)   95,159 
Net Cash Used in Operating Activities   (8,972,775)   (2,331,260)
           
Cash Flows from Investing Activities:          
Investment in Stan Lee Universe, LLC   (500,000)    
Cash Payment for ChizComm, net of cash acquired   (7,788,877)    
Investment in Marketable Securities   (80,902,119)    
Investment in Intangible Assets, net   (5,000)   (500)
Investment in Property & Equipment   (120,210)    
Net Cash Used in Investing Activities   (89,316,206)   (500)
           
Cash Flows from Financing Activities:          
Payments On Lease Liability   131,951    (105,680)
Proceeds from Sale of Securities Purchase Agreement, net       44,755,671 
Proceeds From Warrant Exchange   57,264,656    5,819,319 
Proceeds from Senior Secured Convertible Notes, net       6,098,000 
(Repayment)/Proceeds from Payroll Protection Program   (366,267)   366,267 
Collection Of Investor Notes       3,600,000 
Repayment of Secured Convertible Notes       (2,866,664)
Note Conversion Costs       (55,186)
Repayment of Production Facility, net   (825,348)   (1,202,313)
Net Cash Provided by Financing Activities   56,204,992    56,409,414 
           
Net (Decrease)/Increase in Cash and Cash Equivalents   (42,083,989)   54,077,654 
Beginning Cash and Cash Equivalents   100,456,324    305,121 
Ending Cash and Cash Equivalents  $58,372,335   $54,382,775 

 

 

 

 5 

 

 

Supplemental Disclosures of Cash Flow Information:        
Cash Paid for Interest  $   $468,468 

 

Schedule of Non-Cash Financing and Investing Activities

          
Issuance of common stock for services  $969,000   $ 
Shares issued for ChizComm acquisition  $3,527,027   $ 
Liability for Acquisition Earnout Shares  $7,210,000   $ 
Senior Convertible notes were converted into 65,476,190 shares of Common Stock, 58,522,601 warrants were exercised on a cashless basis resulting in the issuance of 52,551,716 shares of Common Stock   $    $13,750,000 
Warrant Derivative Liability  $   $10,229,852 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 6 

 

 

Genius Brands International, Inc.

Notes to Condensed Financial Statements

June 30, 2021 (unaudited)

 

Note 1: Organization and Business

 

Organization and Nature of Business

 

Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates and licenses multimedia content. Led by experienced industry personnel, we distribute our content in all formats as well as a broad range of consumer products based on our characters. In the children's media sector, our portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment. New intellectual property titles include Stan Lee’s Superhero Kindergarten produced with Stan Lee’s Pow! Entertainment, and Oak Productions. Arnold Schwarzenegger lends his voice as the lead and is also an Executive Producer on the series. The show is being broadcast in the United States on the Company’s wholly-owned distribution outlet, Kartoon Channel!. Other newer series include, the preschool property Rainbow Rangers, which debuted in November 2018 on Nickelodeon and which was renewed for a second season and preschool property Llama Llama, which debuted on Netflix in January 2018 and was renewed by Netflix for a second season. The Company’s library titles include the award-winning Baby Genius, adventure comedy Thomas Edison's Secret Lab® and Warren Buffett’s Secret Millionaires Club, created with and starring iconic investor Warren Buffett, which is distributed across the Company’s Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and Zumo, as well as Connected TV. In July 2020, the Company entered into a binding term sheet with POW, Inc. (“POW!”) in which the Company agreed to form an entity with POW! to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called “Stan Lee Universe, LLC”. POW! and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021. This agreement enables the Company to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations, from which Genius Brands plans to develop and license multiple properties each year. The Company is in production on a new animated series starring Shaquille O’Neal called Shaq’s Garage.

 

In addition, the Company acts as licensing agent for Penguin Young Readers, a division of Penguin Random House LLC which owns or controls the underlying rights to Llama Llama, leveraging the Company’s existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.

 

The Company commenced operations in 2006, assuming all the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement between the Company and Genius Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “Baby Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under those titles. In 2011, the Company reincorporated in Nevada and changed its name to Genius Brands International, Inc. (the “Reincorporation”). In connection with the Reincorporation, the Company changed its trading symbol to “GNUS.”

 

In 2013, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limited liability company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member of A Squared (the “Parent Member”), and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“Acquisition Sub”). Upon closing of the transactions, A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company.

 

Liquidity

 

During the six months ended June 30, 2021, the Company’s cash and cash equivalents and marketable security positions increased by $38,308,505, net. Cash and cash equivalents were used to purchase marketable securities of $80,902,119 during the six months ended June 30, 2021. Cash in excess of immediate requirements is invested in accordance with the Company’s investment policy, primarily with a view to liquidity and capital preservation. Accordingly, available for sale securities, consisting principally of corporate and government debt securities stated at fair value, are also available as a source of liquidity.

 

 

 

 7 

 

 

Historically, the Company has incurred net losses. For the three months ended June 30, 2021 and June 30, 2020, the Company reported net losses of $7,383,978 and $383,258,002, respectively. For the six months ended June 30, 2021 and June 30, 2020, the Company reported net losses of $83,642,921 and $389,093,946, respectively. The Company reported net cash used in operating activities of $8,972,775 and $2,331,260 for the six months ended June 30, 2021 and June 30, 2020, respectively. As of June 30, 2021, the Company had an accumulated deficit of $553,200,246 and total stockholders’ equity of $171,621,715. As of June 30, 2021, the Company had current assets of $152,521,636, including cash and cash equivalents of $58,372,335, and current liabilities of $15,507,100. The Company had working capital of $137,014,536 as of June 30, 2021, compared to working capital of $101,387,183 as of December 31, 2020.

 

On January 28, 2021, the Company entered into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of the Company’s common stock at their original exercise price of $1.55 per share (the “Exercise”). The Company received approximately $61.6 million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent and received a cash fee of approximately $4.3 million. In consideration for the exercise of the Existing Warrants for cash, the exercising holders received new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”) at an exercise price of $2.37 per share and with an exercise period of five years from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends and other language typical for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock underlying the New Warrants is effective after six months), were exercisable immediately, and the Company was required to register the shares of common stock underlying the New Warrants for resale.

  

As more fully discussed in Note 3 on February 1, 2021, the Company through GBI Acquisition LLC, a New Jersey limited liability company, and 2811210 Ontario Inc., a company organized under the laws of the Province of Ontario, two wholly-owned subsidiaries of the Company, purchased the outstanding equity interests of ChizComm Ltd., a corporation organized in Canada and ChizComm USA Corp., a New Jersey corporation.

 

Note 2: Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Genius Brands International, Inc., its wholly-owned subsidiaries A Squared Entertainment LLC, Llama Productions LLC, Rainbow Rangers Productions LLC, Superhero Kindergarten LLC, ChizComm Beacon Media LLC, ChizComm Ltd., Stan Lee Universe LLC and Shaq’s Garage Productions LLC. All significant inter-company balances and transactions have been eliminated in consolidation.

 

The condensed consolidated financial statements have been prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 Business Combinations and ASC 810 Consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

 

 

 8 

 

 

Foreign Currency

 

The Company considers the U.S. dollar to be its functional currency for its United States based operations. The Company considers the Canadian dollar to be its functional currency for its Canada based operation. Accordingly, the financial information is translated from the Canadian dollar to the U.S. dollar for inclusion in the Company’s consolidated financial statements. Revenue and expenses are translated at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are included as a component of accumulated other comprehensive income (loss), net in stockholders’ equity.

 

Foreign exchange transaction gains and losses are included in other income (expense), net in the consolidated statements of operations.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments with initial maturities of three months or less to be cash equivalents. As of June 30, 2021, and December 31, 2020, the Company had cash and cash equivalents of $58,372,335 and $100,456,324, respectively.

 

Marketable Debt Securities

 

The Company purchases high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA/Aa2. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, the Company classifies its investments in marketable securities as “available-for-sale” and records these investments at fair value. The securities are available to support current operations and, accordingly, the Company classifies the investments as current assets without regard to their contractual maturity.

 

Unrealized gains or losses on available-for-sale securities for which the Company expects to fully recover the amortized cost basis are recognized in accumulated other comprehensive (loss) income, a component of stockholders’ equity. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized as a loss in the consolidated statements of operations.

 

Allowance for Doubtful Accounts

 

Accounts receivable are presented on the balance sheets net of estimated uncollectible amounts. The Company assesses its accounts receivable balances on a quarterly basis to determine collectability and records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses based on historical experience and future expectations. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company had an allowance for doubtful accounts of $54,840 as of June 30, 2021 and $43,676 as of December 31, 2020.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to seven years. Maintenance, repairs, and renewals, which neither materially add to the value of the assets nor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property and equipment are reflected in the condensed consolidated statement of operations.

 

Right of Use Leased Assets

 

Effective January 1, 2019, the Company adopted ASC 842, Leases, using the modified retrospective transition method applied at the effective date of the standard.

 

 

 

 9 

 

 

The Company determines at contract inception whether the arrangement is a lease based on its ability to control a physically distinct asset and determines the classification of the lease as either operating or finance. For all leases, the Company combines all components of the lease including related nonlease components as a single component. Operating leases are reflected as operating right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. The Company does not have any finance leases.

