Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.22.2.2
Acquisitions
9 Months Ended
Sep. 30, 2022
Business Combination and Asset Acquisition [Abstract]  
Acquisitions

Note 3: Acquisitions

        

Ameba

 

On January 13, 2022, the Company completed the acquisition of Ameba, pursuant to a Stock Purchase Agreement (the “SPA”) by and between the Company and Tony Havelka, a resident of the Province of Manitoba (the “Seller”), in which the Company acquired from the Seller all of the issued and outstanding equity interests of Ameba. Concurrently, pursuant to an Asset Purchase Agreement (the “APA”) by and among the Company, the Seller and Tek Gear Inc., a corporation owned by the Seller, the Company acquired from the Seller a proprietary software platform (the “Technology”) that powers the Ameba SVOD deliveries. The transactions contemplated by the SPA and the APA are referred to as the “Ameba Acquisition.”

 

Consideration paid by the Company in the transaction at closing consisted of $3.8 million in cash, inclusive of $0.3 million for a net working capital adjustment (the “NWC Adjustment”) pursuant to the SPA and $0.3 million in cash pursuant to the APA, for total consideration of $4.1 million, or $3.9 million net of cash acquired, excluding transaction costs and subject to as described in more detail below.

 

Transaction costs incurred relating to the Ameba Acquisition, including legal and accounting, totaled $0.1 million, which are included in general and administrative expenses on the statements of operations. The agreement provided for an adjustment to the purchase price based on an adjusted net working capital (“NWC”) as defined in the agreement.

 

The Ameba acquisition facilitates the Company’s expansion into SVOD with its technology and content essential to the launch of the ad-free subscription-based Kartoon Channel! Kidaverse platform. The acquisition provides immediate benefit recognized through the content available on the SVOD Ameba channel app, available for download on Amazon Fire TV, Roku, Xbox 360, Xumo, LG Smart TV, TiVo, VEWD, CINEMOOD and iOS and Android devices.

 

The Company has determined that the Ameba Acquisition constitutes a business acquisition as defined by ASC 805. Accordingly, the assets acquired, and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based on the requirements of ASC 820 and represents managements best estimates.

 

The following table summarizes the consideration paid, including the Net Working Capital Adjustment (in thousands):

       
    Amount  
SPA cash consideration at closing   $ 3,500  
APA cash consideration at closing     300  
Net working capital adjustment     269  
Total   $ 4,069  

 

The net working capital calculation was finalized as $268,657 and paid to the acquiree during the three months ended June 30, 2022, as determined by the Company and agreed upon by the acquiree.

 

As of September 30, 2022, the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets. The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent quarters.

 

The preliminary purchase price allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company on January 13, 2022 as follows (in thousands):

       
Cash   $ 176  
Accounts Receivable     238  
Prepaids Expenses     25  
Trade Name     23  
Digital Network     2,804  
Technology     300  
Goodwill     673  
Accounts Payable and Accrued Expenses     (140 )
Tax Liability     (30 )
Total Consideration   $ 4,069  

 

The identifiable intangible assets acquired of $3.1 million is comprised of $2.8 million for the Digital Network, Ameba TV, with a remaining economic life of 18 years, $23,000 for Ameba’s trade name with a useful life of 3 years and $0.3 million for the SVOD technology with a remaining useful life of approximately 3 years. The $0.7 million in goodwill arising from the acquisition consists largely of the synergies expected from the combined businesses, including the Company’s build-out of its technology for the expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content Production & Distribution reporting unit and is not deductible for tax purposes.

 

The valuation and allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.

 

Valuation Methodology

 

The digital network was valued by performing a discounted cash flow analysis. This method includes discounting the projected cash flows associated with the current digital network content, based primarily upon historical revenue and projections over its expected life and considers the operating expenses and contributory asset charges associated with servicing such network. Projected cash flows attributable to the digital network was discounted to the present value at a rate commensurate with the perceived risk. The useful life of the digital network is estimated based primarily upon the present value of cash flows attributable to the digital network.

