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 nine months ended
September 30, 2020 and 2019 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,(the "Securities ACT")
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 April 1, 2019 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 U.S. GAAP. 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 the preschool property Rainbow Rangers,
which debuted in November 2018 on Nickelodeon and which was renewed for a second
season and preschool property Llama Llama, which debuted on Netflix in January
2018 and was renewed by Netflix for a second season. Our library titles include
the award winning Baby Genius, adventure comedy Thomas Edison's Secret Lab®and
Warren Buffett's Secret Millionaires Club, created with and starring iconic
investor Warren Buffett, which is distributed across our Genius Brands Network
on Comcast's Xfinity on Demand, AppleTV, Roku, Amazon Fire, YouTube, Amazon
Prime, Cox, Dish, Sling and Zumo as well as Connected TV. We are also developing
an all-new animated series, Stan Lee's Superhero Kindergarten with Stan Lee's
Pow! Entertainment, Oak Productions and Alibaba. Arnold Schwarzenegger lends his
voice as the lead and is also an Executive Producer on the series. The show will
be broadcast in the United States on Amazon Prime and the Company's wholly owned
distribution outlet, Kartoon Channel! In July, 2020, the Company entered into a
binding term sheet with POW, Inc. ("POW!") in which we agreed to form a 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 called "Stan Lee
Universe, LLC" and POW! and the Company are currently finalizing the details of
the venture.
In addition, we act as licensing agent for Penguin Young Readers, a division of
Penguin Random House LLC who owns or controls the underlying rights to Llama
Llama, leveraging our existing licensing infrastructure to expand this brand
into new product categories, new retailers, and new territories.
34
Recent Developments
January 2020 Warrant Exercise Agreement
On January 22, 2020, we entered into a private transaction pursuant to a Warrant
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 the Common Stock
(as defined below) at an exercise price of $3.90 per share and were to expire in
October 2022. Pursuant to the Agreement, the holder of the Original Warrants and
the Company agreed that such Original Warrant holder would exercise its Original
Warrants in full and the Company would amend the Original Warrants to reduce the
exercise price thereof to $0.34 (the average closing price (as reflected on
Nasdaq.com) of the Common Stock (as defined below) for the five trading days
immediately preceding the signing of the Agreement). We received approximately
$170,000 from the exercise of the Original Warrants.
March 2020 Secured Convertible Note and Warrant Private Placement
On March 11, 2020, we entered into a Securities Purchase Agreement (the "SPA")
with certain accredited investors (each an "Investor" and collectively, the
"Investors") pursuant to which we agreed to sell and issue (1) Senior Secured
Convertible Notes to the Investors in the aggregate principal amount of
$13,750,000 (each, a "Note" and collectively, the "2020 Convertible Notes") and
$11,000,000 funding amount (reflecting an original issue discount of $2,750,000)
and (2) warrants to purchase 65,476,190 shares of the Company's common stock,
par value $0.001 per share (the "Common Stock"), exercisable for a period of
five years at an initial exercise price of $0.26 per share (each a "Warrant" and
collectively, the "Warrants"), for consideration consisting of (i) a cash
payment of $7,000,000, and (ii) full recourse cash secured promissory notes
payable by the Investors to the Company (each, an "Investor Note" and
collectively, the "Investor Notes") in the principal amount of $4,000,000 (the
"Investor Notes Principal") (collectively, the "Financing"). Andy Heyward, our
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 is September 30, 2021
and the maturity date of the Investor Notes is March 11, 2060.