 

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company estimates the incremental borrowing rate to reflect the profile of collateralized borrowing over the expected term of the leases based on the information available at the later of the initial date of adoption, or the lease commencement date.

 

The operating lease ROU asset also includes any lease payments made prior to lease commencement date and excludes lease incentives. Lease terms may include options to extend or terminate the lease when the Company is reasonably certain that it will exercise the option. Lease expense is recognized on a straight-line basis over the lease term in the consolidated statement of operations. Lease incentives are recognized as a reduction to the lease expense on a straight-line basis over the underlying lease term.

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the acquisition method. In accordance with FASB ASC 350, Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. To test for goodwill impairment, the Company is required to estimate the fair market value of each of our reporting units, of which the Company has one. While the Company may use a variety of methods to estimate fair value for impairment testing, its primary method is discounted cash flows. The Company estimates future cash flows and allocations of certain assets using estimates for future growth rates and judgment regarding the applicable discount rates. Changes to judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill or indefinite lived intangible assets in future periods.

 

Other intangible assets have been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fair value. Annual amortization of these intangible assets is computed based on the straight-line method over the remaining economic life of the asset.

 

Debt and Attached Equity-Linked Instruments

 

The Company measures issued debt on an amortized cost basis, net of debt premium/discount and debt issuance costs amortized using the effective interest rate method or the straight-line method when the latter does not lead to materially different results.

 

The Company analyzes freestanding equity-linked instruments including warrants attached to debt to conclude whether the instrument meets the definition of the derivative and whether it is considered indexed to the Company’s own stock. If the instrument is not considered indexed to the Company’s stock, it is classified as an asset or liability recorded at fair value. If the instrument is considered indexed to the Company’s stock, the Company analyzes additional equity classification requirements per ASC 815-40, Contract’s in Entity’s Own Equity. When the requirements are met, the instrument is recorded as part of the Company’s equity, initially measured based on its relative fair value with no subsequent re-measurement. When the equity classification requirements are not met, the instrument is recorded as an asset or liability and is measured at fair value with subsequent changes in fair value recorded in earnings.

 

When required, the Company also considers the bifurcation guidance for embedded derivatives per FASB ASC 815-15, Embedded Derivatives.

 

 

 

 10 

 

 

Film and Television Costs

 

The Company capitalizes production costs for episodic series produced in accordance with FASB ASC 926-20, Entertainment-Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue based on the initial market revenue evidenced by a firm commitment over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firm commitment revenue in the period of delivery of the episodes.

 

The Company capitalizes production costs for films produced in accordance with FASB ASC 926-20, Entertainment - Films - Other Assets - Film Costs. Accordingly, production costs are capitalized at actual cost and then charged against revenue quarterly as a cost of production based on the relative fair value of the film(s) delivered and recognized as revenue. The Company evaluates its capitalized production costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.

 

Additionally, for both episodic series and films, from time to time, the Company develops additional content, improved animation and bonus songs/features for its existing content. After the initial release of the film or episodic series, the costs of significant improvement to existing products are capitalized while routine and periodic alterations to existing products are expensed as incurred

 

Revenue Recognition

 

The Company accounts for revenue according to standard FASB ASC 606, Revenue from Contracts with Customers. The Company has identified the following six material and distinct performance obligations:

 

  · License rights to exploit Functional Intellectual Property (Functional Intellectual Property or “functional IP” is defined as intellectual property that has significant standalone functionality, such as the ability be played or aired. Functional intellectual property derives a substantial portion of its utility from its significant standalone functionality.)

 

  · License rights to exploit Symbolic Intellectual Property (Symbolic Intellectual Property or “symbolic IP” is intellectual property that is not functional as it does not have significant standalone use and substantially all of the utility of symbolic IP is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities, such as the Company’s licensing and merchandising programs associated with its animated content.)

 

  · Options to renew or extend a contract at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.)

 

  · Options on future seasons of content at fixed terms. (While this performance obligation is not significant for the Company’s current contracts, it could become significant in the future.)

 

  · Fixed fee advertising revenue generated from the Genius Brands Network

 

  · Variable fee advertising revenue generated from the Genius Brands Network

   

As a result of the change, beginning January 1, 2018, the Company began recognizing revenue related to licensed rights to exploit functional IP in two ways. For minimum guarantees, the Company recognizes fixed revenue upon delivery of content and the start of the license period. For functional IP contracts with a variable component, the Company estimates revenue such that it is probable there will not be a material reversal of revenue in future periods. Revenue under these types of contracts was previously recognized when royalty statements were received. The Company began recognizing revenue related to licensed rights to exploit symbolic IP substantially similarly to functional IP. Although it has a different recognition pattern from functional IP, the valuation method is substantially the same, depending on the nature of the license.

 

 

 

 11 

 

 

The Company sells advertising on its App and OTT based “Kartoon Channel! in the form of either flat rate promotions or impressions served. For flat rate promotions with a fixed term, the Company recognizes revenue when all five revenue recognition criteria under FASB ASC 606 are met. For impressions served, the Company delivers a certain minimum number of impressions on the channel to the advertiser for which the advertiser pays a contractual CPM per impression. Impressions served are reported to the Company on a monthly basis, and revenue is reported in the month the impressions are served.

 

The Company provides media and advertising services to clients. Revenue is recognized in the month that the services are performed.

 

The Company also purchases advertising for clients on linear and across digital and streaming platforms and receives a commission on these purchases. Advertising commissions are recognized as revenue in the month the advertising is displayed.

 

The Company recognizes revenue related to product sales when the Company completes its performance obligation, which is when the goods are transferred to the buyer.

 

Direct Operating Costs

 

Direct operating costs include costs of the Company’s product sales, non-capitalizable film costs, film and television cost amortization expense, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which the Company is obligated to share net profits of the properties on which they have rendered services.

 

Share-Based Compensation

 

The Company issues stock-based awards to employees and non-employees that are generally in the form of stock options or restricted stock units (“RSUs”). Share-based compensation cost is recorded for all options and awards of non-vested stock based on the grant-date fair value of the award.

 

The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model, which requires management to make assumptions with respect to the fair value on the grant date. The assumptions are as follows: (i) the expected term assumption of the award is based on the Company’s historical exercise and post-vesting behavior (ii) the expected volatility assumption is based on historical and implied volatilities of the Company’s common stock calculated based on a period of time generally commensurate with the expected term of the award; (iii) the risk-free interest rates are based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent expected term; (iv) and the expected dividend yields of the Company’s stock are based on history and expectations of future dividends payable. In the case of RSUs the fair value is calculated based on the Company’s underlying common stock on the date of grant.

 

The Company recognizes compensation expense over the requisite service period ratably, using the graded attribution method, which is in-substance, recognizing multiple awards based on the vesting schedule. The Company has elected to account for forfeitures when they occur. The Company issues authorized shares available for issuance under the 2015 and 2020 Plans upon employees’ exercise of their stock options.

 

Earnings Per Share

 

Basic earnings (loss) per common share (“EPS”) is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding, plus the assumed exercise of all dilutive securities using the treasury stock or “as converted” method, as appropriate. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.

 

 

 

 12 

 

 

Income Taxes

 

Deferred income tax assets and liabilities are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred tax assets and records a valuation allowance that reduces the deferred tax assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized.

 

Concentration of Risk

 

The Company’s cash is maintained at three financial institutions and from time to time the balances for this account exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of June 30, 2021, the Company had three accounts with an uninsured balance of $56,601,018.

 

The Company’s investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. The investments are held and managed by a financial institution that follows the Company’s investment policy. The Company’s policy limits the amount of credit exposure to any one security issue or issuer and the Company believes no significant concentration of credit risk exists with respect to these investments.

 

For the three months ended June 30, 2021, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 11% of the total revenue. As of June 30, 2021, the Company had two customers whose accounts receivable exceeded 10% of total consolidated accounts receivable. Those customers accounted for 62% of accounts receivable. For the six months ended June 30, 2021, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 34% of the total revenue.

 

For the three months ended June 30, 2020, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 46% of the total revenue and 13% of accounts receivable. One other customer accounted for 56% of accounts receivable. For the six months ended June 30, 2020, the Company had one customer whose total revenue exceeded 10% of the total consolidated revenue. That customer accounted for 29% of the total revenue and 13% of accounts receivable. One other customer accounted for 56% of accounts receivable.

 

Fair value of financial instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

·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.

 

The carrying amounts of cash, receivables, accounts payable, and accrued liabilities approximate fair value due to the short-term maturity of the instruments. The carrying amount of the Production Loan Facility approximates fair value since the debt carries a variable interest rate that is tied to either the current Prime or LIBOR rates plus an applicable spread.

 

 

 

 13 

 

 

The fair values of the available-for-sale securities are generally based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level II securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States Government securities, foreign government securities, and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or a variety of valuation techniques, incorporating inputs that are currently observable in the markets for similar securities.

