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GENIUS BRANDS INTERNATIONAL, INC.

Date Filed : Dec 14, 2015

S-11genius_s1-12715.htmREGISTRATION STATEMENT

AS FILED WITH THE SECURITIES AND EXCHANGECOMMISSION ON DECEMBER 14, 2015

REGISTRATION NO. 333-        

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

 

REGISTRATION STATEMENT UNDER THE SECURITIESACT OF 1933

 

 

 

GENIUS BRANDS INTERNATIONAL, INC.

(Exact name of registrant as specified inits charter)

 

Nevada 7812 20-4118216
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

 

301 N. Canon Drive, Suite 305

Beverly Hills, CA 90210

310-273-4222

(Address, includingzip code, and telephone number, including area code, of principal executive offices)

 

Andrew Heyward

Chief Executive Officer

Genius Brands International, Inc.

301 N. Canon Drive, Suite 305

Beverly Hills, CA 90210

310-273-4222

(Name, address, including zip code, andtelephone number, including area code, of agent for service)

 

Copies to:

 

Harvey Kesner, Esq.

Jeff Cahlon, Esq.

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, NY 10006

Tel: 212-930-9700

Fax: 212-930-9725

 

Approximate date of commencement of proposed sale to the public:From time to time after the effective date of this registration statement.

 

If any of the securities being registered on this Form areto be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.☒

 

If this Form is filed to register additional securities foran offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registrationstatement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant toRule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of theearlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant toRule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of theearlier effective registration statement for the same offering. ☐

 

(COVER CONTINUES ON FOLLOWING PAGE)

 

   

 

 

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

☐ Large accelerated filer

☐ Accelerated filer

☐ Non-accelerated filer

☒ Smaller reporting company

 

 

CALCULATION OF REGISTRATIONFEE

 

Title of Class of Securities to be Registered 

Amount To

be Registered

  

Proposed

Maximum

Aggregate

Price

Per Share (3)

  

Proposed

Maximum

Aggregate

Offering

Price

 

Amount of

Registration

Fee

Common Stock, $0.001 par value per share (1)   3,480,000    shares    $1.00   $3,480,000  $350.44
Common Stock, $0.001 par value per share (2)   3,905,000    shares    $1.00   $3,905,000  $393.23
Total number of shares of common stock to be registered   7,385,000    shares        $7,385,000  $743.67

 

(1) Represents outstanding shares of common stock offered bythe selling stockholders.

 

(2) Represents shares of common stock issuable upon exerciseof warrants offered by the selling stockholders.

 

(3) Estimated solely for purposes of calculating the registrationfee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, using the average of the high and low prices as reportedon the OTCQB on December 7, 2015.

 

 

 

 

 

   

 

 

The information in this prospectusis not complete and may be changed. The selling stockholders may not sell these securities under this prospectus until the registrationstatement of which it is a part and filed with the Securities and Exchange Commission is effective. This prospectus is not anoffer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or saleis not permitted.

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION,DATED DECEMBER 14, 2015

 

GENIUS BRANDS INTERNATIONAL, INC.

7,385,000 Shares of Common Stock

 

This prospectus relates to the public offering of up to 7,385,000shares of common stock of Genius Brands International, Inc. by the selling stockholders, including 3,480,000 outstanding sharesand 3,905,000 shares issuable upon exercise of outstanding warrants.

 

The selling stockholders may sell common stock from time totime in the principal market on which the common stock is traded at the prevailing market price or in negotiated transactions.

 

We will not receive any of the proceeds from the sale of commonstock by the selling stockholders. We will pay the expenses of registering these shares.

 

Investing in our common stock involves a high degree ofrisk. You should consider carefully the risk factors beginning on page 3 of this prospectus before purchasing any ofthe shares offered by this prospectus.

 

Our common stock is quoted on theOTCQB and trades under the symbol “GNUS”. The last reported sale price of our common stock on the OTCQB onDecember 11, 2015, was $0.90 per share.

 

Neither the Securities and Exchange Commission nor any statesecurities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.Any representation to the contrary is a criminal offense.

 

The date of this prospectus is_________,2015.