 

The Ameba trade name was valued using the relief-from-royalty method. This method is an income approach that estimates the portion of a company’s earnings attributable to an asset based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying a royalty rate to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value. The useful life of the trade name is based on the estimated time it will take for the Company to rebrand the Ameba trade name and logo with the Company branded Kartoon Channel! Kidaverse trade name.

 

The technology was valued at cost as the Company determined that the cost approximated the fair value.

 

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

 

  · Historical performance including sales and profitability.
     
  · Expense estimates.
     
  · Contributory asset charges.
     
  · Estimated economic life of asset.
     
  · Acquisition of new customers.
     
  · Attrition of existing customers.

 

Wow Unlimited Media

 

On April 6, 2022, the Company completed the acquisition of Wow. On October 26, 2021, the Company’s wholly-owned subsidiary, 1326919 B.C. LTD., a corporation existing under the laws of the Province of British Columbia and Wow, entered into an Arrangement Agreement to effect a plan of arrangement under the arrangement provisions of Part 9, Division 5 of the Business Corporations Act. The Company purchased 100% of issued and outstanding shares of Wow for $38.3 million in cash and 11,057,085 shares of the Company’s common stock, including Wow’s subsidiary Frederator. The plan of arrangement and final agreement, together with the acquisition of Wow’s Mainframe Studios and its subsidiary Frederator, are referred to as the “Wow Acquisition.”

 

Final consideration paid by the Company in the transaction at closing consisted of $38.3 million in cash and 11,057,085 shares of the Company’s common stock, including 691,262 Exchangeable Shares, with a fair value of $11.6 million, 2,409,515 options granted to employees of Wow with a fair value of previously vested options of $1.2 million, included in the purchase price, and $0.3 million for future services and $1.6 million in severance and bonuses to executives, for total consideration of $52.7 million, or $50.1 million net of cash acquired, excluding transaction costs as described in more detail below.

 

Transaction costs incurred relating to the Wow Acquisition, including banks, legal and accounting, totaled $3.1 million, which is included in general and administrative expenses on the statements of operations for the nine months ended September 30, 2022. The Company will also expense the unvested replacement options, with a fair value of $0.3 million, as stock-based compensation expense over the remaining requisite service period specified in the agreements.

 

The Wow Acquisition facilitates the Company’s expansion as a global animation and children’s digital media company. With Wow’s content, ongoing production projects and the addition of two studios that can also be leveraged for in-house production of the Company’s properties, will drive cost synergies, facilitate further expansion into the global children’s entertainment market and strengthen financial growth. Frederator, with its owned and operated channels on YouTube, will provide a distribution platform to facilitate the global growth of Kartoon Channel!.

 

The Company has determined that the Wow Acquisition constitutes a business acquisition as defined by ASC 805. Accordingly, the assets acquired, and the liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s preliminary purchase price allocation was based on an evaluation of the available data to determine the appropriate fair values based on the requirements of ASC 820 and represents managements best estimates.

 

The following table summarizes the consideration paid:

       
    Amount  
Cash   $ 38,310  
Genius Common Stock Issued     10,832  
Shares Issued Exchangeable for Genius Common Stock     722  
Stock Option Value of Replacement Options- Pre-Combination Vested Options     1,213  
Severance Payments     1,044  
Bonuses     529  
Total   $ 52,650  

 

As of September 30, 2022, the accounting for the acquisition is preliminary, as the Company is finalizing its valuation and determination of the intangible assets. The Company has engaged a third-party valuation firm to assist with the purchase price allocation, which will be completed in subsequent quarters.