 

The following table summarizes the marketable securities measured at fair value by level within the fair value hierarchy as of June 30, 2021: 

            
   Level 1   Level 2   Total Fair Value 
Marketable investments:               
Corporate Bonds  $   $45,254,451   $45,254,451 
U.S. Treasury   5,964,342        5,964,342 
U.S. agency and government sponsored securities       5,294,277    5,294,277 
U.S. states and municipalities       11,150,277    11,150,277 
Asset-Backed       12,729,147    12,729,147 
Total  $5,964,342   $74,428,151   $80,392,494 

 

Fair values were determined for each individual security in the investment portfolio. The Company’s marketable securities are considered to be available-for-sale investments as defined under ASC 320, Investments – Debt and Equity Securities. There were no impairment charges recorded for the marketable securities. Refer to Note 4 for additional details. The fair values of the derivative warrants attached to the 2020 Convertible Notes were determined using the Black-Scholes-Merton model (Level 2) with standard valuation inputs. Refer to Note 18 for additional details. The fair value of the contingent earn-out liability was valued using Level 3 inputs. Refer to Note 3 for additional details.

 

The Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2021 or December 31, 2020.

 

Business Combinations

 

The Company allocates the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The valuation of acquired assets and assumed liabilities requires significant judgment and estimates, especially with respect to intangible assets. The valuation of intangible assets requires that the Company use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires significant estimates such as future expected revenue, expenses, capital expenditures and other costs, and discount rates. The Company estimates the fair value based upon assumptions management believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and any related restructuring costs are recognized separately from the business combination and are expensed as incurred.

 

 

 

 14 

 

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, such as the Company, delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Early adoption is permitted for interim and annual reporting periods. The Company is currently evaluating the effect that the ASU will have on its consolidated financial statements and related disclosures.

 

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update simplifies the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments. As part of the amendment, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. The FASB has eliminated the cash conversion and beneficial conversion feature models. The FASB has also modified accounting rules relating to application of the scope exception from derivative accounting. The amendments revise the guidance in ASC 815-40-25-10, to remove three out of seven conditions from the settlement guidance, referred to as additional equity classification requirements. Following the above amendments, more convertible debt instruments will be accounted for as a single liability measured at its amortized cost and more convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no features require bifurcation and recognition as derivatives. The amendments are effective for public business entities, excluding smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, including smaller reporting companies the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company has adopted ASU No. 2020-06 starting January 1, 2021. The impact to the Company’s consolidated financial position, results of operations and cash flows was not material as the Company does not have any outstanding convertible instruments.

  

Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries and are not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

 

Note 3: Acquisition of ChizComm Entities

 

On February 1, 2021, the Company through GBI Acquisition LLC, a New Jersey limited liability company, and 2811210 Ontario Inc., a company organized under the laws of the Province of Ontario, two wholly-owned subsidiaries of the Company, closed its previously announced acquisition pursuant to a Purchase and Sale Agreement (the “Purchase Agreement”) with (i) Harold Aaron Chizick, (ii) Jennifer Mara Chizick, (iii) Wishing Thumbelina Inc. (“Wishing Thumbelina”), and (iv) Harold Aaron Chizick and Jennifer Mara Chizick, the trustees of The Chizsix (2019) Family Trust for and on behalf of Harold Aaron Chizick, Jennifer Mara Chizick and Jay Mark Sonshine, trustees of The Chizsix (2019) Family Trust, (the “Trustees”) (each a “Seller” and, collectively, “Sellers”), pursuant to which the Company acquired from the Sellers all of the issued and outstanding equity interests of ChizComm Ltd., a corporation organized in Canada (“ChizComm Canada”), and ChizComm USA Corp., a New Jersey corporation (“ChizComm USA” and, together with ChizComm Canada, “ChizComm”) (the “Acquisition”).

 

 

 

 15 

 

 

The following table summarizes the fair value of the purchase price consideration paid to acquire ChizComm:

    
   Amount 
Cash consideration at closing  $8,500,000 
Equity consideration at closing   3,527,027 
Fair value of Earn-Out shares   7,210,000 
Total  $19,237,027 

 

Total consideration paid by the Company in the transaction at closing consisted of $8.5 million in cash and 1,980,658 shares (the “Closing Shares”) of the Company’s common stock with a value of approximately $3.5 million, both as subject to certain purchase price adjustments. Of the Closing Shares, 674,157 shares of common stock, with a value of approximately $1.2 million, were deposited into an escrow account to cover potential post-closing indemnification obligations of Sellers under the Purchase Agreement. Additionally, the Purchase Agreement also provides for the issuance of additional shares of common stock with an aggregate value of up to $8.0 million that may be issued to the Sellers if certain EBITDA and performance levels are achieved within a four-year period commencing on the date of the Purchase Agreement (Earn-Out).

 

The Acquisition was approved by the board of directors of each Company. Transaction costs incurred relating to this acquisition including legal and accounting totaled $539,806, which is included in general and administrative expenses on the statement of operations. The acquisition expands the Company’s revenue streams into media and advertising services.

 

The Company has determined that the Acquisition constitutes a business acquisition as defined by Accounting Standards Codification (“ASC”) 805, Business Combinations. Accordingly, the assets acquired and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s purchase price allocation was based on an evaluation of the appropriate fair values and represent managements best estimate based on available data. Fair values are determined based on the requirements of ASC 820, Fair Measurements and Disclosures (“ASC 820”).

 

The Earn-Out arrangement meets the liability classification criteria outlined in ASC 480, Distinguishing Liabilities from Equity, as it is not indexed to the Company’s own shares and is classified as a liability in the accompanying balance sheet. Liability classified contingent consideration is measured initially at the fair value on the acquisition date and is remeasured at each reporting period. Subsequent differences between the estimated fair value of the Earn-Out recorded at the acquisition date and the remeasurement date will be reflected as a charge or credit, as applicable, in the statement of operations. As of June 30, 2021, there were no material changes to the assumptions used on the acquisition date to value the contingent consideration, therefore no change in value was recorded.

 

The Company completed and finalized the purchase price allocation during the three months ended June 30, 2021. The Company recorded assets acquired and liabilities assumed at their respective fair values. The following table summarizes the final fair value of assets acquired and liabilities assumed: 

     
Cash  $711,123 
Accounts Receivable   6,150,919 
Prepaid Expenses   56,594 
Lease Deposits   12,390 
Fixed Assets   147,689 
Trade Name   3,430,000 
Customer Relationships   6,140,000 
Non-Compete Agreements   60,000 
Goodwill   9,607,027 
Accounts Payable and Accrued Expenses   (7,006,350)
Payroll Tax Liability   (72,365)
      
Total Consideration  $19,237,027 

 

 

 

 16 

 

 

The identifiable intangible assets acquired of $9,630,000 was composed of $3,430,000 for ChizComm’s trade name with an indefinite remaining economical life, $6,140,000 for ChizComm’s customer base with a remaining useful life of approximately 12 years, and $60,000 for ChizComm’s non-compete agreements with a remaining economic life of 3 years.

 

Valuation Methodology

 

Customer relationships for ChizComm were valued by performing a discounted cash flow analysis using the multiperiod excess earnings method. This method includes discounting the projected cash flows associated with existing customers based primarily upon customer turnover data over its expected life and considers the operating expenses and contributory asset charges associated with servicing such existing customers. Projected cash flows attributable to the customer relationships were discounted to their present value at a rate commensurate with the perceived risk. The useful lives of customer relationships are estimated based primarily upon the present value of cash flows attributable to the customer relationships.

 

Trademarks and trade names for ChizComm were valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.

 

Non-compete agreements were valued using a with and without method. Under this method, estimated prospective financial information (“PFI”) is calculated with the existence and ownership of an intangible asset and compared to the PFI in the absence of the ownership of the intangible asset. The after-tax differential PFI attributable to the intangible asset is then discounted to its present value.

 

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:

 

  · Historical performance including sales and profitability.

 

  · Business prospects and industry expectations.

 

  · Estimated economic life of asset.

 

  · Acquisition of new customers.

 

  · Attrition of existing customers.

 

The acquisition was treated for tax purposes as a nontaxable transaction and as such, the historical tax basis of the acquired assets, net operating loss, and other tax attributes of ChizComm will carryover. As a result, no new goodwill for tax purposes was created in connection with the acquisition as there is no step-up to the fair value of the underlying tax bases of the acquired net assets.

 

The following supplemental pro forma information summarize the Company’s results of operations for the current reporting period, as if the Company completed the acquisition as of the beginning of the annual reporting period.

 

Supplemental pro forma information as follows: 

                     
    Three Months Ended    Six Months Ended 
    June 30,
2021
    June 30,
2020
    June 30,
2021
    June 30,
2020
 
Total Revenues  $2,342,205   $1,293,956   $4,758,768   $6,963,704 
                     
Net Loss   (7,383,978)   (383,624,941)   (84,269,062)   (391,305,960)
                     
Net Loss per Common Share (Basic and Diluted)  $(0.02)  $(4.89)  $(0.29)  $(15.85)
                     
Weighted Average Shares Outstanding (Basic and Diluted)   300,646,819    78,503,414    293,969,462    24,690,154 

 

 

 

 

 

 17 
 

 

 

Note 4: Marketable Securities

 

The Company classifies and accounts for its marketable debt securities as available-for-sale and the securities are stated at fair value.

 

The investments in marketable securities had an adjusted cost basis of $80,902,119 and a market value of $80,392,494 as of June 30, 2021.