The Company agreed to hold a stockholder meeting (the "Stockholder Meeting") by
no later than May 15, 2020, 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") and the Company will be obligated to
continue to seek Stockholder Approval every 90 days until such approval is
obtained, (ii) until the date that the 2020 Convertible Notes are no longer
outstanding, the Company will not issue, offer, sell or grant any equity or
equity-linked security, subject to certain limited exceptions described in the
SPA, unless (A) Stockholder Approval has been obtained prior thereto and (B) (i)
at least 75% of the gross proceeds in excess of the first $2,000,000 of gross
proceeds of all subsequent Financings consummated prior to the six month
anniversary of the Closing Date are first applied to the redemption of the 2020
Convertible Notes (pro-rata based on an Investor's Purchase Price which
redemption may be waiver by an Investor and it will not increase the pro-rata
percentage of any other Investors) or (ii) at least 75% of the gross proceeds of
any such subsequent placement consummated after the six month anniversary of the
Closing Date are first applied to the redemption of the 2020 Convertible Notes
(pro-rata), (iii) the Company shall use its best efforts to effectuate the
transactions contemplated by the Voting Agreements executed by the Company and
the stockholders who hold in the aggregate approximately 40% of the outstanding
shares of Common Stock which require that such stockholders vote in favor of the
proposals voted on at the Stockholder Meeting, and (iv) promptly securing the
listing of certain shares issuable pursuant to the transaction documents and
maintaining the listing of the shares of Common Stock on an eligible market.
35
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.
In addition, for as long as any 2020 Convertible Notes or Warrants remain
outstanding, the Company will not (i) issue or sell any rights, warrants or
options to subscribe for or purchase Common Stock or directly or indirectly
convertible into or exchangeable or exercisable for Common Stock at a price
which varies or may vary with the market price of the Common Stock, including by
way of one or more reset(s) to any fixed price, unless the conversion, exchange
or exercise price of any such security cannot be less than the then applicable
Conversion Price with respect to the Common Stock into which any 2020
Convertible Notes are convertible or redeemable or the then applicable Exercise
Price (as defined in the Warrants) with respect to the Common Stock into which
any Warrant is exercisable or (ii) enter into, or effect any transaction under,
any agreement, including, but not limited to, an equity line of credit, an
"at-the-market" offering or similar agreement, whereby the Company may issue
securities at a future determined price.
On March 16, 2020 the holders of the August 2018 Secured Convertible Notes were
repaid in full including any outstanding interest.
The 2020 Convertible Notes provide that the Company will repay the principal
amount of the 2020 Convertible Notes in equal monthly installments of 1/12th of
the principal amount of the 2020 Convertible Notes beginning October 31, 2020
and the last business day of each calendar month anniversary thereafter (each an
"Installment Date"). On each Installment Date, assuming that certain Equity
Conditions are met and Stockholder Approval has been obtained, all or some of
the Installment Amount (as defined in the 2020 Convertible Notes) shall be
converted into shares of Common Stock, provided however that the Company may
elect prior to any Installment Date to pay all or a portion of the installment
amount in cash.
Each 2020 Convertible Note is convertible, at the option of the holder, into
shares of Common Stock at an initial conversion price of $1.375, subject to
adjustment as provided in the 2020 Convertible Notes (the "Conversion Price");
provided, however, upon receipt of Stockholder Approval, the conversion price
shall be $0.21, subject to adjustment as provided in the 2020 Convertible Notes.
On or after the date Stockholder Approval is obtained, if the Company issues or
sells, or the Company publicly announces the issuance or sale of, any shares of
Common Stock, or convertible securities or options issuable or exchangeable into
Common Stock (a "New Issuance"), under which such Common Stock is sold for a
consideration per share less than the Conversion Price then in effect, the
Conversion Price will be adjusted to the New Issuance price in accordance with
the formulas provided in the 2020 Convertible Notes. Any such adjustment will
not apply with respect to the issuance of Excluded Securities (as defined in the
2020 Convertible Notes). Upon Stockholder Approval, the Conversion Price may be
further reduced to any amount and for any period of time deemed appropriate by
the Board of Directors.
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.
36
March 2020 Securities Purchase Agreement
On March 22, 2020, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with certain long standing investors (the "Investors"),
pursuant to which we agreed to issue and sell, in a registered direct offering
by the Company directly to the Investors, 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.
May 2020 Securities Purchase Agreements
On May 7, 2020, the Company entered into a Securities 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 8,000,000
shares Common Stock at an offering price of $0.35 per share for gross proceeds
of $2.8 million before deducting the placement agent fees and offering expenses.
The Registered Offering closed on May 8, 2020.
On May 8, 2020, the Company entered into a Securities 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
12,000,000 shares Common Stock at an offering price of $0.454 per share for
gross proceeds of $5.448 million before deducting the placement agent fees and
offering expenses. The Registered Offering closed on May 12, 2020.