 

 

 

 

 

   

 

 

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 3
Forward-Looking Statements 8
Use of Proceeds 8
Selling Security Holders 9
Plan of Distribution 13
Description of Securities 14
Description of Business 15
Description of Property 20
Legal Proceedings 20
Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Market Price of and Dividends on Registrant's Common Equity and Related Stockholder Matters 29
Changes in Accountants 30
Directors and Executive Officers 30
Executive Compensation 35
Security Ownership of Certain Beneficial Owners and Management 38
Certain Relationships and Related Transactions, and Director Independence 39
Additional Information 39
Indemnification for Securities Act Liabilities 39
Legal Matters 40
Experts 40
Financial Statements F-1

 

You may only rely on the information contained in this prospectusor that we have referred you to. We have not authorized anyone to provide you with different information. This prospectus doesnot constitute an offer to sell or a solicitation of an offer to buy any securities other than the common stock offered by thisprospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any common stock in anycircumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connectionwith this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs sincethe date of this prospectus or that the information contained by reference to this prospectus is correct as of any time afterits date.

 

 

 

 

 

 ii 

 

 

Prospectus Summary

 

This summary highlightsinformation contained elsewhere in this prospectus and does not contain all of the information that you should consider in makingyour investment decision. Before deciding to invest in our securities, you should read this entire prospectus carefully, includingthe sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our financial statements and related notes contained elsewhere in this prospectus.References in this prospectus to “we,” “us,” “our”, the “Company” and similar words,refer to Genius Brands International, Inc. and its wholly-owned subsidiary, A Squared Entertainment LLC, unless the context otherwiseindicates.

 

Overview

 

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

 

We own aportfolio of original children’s entertainment that is targeted at toddlers to teens including the award-winningBaby 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 ourwholly-owned brands, we also act as licensing agent for certain brands, leveraging our existing licensing infrastructure to expandthese brands into new product categories, new retailers, and new territories. These include the best-selling children’s bookseries, Llama Llama; Psycho Bunny, a luxury apparel line; From Frank, a humor greeting card and productline; and Celessence Technologies, the world's leading microencapsulation company.

 

On April 2, 2014,we filed a Certificate of Amendment to our Articles of Incorporation to effect a one-for-one-hundred reverse split of our commonstock (the “Reverse Split”). All per share amounts referenced herein are reflective of the Reverse Split.

 

Products

 

Original Content

 

We own and produceoriginal content that is meant to entertain and enrich toddlers to tweens. We have found it generally requires a period of threeyears from the inception of an idea, through production of the content and development and distribution of a range of consumerproducts to retail, creating an inevitable lag between the creation of the intellectual property to the realization of economicor accounting benefit of those assets. Our goal is to maintain a robust and diverse portfolio of brands, appealing to various interestsand ages, featuring evergreen topics with global appeal. Our portfolio of intellectual property can be licensed, re-licensed, andexploited for years to come, with revenue derived from multiple sources and territories.

 

Licensing Agent

 

Augmenting our originalcontent, we act as an agent for established brands which maximizes the existing infrastructure while creating incremental sourcesof revenue for us without additional overhead:

 

· Psycho Bunny: Inspired by the 17th-century maritime marauders and secret societies such as the infamous Skull & Bones, Psycho Bunny creates timeless wardrobe essentials that couple refined English tailoring with bold American design. Currently available in limited product categories in upscale department stores, we are expanding this popular brand to additional product lines, new retail outlets, and additional international territories. We have already signed licensees for headwear and footwear.
· From Frank: Already a popular line of greeting cards, we are expanding the brand into new product categories and have already signed licensees for publishing, stationery, gifts, lottery and more.
· Celessence: Celessence’s microencapsulation technology releases fragrance and is used to scent products including socks, stationery, toys, bedding and pillows. We are licensing this technology to a range of products from homewares, bedding, fragrance, automotive, pets, apparel and more.
· Llama Llama: With 9.4 million units in print, Anna Dewdney's Llama Llama books have all been New York Times bestsellers, with several titles claiming the #1 spot. Her work has been translated into eight languages. Praised as a “geographer extraordinaire of the emotional terrain of preschoolers and their mothers” (Chicago Tribune), Dewdney's soothing tales are synonymous with calming early childhood anxiety. Llama Llama Red Pajama was chosen as Jumpstart's Read for the Record book in 2011, setting the world record for the most reads of a particular book on one day. Dewdney is an outspoken advocate for literacy and many states and non-profits use her books for literacy campaigns and programs, including the Library of Congress.