            
   Adjusted Cost   Unrealized Loss   Fair Value 
Corporate Bonds  $45,625,483   $(371,032)  $45,254,451 
U.S. Treasury   5,997,340    (32,998)   5,964,342 
U.S. agency and government sponsored securities   5,300,463    (6,186)   5,294,277 
U.S. states and municipalities   11,231,747    (81,470)   11,150,277 
Asset-Backed   12,747,086    (17,939)   12,729,147 
Total  $80,902,119   $(509,625)  $80,392,494 

 

The Company reported the unrealized losses, net of taxes, as a component of stockholders' equity. The decline in fair value is largely due to changes in interest rates and other market conditions. The Company has evaluated these securities and determined that no allowance is necessary based on the credit quality and the low risk of loss due to the security type. The fair value is expected to recover as the securities approach maturity.

 

The contractual maturities of the Company’s marketable investments as of June 30, 2021 were as follows: 

    
   Fair Value 
Due after 1 year through five years  $70,408,695 
Due after 5 years through 10 years   2,074,020 
Due after 10 years (a)   7,909,779 
Total  $80,392,494 

 

(a)Included within this category are municipal bonds with a fair value of $2,300,000 that the Company plans to sell within the next twelve months.

 

The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.

 

The Company did not sell any securities during the three or six months ended June 30, 2021, that resulted in gains or losses.

 

Note 5: Property and Equipment, Net

 

The Company has property and equipment as follows as of June 30, 2021 and December 31, 2020: 

        
  

June 30,

2021

  

December 31,

2020

 
Furniture and Equipment  $124,585   $19,419 
Computer Equipment   231,097    168,122 
Leasehold Improvements   43,485    14,182 
Software   115,622    68,152 
Production Equipment   23,017     
Property and Equipment, Gross   537,806    269,875 
Less Accumulated Depreciation   (203,908)   (174,047)
Property and Equipment, Net  $333,898   $95,828 

 

 

 

 18 

 

 

During the three months ended June 30, 2021 and 2020, the Company recorded depreciation expense of $15,265 and $13,537, respectively. During the six months ended June 30, 2021 and 2020, the Company recorded depreciation expense of $29,829 and $27,075, respectively.

 

Note 6: Right of Use Leased Asset

 

Right of use asset consisted of the following as of June 30, 2021 and December 31, 2020:

           
     

June 30,

2021

   

December 31,

2020

 
Office Lease Asset  $2,700,864   $2,245,093 
Printer Lease Asset   12,374    12,374 
Right Of Use Asset, Gross   2,713,238    2,257,467 
           
Office Lease Accumulated Amortization   (402,403)   (274,980)
Printer Lease Accumulated Amortization   (11,605)   (10,123)
Right Of Use Asset, Net  $2,299,230   $1,972,364 

 

During the three months ended June 30, 2021 and June 30, 2020, the Company recorded amortization expense of $82,668 and $109,458, respectively. During the six months ended June 30, 2021 and June 30, 2020, the Company recorded amortization expense of $128,905 and $217,704, respectively.

 

Note 7: Film and Television Costs, Net

 

As of June 30, 2021, the Company had net Film and Television Costs of $14,972,446, compared to $11,828,494 as of December 31, 2020. The increase primarily relates to the development costs related to Stan Lee’s Superhero Kindergarten offset by amortization of Rainbow Rangers Season 1 and Llama Llama Seasons 1 & 2.

 

During the three months ended June 30, 2021 and 2020, the Company recorded Film and Television Cost amortization expense of $553,562 and $185,748, respectively. During the six months ended June 30, 2021 and 2020, the Company recorded Film and Television Cost amortization expense of $658,369 and $292,363, respectively.

 

The following table highlights the activity in Film and Television Costs as of June 30, 2021, and December 31, 2020: 

    
   Total 
Film and Television Costs, Net as of December 31, 2019  $9,906,885 
Additions to Film and Television Costs   2,901,207 
Film Amortization Expense   (979,598)
Film and Television Costs, Net as of December 31, 2020   11,828,494 
Additions to Film and Television Costs   3,903,941 
Film Amortization Expense   (759,989)
Film and Television Costs, Net as of June 30, 2021  $14,972,446 

 

 

 

 19 

 

 

Note 8: Goodwill and Intangible Assets, Net

 

Goodwill

 

In 2013, the Company recognized $10,365,806 in goodwill, representing the excess of the fair value of the consideration for the merger with A Squared over net identifiable assets acquired. Pursuant to FASB ASC 350-20, Goodwill is not subject to amortization but is subject to annual review to determine if certain events warrant impairment to the goodwill asset.

 

As a result of the ChizComm acquisition, the consideration exceeded the fair value of the assets acquired by $9,607,027. Accordingly, this amount was recorded as goodwill at the time of the acquisition. Through June 30, 2021, the Company has not recognized any impairment on goodwill.

 

The following table represents details of our goodwill balance: 

    
   Total 
Goodwill as of December 31, 2020  $10,365,806 
Acquisition of ChizComm Entities   9,607,027 
Foreign Currency Translation Adjustment   22,203 
Goodwill as of June 30, 2021  $19,995,036 

 

Intangible Assets, Net

 

The Company had the following intangible assets as of June 30, 2021 and December 31, 2020: 

        
  

June 30,

2021

  

December 31,

2020

 
Trademarks (a)  $129,831   $129,831 
Trade Name (b)   3,430,000     
Customer Relations (c)   6,140,000     
Non-Compete (d)   60,000     
Other Intangible Assets (a)   304,028    299,028 
Intangible Assets, Gross   10,063,859    428,859 
Foreign Currency Translation Adjustment   89,202     
Less Accumulated Amortization   (634,292)   (400,165)
Intangible Assets, Net  $9,518,769   $28,694 

 

  (a) Pursuant to FASB ASC 350-30-35, the Company reviews these intangible assets periodically to determine if the value should be retired or impaired due to recent events. During the three months ended June 30, 2021 and June 30, 2020, the Company recognized, $8,276 and $10,847, respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets. During the six months ended June 30, 2021 and June 30, 2020, the Company recognized, $11,131 and $21,638, respectively, in amortization expense related to the Trademarks, Product Masters, and Other Intangible Assets. 
  (b) Amount represents fair value of the ChizComm and ChizComm Beacon Media Trade Names which have been determined to have an indefinite useful life.
  (c) Amount represents fair value of the ChizComm and ChizComm Beacon Media Customer Relationships with a useful life of 12 years. Amortization expense for the three and six months ended June 30, 2021 was $129,277 and $214,610, respectively.
  (d) Amount represents fair value of the Non-Compete agreements as part of the ChizComm acquisition. The Non-Compete agreements have a useful life of 3 years. Amortization expense for the three and six months ended June 30, 2021 was $5,053 and $8,386, respectively.

 

Expected future intangible asset amortization as of June 30, 2021 is as follows:

 

     
Fiscal Year:      
Remaining 2021   $ 276,655  
2022     552,963  
2023     549,018  
2024     524,678  
Thereafter     4,185,455  
Total   $ 6,088,769  

 

 

 20 

 

 

Note 9: Deferred Revenue

 

As of June 30, 2021 and December 31, 2020, the Company had total short term and long term deferred revenue of $3,957,937 and $4,432,377, respectively. Deferred revenue includes both (i) variable fee contracts with licensees and customers in which the Company had collected advances and minimum guarantees against future royalties and (ii) fixed fee contracts. The Company recognizes revenue related to these contracts when all revenue recognition criteria have been met. Included in the deferred revenue balance as of June 30, 2021 and December 31, 2020 is the $3,394,967 which is the remaining balance from the total $3,489,583 advance against future royalty that Sony paid to the Company for both the foreign and domestic distribution rights.

 

Note 10: Accrued Expenses, Salaries and Wages – Current

 

As of June 30, 2021 and December 31, 2020, the Company has the following current accrued liabilities:

        
  

June 30,

2021

  

December 31,

2020

 
Other Accrued Expenses (a)  $151,345   $408,459 
Accrued Salaries and Wages (b)   470,240    428,922 
Total Accrued Liabilities – Current  $621,585   $837,381 

 

  (a)  Primarily represents accrued interest and legal fees.
  (b)  Represents accrued salaries and wages and accrued vacation payable to employees as of June 30, 2021 and the year ended December 31, 2020.

 

Note 11: Senior Secured Convertible Notes

 

On March 11, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (each an “Investor” and collectively, the “Investors”) pursuant to which the Company agreed to sell and issue (1) Senior Secured Convertible Notes to the Investors in the aggregate principal amount of $13,750,000 (each, a “Note” and collectively, the “2020 Convertible Notes”) and $11,000,000 funding amount (reflecting an original issue discount of $2,750,000) and (2) warrants to purchase 65,476,190 shares of the Company’s common stock exercisable for a period of five years at an initial exercise price of $0.26 per share (each a “Warrant” and collectively, the “Warrants”), for consideration consisting of (i) a cash payment of $7,000,000, and (ii) full recourse cash secured promissory notes payable by the Investors to the Company (each, an “Investor Note” and collectively, the “Investor Notes”) in the principal amount of $4,000,000 (the “Investor Notes Principal”) (collectively, the “Financing”). Andy Heyward, the Company’s Chairman and Chief Executive Officer, participated as an Investor and invested $1,000,000 in connection with the Financing, all of which was paid at the closing and not pursuant to an Investor Note. The Special Equities Group, LLC, a division of Bradley Woods & Co. LTD, acted as placement agent and received warrants to purchase 6,547,619 shares at an exercise price of $0.26 per share (the “Placement Agent Warrants”).