On May 18, 2020, we entered into a Securities Purchase Agreement with certain
long standing investors (the "May 18th Investors"), pursuant to which we agreed
to issue and sell, in a registered direct offering by the Company directly to
the May 18th Investors, an aggregate of 7,500,000 shares of our Common Stock, at
an offering price of $1.20 per share for gross proceeds of approximately $9.0
million before deducting offering expenses.
On May 28, 2020, we entered into a Securities Purchase Agreement with certain
long standing investors (the "May 28th Investors"), pursuant to which we agreed
to issue and sell, in a registered direct offering by the Company directly to
the May 28th Investors, an aggregate of 20,000,000 shares of our Common Stock,
at an offering price of $1.50 per share for gross proceeds of approximately
$30.0 million before deducting offering expenses.
Warrant Exercises
During the three months ended September 30, 2020, certain warrant holders
exercised 16,670 warrants for shares of Common Stock at $3.30 per share in cash.
October 2020 Securities Purchase Agreement
On October 28, 2020, the Company entered into the Purchase Agreement with the
Investors pursuant to which the Company agreed to issue and sell, in a
registered director offering by the Company directly to the Investors, an
aggregate of 37,400,000 shares of our Common Stock and warrants to purchase up
to 37,400,000 shares of our Common Stock, at an offering price of $1.55 per
fixed combination of one share of Common Stock and a warrant to purchase one
share of Common Stock for gross proceeds of approximately $57.9 million before
deducting offering expenses.
November 2020 Letter of Intent
On November 15, 2020, the Company entered into a binding letter of intent (the
"Letter of Intent") with ChizComm Ltd., a corporation organized in Canada
("ChizComm Canada"), and ChizComm USA Corp., a New Jersey corporation ("ChizComm
USA" and, together with ChizComm Canada, "ChizComm"). The Company expects to
acquire 100% of the equity interests of ChizComm in exchange for (i) $8.5
million in cash and (ii) $3.5 million of shares of the Company's unregistered
common stock, at a per share price equal to the closing price of the Company's
common stock on the day prior to the closing of the acquisition, for a total $12
million transaction value (the "Transaction Value"). As detailed in the Letter
of Intent, $2 million of the Transaction Value would be allocated to the
acquisition of 2 million new subscribers for the Company's Kartoon Channel!.
Further, ChizComm would be entitled to additional consideration of up to $8
million if the Company meets certain milestones following the acquisition, as
set out in the Letter of Intent. The Company expects to negotiate and execute
definitive agreements with ChizComm and to consummate the transactions
contemplated in the Letter of Intent in the first fiscal quarter of 2021.
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 the Company's employees have been working remotely from home, with
only a few individuals monitoring the office as needed. We have not experienced
any disruption in our supply chain, nor have we experienced any negative impact
from our animation production partners. With regard to content distribution, we
have observed demand increases for streaming entertainment services in 2020. In
terms of our consumer products business, we are starting to see some negative
impact from COVID-19 as consumer activity decelerates in the U.S. and across the
world. Global supply chain issues had a negative impact on the timing of certain
toy releases. The toy manufacturing business has experienced slowdowns related
to global supply chain issues caused by the COVID -19 outbreak. Equally
important, the retail toy business has suffered a slowdown and closures
effecting toy sales. New to market brands are impacted more severely by a
slowdown in physical retail sales. Other consumer products licensees' business
is driven, by toy sales, so a there is a negative downstream effect across the
industry. If the COVID-19 outbreak is prolonged, we will see a negative impact
on our revenues.
37
The Company's management cannot at this point estimate the impact of COVID-19 on
its 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. It is not
clear what the potential effects any such alterations or modifications may have
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 September 30, 2020, and the three
months ended September 30, 2019 are below.
Revenues
Three Months Ended
September 30, September 30,
2020 2019 Change % Change
Licensing & Royalties $ 199,572 $ 174,261 $ 25,311 15%
Television & Home
Entertainment 31,375 3,147,411 (3,116,036 ) -99%
Advertising Sales 42,715 147,034 (104,319 ) -71%
Product Sales 330 290 40 14%
Total Revenue $ 273,992 $ 3,468,996 $ (3,195,004 ) -92%
Licensing and royalty 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 September 30, 2020
compared to the three months ended September 30, 2019, this category increased
$25,311 or 15%.
