Attached files

file filename
EX-31.2 - CERTIFICATION - Genius Brands International, Inc.genius_10q-ex3102.htm
EX-32.2 - CERTIFICATION - Genius Brands International, Inc.genius_10q-ex3202.htm
EX-31.1 - CERTIFICATION - Genius Brands International, Inc.genius_10q-ex3101.htm
EX-32.1 - CERTIFICATION - Genius Brands International, Inc.genius_10q-ex3201.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

  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: 000-54389

 

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.)
     
301 North Canon Drive, Suite 305    
Beverly Hills, California   90210
(Address of principal executive offices)   (Zip Code)

 

310-273-4222

(Registrant’s telephone number, including area code)

 

 9401 Wilshire Blvd, #608, Beverly Hills, CA 90212

(Registrant’s Former Address)

 

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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

 

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

 

Large accelerated filer o   Accelerated filer o
         
Non-accelerated filer (Do not check if a smaller reporting company) o   Smaller reporting company x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,859,450 shares of common stock, par value $0.001, were outstanding as of November 16, 2015.

 

 

 

 
 

 

GENIUS BRANDS INTERNATIONAL, INC.

FORM 10-Q

 

For the Quarterly Period Ended September 30, 2015

 

Table of Contents

 

PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited). 3
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 26
   
Item 4. Controls and Procedures. 26
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings. 27
   
Item 1a. Risk Factors. 27
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 27
   
Item 3. Defaults upon Senior Securities. 27
   
Item 4. Mine Safety Disclosures. 27
   
Item 5. Other Information. 27
   
Item 6. Exhibits. 27
   
SIGNATURES 28

 

 

2
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Genius Brands International, Inc.

Consolidated Balance Sheets

As of September 30, 2015 (unaudited) and December 31, 2014 (audited)

   

 

ASSETS  9/30/2015   12/31/2014 
Current Assets:        
Cash and Cash Equivalents  $2,147,931   $4,301,099 
Accounts Receivable, net   263,916    208,486 
Inventory, net   14,046    11,691 
Prepaid and Other Assets   191,565    217,622 
Total Current Assets   2,617,458    4,738,898 
           
Property and Equipment, net   166,773    32,420 
Film and Television Costs   903,634    303,953 
Capitalized Product Development in Process       7,500 
Intangible Assets, net   1,937,337    1,876,438 
Goodwill   10,365,805    10,365,805 
Investment in Stan Lee Comics, LLC        
Total Assets  $15,991,007   $17,325,014 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts Payable  $346,320   $312,728 
Accrued Expenses   409,512    283,582 
Deferred Revenue and Advances   290,999    242,160 
Accrued Salaries and Wages   85,620    50,288 
Disputed Trade Payable   925,000    925,000 
Short Term Debt - Related Party   411,521    411,008 
Total Current Liabilities   2,468,972    2,224,766 
           
Long Term Liabilities:          
Deferred Revenue and Advances   715,598    640,417 
Services Advance   1,489,583    739,583 
Total Liabilities   4,674,153    3,604,766 
           
Stockholders’ Equity          
Preferred Stock, $0.001 par value, 10,000,000 share authorized, respectively; 5,690 and 6,000 shares issued and outstanding, respectively   6    6 
Common Stock, $0.001 par value, 700,000,000 shares authorized, respectively; 6,529,450 and 6,374,450 shares issued and outstanding, respectively   6,530    6,375 
Additional Paid in Capital   34,884,910    34,866,521 
Accumulated Deficit   (23,574,592)   (21,152,654)
Total Equity   11,316,854    13,720,248 
           
Total Liabilities and Stockholders’ Equity  $15,991,007   $17,325,014 

 

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

 

3
 

 

Genius Brands International, Inc.

 Consolidated Statements of Operations

 Three Month and Nine Month Periods Ended September 30, 2015 and 2014 (unaudited)

 

   Three Months Ended   Nine Months Ended 
   9/30/2015   9/30/2014   9/30/2015   9/30/2014 
Revenues:                
Licensing & Royalties  $98,035   $53,774   $372,022   $155,341 
Television & Home Entertainment   182,715    25,635    323,804    112,910 
Product Sales       239,392    15,173    444,028 
Total Revenues   280,750    318,801    710,999    712,279 
                     
Cost of Sales   23,127    172,870    45,699    414,017 
                     
Gross Profit   257,622    145,931    665,300    298,262 
                     
Operating Expenses:                    
Professional Services   244,803    202,154    549,702    822,997 
Rent Expense   34,136    34,863    106,271    105,207 
Marketing & Sales   91,258    109,592    342,318    234,286 
Amortization of Film & TV Costs   42,642        42,642     
Depreciation & Amortization   36,673    29,673    96,823    83,301 
Salaries and Related Expenses   429,348    442,760    1,414,746    1,003,234 
Bad Debt Expense (Recovery)           (1,550)   55,000 
Other General & Administrative   133,388    191,774    581,774    605,454 
Total Operating Expenses   1,012,247    1,010,816    3,132,726    2,909,479 
                     
Loss from Operations   (754,624)   (864,885)   (2,467,426)   (2,611,217)
                     
Other Income (Expense):                    
Other Income   11,421    22,156    16,965    29,945 
Interest Expense   (723)       (2,212)   (2,230)
Interest Expense - Related Parties   (6,224)   (6,241)   (18,544)   (19,611)
Gain (Loss) on Distribution Contracts   (47,650)       102,350    (47,229)
Gain (Loss) on Impairment of Assets           (7,500)    
Gain (Loss) on Extinguishment of Debt               52,447 
Gain (Loss) on Disposition of Assets               (70,905)
Gain (Loss) on Inventory               (174,963)
Gain (Loss) on Deferred Financing Costs           (9,313)    
Unrealized Gain (Loss) on Foreign Currency Translation   (20)       (36,258)    
Net Other Income (Expense)   (43,196)   15,915    45,488    (232,546)
                     
Loss before Income Tax Expense   (797,820)   (848,970)   (2,421,938)   (2,843,763)
                     
Income Tax Expense                
                     
Net Loss  $(797,820)  $(848,970)  $(2,421,938)  $(2,843,763)
                     
Net Loss per Common Share  $(0.12)  $(0.13)  $(0.37)  $(0.46)
                     
Weighted Average Shares Outstanding   6,529,450    6,383,450    6,464,505    6,129,391 

 

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

 

4
 

 

Genius Brands International, Inc.

Consolidated Statements of Cash Flows

Nine Month Period Ended September 30, 2015 and 2014 (unaudited)

   

 

  9/30/2015   9/30/2014 
Cash Flows from Operating Activities:          
Net Loss  $(2,421,938)  $(2,843,763)
Adjustments to reconcile net loss to net cash provided in operating activities:          
Depreciation Expense   46,501    37,774 
Amortization Expense   50,322    45,527 
Imputed Interest Expense   18,544    19,611 
Bad Debt Expense   (1,550)   55,000 
Prepaid Consulting Services Expense       280,482 
(Gain) Loss on Distribution Contracts   (102,350)   47,229 
(Gain) Loss on Deferred Financing Asset   9,313     
(Gain) Loss on Impairment of Assets   7,500    70,905 
(Gain) Loss on Foreign Currency Translation   36,258     
(Gain) Loss on Settlement of Accounts Payable       (52,447)
(Gain) Loss on Inventory       174,963 
Decrease (increase) in operating assets:          
Accounts Receivable   18,612    495,522 
Inventory   (2,355)   28,226 
Prepaid Expenses & Other Assets   16,744    138,295 
Film and Television Costs, net   (599,681)   (156,592)
           
Increase (decrease) in operating liabilities:          
Accounts Payable   (14,059)   (448,708)
Accrued Salaries   35,332    59,800 
Deferred Revenue and Advances   165,270    432,648 
Other Accrued Expenses   125,930    (9,392)
Net cash used in operating activities   (2,611,607)   (1,624,920)
           
Cash Flows from Investing Activities:          
Investment in Intangible Assets   (111,221)   (70,000)
Investment in Fixed Assets   (180,853)   (3,151)
Investment in Capitalized Product Development       (16,330)
Net cash used in investing activities   (292,074)   (89,481)
           
Cash Flows from Financing Activities:          
Sale of Preferred Stock, net of offering costs       6,000,000 
Sale of Common Stock, net of offering costs       360,000 
Proceeds from Services Advance   750,000    750,000 
Repayment of Services Advance       (10,117)
Proceeds of Related Party Notes   513     
Payments of Related Party Notes       (105,017)
Common Stock Offering Costs       (4,884)
Preferred Stock Offering Costs       (620,085)
Debt Issuance Cost       (15,000)
Net cash provided by financing activities   750,513    6,354,897 
           
Net Increase (Decrease) in Cash and Cash Equivalents   (2,153,168)   4,640,496 
Beginning Cash and Cash Equivalents   4,301,099    527,110 
Ending Cash and Cash Equivalents  $2,147,931   $5,167,606 
           
Supplemental disclosures of cash flow information:          
Cash paid for income taxes  $   $ 
Cash paid for interest  $1,076   $2,230 
           
Schedule of non-cash financing and investing activities:          
Common Stock issued as Settlement for Accounts Payable  $   $32,572 
Common Stock issued for Prepaid Services  $   $113,998 

 

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

5
 

 

Genius Brands International, Inc.