 

The closing of the sale and issuance of the 2020 Convertible Notes, the Warrants and the Placement Agent Warrants occurred on March 17, 2020 (the “Closing Date”). The maturity date of the 2020 Convertible Notes was September 30, 2021 and the maturity date of the Investor Notes was March 11, 2060.

 

The Company held a stockholder meeting to approve the issuance of shares of common stock issuable under the 2020 Convertible Notes and pursuant to the terms of the SPA for the purposes of compliance with the stockholder approval rules of The Nasdaq Stock Market (“Stockholder Approval”).

 

 

 

 21 

 

 

In addition, pursuant to the terms of the SPA, the 2020 Convertible Notes and the Warrants, the Company agreed that the following will apply or become effective only following Stockholder Approval: (1) the conversion price of the 2020 Convertible Notes shall be reduced to $0.21 per share and may be further reduced to any amount and for any period of time deemed appropriate by the board of directors of the Company (the “Board of Directors”), (2) the exercise price of the Warrants shall be immediately reduced to $0.21 per share and may be further reduced to any amount and for any period of time deemed appropriate by the Board of Directors, (3) the 2020 Convertible Notes and Warrants shall each have full ratchet anti-dilution protection for subsequent financings (subject to certain exceptions), (4) existing warrant holders that are participating in the Financing (representing warrants to purchase an aggregate of 8,715,229 shares of Company common stock) will have their existing warrants’ exercise prices reduced to $0.21 and (5) the investors shall have a most favored nations right which provides that if the Company enters into a subsequent financing, then the Investors (together with their affiliates) at their sole discretion shall have the ability to exchange their 2020 Convertible Notes on a $1 for $1 basis into securities issued in the new transaction. Additionally, in the event that any warrants or options (or any similar security or right) issued in a subsequent financing include any terms more favorable to the holders thereof (less favorable to the Company) than the terms of the Warrants, the Warrants shall be automatically amended to include such more favorable terms. On March 16, 2020, the holders of the August 2018 Secured Convertible Notes were repaid in full including any outstanding interest. 

 

On May 15, 2020, the Company received the necessary Stockholder Approval in connection with the Nasdaq proposals described above. As a result, the Conversion Price of the 2020 Convertible Notes and the exercise price of the Warrants were each reduced to $0.21. In addition, existing warrant holders that participated in the Financing (representing warrants to purchase an aggregate of 9,172,463 shares of Common Stock) also had their existing warrants’ exercise prices reduced to $0.21.

 

On June 23, 2020, the Company received $3,600,000, net of expenses, from the payment of the Investor Notes Principal.

 

Between June 19 and June 23, 2020, the Convertible Notes were converted and repaid through the issuance of 65,476,190 shares of common stock.

 

Note 12: Production Loan Facility

 

On August 8, 2016, Llama Productions LLC (“Llama”) closed a $5,275,000 multiple draw-down, secured, non-recourse, non-revolving credit facility (the “Facility”) with Bank Leumi USA (the “Lender”) to produce its animated series Llama Llama, (the “Series”) which is configured as fifteen half-hour episodes comprised of thirty 11-minute programs that were delivered to Netflix in fall 2017. The Facility is secured by the license fees the Company will receive from Netflix for the delivery of the Series as well as the Company’s copyright in the Series. The Facility has a term of 40 months and has an interest rate of either Prime plus 1% or one, three, or six-month LIBOR plus 3.25%. As a condition of the loan agreement with Bank Leumi, the Company deposited $1,000,000 into a cash account to be used solely to produce the Series. Additionally, the Facility contains certain standard affirmative and negative non-financial covenants such as maintaining certain levels of production insurance and providing standard financial reports. As of June 30, 2020, the Company was in compliance with these covenants.

 

On September 28, 2018, Llama entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with the Lender, pursuant to which the Lender agreed to make a secured loan in an aggregate amount not to exceed $4,231,989 to Llama (the “Loan”). The proceeds of the Loan will be used to pay the majority of the expenses of producing, completing and delivering two 22-minute episodes and sixteen 11- minute episodes of the second season of the animated series Llama Llama to be initially exhibited on Netflix. To secure payment of the Loan, Llama has granted to the Lender a continuing security interest in and against, generally, all of its tangible and intangible assets, which includes all seasons of the Llama Llama animated series.

   

Under the Loan and Security Agreement, Llama can request revolving loan advances under (a) the Prime Rate Loan facility and (b) the LIBOR Loan facility, each as further described in the Loan and Security Agreement attached as an exhibit hereto. Prime Rate Loan advances shall bear interest, on the outstanding balance thereof, at a fluctuating per annum rate equal to 1.0% plus the Prime Rate (as such term is defined in the Loan and Security Agreement), provided that in no event shall the interest rate applicable to Prime Rate Loans be less than 4.0% per annum. LIBOR Loan advances shall bear interest, on the outstanding balance thereof, for the period commencing on the funding date and ending on the date which is one (1), three (3) or six (6) months thereafter, at a per annum rate equal to 3.25% plus the LIBOR determined for the applicable Interest Period (as such terms are defined in the Loan and Security Agreement), provided that in no event shall the interest rate applicable to LIBOR Loans be less than 3.25% per annum. The Maturity Date of the Prime Rate Loan facility and LIBOR Loan facility was June 30, 2021. Interest rates on advances under the Loan and Security Agreement averaged 4.25% as of June 30, 2020.

 

 

 

 22 

 

 

In addition, on September 28, 2018, Llama and the Lender entered into Amendment No. 2 to the Loan and Security Agreement, effective as of August 27, 2018, by and between Llama and the Lender (the “Amendment”). Pursuant to the Amendment, the original Loan and Security Agreement, dated as of August 8, 2016 and amended as of November 7, 2017 (the “Original Loan and Security Agreement”), was amended to (i) reduce the loan commitment thereunder to $1,768,010, and (ii) include the Llama Llama season two obligations under the Loan and Security Agreement as obligations under the Original Loan and Security Agreement.

 

As of June 30, 2021, the Company had gross outstanding borrowing under the facility of $274,365. As of December 31, 2020, the Company had gross outstanding borrowing under the facility of $1,099,713. The outstanding balance was repaid on July 14, 2021.

 

Note 13: Disputed Trade Payable

 

As part of the merger in 2013, the Company assumed certain liabilities from a previous member of A Squared which has claimed certain liabilities totaling $925,000. The Company disputes the basis for this liability. As of December 31, 2017, the Company believed that the statute of limitations applicable to the assertion of any legal claim relating to the collection of these liabilities has expired and therefore believes this liability is not owed.

 

Note 14: Payroll Protection Program Loan

 

On April 30, 2020, the Company received loan proceeds in the amount of $366,267 under the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and is administered through the Small Business Administration (“SBA”). The Company repaid the loan, including interest of $3,452 on April 28, 2021.

 

Note 15: Stockholders’ Equity

 

Common Stock

 

As of June 30, 2021, the total number of authorized shares of Common Stock was 400,000,000.

     

On March 22, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain long-standing investors (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “Registered Offering”), an aggregate of 4,000,000 shares of common stock at an offering price of $0.2568 per share for gross proceeds of approximately $1.0 million before deducting offering expenses. The Registered Offering closed on March 25, 2020.

 

As of June 30, 2021 and December 31, 2020, there were 300,791,335 and 258,438,514 shares of common stock outstanding, respectively.

 

On January 6, 2021, the Company issued 25,000 shares of the Company’s common stock valued at $1.40 per share for marketing services.

 

On January 21, 2021, the Company issued 136,986 shares of the Company’s common stock valued at $1.46 per share for marketing services.

 

On February 1, 2021, the Company issued 1,932,163 shares of the Company’s common stock valued at $1.78 per share as partial consideration for the ChizComm acquisition.

 

On February 4, 2021, the Company issued 48,495 shares of the Company’s common stock valued at $1.81 per share as partial consideration for the ChizComm acquisition.

 

On May 14, 2021, the Company issued 469,677 shares of the Company’s common stock valued at $1.55 per share for production services.

 

 

 

 23 

 

 

Preferred Stock

 

The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001 per share. The Board of Directors is authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time-to-time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our Board of Directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

 

There were no shares of preferred stock outstanding as of June 30, 2021 and December 31, 2020.

 

Note 16: Stock Options

 

On September 18, 2015, the Company adopted the Genius Brands International, Inc. 2015 Incentive Plan (the “2015 Plan”). The total number of shares that can be issued under the 2015 Plan is 2,167,667 shares.

 

On September 1, 2020, the Company adopted the Genius Brands International, Inc. 2020 Incentive Plan (the “2020 Plan”). On August 4, 2020, the Board of Directors voted to adopt the 2020 Plan. The shares available for issuance under the 2020 Plan was approved by stockholders on August 27, 2020. The 2020 Plan as approved by the stockholders increased the maximum number of shares available for issuance up to an aggregate of 32,167,667 shares of common stock.