Television & Home Entertainment revenue is generated from distribution of our
properties for broadcast on television, VOD, or 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 September 30, 2020 compared to the three months
ended September 30, 2019, Television & Home Entertainment revenue decreased
$3,116,036 or 99%, primarily due to the revenue generated from the delivery of
Llama Llama Season 2 to Netflix in September 2019 without comparable revenue
recognition in the three months ending September 30, 2020.
Advertising sales are generated on the "Kartoon Channel!" in the form of either
flat rate promotions or advertising impressions served. Advertising sales
decreased by $104,319 or 71%, during the three months ended September 30, 2020
compared to the three months ended September 30, 2019. The increase is due to
our continued efforts to grow this revenue stream of our business.
Expenses
Three Months Ended
September 30, September 30,
2020 2019 Change % Change
Marketing and Sales $ 364,869 $ 97,541 $ 267,328 274%
Direct Operating Costs 219,451 2,841,358 (2,621,907 ) -92%
General and Administrative 3,042,178 2,092,734 949,444 45%
Interest Expense 17,193 30,642 (13,449 ) -44%
Total $ 3,643,691 $ 5,062,275 $ (1,418,584 ) -28%
38
Marketing and sales expenses increased $267,328, or 274%, for the three months
ended September 30, 2020 compared to the three months ended September 30, 2019
primarily due to an increase in marketing and advertising expenses to promote
the Rainbow Rangers property.
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. Direct operating costs for the three months ended
September 30, 2020 decreased $2,621,907, or 92%, compared to the three months
ended September 30, 2019. During the three months ended September 30, 2020, we
recorded film and television cost amortization expense of $101,717 and
participation expense of $113,894 compared to expenses of $1,285,237 and
$1,022,229, respectively, for the three months ended September 30, 2019. The
increases in film amortization and participation expenses were primarily related
to the Llama Llama Season 2 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 September 30, 2020 increased $949,444, or 45%,
compared to the same period in 2019. This increase was primarily related to
increases in stock based compensation and consulting fees.
Interest expense for the three months ended September 30, 2020 decreased
$13,449, or 44%, compared to the same period in 2019. This decrease is due to
the interest expense related to the August 2018 Secured Convertible Notes.
Interest expense for the three months ended September 30, 2019 included interest
and the amortization of the debt issue costs, the amortization of the debt
discount related to the August 2018 Secured Convertible Notes, which were
expensed in the first quarter of 2019. Therefore, there was no amortization of
these costs in the three months ended September 30, 2020.
Our summary results for the nine months ended September 30, 2020, and the nine
months ended September 30, 2019 are below.
Revenues
Nine Months Ended
September 30, September 30,
2020 2019 Change % Change
Licensing & Royalties $ 565,696 $ 674,107 $ (108,411 ) -16%
Television & Home
Entertainment 409,837 4,292,972 (3,883,135 ) -90%
Advertising Sales 191,728 184,716 7,012 4%
Product Sales 2,149 2,396 (247 ) -10%
Total Revenue $ 1,169,410 $ 5,154,191 $ (3,984,781 ) -77%
Licensing and royalty 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 nine months ended September 30, 2020
compared to the nine months ended September 30, 2019, this category decreased
$108,411, or 16%, primarily due to the revenue generated from Rainbow Rangers
and Llama Llama properties.
39
Television & Home Entertainment revenue is generated from distribution of our
properties for broadcast on television, VOD, or 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 nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019, Television & Home Entertainment revenue decreased
$3,883,135, or 90%, primarily due to the revenue generated from the delivery of
Llama Llama Season 2 to Netflix, delivery of Rainbow Rangers Season 1 to Viacom
Media Networks and deliveries to international territories in September 2019
without comparable revenue generated for the same period in 2020.
Advertising sales are generated on the "Kartoon Channel!" in the form of either
flat rate promotions or advertising impressions served. Advertising sales
increased by $7,012, or 4%, during the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019. The increase is due to our
continued efforts to grow this revenue stream of our business.