Consolidated Statements of Stockholders' Equity

   

 

  Common Stock  Preferred Stock  Additional
Paid in
  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
Balance, December 31, 2014 (audited)  6,374,450  $6,375   6,000  $6  $34,866,521  $(21,152,654) $13,720,248 
                             
Conversion of preferred shares  155,000   155   (310)       –  (155)     
Imputed Interest for Member Advances              18,544      18,544 
Net Loss                 (2,421,938)  (2,421,938)
Balance, September 30, 2015 (unaudited)  6,529,450  $6,530   5,690  $6  $34,884,910  $(23,574,592) $11,316,854 

 

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

 

6
 

 

Genius Brands International, Inc.

Notes to Financial Statements

September 30, 2015 (unaudited)

 

Note 1: Organization and Business

 

Organization and Nature of Business

 

Genius Brands International, Inc. (“we”, “us”, “our”, “GBI” or the “Company”) is a global content and brand management company dedicated to providing entertaining and enriching “content and products with a purpose” for toddlers to tweens. Led by industry veterans Andrew Heyward (Chief Executive Officer) and Amy Moynihan Heyward (President), the Company produces original content and licenses the rights to that content to a variety of partners. Our licensees include (i) companies to which the audio-visual rights are licensed for exhibition in various formats, including but not limited to, Pay Television, Free or Broadcast Television, Video-on-Demand (“VOD”), subscription on demand (“SVOD”), DVDs/CDs and (ii) companies that develop and distribute products based on our content within different product categories, includimg but not limited to, toys, electronics, publishing, home goods, stationary, gifts.

 

The Company owns a portfolio of original children’s entertainment that is targeted at children from toddlers to teens including the award-winning Baby Genius, Warren Buffett's Secret Millionaires Club, Thomas Edison's Secret Lab and Stan Lee's Mighty 7, the first project from Stan Lee Comics, LLC , a joint venture with legendary Stan Lee's POW! Entertainment.

 

In addition to the Company’s wholly-owned brands, it also acts as licensing agent for certain brands, leveraging its existing licensing infrastructure to expand these brands into new product categories, new retailers, and new territories. These include the best-selling children’s book series, Llama Llama; Psycho Bunny, a luxury apparel line; From Frank, a humor greeting card and product line; and Celessence Technologies, the world's leading microencapsulation company.

 

Consistent with the Company’s strategy of securing widespread distribution for its content in a variety of formats and building awareness and engagement for its brands that in turn drives its consumer products business, the Company has expanded its successful relationship with Comcast beyond the already popular Baby Genius on-demand offering. The Company has announced it will launch a new Kid Genius Channel in the fourth quarter of 2015, offering 24-hours of video on-demand content that will be consistent with the Company’s “content and products with a purpose” mission. The new video on-demand channel will include the Company’s own content, in addition to other content the Company will curate, to offer a robust line-up for kids. The Company’s Senior Vice President - International Sales, Andrew Berman, will oversee the channel.

 

The Company commenced operations in January 2006, assuming all of 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,” “Little Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under those titles. In October 2011, the Company (i) changed its domicile to Nevada from California, and (ii) changed its name to Genius Brands International, Inc. from Pacific Entertainment Corporation (the “Reincorporation”). In connection with the Reincorporation, the Company changed its trading symbol from “PENT” to “GNUS”.

 

On November 15, 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 contemplated under the Merger Agreement (the “Merger”), which occurred concurrently with entering into the Merger Agreement, the Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company.  As a result of the Merger, the Company acquired the business and operations of A Squared.

 

On April 2, 2014, the Company filed a certificate of amendment to its Articles of Incorporation to affect a reverse split of its issued and outstanding common stock on a one-for-one-hundred basis. The reverse stock split was effective with FINRA (Financial Industry Regulatory Authority) on April 7, 2014 (the “Reverse Split”). All per share amounts referenced herein are reflective of the Reverse Split.

  

Strategic Initiatives

 

During 2014, the Company began a series of strategic initiatives to restructure certain areas of business in an effort to operate more profitably in the long run. This included product sales, content distribution, production, and product development:

 

  1) During the second quarter of 2014, the Company began phasing out the direct production and sale of physical products including DVDs and CDs and shifted to a licensing model whereby these functions were outsourced to industry experts and category leaders in their respective industries. On July 14, 2014, the Company employed Stone Newman in the newly created position of President - Global Consumer Products to manage all consumer products, licensing and merchandising sales for the Company’s brands.

 

7
 

 

  2) Prior to the third quarter of 2014, the Company utilized an agency to license its content to international television broadcasters, home video, and digital distribution outlets. To exert greater control over the distribution of its expanding portfolio of content, during the second quarter of 2014, the Company formed a new global distribution division and appointed Andrew Berman to the newly created position of Senior Vice President - International Sales to oversee the division and the appointment of regional agents to represent the Company locally in key regions.

  

  3) During the third and fourth quarter of 2014, the Company partnered with various pre-production, production, and animation companies to provide services to the Company for the production of Thomas Edison’s Secret Lab in exchange for a certain percentage of the series’ forthcoming adjusted net revenues and the ability to distribute the series in certain languages in certain territories. This model helps to better manage the Company’s cash flows while enabling it to exploit territories that would otherwise be challenging to manage and monetize.  The Company intends to replicate the model for future productions.

 

  4) The infrastructure the Company has put in place enables it to efficiently exploit a growing portfolio of brands. The Company is actively developing a number of new brands to add to its growing portfolio and consistently looks for existing brands to acquire or act as licensing agent, as with the best-selling line of books, Llama Llama which the Company recently signed. The Company remains focused on brands that lend themselves to interactive exploitation in multiple areas and are consistent with the Company’s primary point of differentiation: providing multi-media “content and products with a purpose” that entertain and enrich kids.

 

Liquidity

 

Historically, the Company has incurred net losses. As of September 30, 2015, the Company had an accumulated deficit of $23,574,592 and a total stockholders’ equity of $11,316,854 At September 30, 2015, the Company had current assets of $2,617,458 including cash of $2,147,931 and current liabilities of $2,468,972, including short-term debt to related parties which bears no interest and has no stated maturity of $411,521 and certain trade payables of $925,000 to which the Company disputes the claim, resulting in working capital of $148,486. For the nine months ended September 30, 2015 and 2014, the Company reported a net loss of $2,421,938 and $2,843,763, respectively, and reported net cash used by operating activities during nine months ended September 30, 2015 of $2,611,607.

 

During the nine months ended September 30, 2015, the Company received $750,000 in proceeds from the second payment of its long term supply chain services agreement. While the Company believes that these funds plus its working capital will be sufficient to fund operations for the next twelve months, there can be no assurance that cash flows from operations will continue to improve in the near future. If the Company is unable to attain profitable operations and positive operating cash flows in a reasonable period of time, it may need to (i) seek additional funding, (ii) scale back its development plans, or (iii) reduce certain operations.

  

Note 2: Summary of Significant Accounting Policies

 

Cash Equivalents

 

The Company considers all highly liquid debt instruments with initial maturities of six months or less to be cash equivalents. 

 

Reverse Stock Split

 

On April 2, 2014, we effected the Reverse Split which was deemed effective with FINRA on April 7, 2014. All common stock share and per share information in this Form 10-Q, including the accompanying consolidated financial statements and notes thereto, have been adjusted to reflect retrospective application of the Reverse Split, unless otherwise indicated.

 

Business Combination

 

On November 15, 2013, the Company entered into the Merger Agreement with A Squared, the Member, and the Acquisition Sub. Upon closing of the Merger, which occurred concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of A Squared.

 

The audited financial statements have been prepared using the acquisition method of accounting in accordance with FASB Accounting Standards Codification (“ASC”) 805 Business Combinations.