 

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CompanyInformation

 

We were incorporatedin California on January 3, 2006 and reincorporated in Nevada in October 2011. Our principal executive offices are located at 301North Canon Drive, Suite 305, Beverly Hills, CA 90210. Our telephone number is 310-273-4222. We maintain an Internet website atwww.gnusbrands.com. The information contained on, connected to or that can be accessed via our website is not part of this prospectus.We have included our website address in this prospectus as an inactive textual reference only and not as an active hyperlink.

 

Private Placement of Common Shares and Warrants

 

On October 29, 2015,the Company entered into securities purchase agreements (the “October 2015 Purchase Agreements”) with certain accreditedinvestors (the “October 2015 Investors”) pursuant to which the Company sold an aggregate of 4,330,000 shares of commonstock and warrants (the “October 2015 Warrants”) to purchase up to an aggregate of 4,330,000 shares of common stockfor a purchase price of $1.00 per share (the “October 2015 Private Placement”) and gross proceeds to the Company of$4,330,000. The closing of the October 2015 Private Placement was subject to certain customary closing conditions and occurredon November 3, 2015.

 

The October 2015 Warrantsare exercisable into shares of common stock for a period of five (5) years from issuance at an initial exercise price of $1.10per share, subject to adjustment in the event of stock splits, dividends and recapitalizations. The Company is prohibited fromeffecting an exercise of the October 2015 Warrants to the extent that as a result of such exercise, the October 2015 Investor wouldbeneficially own more than 4.99% (subject to increase up to 9.99% upon 61 days’ notice) in the aggregate of the issued andoutstanding shares of common stock.

 

Pursuant to the October2015 Purchase Agreements, beginning on the closing date of the October 2015 Private Placement and ending sixty (60) days afterthe Effective Date (as defined in the October 2015 Purchase Agreements), the Company agreed not to issue any shares of common stockor securities convertible or exercisable into common stock, subject to certain exceptions. Additionally, until the later of (i)such time as the October 2015 Investors, in the aggregate, hold less than 50% of the shares of common stock originally purchasedin the October 2015 Private Placement and the average daily trading volume of the common stock for a period of ten (10) consecutivetrading days is greater than $75,000 and (ii) the one year anniversary of the closing of the October 2015 Private Placement, theCompany agreed to not sell any common stock or securities convertible or exercisable into common stock, subject to certain exceptions,at an effective per share price of common stock less than the purchase price per share of common stock sold in the October 2015Private Placement.

 

In connection withthe October 2015 Private Placement, the Company’s officers, directors and 10% or greater shareholders executed a lockup agreementwhereby they are prohibited from disposing of any of the Company’s common stock or securities convertible or exercisableinto the Company’s common stock held by them for a period of ninety (90) days from the closing of the October 2015 PrivatePlacement.

 

Pursuant to a registrationrights agreement entered into between the Company and the October 2015 Investors, the Company agreed to file a “resale”registration statement with the Securities and Exchange Commission (the “SEC”) covering the resale of all shares ofcommon stock and shares of common stock issuable upon exercise of the October 2015 Warrants issued pursuant to the October 2015Private Placement within 45 days of the closing of the October 2015 Private Placement (the “Filing Date”) andto maintain the effectiveness of the registration statement until all securities have been sold or are otherwise able to be soldpursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). The Company agreed to useits reasonable best efforts to have the registration statement declared effective within 90 days of the closing of the October2015 Private Placement (or 120 days after such closing if the registration statement is subject to review by the SEC (the “EffectivenessDate”). The Company is obligated to pay to the October 2015 Investors a fee of 1% per month in cash for every thirty dayperiod up to a maximum of six (6%) percent of the purchase price paid under the October 2015 Purchase Agreement, (i) that the registrationstatement has not been filed after the Filing Date, (ii) following the Effectiveness Date that the registration statement has notbeen declared effective; and (iii) as otherwise set forth in the Registration Rights Agreement.

 

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

 

About This Offering

 

This prospectus includes the resale of(i) 3,480,000 shares of common stock issued in the October 2015 Private Placement, (ii) 3,480,000 shares of common stock issuableupon exercise of the October 2015 Warrants, and (iii) 425,000 shares of common stock issuable upon exercise of the Placement AgentWarrants.