Expenses
Nine Months Ended
September 30, September 30,
2020 2019 Change % Change
Marketing and Sales $ 606,125 $ 405,751 $ 200,374 49%
Direct Operating Costs 886,972 3,929,187 (3,042,215 ) -77%
General and Administrative 7,173,594 5,298,865 1,874,729 35%
Interest Expense 1,168,801 697,386 471,415 68%
Total $ 9,835,492 $ 10,331,189 $ (495,697 ) -5%
Marketing and sales expenses increased $200,374, or 49%, for the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019
primarily due to an increase in marketing and advertising expenses to promote
the Rainbow Rangers property.
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. Direct operating costs for the nine months ended
September 30, 2020 decreased $3,042,215, or 77%, compared to the nine months
ended September 30, 2019. During the nine months ended September 30, 2020, we
recorded film and television cost amortization expense of $395,073 and
participation expense of $484,697 compared to September 30, 2019 expenses of
$1,907,222 and $1,457,315, respectively, for the nine months ended September 30,
2019. The decreases in direct operating costs in the nine months ended September
30, 2020 compared to the same period in the prior year reflect decreases in film
amortization and participation expenses related to decreased revenues from the
Llama Llama Season 2 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 the nine months ended September 30, 2020 increased $1,874,729, or
35%, compared to the same period in 2019. This increase was primarily related to
increases stock based compensation and professional fees.
Interest expense for the nine months ended September 30, 2020 increased
$471,415, or 68%, compared to the same period in 2019. This increase is due to
the expensing of the debt discount in excess of principal related to the 2020
Convertible Notes. This was partially offset by reductions in the amortization
of the debt discount related to the $4,500,000 of 2020 Convertible Notes, and
interest paid on the lower outstanding balance.
40
Liquidity and Capital Resources
Working Capital
As of September 30, 2020, we had current assets of $54,864,958, including cash
and cash equivalents, of $50,461,566, and current liabilities of $6,990,910,
resulting in working capital of $47,874,048, compared to negative working
capital of $3,650,136 as of December 31, 2019.
Prior to the Company's successful capital raises, the Company applied a loan
pursuant to the PPP established under CARES Act as interpreted and applied by
the SBA, an Agency of the United States of America. The application was approved
and on April 30,2020, the Company received a loan with a principal amount of
$366,267. The loan has an interest rate of one percent (1%) per year and matures
on April 19, 2021. The loan may be eligible, in whole or in part, for
forgiveness pursuant to the PPP. The Company shall apply to the lender for loan
forgiveness in accordance with the PPP as implemented by the SBA. The Company
reported the proceeds from the PPP loan as debt using the effective interest
rate method.
Comparison of Cash Flows for the Nine Months Ended September 30, 2020, and the
Nine Months Ended September 30, 2019
Our total cash and cash equivalents were $50,461,566 and $633,561 at September
30, 2020, and September 30, 2019, respectively.
Comparison of Cash Flows
Nine Months Ended
September 30, September 30,
2020 2019 Change % Change
Cash used in operations $ (5,316,579 ) $ (4,636,416 ) $ (680,163 ) 15%
Cash used in investing
activities (554,926 ) (26,976 ) (527,950 ) 1957%
Cash provided by
financing activities 56,027,950 2,211,927 53,816,023 2433%
Increase (decrease) in
cash and cash equivalents $ 50,156,445 $ (2,451,465 ) $ 52,607,910 -2146%
During the nine months ended September 30, 2020, our primary sources of cash
were the net proceeds from the 2020 Convertible Notes of $6,098,000, the net
sales of common shares for $44,755,671, net proceeds of $5,874,329 from warrant
exercises and $3,600,000 from the collection of the Investor Notes. The primary
uses of cash during the nine months ended September 30, 2020, were $5,316,579 in
operations, the repayment of the August 2018 Secured Convertible Notes of
$2,866,664 and the repayment of the Production Facility of $1,585,220.
Operating Activities
Cash used in operating activities for the nine months ended September 30, 2020
was $5,316,579 as compared to cash used in operating activities of $4,636,416
during the comparable period in the prior year.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2020
was $554,926 as compared to a use of $26,976 for the nine months ended September
30, 2019. Investing activities include the $500,000 contribution to the Stan Lee
Universe, LLC entity, the purchase of intangible assets and the purchase of
property and equipment. Investing activities included the purchase of furniture
and equipment for the same period in 2019.