8
 

 

See Note 3 - Business Combination for additional information.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Genius Brands International, Inc. and its wholly owned subsidiary A Squared. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

 

Financial Statement Reclassification

 

Certain account balances from prior periods have been reclassified in these unaudited consolidated financial statements so as to conform to current period classifications.

 

Allowance for Sales Returns

 

An Allowance for Sales Returns is estimated based on average sales during the previous year. Based on experience, sales growth, and our customer base, the Company concluded that the allowance for sales returns at September 30, 2015 and December 31, 2014 should be $44,108 and $45,582, respectively.

 

Inventories

 

Inventories are stated at the lower of cost (average) or market and consist of finished goods such as DVDs, CDs and other products. A reserve for slow-moving and obsolete inventory is established for all inventory deemed potentially non-saleable by management in the period in which it is determined to be potentially non-saleable. The current inventory is considered properly valued and saleable. The Company concluded that there was an appropriate reserve for slow moving and obsolete inventory of $53,338 and $54,673 established as of September, 2015 and December 31, 2014.

 

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 statement of operations.

   

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 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, 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 methods are 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 of 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. Additionally, the Company develops new videos, music, books and digital applications in addition to adding content, improved animation and bonus songs/features to its existing product catalog. In accordance with ASC 350 Intangible Assets and ASC 730 Research and Development, 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.

9
 

 

Films and Televisions Costs

 

The Company capitalizes production costs for episodic series produced in accordance with 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 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 their capitalized production costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.

 

Revenue Recognition

 

The Company recognized 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 as required by ASC 605 Revenue Recognition.

 

Revenues associated with the sale of products are recorded when shipped to customers pursuant to approved customer purchase orders resulting in the transfer of title and risk of loss. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reporting date.

 

The Company recognizes revenue in accordance with ASC 926-605 Entertainment-Films - Revenue Recognition. Accordingly, the Company recognizes revenue when (i) persuasive evidence of a sale with customer exists, (ii) the film is complete and has been delivered or is available for delivery, (iii) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale, (iv) the arrangement fee is fixed or determinable, and (v) collection of the arrangement fee is reasonably assured.

 

For its distribution, TV, and home entertainment income the Company generally enters in to flat fee arrangements to deliver multiple films or episodes. The Company allocates revenue to each film or episode based on their relative fair market values and recognizes revenue as each film or episode is complete and available for delivery.

 

The Company’s licensing and royalty revenue represents both (a) variable payments based on net sales from brand licensees for content distribution rights. These license agreements are held in conjunction with third parties that are responsible for collecting fees due and remitting to the Company its share after expenses. Revenue from licensed products is recognized when realized or realizable based on royalty reporting received from licensees and (b) licensing income the Company recognizes revenue as an agent in accordance with ASC 605-45 Revenue Recognition - Principal Agent. Accordingly, the Company’s revenue is its gross billings to its customers less the amounts it pays to suppliers for their products and services.

 

Earnings Per Share

 

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

 

Income Taxes

 

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

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU No. 2013-11”). ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with limited exceptions. ASU No. 2013-11 is effective for interim and annual periods beginning after December 15, 2013 and may be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

10
 

 

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the new definition of a discontinued operation. It also allows an entity to present a discontinued operation even when it has continuing cash flows and significant continuing involvement with the disposed component. The amendments in ASU 2014-08 are effective prospectively for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic No. 605, “Revenue Recognition,” most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation - Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We are currently evaluating the potential impact of adopting this guidance on our 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.

  

Note 3: Business Combination

 

Overview

 

On November 15, 2013, the Company entered into the Merger Agreement with A Squared and Acquisition Sub. Upon closing of the Merger, which occurred concurrently with entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of A Squared. 

 

Immediately following the Merger, the Company’s pre-Merger shareholders and option holders owned approximately 50% of the Company’s common stock on a fully-diluted basis, and former A Squared members directly and indirectly owned approximately 50% of the Company’s common stock on a fully diluted basis.

  

Pursuant to the terms and conditions of the Merger:

 

  · At the closing of the Merger, the membership interests of A Squared issued and outstanding immediately prior to the closing of the Merger were cancelled, and the Parent Member received 2,972,183 shares of our common stock.
  · Upon the closing of the Merger, Klaus Moeller resigned as the Company’s Chief Executive Officer and Chairman, Larry Balaban resigned as the Company’s Corporate Secretary, and Howard Balaban resigned as the Company’s Vice President of Business Development. Simultaneously with the effectiveness of the Merger, Andrew Heyward was appointed as the Company’s Chief Executive Officer, Amy Moynihan Heyward was appointed as the Company’s President and Gregory Payne was appointed as the Company’s Corporate Secretary. Mr. Moeller remained a director of the Company until his subsequent resignation on May 15, 2014.
  · Effective upon the Company’s meeting its information obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Michael Meader, Larry Balaban, Howard Balaban and Saul Hyatt resigned as directors of the Company, and Andrew Heyward, Amy Moynihan Heyward, Lynne Segall, Jeffrey Weiss, Joseph “Gray” Davis, William McDonough and Bernard Cahill were appointed as directors of the Company. On December 9, 2013, these changes to the Board of Directors were made effective.

 

11
 

 

Accounting Treatment

 

Although the transaction was structured as a merger of equals, the merger was treated as a business combination for accounting purposes. The audited financial statements have been prepared using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Genius Brands is the deemed accounting acquirer, and A Squared is the deemed accounting acquiree based on the following factors: the transfer of the Company’s equity as consideration for the merger, the relative size of the pre-merger assets and revenue bases with the Company holding a significantly larger asset and revenue base as compared to A Squared, and the fact that the Company paid a premium over the pre-combination fair value of A Squared.

 

Purchase Price Allocation

 

The following table summarizes the final purchase accounting for the fair value of the assets acquired and liabilities assumed at the date of the Merger:

 

   Allocated Fair Value 
Cash  $283,199 
Accounts Receivable   89,398 
Prepaid Expenses and Other Assets   145,574 
Property and equipment, net   75,385 
Identifiable artistic-related intangible assets (a)   1,740,000 
Total assets acquired   2,333,556 
      
Accounts Payable   (404,757)
Accrued Expenses   (450,000)
Short Term Debt - Related Party   (516,966)
Disputed Trade Payable   (925,000)
Total liabilities assumed   (2,296,723)
      
Net assets acquired   36,833 
      
Consideration (b)   10,402,638 
      
Goodwill  $10,365,805 

 

(a) The value of the identifiable artistic-related intangible assets was determined by an independent Corporate Finance and Business Valuation firm.
(b) As consideration for the net assets acquired in the Merger, the Company issued an aggregate of 2,972,183 shares of its common stock the Parent Member, valued at $3.50 per share. The acquisition-date fair value of the common stock was based on the common stock sold under the private placement on the date of the Merger.

  

Note 4: Investment in Stan Lee Comics, LLC

 

In November 2009, A Squared formed a joint venture, Stan Lee Comics, LLC, with POW Entertainment Inc. (“POW”), a California corporation, and Archie Comics Publications, Inc. (“Archie”), a New York corporation, to create, produce, and distribute comic books and other intellectual property based on exclusive properties created by Stan Lee and owned by POW. Each of A Squared, POW, and Archie own one-third of Stan Lee Comics, LLC.

 

Upon formation, the parties agreed that POW would contribute certain properties to Stan Lee Comics, LLC as consideration for its ownership interest. Similarly, A Squared would contribute certain creative development functions and be entitled to the exercise of all audio-visual development, production and distribution rights in all media, as well as all merchandising rights, in and to the contributed properties as consideration for its ownership interest. Finally, Archie would be entitled to all comic book publication and distribution rights in and to the contributed properties as consideration for its ownership interest. Each party would be entitled to one-third of any net proceeds derived from the contributed properties or their derivative works after recoupment of production cost and fees. Stan Lee Comics, LLC is the owner of the Stan Lee and the Mighty 7 property.

 

Upon closing of the Merger, the Company assumed the rights to Stan Lee Comics, LLC held by A Squared.

 

12
 

 

Pursuant to ASC 323-30, as of September 30, 2015, the Company has recorded the Investment in Stan Lee Comics, LLC at $0 as no monetary consideration was paid by A Squared, or assumed by the Company in the Merger, for the ownership interest in Stan Lee Comics, LLC.

 

Note 5: Inventory

 

During the second quarter of 2014, the Company began a strategic initiative to restructure its product sales business by phasing out the direct sale of physical products including DVDs and CDs and shifting to a licensing model. On July 14, 2014, the Company employed Stone Newman in the newly created position of President - Worldwide Consumer Products to manage all consumer products, licensing and merchandising sales and rights for the Company’s brands and programming.