 

During the three months ended March 31, 2021, the Company granted options to purchase 520,000 shares of common stock to employees and granted to each of the members of the Board of Directors 20,000 options to purchase shares of the Company’s common stock with an option price of $3.06 per share. The options vest on January 27, 2022 and have a five-year term.

 

During the three months ended June 30, 2021, the Company granted options to purchase 253,636 shares of common stock to employees that fully vest on January 24, 2024 and have a five-year term. The Company also granted 20,000 options to purchase shares of common stock to a new member of the Board of Directors that vest on June 24, 2022 and have a five-year term. The shares have an option price of $1.98 per share.

 

 

 

 24 

 

 

The table below outlines the weighted average assumptions for options granted during the three months ended March 31, 2021 and June 30, 2021:

        
   March 31, 2021   June 30, 2021 
Exercise Price  $3.06   $1.98 
Dividend Yield   0%    0% 
Volatility   143%    101% 
Risk-free interest rate   0.41%    0.90% 
Expected life of options   5.0 years    5.0 years 

 

The following table summarizes the changes in the Company’s stock option plan during the six months ended June 30, 2021: 

            
   Number of Shares   Weighted- Average Remaining Contractual Life   Weighted- Average Exercise Price 
Outstanding at December 31, 2020   9,116,176    1.69   $1.69 
Granted   933,636    4.70   $2.74 
Exercised          $ 
Forfeited   150,000    4.26   $2.82 
Expired          $ 
Outstanding at June 30, 2021   9,899,812    8.55   $1.76 
                
Unvested at June 30, 2021   3,280,303        $2.32 
Vested and exercisable June 30, 2021   6,619,509        $1.48 

 

During the three and six months ended June 30, 2021, the Company recognized $762,341 and $1,920,965, respectively in share-based compensation expense related to stock options. During the three and six months ended June 30, 2020, the Company recognized $328,497 and $352,311, respectively in share-based compensation expense. The unrecognized share-based compensation as of June 30, 2021 was $3,098,651 and will be recognized over a weighted average remaining contractual life of 7.62 years. The outstanding shares as of June 30, 2021 have an aggregated intrinsic value of $0. The weighted average fair values per option granted for the six months ended June 30, 2021 was determined to be $2.36.

 

Note 17: Restricted Stock Units

 

On December 7, 2020, the Company granted 9,075,000 shares of Restricted Stock Units (RSU’s) with a fair market value of $12,614,250 to certain employees and officers. Of such RSU’s, 7,500,000 were issued to Andy Heyward, the Company’s Chief Executive Officer (“CEO”) and were to vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued employment (the “service-based awards”). The CEO also received an additional 7,500,000 RSU’s that vested in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain performance goals (the “performance-based awards”), which have not been established at the time the CEO and the Company entered into the arrangement, and subject to his continued employment. As the performance conditions have not been established for the performance-based awards, a grant date was not yet established.

 

On February 1, 2021, the Company issued 53,763 shares of RSU’s with a fair market value of $74,193.

 

On June 23, 2021, the Compensation Committee of the Board of Directors amended the service-based awards granted to the CEO, such that 3,750,000 of such RSUs shall continue to vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, subject to his continued employment and the remaining 3,750,000 RSU’s shall be modified to vest based on performance or market conditions. The previously issued 7,500,000 performance-based awards, along with the 3,750,000 modified service-based awards, shall vest as follows:  (i) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.00 per share or the Company’s market capitalization equals or exceeds $903,000,000 for 20 consecutive trading days; (ii) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.50 per share or the Company’s market capitalization equals or exceeds $1,053,500,000 for 20 consecutive trading days, and (iii) 3,750,000 RSUs vest when the Company’s common stock closing sale price equals or exceeds $3.75 per share or the Company’s market capitalization equals or exceeds $1,128,750,000 for 20 consecutive trading days (the “market conditions”). In addition to the stock price and market capitalization vesting conditions set forth above, such 11,250,000 RSUs may also vest in four equal installments on the first, second, third and fourth anniversaries of December 7, 2020, based on achievement of certain operating performance-based vesting conditions established by the Compensation Committee on June 23, 2021 and subject to his continued employment, adjusted pro-ratably for vesting pursuant to the market conditions. As a result of these modifications, the RSUs subject to the market conditions were valued at $15,649,700 with a derived service period of 12 months, using a Monte-Carlo simulation model. This resulted in a $221,665 increase in stock-based compensation for the three months ended June 30, 2021.

 

On June 24, 2021, the Company issued 213,636 shares of RSU’s with a fair market value of $422,999.

  

 

 

 25 

 

 

The following table summarizes the Company’s restricted stock issuance during the six months ended December 31, 2020:

        
   Restricted Stock Units   Weighted-
Average
Grant Date Fair Value
Per Share
 
Unvested at December 31, 2020   9,075,000   $1.39 
Granted   267,399   $1.86 
Vested      $ 
Forfeited      $ 
Unvested at June 30, 2021   9,342,399   $1.40 

 

During the three and six months ended June 30, 2021, the Company recognized $2,231,833 and $3,646,356, respectively in share-based compensation expense related to RSU awards. The unvested share-based compensation as of June 30, 2021 is $19,334,519 which will be recognized through the fourth quarter of 2024 assuming the underlying grants are not cancelled or forfeited.

 

Note 18: Warrants

 

The Company has warrants outstanding to purchase up to 45,511,965 shares as of June 30, 2021 and December 31, 2020.

 

On January 22, 2020, the Company entered into a private transaction (the “Private Transaction”) pursuant to a Warrant Exercise Agreement (the “Agreement”) with the holder of the Company’s existing warrants (the “Original Warrants”). The Original Warrants were originally issued on October 3, 2017, to purchase an aggregate of 500,000 shares of common stock, at an exercise price of $3.90 per share and were to expire in October 2022.

 

Pursuant to the Agreement, the holder of the Original Warrants and the Company agreed that such Original Warrant holder would exercise its Original Warrants in full and the Company would amend the Original Warrants to reduce the exercise price thereof to $0.34 (the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the Agreement) (the “Amended Exercise Price”). The Company received approximately $170,000 from the exercise of the Original Warrants.

 

The placement agent received warrants to purchase 50,000 shares at an exercise price of $0.34 per share.

 

Pursuant to the SPA described in Note 11, the Company issued to the note holders warrants to purchase 65,476,191 shares of common stock, exercisable for a period of five years at an initial exercise price of $0.26 per share.

 

 

 

 26 

 

 

The placement agent received warrants to purchase 6,547,619 shares at an exercise price of $0.26 per share. The fair values of derivative warrants attached to 2020 Convertible Notes and Notes conversion option were determined using the Black-Scholes-Merton model with standard valuation inputs. The valuation inputs as of March 17, 2020 included expected volatility of 89%, and annual interest rate of 0.66%. The warrants were determined to be liability classified and adjusted to fair value as of each reporting period. As of June 30, 2021, warrants to purchase 892,857 shares were outstanding and re-valued at $1,513,883, resulting in a net increase in liability of $316,814, as compared to December 31, 2020. The change in value is recorded in the Warrant Revaluation Expense line item within Net Other Income (Expense) on the consolidated statement of operations. The valuation inputs as of June 30, 2021 included expected volatility of 103%, and annual interest rate of 0.61%.

 

On January 28, 2021, the Company entered into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of the Company’s common stock at their original exercise price of $1.55 per share (the “Exercise”). The Company received approximately $61.6 million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent and received a cash fee of $4,286,844 million. In consideration for the exercise of the Existing Warrants for cash, the exercising holders will receive new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”) at an exercise price of $2.37 per share and with an exercise period of five years from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends and other language typical for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock underlying the New Warrants is effective after six months), will be exercisable immediately, and will have a term of exercise of five years, The Company registered the resale of the shares of common stock issuable upon exercise of the New Warrants. The valuation inputs at January 28, 2021 included expected volatility of 144%, and annual interest rate of 0.42%. The fair value of these warrants was determined to be $69,138,527 using the Black-Scholes option pricing model, which was recorded as a warrant incentive expense and included in the calculation of the Net Loss per Common Share, based on the following assumptions: 

     
Exercise Price  $2.37 
Dividend Yield   0% 
Volatility   144% 
Risk-free interest rate   0.42% 
Expected life of options   5.0 years 

 

The following table summarizes the changes in the Company’s outstanding warrants during the six months ended June 30, 2021: 

                
   Warrants Outstanding Number of Shares  

Exercise Prices

Per Share

   Weighted Average Remaining Contractual Life   Weighted Average Exercise Price Per Share 
Balance at December 31, 2020   45,511,965   $0.21 - 5.30    5.19 years   $1.55 
Warrants Granted   39,740,500   $2.37    4.58 years   $2.37 
Warrants Exercised   39,740,500   $1.55    4.76 years   $1.55 
Warrants Expired      $       $ 
Balance at June 30, 2021   45,511,965   $0.21 - 5.30    4.91 years    $2.27 
                     
Exercisable December 31, 2020   7,176,620   $0.76 - 6.00    3.77 years   $2.52 
Exercisable June 30, 2021   44,511,965   $0.21 - 5.30    4.77 years   $2.29 

 

 

 

 27 

 

 

Note 19: Income Taxes

 

The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740 Income Taxes (“Topic 740”), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.

 

Topic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.