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Financing Activities
Cash provided by financing activities for the nine months ended September 30,
2020 was $56,027,950 as compared to $2,211,927 cash provided in the comparable
period in 2019. During the nine months ended September 30, 2020, our primary
sources of cash were the net proceeds from the 2020 Convertible Notes of
$6,098,000, the net sales of Common Shares for $44,755,671, net proceeds of
$5,874,329 from warrant exercises and $3,600,000 from the collection of the
Investor Notes. The primary uses of cash during the nine months ended September
30, 2020, were the repayment of the August 2018 Secured Convertible Notes of
$2,866,664, the repayment of the Production Facility of $1,585,220 and
production costs for Rainbow Rangers Season 2.
Capital Expenditures
As of September 30, 2020, we do not have any material commitments for capital
expenditures.
Critical Accounting Policies
Our accounting policies are described in the notes to the financial statements.
Below is a summary of the critical accounting policies, among others, that
management believes involve significant judgments and estimates used in the
preparation of its financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Genius Brands International, Inc., its wholly-owned subsidiaries A Squared,
Llama Productions and Rainbow Rangers Productions. All significant inter-company
balances and transactions have been eliminated in consolidation.
Right of Use Leased Assets
In February 2016, the FASB issued Accounting Standards Update 2016-02, "Leases."
The standard requires lessees to recognize the assets and liabilities that arise
from leases on the balance sheet. A lessee should recognize in the statement of
financial position a liability to make lease payments (the lease liability) and
a right-of-use asset representing its right to use the underlying asset for the
lease term. The new guidance is effective for annual and interim reporting
periods beginning after December 15, 2018. The amendments should be applied at
the beginning of the earliest period presented using a modified retrospective
approach with earlier application permitted as of the beginning of an interim or
annual reporting period.
In July 2018, the FASB issued Topic 842, Targeted Improvements, which allows for
an additional optional transition method where comparative periods presented in
the financial statements in the period of adoption will not be restated and
instead those periods will be presented under existing guidance in accordance
with ASC 840, Leases. Management used this optional transition method. As of
January 1, 2019, management recorded lease liability of $2,071,903, right-of-use
asset of $2,153,747, accumulated amortization of $124,070, a reversal of
previously recorded deferred rent of $37,920 and the increase in accumulated
deficit of $4,306.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value
of net assets acquired in business combinations accounted for by the purchase
method. In accordance with FASB ASC 350 Intangibles Goodwill and Other, goodwill
and certain intangible assets are presumed to have indefinite useful lives and
are thus not amortized, but subject to an impairment test annually or more
frequently if indicators of impairment arise. We complete the annual goodwill
and indefinite-lived intangible asset impairment tests at the end of each fiscal
year. To test for goodwill impairment, we are required to estimate the fair
market value of each of our reporting units, of which we have one. While we may
use a variety of methods to estimate fair value for impairment testing, our
primary method is discounted cash flows. We estimate future cash flows and
allocations of certain assets using estimates for future growth rates and our
judgment regarding the applicable discount rates. Changes to our judgments and
estimates could result in a significantly different estimate of the fair market
value of the reporting units, which could result in an impairment of goodwill or
indefinite lived intangible assets in future periods.
42
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.
In accordance with FASB ASC 350 Intangible Assets, the costs of new product
development and significant improvement to existing products are capitalized
while routine and periodic alterations to existing products are expensed as
incurred. Annual amortization of these intangible assets is computed based on
the straight-line method over the remaining economic life of the asset.
Film and Television Costs
We capitalize 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. We expense all capitalized costs that exceed the initial
market firm commitment revenue in the period of delivery of the episodes.
We capitalize 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. We evaluate 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, we develop
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.
Debt and Attached Equity-Linked Instruments
The Company measures issued debt on an amortized cost basis, net of debt
premium/discount and debt issuance costs amortized using the effective interest
rate method or the straight-line method when the latter does not lead to
materially different results.