 

As of September 30, 2015 and December 31, 2014, the Company had recorded a total reserve of $53,338 and $54,673, respectively. In addition to nominal changes to the reserve made during the normal course of business, during the second quarter of 2014, the Company determined that a portion of its inventory may not be saleable and recorded an additional reserve of $174,963 which was recorded as a loss on inventory. Finally, during the fourth quarter of 2014, the Company donated certain inventory that had already been reserved for at which time the inventory was written off.

  

Note 6: Property and Equipment, Net

 

The Company has property and equipment as follows as of September 30, 2015 and December 31, 2014:

 

   9/30/2015   12/31/2014 
Furniture and Equipment  $12,385   $12,385 
Computer Equipment   34,678    36,649 
Leasehold Improvements   176,903    99,778 
Software   15,737    15,737 
Less Accumulated Depreciation   (72,930)   (132,129)
Property and Equipment, Net  $166,773   $32,420 

 

During the nine months ended September 30, 2015 and 2014, the Company recorded depreciation expense of $46,500 and $37,774, respectively.

  

Note 7: Film and Television Costs and Capitalized Product Development in Process

 

As of September 30, 2015, the Company had Film and Television Costs of $903,634 compared to $303,953 at December 31, 2014. The increase relates to the development and production of episodes of Thomas Edison’s Secret Lab as well as the development of Space Pop (working title).

 

As of September 30, 2015, the Company had Capitalized Product Development in Process of $0 compared to $7,500 as of December 31, 2014. During the nine months ended September 30, 2015, the Company fully impaired these assets.

  

Note 8: Goodwill and Intangible Assets, Net

 

Goodwill

 

In association with the Merger, the Company recognized $10,365,805 in Goodwill, representing the excess of the fair value of the consideration for the Merger over net identifiable assets acquired (See Note 3 - Business Combination for additional information). Pursuant to 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. Through September 30, 2015, the Company has not recognized any impairment related to Goodwill.

 

Intangible Assets, Net

 

The Company had following intangible assets as of September 30, 2015 and December 31, 2014:

 

   9/30/2015   12/31/2014 
Identifiable artistic-related assets (a)  $1,740,000   $1,740,000 
Trademarks (b)   129,831    129,831 
Product Masters (b)   64,676    3,257,129 
Other Intangible Assets (b)   181,220    70,000 
Less Accumulated Amortization (c)   (178,390)   (3,320,522)
Intangible Assets, Net  $1,937,337   $1,876,438 

 

13
 

 

(a) In association with the Merger, the Company acquired $1,740,000 in identifiable artistic-related assets. These assets, related to certain properties owned by A Squared and assumed by the Company, were valued using an independent firm during the fourth quarter of 2013. Based on certain legal, regulatory, contractual, and economic factors, the Company has deemed these assets to be indefinite-lived. Hence, pursuant to ASC 350-30, these assets are not subject to amortization and are tested annually for impairment.  Through September 30, 2015, the Company has not recognized any impairment expense related to these assets.
(b) Pursuant to 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 six months ended September 30, 2015 and 2014, the Company did not recognize any impairment of these assets.
(c) During the nine months ended September 30, 2015 and 2014, the Company recognized $50,322 and $45,527, respectively, in amortization expense related to these intangible assets.

 

Expected future intangible asset amortization as of September 30, 2015 is as follows:

 

Fiscal Year:     
2015  $34,835 
2016   38,596 
2017   17,180 
2018   8,655 
2019   8,655 
Total  $107,921 

  

Note 9: Deferred Revenue and Advances

 

As of September 30, 2015 and December 31, 2014, the Company had deferred revenue and advances of $1,006,597 and $882,577, respectively, resulting from the collection of certain advances or minimum guarantees against future royalty payments or flat license fees from its customers. These amounts represent collections for which revenue recognition criteria have not been met.

  

Note 10: Accrued Liabilities

 

As of September 30, 2015 and December 31, 2014, the Company has the following accrued liabilities:

 

   9/30/2015   12/31/2014 
Accrued Salaries and Wages        
Accrued Salaries and Wages  $85,620   $50,288 
           
Disputed Trade Payables          
Disputed Trade Payables (a)   925,000    925,000 
           
Services Advance          
Services Advance (b)   1,489,583    739,583 
           
Accrued Expenses          
Other Accrued Expenses   409,512    283,582 
           
Total Accrued Liabilities  $2,909,715   $1,998,453 

  

(a) As part of the Merger, 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.
(b) During the first quarter of 2014, the Company entered into an exclusive three year agreement with Sony DADC, the optical disc manufacturing and fulfillment arm of Sony, to provide all CD, DVD and BD replication, packaging and distribution to Genius Brands International’s direct customers. Under the terms of the long-term, exclusive supply chain services agreement, the Company will order a minimum level of disc replication, packaging and distribution services for its content across all physical media, including DVD, CD, and Blu-ray from Sony DADC. As consideration for these minimum order levels, the Company received a total of $1,500,000, $750,000 during the first quarter of 2014 and $750,000 during the first quarter of 2015. At the end of the term, the Company is obligated to repay a pro-rata portion of the advance if it has not ordered a minimum number of DVD/CD units during the term.

 

14
 

 

Note 11: Short Term Debt - Related Parties

 

As part of the Merger, the Company acquired certain liabilities from A Squared. From time to time, A Squared required short-term advances to fund its operations and provide working capital from its founder, the Company’s current Chief Executive Officer, Andrew Heyward. As of September 30, 2015, these advances totaled $411,521, compared to $411,008 as of December 31, 2014.

 

These advances are interest free and have no stated maturity. The Company has applied an imputed interest rate of 6% in accordance with ASC 835-30-45. During nine months ended September 30, 2015 and 2014, the Company recognized imputed interest expense of $18,544 and $19,611 as a contribution to additional paid-in capital, respectively.

 

Note 12: Stockholders’ Equity

 

Common Stock

 

As part of the Reincorporation, the total number of authorized shares of common stock was changed to 250,000,000 shares, $0.001 par value per share. The common stock and additional paid in capital accounts were restated as of December 31, 2012, and for the years then ended, to recognize the change from no par common stock to a par value of $0.001 per share. The Company conducted a consent solicitation of its stockholders of record as of September 3, 2013 to approve certain corporate actions. Stockholders, representing at least a majority of outstanding shares of the Company’s voting capital as of the record date voted by written consent to approve an amendment to the Company’s Article of Incorporation in order to increase the number of common stock authorized to 700,000,000 from 250,000,000. As of September 30, 2015 and December 31, 2014, the total number of authorized shares of common stock was 700,000,000.

 

As part of the aforementioned consent solicitation, stockholders, representing at least a majority of outstanding shares of the Company’s voting capital as of the record date, also voted by written consent to approve a proposal to effect the Reverse Split of the Company’s common stock in a ratio to be determined by the Board which would not be less than One for Ten (1:10) and not more than One for One-Hundred (1:100), which was to be effective no later than September 30, 2014, at such ratio and at such time in the sole discretion of the Board and in lieu of issuing any fractional shares resulting from the Reverse Split, to issue the next whole share.

 

On April 2, 2014, we filed an amendment to our Articles of Incorporation to effect the Reverse Split on a one-for-one hundred basis. The Reverse Split was effective with FINRA on April 7, 2014. All common stock share and per share information in this Form 10-Q, including the accompanying consolidated financial statements and notes thereto, have been adjusted to reflect retrospective application of the Reverse Split, unless otherwise indicated. The total number of authorized shares of common stock was not adjusted in conjunction with the Reverse Split.

 

As of September 30, 2015 and December 31, 2014, there were 6,529,450 and 6,374,450 shares of common stock issued and outstanding.

 

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. 

 

On May 12, 2014, the Board of Directors authorized the designation of a class of preferred stock as “Series A Convertible Preferred Stock”. On May 14, 2014, the Company filed the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible Preferred Stock with the Secretary of State of the State of Nevada.

 

Each share of the newly designated Series A Preferred Stock is convertible into shares of the Company’s common stock, par value $0.001 per share based on a conversion calculation equal to the Base Amount divided by the conversion price. The Base Amount is defined as the sum of (i) the aggregate stated value of the Series A Preferred Stock to be converted and (ii) all unpaid dividends thereon. The stated value of each share of the Series A Preferred Stock is $1,000 and the initial conversion price is $2.00 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. Additionally, in the event the Company issues shares of its common stock or common stock equivalents at a per share price that is lower than the conversion price then in effect, the conversion price shall be adjusted to such lower price, subject to certain exceptions. The Company is prohibited from effecting a conversion of the Series A Preferred Stock to the extent that as a result of such conversion, the investor would beneficially own more than 9.99% in the aggregate of the issued and outstanding shares of the Company’s common stock, calculated immediately after giving effect to the issuance of shares of common stock upon conversion of the Series A Preferred Stock. Holders of our outstanding shares of Series A Preferred Stock are entitled to vote on an “as converted” basis with the holders of common stock, equal to the number of shares of common stock into which such shares of Series A Preferred Stock are convertible, but not in excess of any applicable beneficial ownership limitations governing such shares.