 

The preliminary purchase price allocation is based upon the estimate of the fair value of the assets acquired and the liabilities assumed by the Company on April 6, 2022 as follows (in thousands):

       
Cash and cash equivalents   $ 2,573  
Accounts Receivable     34,237  
Other Receivables     78  
Prepaid Expenses and Other     1,245  
Property and Equipment     1,936  
ROU Assets     10,311  
IP (In-Process)     4,600  
IP (Proprietary Productions)     5,684  
Tradename     7,631  
Customer Relationships     16,064  
Networks and Platforms     803  
Goodwill     21,399  
Accounts Payable     (1,547 )
Participations Payable     (1,380 )
Bank Debt     (1,475 )
Accrued Liabilities     (3,825 )
Interim Production Facilities     (16,930 )
Deferred Revenue     (18,080 )
Lease Liabilities     (10,614 )
Other Liabilities     (60 )
Total Consideration   $ 52,650  

 

The identifiable intangible assets acquired of $34.8 million is comprised of $16.1 million for Customer Relationships, with remaining economic lives of 8 years, $10.3 million for IP Content including completed productions and productions in progress, that is included as part of Film and Television costs on the condensed consolidated balance sheet and will be amortized as such, Tradenames for $7.6 million, with an indefinite life and Networks and Platforms of $0.8 million, with a remaining economic life of 16 years. The goodwill of $21.4 million arising from the acquisition consists largely of the synergies expected from the combined businesses, including the Company’s ability to produce its content in-house utilizing the acquired studios and expansion of the Kartoon Channel! platform. The goodwill was recorded to the Content Production & Distribution reporting unit and is not deductible for tax purposes.

 

The valuation and allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions, especially with respect to intangible assets, that are subject to change within the purchase price allocation period generally one year from the acquisition date, including the Company’s evaluation of certain income tax positions, with corresponding adjustments to goodwill.

 

Valuation Methodology

 

The Networks and Platforms were valued by performing a discounted cash flow analysis, specifically the multi-period excess earnings method. This method involves quantifying the amount of residual (or excess) cash flows generated by the current digital network content, based primarily upon historical revenue and projections over its expected life, and considers the operating expenses and contributory asset charges associated with servicing such network. Projected cash flows attributable to the networks are discounted to present value at a rate commensurate with the perceived risk. The significant assumptions used in this model included the customer attrition rate, acquisition rate of new customers, weighted average cost of capital, and expense estimates. The useful life of the networks is estimated based primarily upon the present value of cash flows attributable to the digital network. The significant assumptions used in this method included the royalty rate and weighted average cost of capital.

 

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

 

Supplemental Pro Forma Information

 

The following unaudited supplemental pro forma information summarizes the Company’s results of operations as if the acquisitions were completed at the beginning of the periods presented (in thousands, except for share and per share data):

                               
    Three Months Ended  
   

Genius Brands Consolidated

(including Wow and Ameba results)

    Wow     Ameba  
   

September 30,

2022

   

September 30,

2021

    September 30, 2021(1)    

September 30,

2021

 
                         
Total Revenues   $ 19,679     $ 18,091     $ 16,033     $ 186  
                                 
Net Income (Loss)   $ (11,218 )   $ (8,338 )   $ 833     $ 82  
                                 
Net Loss per Share of Common Stock (Basic and Diluted)   $ (0.04 )   $ (0.03 )   $     $  
                                 
Weighted Average Shares Outstanding (Basic and Diluted)     317,282,770       300,321,658              

 

                                     
    Nine months Ended  
   

Genius Brands Consolidated

(including Wow and Ameba results)

    Wow     Ameba     Wow     Ameba  
    September 30, 2022     September 30, 2021     September 30, 2022(1)     September 30, 2022     September 30, 2021(1)     September 30, 2021  
                                     
Total Revenues   $ 61,346     $ 48,927     $ 53,242     $ 1,274     $ 43,130     $ 519  
                                                 
Net Income (Loss)   $ (28,144 )   $ (90,388 )   $ 158     $ (22 )   $ 2,272     $ 247  
                                                 
Net Loss per Share of Common Stock (Basic and Diluted)   $ (0.09 )   $ (0.31 )   $     $     $     $  
                                                 
Weighted Average Shares Outstanding (Basic and Diluted)     312,243,439       296,001,742                          

 

(1) The unaudited historical financial statements of Wow are not adjusted for conversion to U.S. GAAP from International Financial Reporting Standards, as the adjustments are immaterial to the periods presented.