 

The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of June 30, 2021, and December 31, 2020, the Company had no accrued interest or penalties related to uncertain tax positions.

 

The Company files income tax returns in the U.S. federal jurisdiction and in the state of California and Massachusetts, and New Jersey. The Company is currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.

 

Genius Brands International, Inc. is subject to US income taxes on a stand-alone basis. Genius Brands International, Inc. and ChizComm Canada file separate stand-alone tax returns in each jurisdiction in which they operate. ChizComm Canada is a corporation operating in Canada and is subject to Canadian income taxes on its stand-alone taxable income.

 

Note 20: Commitment and Contingencies

 

Effective January 1, 2019, the Company adopted ASC 842, Leases, using the modified retrospective transition method applied at the effective date of the standard.

 

As of January 1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.

  

As of June 30, 2021, weighted-average lease term for operating leases equals to 72.72 months. Weighted-average discount rate equals to 9.86%.

 

On February 6, 2018, the Company entered into an operating lease for 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to a 91-month lease that commenced on May 25, 2018. The Company pays rent of $364,130 annually, subject to annual escalations of 3.5%.

 

Effective January 21, 2019, the Company entered into a sublease for the 6,969 square feet of general office space located at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to an 83-month sublease that commenced on February 4, 2019. The subtenant paid the Company rent of $422,321 annually, subject to annual escalations of 3.5%. On September 11, 2020, the Company entered into a Surrender Agreement with the landlord which terminated the 131 South Rodeo Dr. lease agreement. As a result, the Company recorded a decrease in the Right of Use asset, accumulated amortization, and the lease liability of $2,142,863, $465,124 and $1,760,302 respectively. The termination of the lease resulted in a loss of $338,586. Simultaneously, as part of the Surrender Agreement the Sublease was terminated.

 

On January 30, 2019, the Company entered into an operating lease for 5,838 square feet of general office space at 190 N. Canon Drive, Suite 400, Beverly Hills, CA 90210 pursuant to a 96-month lease that commenced on August 1, 2019. The Company pays rent of $392,316 annually, subject to annual escalations of 3.5%.

 

On February 1, 2021, as part of the Acquisition, the Company assumed an operating lease that was entered into on May 19, 2019 for 6,845 square feet of general office space located at 245 Fairview Mall Drive, Suites 202 and 301, Toronto, Ontario M2J 4T1 pursuant to a 84 month lease which commenced on October 1, 2019. The Company pays rent of $95,830 annually, subject to annual escalations 5% to 7%.

 

 

 

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On February 1, 2021, as part of the Acquisition, the Company assumed an operating lease that entered into on April 30, 2019 for 3,379 square feet of general office space located at One International Boulevard, 11th Floor, Mahawh, New Jersey pursuant to a 24-month lease which commenced on May 1, 2019. The Company pays rent of $74,338 annually.

 

On March 2, 2021, the Company entered into an operating lease for 4,765 square feet of general office space located at 1050 Wall Street West, Suite 665, Lyndhurst NJ, 07071 pursuant to an 89-month lease which is expected to commence on August 1, 2021. The Company will pay $114,360 annually subject to annual escalations of 2.5%.

 

In addition, the Company has contractual commitments for employment agreements of certain employees.

 

Rental expenses incurred for operating leases during the three months ended June 30, 2021 and June 30, 2020 were $131,403 and $207,839, respectively. Rental expenses incurred for operating leases during the six months ended June 30, 2021 and June 30, 2020 were $243,746 and $415,678, respectively. During the six months ended June 30, 2021, the Company did not receive sub-lease income. During the six months ended June 30, 2020, the Company received sub-lease income of $238,484.

 

The following is a schedule of future minimum contractual obligations as of June 30, 2021, under the Company’s operating leases and employment agreements: 

                            
   2021   2022   2023   2024   2025   Thereafter   Total 
Operating Leases  $227,931   $572,896   $556,152   $578,180   $596,844   $896,766   $3,428,769 
Employment Contracts   1,544,508    2,932,027    2,236,788    1,105,566    506,583        8,325,472 
Consulting Contracts   150,000    187,500                    337,500 
   $1,922,439   $3,692,423   $2,792,940   $1,683,746   $1,103,427   $896,766   $12,091,741 

 

Note 21: Related Party Transactions

 

Pursuant to his employment agreements dated November 16, 2018 and November 16, 2020, Mr. Heyward is entitled to an Executive Producer fee of $12,500 per half hour episode for each episode he provides services as an executive producer. The third identified series under this employment agreement is Stan Lee’s Superhero Kindergarten. During the six months ended June 30, 2021, 11 half hours were delivered. Accordingly, Mr. Heyward is owed $137,500 which is included in Due to Related Party on the Company’s condensed consolidated Balance Sheet.

 

On July 21, 2020, the Company entered into a merchandising and licensing agreement with Andy Heyward Animation Art (“AHAA”), whose principal is Andy Heyward, the Company’s Chief Executive Officer. The Company entered into a customary merchandise license agreement with AHAA for the use of characters and logos related to Warren Buffett’s Secret Millionaires Club and Stan Lee’s Mighty 7 in connection with certain products to be sold by AHAA. The terms and conditions of such license are customary within the industry, and the Company earns an arm-length industry standard royalty on all sales made by AHAA utilizing the licensed content. During the three and six months ended June 30, 2021, the Company earned $0 in royalties from this agreement.

 

As of June 30, 2021, Mr. Heyward is owed $1,506 for reimbursable expenses which are included in Due to Related Party on the condensed consolidated Balance Sheet.

 

 

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Note 22: Segment Reporting

 

The Company has determined that it operates in two operating segments, the production and distribution of children’s content and to provide media and advertising services.

 

The following table presents sales and earnings within our two operating segments.

           
   Content Production & Distribution  Media & Advertising Services   Total 
Total Revenue  $1,681,756   $1,724,712   $3,406,469 
% of segment revenue   49%    51%    100% 
                
Total Assets  $193,873,259   $7,346,495   $201,219,754 
% of segment assets   96%    4%    100% 

 

Note 23: Subsequent Events

 

On July 20, 2021, Mr. Heyward was paid a bonus of $55,000.

 

On July 20, 2021, the Company issued 176,101 shares of the Company’s common stock valued at $1.55 per share to a production company for services.

 

On August 5, 2021, Mr. Heyward was paid $137,500 for accrued producer fees.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the three and six months ended June 30, 2021 and 2020. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on March 31, 2021 and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire.

 

Overview

 

The management’s discussion and analysis is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

 

Our Business

 

Genius Brands International, Inc. (“we,” “us,” “our,” or the “Company”) is a global content and brand management company that creates and licenses multimedia content. Led by experienced industry personnel, we distribute our content in all formats as well as a broad range of consumer products based on our characters. In the children's media sector, our portfolio features “content with a purpose” for toddlers to tweens, which provides enrichment as well as entertainment. New intellectual property titles include Stan Lee’s Superhero Kindergarten produced with Stan Lee’s Pow! Entertainment, and Oak Productions. Arnold Schwarzenegger lends his voice as the lead and is also an Executive Producer on the series. The show is being broadcast in the United States on our wholly-owned distribution outlet, Kartoon Channel!. Other newer series include, the preschool property Rainbow Rangers, which debuted in November 2018 on Nickelodeon and which was renewed for a second season and preschool property Llama Llama, which debuted on Netflix in January 2018 and was renewed by Netflix for a second season. Our library titles include the award-winning Baby Genius, adventure comedy Thomas Edison's Secret Lab® and Warren Buffett’s Secret Millionaires Club, created with and starring iconic investor Warren Buffett, which is distributed across our Genius Brands Network on Comcast’s Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon Prime, Cox, Dish, Sling and Zumo, as well as Connected TV. In July 2020, we entered into a binding term sheet with POW, Inc. (“POW!”) in which we agreed to form an entity with POW! to exploit certain rights in intellectual property created by Stan Lee, as well as the name and likeness of Stan Lee. The entity is called “Stan Lee Universe, LLC”. POW! and the Company executed an Operating Agreement for the joint venture, effective as of June 1, 2021. This agreement enables us to assume the worldwide rights, in perpetuity, to the name, physical likeness, physical signature, live-action and animated motion picture, television, online, digital, publishing, comic book, merchandising and licensing rights to Stan Lee and over 100 original Stan Lee creations, from which Genius Brands plans to develop and license multiple properties each year. We are also in production on a new animated series starring Shaquille O’Neal called Shaq’s Garage.

 

In addition, we act as licensing agent for Penguin Young Readers, a division of Penguin Random House LLC which owns or controls the underlying rights to Llama Llama, leveraging our existing licensing infrastructure to expand this brand into new product categories, new retailers, and new territories.

 

 

 

 

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Environmental, Social and Governance Strategy

 

We are attempting to shape culture, social attitudes and societal outcomes with our animated content and consumer products that touch the lives of young people and their families. As a global content company that reaches millions of people, we aim to be a positive force in the world.

 

We are committed to advancing and strengthening our approach to environmental, social and governance (“ESG”) topics to help serve our partners, audiences, employees and shareholders — and to enhance our success as a business.