15
 

 

On May 14, 2014, we entered into securities purchase agreements with certain accredited investors pursuant to which we sold an aggregate of 6,000 shares of our newly designated Series A Convertible Preferred Stock at a price of $1,000 per share for gross proceeds to us of $6,000,000. Related to the sale, we incurred offering costs of $620,085 resulting in net proceeds of $5,379,915. The closing of the transaction was subject to certain customary closing conditions and closed on May 15, 2014.

 

On various dates during the nine months ended September 30, 2015, the Company received notices of conversion from certain preferred stock holders to convert 310 shares of Series A Convertible Preferred Stock into 155,000 shares of the Company’s common stock.

 

On various dates subsequent to September 30, 2015, the Company received notices of conversion from certain preferred stock holders to convert 310 shares of Series A Convertible Preferred Stock into 155,000 shares of the Company’s common stock.

 

As of September 30, 2015 and December 31, 2014, 5,690 and 6,000 shares of preferred stock, designated as Series A Convertible Preferred Stock, were issued and outstanding.

 

Note 13: Stock Options

 

The Company has adopted the provisions of ASC 718 - Compensation which requires companies to measure the cost of employee services received in exchange for equity instruments based on the grant date fair value of those awards and to recognize the compensation expense over the requisite service period during which the awards are expected to vest.

 

On December 29, 2008, the Company adopted the Pacific Entertainment Corporation 2008 Stock Option Plan (the “2008 Plan”), which provides for the issuance of qualified and non-qualified stock options to officers, directors, employees and other qualified persons. The 2008 Plan is administered by the Board of Directors of the Company or a committee appointed by the Board of Directors. The number of shares of the Company’s common stock initially reserved for issuance under the 2008 Plan was 110,000. On September 2, 2011, the shareholders holding a majority of the Company’s outstanding common stock adopted an amendment to the 2008 Plan to increase the number of shares of common stock issuable under the plan to 500,000.

 

The following schedule summarizes the changes in the 2008 Plan during the nine months ended September 30, 2015:

 

    Options
Outstanding
    Exercise     Weighted
Average
Remaining
    Aggregate     Weighted
Average
Exercise
 
    Number of     Price     Contractual     Intrinsic     Price  
    Shares     per Share     Life     Value     per Share  
Balance at December 31, 2014     350       $6.00 - 33.60       2.29 years     $  –     $ 15.09  
Options Granted                                      
Options Exercised                                      
Options Cancelled     (350 )                                
Balance at September 30, 2015                     $     $  
                                         
Exercisable December 31, 2014     350       $6.00 - 33.60       2.29 years     $     $ 15.09  
Exercisable September 30, 2015           $                 –           $     $  

 

The Company did not recognize any stock based compensation expense during the nine months ended September 30, 2015 or 2014.

  

Note 14: Warrants

 

The Company has warrants outstanding to purchase up to 300,000 shares of our common stock at September 30, 2015 and December 31, 2014.

 

In connection with the sale of the Company’s newly designated Series A Convertible Preferred Stock in May 2014, Chardan Capital Markets LLC (“Chardan”) acted as sole placement agent in consideration for which Chardan received a cash fee of $535,000 and a warrant to purchase up to 300,000 shares of the Company’s common stock. These warrants vested immediately, have an exercise price of $2.00 per share, and have a five year term.

16
 

 

The following schedule summarizes the changes in the Company’s outstanding warrants during the nine months ended September 30, 2015:

 

    Warrants
Outstanding
    Exercise     Weighted
Average
Remaining
  Aggregate     Weighted
Average
Exercise
 
    Number of     Price     Contractual   Intrinsic     Price  
    Shares     per Share     Life   Value     per Share  
Balance at December 31, 2014     300,000     $ 2.00     4.37 years         $ 2.00  
Warrants Granted                                  
Warrants Exercised                                  
Warrants Expired                                  
Balance at September 30, 2015     300,000     $ 2.00     3.88 years   $ 0     $ 2.00  
                                     
Exercisable December 31, 2014     300,000     $ 2.00     4.37 years         $ 2.00  
Exercisable September 30, 2015     300,000     $ 2.00     3.88 years   $ 0     $ 2.00  

  

Note 15: Income Taxes

 

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

 

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

  

At the adoption date of January 1, 2008, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.

 

The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of September 30, 2015 and December 31, 2014, 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.  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.

  

Note 16: Employment Agreements

 

On November 15, 2013, as a closing condition to the Merger, the Company entered into five-year employment agreements with Andrew Heyward to serve as Chief Executive Officer and Amy Moynihan Heyward to serve as President of the Company, for which each receives an annual base salary of $200,000 and $180,000, respectively.

 

Effective May 26, 2014, the Company entered into an employment agreement with Andrew Berman for the newly created position of Senior Vice President - International Sales. The agreement has a one year term with an additional one year term renewal subject to approval of the Company and Mr. Berman. The agreement provides for an annual salary of $175,000.

 

Effective July 14, 2014, the Company employed Stone Newman in the newly created operating position of President - Worldwide Consumer Products and executed a three-year employment agreement which either party may terminate on the 12th and 24th month anniversary upon thirty (30) days’ notice. Mr. Newman will have oversight over all consumer products, licensing and merchandising sales and rights for the Company’s brands and programming as well as certain brands he previously managed prior to his employment by the Company. The agreement provides Mr. Newman with an annual salary of $275,000 plus an additional participation for certain customers.

   

Note 17: Lease Commitments

 

As of December 31, 2014, the Company leased approximately 2,807 square feet of office space at 9401 Wilshire Boulevard, Beverly Hills, California pursuant to a standard office lease dated February 3, 2012. The lease had a term of 3 years, from May 1, 2012 through April 30, 2015. The monthly rent was $10,807 which was to be adjusted upward 3% each year on the anniversary of the lease. The Company did not renew this lease.

17
 

 

During the first quarter of 2015, the Company entered into an agreement for new office space to which it relocated its operations upon the expiration of its prior lease. Effective May 1, 2015, the Company began leasing approximately 3,251 square feet of general office space at 301 North Canon Drive, Suite 305, Beverly Hills, CA 90210 pursuant to a 35-month sub-lease that commenced on May 1, 2015. The Company will pay approximately $136,542 annually subject to annual escalations of 3%.

 

Rental expenses incurred for operating leases during the nine months ended September 30, 2015 and 2014 were $106,271 and $105,207, respectively.

 

The following is a schedule of future minimum lease payments required by the non-cancelable operating lease agreement:

 

Year   Amount  
2015   $ 34,113  
2016     139,273  
2017     143,451  
2018     36,214  
    $ 353,051  

  

Note 18: Commitment and Contingencies

 

In the normal course of the its business, the Company enters into agreements which call for the payment of royalties or “profit” participations for the use of third party intellectual property. For properties such as Gisele & The Green Team, Martha & Friends and Stan Lee and the Mighty 7, the Company is obligated to share net profits with the underlying rights holders on a certain basis, defined in the respective agreements.

 

In addition, the Company has also entered into an agreement with XingXing Digital Corporation, an animation company based in China pursuant to which in exchange for the investment of 100% of the costs of the animation, XingXing is entitled to receive a specified percentage of the net proceeds received by the Company from the exploitation of those series on which XingXing has provided animation services. The series covered by this arrangement are Secret Millionaires Club and Gisele & the Green Team.

 

The Company has also entered into a similar arrangement with another production vendor, BangZoom Entertainment, which calls for a payment of $120,000 from the net profits received by the Company from the exploitation of the series Secret Millionaires Club. The payment represents the deferral of certain costs and fees for audio/video post-production work performed by such vendor in connection with that series.

 

In July 2014, the Company has partnered with Symbiosis Technologies (“Symbiosis”) in which Symbiosis will provide certain pre-production and production services to the Company for the production of Thomas Edison’s Secret Lab in exchange for a certain percentage of the series’ forthcoming adjusted revenues as well as the ability to distribute the series in certain territories.

  

In December 2014, the Company has partnered with Telegael Teoranta (“Telegael”) in which Telegael will provide certain production services to the Company for the production of Thomas Edison’s Secret Lab in exchange for a certain percentage of the series’ forthcoming adjusted revenues as well as the ability to distribute the series in certain territories.