 

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Summary Consolidated Financial Data

 

The following tablesets forth our (i) summary statement of operations data for the years ended December 31, 2014 and 2013 derived from our auditedfinancial statements and related notes included elsewhere in this prospectus, (ii) summary statement of operations data for thenine months ended September 30, 2015 and 2014 derived from our unaudited financial statements included elsewhere in this prospectus,and (iii) summary consolidated balance sheet data as of September 30, 2015 derived from our unaudited consolidated financial statementsincluded elsewhere in this prospectus. Our financial statements are prepared and presented in accordance with generally acceptedaccounting principles in the United States. The results indicated below are not necessarily indicative of our future performance.You should read this information together with the section entitled “Management's Discussion and Analysis of Financial Conditionand Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

Statement of Operations Information:

 

   Year Ended
December 31, 2014
   Year Ended
December 31, 2013
 
Sales  $925,788   $2,556,538 
Net (loss)  $(3,728,599)  $(7,216,031)
Net (loss) per share (basic and diluted)  $(0.60)  $(5.10)
Weighted average shares of common stock  $6,254,497   $1,413,631 
             
   

Nine Months Ended

September 30, 2015

   

Nine Months Ended

September 30, 2014

 
Revenue   $ 710,999     $ 712,279  
Net (loss)   $ (2,421,938 )   $ (2,843,763 )
Net (loss) per share (basic and diluted)   $ (0.37 )   $ (0.46 )
Weighted average shares of common stock   $ 6,464,505     $ 6,129,391  
         
Balance Sheet Information:        

 

  December 31, 2014   December 31, 2013 
Working capital (deficit)  $2,514,132   $(490,732)
Total assets  $17,325,014   $14,592,177 
Total liabilities  $3,604,766   $3,096,075 
Accumulated (deficit)  $(21,152,654)  $(17,424,055)
Stockholders' equity  $13,720,248   $11,496,102 
             
   

September 30, 2015

       
Working capital   $ 148,486        
Total assets   $ 15,991,007        
Total liabilities   $ 4,674,153        
Accumulated (deficit)   $ (23,574,592 )      
Stockholders' equity   $ 11,316,854        

 

 

RISK FACTORS

 

Any investmentin our common stock involves a high degree of risk. Investors should carefully consider the risks described below and all of theinformation contained in this prospectus before deciding whether to purchase our common stock. Our business, financial conditionor results of operations could be materially adversely affected by these risks. This prospectus also contains forward-looking statementsthat involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus.

 

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Risks Related to Our Business

 

We have incurrednet losses since inception.

 

We have a historyof operating losses and incurred net losses in each fiscal quarter since our inception. For the nine months ended September 30,2015, we generated revenues of $710,999 and incurred a net loss of $2,421,938. For the year ended December 31, 2014, we generatedrevenues of $925,788 and incurred a net loss of $3,728,599, while for the previous year, we generated revenue of $2,556,538 andincurred a net loss of $7,216,031. These losses, among other things, have had an adverse effect on our results of operations, financialcondition, stockholders’ equity, net current assets and working capital.

 

We will need to generateadditional revenue to achieve profitability. We have already achieved significant cost savings and are beginning to generate revenuesderived from our existing properties, properties in production, new brands being introduced into the marketplace, the re-launchof Baby Genius, and incremental revenue derived from the licensing business we manage on behalf of our clients. However, the abilityto sustain these revenues and generate significant additional revenues or achieve profitability will depend upon numerous factorssome of which are outside of our control.

 

We may needadditional capital to fund our growing operations.  If we are not able to obtain sufficient capital, we may then be forcedto limit the scope of our operations.

 

We expect that as our business continues to grow we may need additional workingcapital. While we believe that we will be able to fund our business through operating cash flows generated though our enhancedbusiness model, if these cash flows are less than anticipated or do not come to fruition in the time horizon we anticipate, wewill require additional debt and/or equity financing to sustain our operations. If adequate additional debt and/or equity financingis not available on reasonable terms or at all, we may not be able to continue to expand our business, and we will have to modifyour business plans accordingly. These factors could have a material adverse effect on our future operating results and our financialcondition.