 

We are committed to responsible, ethical and inclusionary business practices as outlined below:

 

Human Capital Management

 

We aim to build a culture that attracts and retains the best employees and a workplace where everyone feels welcome, safe and inspired. Our human capital management strategy is intended to address the following areas:

 

A Culture of Diversity, Equity and Inclusion

 

We seek to foster a culture of diversity, equity and inclusion through a range of partnerships, collaborations, programs and initiatives, some of which are described below.

 

We strive to be an inclusionary workplace because we believe that it strengthens our business.

 

·In 2021, we created the role of Chief Diversity Officer. That role is responsible for both helping meet our hiring goals and reviewing the content we create.
·Our board of directors is diverse: 33.3% female and with representation from people of color and the LBGTQ community.
·Our diverse workforce is 59% female.

 

Preventing Harassment and Discrimination

 

We have enacted policies addressing harassment, discrimination and other behaviors that could create a hostile workplace, some of which are described below.

 

·We make available to our employees, training on preventing sexual harassment, discrimination and retaliation.
·We expect employees to report any violations of Company policies, including sexual harassment, they witness. Among other ways, employees can report incidents of harassment using our anonymous complaint and reporting hotline.

 

Social Impact and Corporate Social Responsibility

 

We believe that the content we produce, primarily directed at young people and their families, both reflects and influences how our young viewers perceive and understand important issues. We endeavor to earn our viewers’ trust through a variety of practices, and we are focused on using our platforms to create positive social impacts.

 

By way of just a few examples: in our show Rainbow Rangers, a diverse cast of girls works to save animals and protect the environment, while demonstrating the power of teamwork; in our Llama Llama series, we teach kindness and inclusion, and feature a differently abled character, which we have been told is appreciated by moms and kids who deal with physical challenges. In the earliest days of the COVID-19 pandemic, we spread public service messages to keep our audiences safe and informed with animated shorts featuring the iconic voices from our series including Warren Buffett from The Secret Millionaires Club and Jennifer Garner, the voice of Mama Llama from the Llama Llama series.

 

Our mission statement says it all: “Content with a Purpose.” Social justice, caring about the environment and modeling appropriate and inclusionary behavior for kids has been part of our company for many years and we are constantly seeking ways to improve on what we have already been doing.

 

 

 

 

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Recent Financings

 

On January 28, 2021, we entered into letter agreements (the “Letter Agreements”) with certain existing institutional and accredited investors to exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 39,740,500 shares of our common stock at their original exercise price of $1.55 per share (the “Exercise”). We received approximately $61.6 million in gross proceeds. The Special Equities Group, a division of Bradley Woods & Co. Ltd., acted as warrant solicitation agent and received a cash fee of approximately $4.3 million. In consideration for the exercise of the Existing Warrants for cash, the exercising holders received new unregistered warrants to purchase up to an aggregate of 39,740,500 shares of common stock (the “New Warrants”) at an exercise price of $2.37 per share and with an exercise period of five years from the initial issuance date. Pursuant to the Letter Agreements, the New Warrants are substantially in the form of the Existing Warrants (except for customary legends and other language typical for an unregistered warrant, including the ability for the holder of the New Warrant to make a cashless exercise if no resale registration statement covering the common stock underlying the New Warrants is effective after six months), were exercisable immediately, and we were required to register the shares of common stock underlying the New Warrants for resale.

 

Coronavirus (COVID-19)

 

With respect to the ongoing and evolving coronavirus (“COVID-19”) outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, COVID-19 has caused substantial disruption in international and U.S. economies and markets. COVID-19 has had an adverse impact on the entertainment industry and, if repercussions of COVID-19 are prolonged, could have a significant adverse impact on our business, which could be material. The majority of our employees have been working remotely from home, with only a few individuals monitoring the office as needed. A safe return-to-work plan has been developed. We had announced a return to office date of September 7, 2021, for fully vaccinated employees. However, due to a recent surge in COVID-19 cases and the increased transmissibility ofCOVID-19 variants, there may be a further delay in returning, in-person, to the office. We have not experienced any disruption in our supply chain, nor have we experienced any negative impact from our animation production partners. However, shipping logistical issues and increased expenses due to COVID-19 may impact our consumer products partners and our projected advertising revenues. With regard to content distribution, we have observed demand increases for streaming entertainment services in 2021. If there is a further resurgence and the COVID-19 outbreak is prolonged, we may see a negative impact on our revenues.

 

Our management cannot at this point estimate the impact of COVID-19 on our business and no provision for COVID-19 is reflected in the accompanying financial statements. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. To date, we believe that COVID-19 has not caused a material negative impact on our business, including the effects on our customers, suppliers or vendors, or on our financial results.

 

Results of Operations

 

Our summary results for the three months ended June 30, 2021 and the three months ended June 30, 2020 are below.

 

Revenues

 

   Three Months Ended         
   June 30, 2021   June 30, 2020   Change   % Change 
Licensing & Royalties  $1,236,156   $162,759   $1,073,397    660 %
Media Advisory & Advertising Services   971,324        971,324    N/A 
Television & Home Entertainment   67,959    326,244    (258,285)   (79)%
Advertising Sales   66,102    70,357    (4,255)   (6)%
Product Sales   664    1,319    (655)   (50)%
Total Revenue  $2,342,205   $560,679   $1,781,526    318 %

 

 

 

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Licensing and Royalties revenue include items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent. During the three months ended June 30, 2021 compared to the three months ended June 30, 2020, Licensing and Royalties revenue increased $1,073,397 or 660%. The increase was primarily due to proceeds received in conjunction with the mutually agreed termination of certain licensing rights.

 

Media Advisory & Advertising Services revenue is a combination of client retainer fee-based services and media commissions. The increase of $971,324 was a result of the ChizComm acquisition on February 1, 2021.

 

Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television, video-on-demand (“VOD”), or subscription video-on-demand (“SVOD”) in domestic and international markets and the sale of DVDs for home entertainment through our partners. Fluctuations in Television & Home Entertainment revenue occur period over period based on the achievement of revenue recognition criteria such as the start of a license period and the delivery of the content to the customer. During the three months ended June 30, 2021 compared to the three months ended June 30, 2020, Television & Home Entertainment revenue decreased $258,285, or 79%. The decrease was primarily due to the recognition of revenue related to the delivery of Rainbow Rangers Season 2 in 2020. There was no comparable delivery during the same period 2021.

 

Advertising sales are generated on the Kid Genius Cartoon Channel in the form of either flat rate promotions or advertising impressions served. Advertising sales decreased by $4,255 or 6%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The decrease was primarily due to reduced Ad impressions to drive an increase in market share and user growth.

 

Product sales are generated through Merch by Amazon and consist of on-demand printed t-shirt sales for the Llama Llama and Rainbow Rangers brands. Product sales decreased $655 or 50%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2021.

 

Expenses

 

    Three Months Ended              
    June 30, 2021     June 30, 2020     Change     % Change  
Marketing and Sales   $ 1,540,882     $ 128,556     $ 1,412,326       1,099  %
Direct Operating Costs     1,269,301       440,015       829,286       188  %
General and Administrative     7,106,151       2,368,834       4,737,317       200  %
Interest Expense     8,803       430,606       (421,803 )     (98 )%
Total   $ 9,925,137     $ 3,368,011     $ 6,557,126       195  %

 

Marketing and sales expenses increased $1,412,326, or 1,099%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to an increase in marketing and advertising expenses to promote Stan Lee’s Superhero Kindergarten and the Kartoon Channel!.

 

Direct operating costs include costs of our product sales, unamortizable post-production costs, film and television cost amortization expense, and participation expense related to agreements with various animation studios, post-production studios, writers, directors, musicians or other creative talent with which we are obligated to share net profits of the properties on which they have rendered services. During the three months ended June 30, 2021, we recorded film and television cost amortization expense of $553,562 and participation expense of $704,949 compared to expenses of $292,362 and $370,803, respectively, for the three months ended June 30, 2020. The increases in direct operating costs for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 is primarily due to increased amortization and participation expenses related to revenues from the Rainbow Rangers property.

 

General and administrative expenses consist primarily of salaries, employee benefits, share-based compensation related to stock options, insurances, rent, depreciation, and amortization as well as other professional fees related to finance, accounting, legal and investor relations. General and administrative expenses for three months ended June 30, 2021 increased $4,737,317, or 200%, compared to the same period in 2020. This increase was primarily related to the acquisition of the ChizComm entities, increases in legal professional fees, share based compensation, rent expense and directors’ and officers’ insurance.

 

 

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Interest expense for the three months ended June 30, 2021 decreased $421,803, or 98%, compared to the same period in 2020. This decrease was due to the repayment of the outstanding Senior Secured Convertible Notes in 2020.

 

Our summary results for the six months ended June 30, 2021 and the three months ended June 30, 2020 are below.

 

Revenues

   Six Months Ended         
   June 30, 2021   June 30, 2020   Change   % Change 
Licensing & Royalties  $1,406,616   $366,124   $1,040,492    284 %
Media Advisory & Advertising Services   1,724,712        1,724,712    N/A 
Television & Home Entertainment   151,430    378,461    (227,031)   (60)%
Advertising Sales   122,564    149,014    (26,450)   (18)%
Product Sales   1,146    1,819    (673)   (37)%
Total Revenue  $3,406,468   $895,418   $2,511,050    280 %

 

Licensing and Royalties revenue include items for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act as a licensing agent. During the six months ended June 3