  

Note 19: Subsequent Events

 

Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred through the date of issuance of these financial statements.

 

On October 19, 2015, we entered into a Memorandum Regarding Services with Michael Handelman, our current Chief Financial Officer, effective as of November 1, 2015, which supersedes our previous agreement with Mr. Handelman and pursuant to which Mr. Handelman shall continue his engagement as our Chief Financial Officer for a period of one year from the effective date thereof, subject to renewal, in consideration for a fee of $10,000 per month plus reimbursement of certain out-of-pocket expenses.

 

On October 29, 2015, the Company entered into securities purchase agreements (the “Purchase Agreement”) with certain accredited investors pursuant to which the Company sold an aggregate of 4,330,000 shares of its common stock, par value $0.001 per and warrants to purchase up to an aggregate of 4,330,000 shares of common stock for a purchase price of $1.00 per share and gross proceeds to the Company of $4,330,000 (the “2015 Private Placement”). The closing of the 2015 Private Placement was subject to certain customary closing conditions and closed on November 3, 2015.

18
 

 

The warrants are exercisable into shares of common stock for a period of five (5) years from issuance at an initial exercise price of $1.10 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. The Company is prohibited from effecting an exercise of the warrants to the extent that as a result of such exercise, the holder would beneficially own more than 4.99% (subject to increase up to 9.99% upon 61 days’ notice) in the aggregate of the issued and outstanding shares of common stock, calculated immediately after giving effect to the issuance of shares of common stock upon exercise of the warrant.

 

Pursuant to the terms of the Purchase Agreements, beginning on the closing date of the 2015 Private Placement and ending sixty (60) days after the Effective Date (as defined in the Purchase Agreements), the Company shall not issue any securities, subject to certain exceptions. Additionally, until the later of (i) such time as the investors in the 2015 Private Placement, in the aggregate, hold less than 50% of the common stock originally purchased by them in the Private Placement and the average daily trading volume of the common stock for a period of ten (10) consecutive trading days is greater than $75,000 and (ii) the one year anniversary of the closing of the 2015 Private Placement, the Company has agreed to not sell any securities, subject to certain exceptions, at an effective per share price of common stock less than the purchase price of the common stock sold in the 2015 Private Placement then in effect.

 

The Company has agreed to file a “resale” registration statement with the Securities and Exchange Commission (the “SEC”) covering all shares of common stock and shares of common stock underlying the warrants issued or issuable in the 2015 Private Placement within 45 days of the closing of the 2015 Private Placement and to maintain the effectiveness of the registration statement until all securities have been sold or are otherwise able to be sold pursuant to Rule 144. The Company has agreed to use its reasonable best efforts to have the registration statement declared effective within 90 days of the closing of the 2015 Private Placement (or 120 days after such closing if the registration statement is subject to review by the SEC. The Company is obligated to pay to investors a fee of 1% per month in cash for every thirty day period up to a maximum of six (6%) percent, (i) that the registration statement has not been filed after the required filing date, (ii) following the required effectiveness date that the registration statement has not been declared effective; and (iii) as otherwise set forth in the Registration Rights Agreement.

 

Chardan acted as sole placement agent in the 2015 Private Placement in consideration for which Chardan received a cash fee of $300,000 and a five-year warrant to purchase up to 425,000 shares of common stock (the “Placement Agent Warrant”) at an initial exercise price of $1.20 per share. The terms of the Placement Agent warrant are identical to the warrants issued in the 2015 Private Placement except with respect to the exercise price thereof.

 

19
 

 

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 unaudited financial statements and related notes for the nine months ended September 30, 2015. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Overview

 

The MD&A 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.

 

Organization

 

The Company commenced operations in January 2006, assuming all of 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,” “Little Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,” and all then existing productions under those titles. In October 2011, the Company (i) changed its domicile to Nevada from California (the “Reincorporation”), and (ii) changed its name to Genius Brands International, Inc. from Pacific Entertainment Corporation. In connection with the Reincorporation, the Company changed its trading symbol from “PENT” to “GNUS”.

 

On November 15, 2013, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC (“A Squared”), A Squared Holdings LLC and A2E Acquisition LLC (the “Merger”). Upon closing of the Merger, which occurred concurrently with entering into the Merger Agreement, our acquisition sub merged with and into A Squared, and A Squared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business and operations of A Squared.

 

On April 2, 2014, the Company filed a certificate of amendment to its Articles of Incorporation to effect a reverse split of our issued and outstanding common stock on a one-for-one-hundred basis (the “Reverse Split”). The Reverse Split was effective with FINRA on April 7, 2014. All per share amounts referenced herein are reflective of the Reverse Split. 

 

Our Business

 

Genius Brands International, Inc. (“we”, “our” or the “Company”) is a global content and brand management company dedicated to providing entertaining and enriching “content and products with a purpose” for toddlers to tweens. Led by industry veterans Andrew Heyward (Chief Executive Officer) and Amy Moynihan Heyward (President), the Company produces original content and licenses the rights to that content to a variety of partners. Our licensees include (i) companies to which the audio-visual rights are licensed for exhibition in various formats such as Pay Television, Free or Broadcast Television, Video-on-Demand (“VOD”), subscription on demand (“SVOD”), DVDs/CDs and (ii) companies that develop and distribute products based on our content within different product categories such as toys, electronics, publishing, home goods, stationary and gifts.

 

The Company owns a portfolio of original children’s entertainment that is targeted at children from toddlers to teens including the award-winning Baby Genius, Warren Buffett's Secret Millionaires Club, Thomas Edison's Secret Lab and Stan Lee's Mighty 7, the first project from Stan Lee Comics, LLC , a joint venture with legendary Stan Lee's POW! Entertainment.

 

In addition to the Company’s wholly-owned brands, it also acts as licensing agent for certain brands, leveraging its existing licensing infrastructure to expand these brands into new product categories, new retailers, and new territories. These include the best-selling children’s book series, Llama Llama; Psycho Bunny, a luxury apparel line; From Frank, a humor greeting card and product line; and Celessence Technologies, the world's leading microencapsulation company.

 

Consistent with the Company’s strategy of securing widespread distribution for its content in a variety of formats and building awareness and engagement for its brands that in turn drives its consumer products business, the Company has expanded its successful relationship with Comcast beyond the already popular Baby Genius on-demand offering. The Company has announced it will launch a new Kid Genius Channel in the fourth quarter of 2015, offering 24-hours of video on-demand content that will be consistent with the Company’s “content and products with a purpose” mission. The new video on-demand channel will include the Company’s own content, in addition to other content the Company will curate to offer a robust line-up for kids. The Company’s Senior Vice President - International Sales, Andrew Berman, will oversee the channel.

20
 

 

Recent Developments

 

On September 18, 2015, our shareholder approved the adoption of the Company’s 2015 Incentive Plan and the reservation of 450,000 shares of common stock for issuance thereunder.

 

On October 29, 2015, we conducted a private placement with certain accredited investors pursuant to which we sold an aggregate of 4,330,000 shares of its common stock, par value $0.001 per and warrants to purchase up to an aggregate of 4,330,000 shares of common stock for a purchase price of $1.00 per share and gross proceeds to us of $4,330,000 (the “2015 Private Placement”). The closing of the 2015 Private Placement was subject to certain customary closing conditions and closed on November 3, 2015.

 

The warrants are exercisable into shares of common stock for a period of five (5) years from issuance at an initial exercise price of $1.10 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. The Company is prohibited from effecting an exercise of the warrants to the extent that as a result of such exercise, the holder would beneficially own more than 4.99% (subject to increase up to 9.99% upon 61 days’ notice) in the aggregate of the issued and outstanding shares of common stock, calculated immediately after giving effect to the issuance of shares of common stock upon exercise of the warrant.

 

Pursuant to the terms of the Purchase Agreements, beginning on the closing date of the 2015 Private Placement and ending sixty (60) days after the Effective Date (as defined in the Purchase Agreements), the Company shall not issue any securities, subject to certain exceptions. Additionally, until the later of (i) such time as the investors in the 2015 Private Placement, in the aggregate, hold less than 50% of the common stock originally purchased by them in the Private Placement and the average daily trading volume of the common stock for a period of ten (10) consecutive trading days is greater than $75,000 and (ii) the one year anniversary of the closing of the 2015 Private Placement, the Company has agreed to not sell any securities, subject to certain exceptions, at an effective per share price of common stock less than the purchase price of the common stock sold in the 2015 Private Placement then in effect.