The Company accounts for the proceeds from the issuance of convertible notes
payable in accordance with FASB ASC 470-20 Debt with Conversion and Other
Options. Pursuant to FASB ASC 470-20, the intrinsic value of the embedded
conversion feature (beneficial conversion interest), which is in the money on
the commitment date is included in the discount to debt and amortized to
interest expense over the term of the note agreement. When the conversion option
is not separated, the Company accounts for the entire convertible instrument
including debt and the conversion feature as a liability.
The Company analyzes freestanding equity-linked instruments including warrants
attached to debt to conclude whether the instrument meets the definition of the
derivative and whether it is considered indexed to the Company's own stock. If
the instrument is not considered indexed to the Company's stock, it is
classified as an asset or liability recorded at fair value. If the instrument
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.
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Revenue Recognition
On January 1, 2018, we adopted the new accounting standard Topic 606, Revenue
from Contracts with Customers and all the related amendments ("new revenue
standard") using the modified retrospective method applied to those contracts
which were not completed as of January 1, 2018. Results for reporting periods
beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with
our historic accounting under Topic 605.
As a result of the change, beginning January 1, 2018, we began recognizing
revenue related to licensed rights to exploit functional IP in two ways. For
minimum guarantees, we will recognize fixed revenue upon delivery of content and
the start of the license period. For functional IP contracts with a variable
component, we will estimate 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. We
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.
We sell advertising on our 'Kartoon Channel! channel in the form of either flat
rate promotions or impressions served. For flat rate promotions with a fixed
term, we recognize revenue when all five revenue recognition criteria under
Topic 606 are met. For impressions served, we deliver 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 us on a
monthly basis, and revenue is reported in the month the impressions are served.
We recognize revenue related to product sales when (i) the seller's price is
substantially fixed, (ii) shipment has occurred causing the buyer to be
obligated to pay for product, (iii) the buyer has economic substance apart from
the seller, and (iv) there is no significant obligation for future performance
to directly bring about the resale of the product by the buyer.
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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods.
Recent Accounting Pronouncements
In March 2019, the FASB issued ASU No. 2019-02, Subtopic 920-350. The update
aligns the accounting for production costs of an episodic television series with
the accounting for production costs of films by removing the content distinction
for capitalization. The amendments also require that an entity reassess
estimates of the use of a film in a film group and account for any changes
prospectively. The amendments in this update require that an entity test a film
or license agreement for program material within the scope of Subtopic 920-350
for impairment at a film group level when the film or license agreement is
predominantly monetized with other films and/or license agreements. For public
business entities, the amendments in this update are effective for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal
years. We adopted ASU 2019-02 in 2019. The impact to our consolidated financial
position, results of operations and cash flows were not material.
44
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity. The update simplifies the
accounting for convertible instruments by removing certain separation models in
Subtopic 470- 20, Debt-Debt with Conversion and Other Options, for convertible
instruments. As part of the amendment, the embedded conversion features are no
longer separated from the host contract for convertible instruments with
conversion features that are not required to be accounted for as derivatives
under Topic 815, Derivatives and Hedging, or that do not result in substantial
premiums accounted for as paid-in capital. The FASB has eliminated the cash
conversion and beneficial conversion feature models. The FASB has also modified
accounting rules relating to application of the scope exception from derivative
accounting. The amendments revise the guidance in ASC 815-40-25- 10, to remove
three out of seven conditions from the settlement guidance, referred to as
additional equity classification requirements. Following the above amendments,
more convertible debt instruments will be accounted for as a single liability
measured at its amortized cost and more convertible preferred stock will be
accounted for as a single equity instrument measured at its historical cost, as
long as no features require bifurcation and recognition as derivatives. The
amendments are effective for public business entities, excluding smaller
reporting companies, for fiscal years beginning after December 15, 2021,
including interim periods within those fiscal years. For all other entities,
including smaller reporting companies the amendments are effective for fiscal
years beginning after December 15, 2023, including interim periods within those
fiscal years. Early adoption is permitted, but no earlier than fiscal years
beginning after December 15, 2020, including interim periods within those fiscal
years. The Company is in the process of assessing the impact of the amendments
to Company's consolidated financial statements.
Various other accounting pronouncements have been recently issued, most of which
represented technical corrections to the accounting literature or were
applicable to specific industries, and are not expected to have a material
effect on our financial position, results of operations, or cash flows.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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