 

The Company has agreed to file a “resale” registration statement with the Securities and Exchange Commission (the “SEC”) covering all shares of common stock and shares of common stock underlying the warrants issued or issuable in the 2015 Private Placement within 45 days of the closing of the 2015 Private Placement and to maintain the effectiveness of the registration statement until all securities have been sold or are otherwise able to be sold pursuant to Rule 144. The Company has agreed to use its reasonable best efforts to have the registration statement declared effective within 90 days of the closing of the 2015 Private Placement (or 120 days after such closing if the registration statement is subject to review by the SEC. The Company is obligated to pay to investors a fee of 1% per month in cash for every thirty day period up to a maximum of six (6%) percent, (i) that the registration statement has not been filed after the required filing date, (ii) following the required effectiveness date that the registration statement has not been declared effective; and (iii) as otherwise set forth in the Registration Rights Agreement.

 

Chardan Capital Markets LLC acted as sole placement agent in the 2015 Private Placement in consideration for which Chardan received a cash fee of $300,000 and a five-year warrant to purchase up to 425,000 shares of common stock (the “Placement Agent Warrant”) at an initial exercise price of $1.20 per share. The terms of the Placement Agent warrant are identical to the warrants issued in the 2015 Private Placement except with respect to the exercise price thereof.

  

Results of Operations

  

Comparison of Results of Operations for the Three months Ended September 30, 2015 and 2014

 

Below is a discussion of our operating results for the three months ended September 30, 2015, compared to our operating results during the comparable period in 2014. Net loss for the three months ended September, 2015, was $797,820 compared to net loss of $848,970 for the three months ended September 30, 2014. The decrease in net loss resulted from a decrease in revenue, a decrease in costs of sales, increases in operating costs, and offset by decreases in other expense, as described below.

 

Revenues.

 

   9/30/2015   9/30/2014   Change   % Change 
Licensing & Royalties  $98,035   $53,774   $44,261    82% 
Television & Home Entertainment   182,715    25,635    157,080    613% 
Product Sales       239,392    (239,392)   -100% 
Total Revenue  $280,750   $318,801   $(83,581)   -12% 

 

21
 

 

Licensing and royalty revenue includes items for which we license the rights to our copyrights and trademarks of our brands and those of the brands in which we act as a licensing agent. During the three months ended September 30, 2015 compared to September 30, 2014, this category increased $44,261 due to an increase in revenue from our established agency properties while the licensing programs of wholly owned properties are in development.

 

Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television, VOD, or SVOD in domestic and foreign markets and the sale of DVDs for home entertainment. During the three months ended September 30, 2015, Television & Home Entertainment revenue increased $157,080 compared to the three months ended September 30, 2014, as we continue to earn revenue from properties previously completed and begin delivering and meeting revenue recognition criteria of our current projects.

  

Product sales represent physical products including DVDs and CDs in which the Company holds intellectual property rights such as trademarks and copyrights to the characters and which are manufactured and sold by the Company either directly at wholesale to retail stores or online retailers. During the three months ended September 30, 2015, there were no product sales, for a decrease of $239,392 compared to the three months ended September 30, 2014 due to the change in business strategy whereby the Company has transitioned from the direct production and sale of physical products and their associated low-margins, to a licensing model in which these functions were outsourced to industry experts and category leaders. The Company plans to re-launch its Baby Genius brand in fourth quarter 2015 utilizing a newly designed and expanded product line, resulting in a period-over-period loss in Baby Genius sales.

  

Cost of Sales and Operating Costs.***

 

   9/30/2015   9/30/2014   Change   % Change 
Cost of Sales  $23,127   $172,870   $(149,743)   -87% 
General and Administrative   841,675    871,551    (29,876)   -3% 
Marketing and Sales   91,258    109,592    (18,334)   -17% 
Amortization of Film & TV Costs   42,642        42,642    N/A 
Depreciation & Amortization   36,673    29,673    7,000    24% 
Total Costs of Sales and Operating Costs  $1,035,375   $1,183,686   $(148,311)   -13% 

 

Cost of Sales decreased $149,743 during three months ended September 30, 2015 compared to the same period of 2014. The decrease was a result of the decrease in product sales discussed above as well as the elimination of the overhead associated with handling sales directly, replaced by a new model whereby these costs will be borne by our licensees.

 

General and Administrative expenses consist primarily of salaries, employee benefits, as well as other expenses associated with finance, legal, facilities, marketing, rent, and other professional services. General and administrative costs for the three months ended September 30, 2015 decreased $29,876 compared to the same period in 2014. The aggregate decrease for the category results primarily from increases in professional fees of $42,649 related to additional legal fees associated with the 2015 annual shareholder meeting as well as an arbitration that was settled in the fourth quarter. Offsetting these increases is a decrease in salaries and related expenses by $13,412 and a decrease in other general and administrative expenses by $58,386 due to decreases in consulting and investor relations fees.

 

Marketing and sales expenses decreased $18,334 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 primarily due to the amortization of certain prepaid marketing expenses which did not exist in the current period.

 

Other Income / (Expense).

 

   9/30/2015   9/30/2014   Change   % Change 
Other Income  $11,421   $22,156   $(10,735)   -48% 
Interest Expense   (723)       (723)   N/A  
Interest Expense - Related Parties   (6,224)   (6,241)   17    0% 
Gain (Loss) on Distribution Contracts   (47,650)    _   (47,650)   N/A  
Gain (Loss) on Foreign Currency Translation   (20)       (20)   N/A  
Net Other Income (Expense)  $(43,196)  $15,915   $(59,111)   -371% 

 

Other income (expense) represents non-operating income and expense such as interest expense and the gain or loss on certain transactions as well as unrealized foreign currency translation adjustments related to certain contracts denominated in foreign currency. For the three months ended September 30, 2015, other income (expense) totaled $(43,196) compared to $15,915 in the prior period of 2014. This $59,111 decrease was primarily the result of the company recognizing loss on a distribution contract originating pre-merger in the amount of $47,650 during the three months ended September 30, 2015.

  

22
 

 

Comparison of Results of Operations for the Nine months Ended September 30, 2015 and 2014

 

Below is a discussion of our operating results for the nine months ended September 30, 2015, compared to our operating results during the comparable period in 2014. Net loss for the nine months ended September 30, 2015, was $2,421,938 compared to net loss of $2,843,763 for the nine months ended September 30, 2014. The decrease in net loss resulted from a slight decrease in revenue, offset by decreases in costs of sales, increases in operating costs, and increases in other income, as described below.

 

Revenues.

 

   9/30/2015   9/30/2014   Change   % Change 
Licensing & Royalties  $372,022   $155,341   $216,681    139% 
Television & Home Entertainment   323,804    112,910    210,894    187% 
Product Sales   15,173    444,028    (428,855)   -97% 
Total Revenue  $710,999   $712,279   $(1,280)   0% 

 

Licensing and royalty revenue includes 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, 2015 compared to September 30, 2014, this category increased $216,681 due to increased licensing activity given the strategic restructuring of the Company in 2014.

 

Television & Home Entertainment revenue is generated from distribution of our properties for broadcast on television, VOD, or SVOD in domestic and foreign markets and the sale of DVDs for home entertainment. During the nine months ended September 30, 2015, Television & Home Entertainment revenue increased $210,894 compared to the nine months ended September 30, 2014, representing expanded distribution of our content given the strategic restructuring of the Company in 2014 in addition to the commencement of deliveries of Thomas Edison’s Secret Lab.

  

Product sales represent physical products including DVDs and CDs in which the Company holds intellectual property rights such as trademarks and copyrights to the characters and which are manufactured and sold by the Company either directly at wholesale to retail stores or online retailers. During the nine months ended September 30, 2015, product sales decreased by $428,855 compared to the nine months ended September 30, 2014 due to the change in business strategy whereby the Company has transitioned from the direct production and sale of physical products to a licensing model in which these functions were outsourced to industry experts and category leaders. The Company plans to re-launch its Baby Genius brand in fourth quarter 2015 utilizing a newly designed and expanded product line, resulting in a period-over-period loss in Baby Genius sales.

 

Cost of Sales and Operating Costs.

 

   9/30/2015   9/30/2014   Change   % Change 
Cost of Sales  $45,699   $414,017   $(368,318)   -89% 
General and Administrative   2,650,943    2,591,892    59,051    2% 
Marketing and Sales   342,318    234,286    108,032    46% 
Amortization of Film & TV Costs   42,642        42,642    N/A 
Depreciation & Amortization   96,823    83,301    13,522    16% 
Total Costs of Sales and Operating Costs  $3,178,425   $3,323,496   $(145,071)   -4% 

 

Cost of Sales decreased $368,318 during the nine months ended September 30, 2015 compared to the same period of 2014. The decrease was a result of the decrease in product sales discussed above as well as the elimination of the overhead associated with handling sales directly, replaced by a new model whereby these costs will be borne by our licensees.

 

General and Administrative expenses consist primarily of salaries, employee benefits, as well as other expenses associated with finance, legal, facilities, marketing, rent, and other professional services. General and administrative costs for the nine months ended September 30, 2015 increased $59,051 compared to the same period in 2014. The aggregate increase for the category results primarily from increases in salaries and related expense of $411,512 related to the addition of several critical hires in sales functions and digital initiatives offset by decreases in professional fees of $273,295 and bad debt expense of $56,550.

 

Marketing and sales expenses increased $108,032 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily due to an increase in trade show expenses which did not exist in the prior period as well as increases in other advertising expenses related to the increased size of the portfolio of brands the Company promotes.

 

23
 

 

Other Income / (Expense).

 

   9/30/2015   9/30/2014   Change   % Change 
Other Income  $16,965   $29,945   $(12,980)   -43% 
Interest Expense   (2,212)   (2,230)   18    1% 
Interest Expense - Related Parties   (18,544)   (19,611)   1,067    5% 
Gain (Loss) on Distribution Contracts   102,350    (47,229)   149,579    -317% 
Gain (Loss) on Impairment of Assets   (7,500)       (7,500)   N/A 
Gain (Loss) on Extinguishment of Debt       52,447    (52,447)   -100% 
Gain (Loss) on Disposition of Assets       (70,905)   70,905    -100% 
Gain (Loss) on Inventory       (174,963)   174,963    -100% 
Gain (Loss) on Deferred Financing Costs   (9,313)       (9,313)   N/A 
Gain (Loss) on Foreign Currency Translation   (36,258)       (36,237)   N/A 
Net Other Income (Expense)  $45,488   $(232,546)  $278,033    -120% 

 

Other income (expense) represents non-operating income and expense such as interest expense and the gain or loss on certain transactions as well as unrealized foreign currency translation adjustments related to certain contracts denominated in foreign currency. For the nine months ended September 30, 2015, other income totaled $45,488 compared to other expense of $(232,546) in the same period of 2014. This $278,033 increase was primarily the result of the termination of a distribution contract in which certain amounts that had been included in deferred revenue were recognized as a gain on the settlement of the contract as well as an additional amounts due to the Company to terminate the contract. Additionally, there were no further inventory write-offs in the current period.

 

Liquidity

 

Comparison of Cash Flows for the Nine months Ended September 30, 2015 and 2014

 

Cash totaled $2,147,931 and $5,167,606 at September 30, 2015 and 2014, respectively. The change in cash is as follows:

 

   9/30/2015   9/30/2014   Change 
Cash Used in Operating Activities  $(2,611,607)  $(1,624,920)  $(986,687)
Cash Used in Investing Activities   (292,074)   (89,481)   (202,593)
Cash Provided by Financing Activities   750,513    6,354,897    (5,604,384)
Increase (Decrease) in Cash  $(2,153,168)  $4,640,496   $(6,793,664)

 

During the nine months ended September 30, 2015, our primary source of cash was financing activity, specifically the collection of the second payment related to a long-term, exclusive supply chain services agreement. During the comparable period in 2014, our primary source of cash was financing activity including the collection of the first payment related to a long-term, exclusive supply chain services contract and the receipt of funds related to the issuance of preferred stock. During both periods, these funds were primarily used to fund operations as well as investments in fixed assets, intangible assets, and capitalized product development.

 

Operating Activities

 

Cash used in operating activities in the nine months ended September 30, 2015 was $2,611,607 as compared to cash used of $1,624,920 during the prior period, representing an increase in cash used in operating activities of $986,687 based on the operating results discussed above as well as increases in film and television costs related to the development and production of episodes of Thomas Edison’s Secret Lab and the development of Space Pop (working title).

 

Investing Activities

 

Cash used in investing activities for the nine months ended September 30, 2015 was $292,074 as compared to a use of $89,481 for the comparable period in 2014, representing an increase in cash used in investing activities of $202,593. This increase is primarily the result of approximately $121,000 spent on leasehold improvements in our new leased office space.

  

Financing Activities

 

Cash generated from financing activities during the nine months ended September 30, 2015 was $750,513 as compared to $6,354,897 generated in the comparable period in 2014 representing a decrease of $5,604,384. During the first quarter of 2014, the Company entered into a long-term, exclusive supply chain services agreement in which it will order a minimum level of disc replication, packaging and distribution services for its content across all physical media. As consideration for these minimum order levels, the Company received a total of $1,500,000, $750,000 during the first quarter of 2014 and $750,000 during the first quarter of 2015. Additionally, during the first quarter of 2014, the Company received net proceeds of $355,116 from the sale of its common stock offset by repayment of related party notes of $100,872. During the second quarter of 2014, the Company received net proceeds from the sale of its preferred stock of $5,379,915.

24
 

 

Capital Resources

 

As of September 30, 2015, the Company does not have any material commitments for capital expenditures.

 

Critical Accounting Policies

 

The Company’s 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 Company’s consolidated financial statements include the accounts of Genius Brands International, Inc. and its wholly owned subsidiary A Squared. All significant inter-company balances and transactions have been eliminated in consolidation.

  

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 ASC Topic 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 during the fourth quarter. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units. While we may use a variety of methods to estimate fair value for impairment testing, our primary methods are 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.

 

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. Additionally, the Company develops new videos, music, books and digital applications in addition to adding content, improved animation and bonus songs/features to its existing product catalog. In accordance with ASC 350 Intangible Assets and ASC 730 Research and Development, 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.

 

Films and Televisions Costs

 

The Company capitalizes production costs for episodic series produced in accordance with 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 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 their capitalized production costs annually and limits recorded amounts by their ability to recover such costs through expected future sales.

  

Revenue Recognition

 

The Company recognized 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 as required by ASC 605 Revenue Recognition.

 

Revenues associated with the sale of products, are recorded when shipped to customers pursuant to approved customer purchase orders resulting in the transfer of title and risk of loss.  Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reporting date.

 

The Company recognizes revenue in accordance with ASC Topic 926-605 Entertainment-Films - Revenue Recognition. Accordingly, the Company recognizes revenue when (i) persuasive evidence of a sale with customer exists, (ii) the film is complete and has been delivered or is available for delivery, (iii) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale, (iv) the arrangement fee is fixed or determinable, and (v) collection of the arrangement fee is reasonably assured.

 

25
 

 

For its distribution, TV, and home entertainment income the Company generally enters in to flat fee arrangements to deliver multiple films or episodes. The Company allocates revenue to each film or episode based on their relative fair market values and recognizes revenue as each film or episode is complete and available for delivery.

 

The Company’s licensing and royalty revenue represents both (a) variable payments based on net sales from brand licensees for content distribution rights. These license agreements are held in conjunction with third parties that are responsible for collecting fees due and remitting to the Company its share after expenses. Revenue from licensed products is recognized when realized or realizable based on royalty reporting received from licensees and (b) licensing income the Company recognizes revenue as an agent in accordance with ASC 605-45 Revenue Recognition - Principal Agent. Accordingly, the Company’s revenue is its gross billings to its customers less the amounts it pays to suppliers for their products and services.

  

Other Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

 

Off Balance Sheet Arrangements

 

As of September 30, 2015, the Company has no off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures that are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective for the period ended September 30, 2015, in ensuring that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

Changes in Internal Control over Financial Reporting.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations Over Internal Controls

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

  

26
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

There are presently no material pending legal proceedings to which the Company is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.

 

ITEM 1A. RISK FACTORS.

 

There have been no changes to the Risk Factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

There were no reportable events under this Item 3 during the six months ended September 30, 2015.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

  

ITEM 6. EXHIBITS.

 

Exhibit No. Description
31.1 Section 302 Certification of Chief Executive Officer.
   
31.2 Section 302 Certification of Chief Financial Officer.
   
32.1 Section 906 Certification of Chief Executive Officer.
   
32.2 Section 906 Certification of Chief Financial Officer
   
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF XBRL Definition Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document

 

 

27
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  GENIUS BRANDS INTERNATIONAL, INC.
   
Date: November 16, 2015 By: /s/ Andrew Heyward
   

Andrew Heyward, Chief Executive Officer

(Principal Executive Officer)

     
     
Date: November 16, 2015 By: /s/ Michael Handelman
    Michael Handelman, Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

 

 

 

 

28