 

If we reach a pointwhere we are unable to raise needed additional funds to continue as a going concern, we could be forced to cease our activitiesand dissolve. In such an event, we will need to satisfy various creditors and other claimants, severance, lease termination andother dissolution-related obligations.

 

Our ability to raisefinancing through sales of equity securities depends on general market conditions and the demand for our common stock. We may beunable to raise adequate capital through sales of equity securities, and if our stock has a low market price at the time of suchsales, our existing stockholders could experience substantial dilution. If adequate financing is not available or unavailable onacceptable terms, we may find we are unable to fund expansion, continue offering products and services, take advantage of acquisitionopportunities, develop or enhance services or products, or to respond to competitive pressures in the industry which may jeopardizeour ability to continue operations.

 

Restrictionson subsequent equity sales under the October 2015 Purchase Agreements may make it more difficult for us to raise additional capitalin the future.

 

Pursuant to the October2015 Purchase Agreements, beginning on the closing date of the October 2015 Private Placement and ending sixty (60) days afterthe Effective Date (as defined in the October 2015 Purchase Agreements), the Company agreed not to issue any shares of common stockor securities convertible or exercisable into common stock, subject to certain exceptions. Additionally, until the later of (i)such time as the October 2015 Investors, in the aggregate, hold less than 50% of the shares of common stock originally purchasedin the October 2015 Private Placement and the average daily trading volume of the common stock for a period of ten (10) consecutivetrading days is greater than $75,000 and (ii) the one year anniversary of the closing of the October 2015 Private Placement, theCompany agreed to not sell any common stock or securities convertible or exercisable into common stock, subject to certain exceptions,at an effective per share price of common stock less than the purchase price per share of common stock sold in the October 2015Private Placement. These provisions may make it more difficult for us to raise capital in the future.

 

Our revenuesand results of operations may fluctuate from period to period.

 

Cash flow and projectionsfor any entertainment company producing original content can be expected to fluctuate until the animated content and ancillaryconsumer products are in the market and could fluctuate thereafter even when the content and products are in the marketplace. Thereis significant lead time in developing and producing animated content before that content is in the marketplace. Unanticipateddelays in entertainment production can delay the release of the content into the marketplace. Structured retail windows that dictatewhen new products can be introduced at retail are also out of our control. While we believe we have mitigated this in part by creatinga slate of properties at various stages of development or production as well as representing certain established brands which contributeimmediately to cash flow, any delays in the production and release of our content and products or any changes in the preferencesof our customers could result in lower than anticipated cash flows.

 

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As with our cash flows,our revenues and results of operations depend significantly upon the appeal of our content to our customers, the timing of releasesof our products and the commercial success of our products, none of which can be predicted with certainty. Accordingly, our revenuesand results of operations may fluctuate from period to period. The results of one period may not be indicative of the resultsof any future period. Any quarterly fluctuations that we report in the future may not match the expectations of market analystsand investors. This could cause the price of our common stock to fluctuate.

 

Production cost willbe amortized according to the individual film forecasting methodology. If estimated remaining revenue is not sufficient to recoverthe unamortized production costs, the unamortized production costs will be written down to fair value. In any given quarter, ifwe lower our previous forecast with respect to total anticipated revenue, we will be required to adjust amortization of relatedproduction costs. These adjustments would adversely impact our business, operating results and financial condition.

 

Changes inthe United States, global or regional economic conditions could adversely affect the profitability of our business.

 

Adecrease in economic activity in the United States or in other regions of the world in which we do business could adversely affectdemand for our products, thus reducing our revenue and earnings. A decline in economic conditions could reduce demand for andsales of our products. In addition, an increase in price levels generally, or in price levels in a particular sector, could resultin a shift in consumer demand away from the animated content and consumer products we offer, which could also decrease our revenues,increase our costs, or both.

 

Inaccuratelyanticipating changes and trends in popular culture, media and movies, fashion, or technology can negatively affect our sales.

 

While trends in thetoddler to tween sector change quickly, we respond to trends and developments by modifying, refreshing, extending, and expandingour product offerings on an on-going basis. However, we operate in extremely competitive industries where the ultimate appeal andpopularity of content and products targeted to this sector can be difficult to predict. We believe our focus on “contentand products with a purpose” serves an underrepresented area of the toddler to tween market; however, if the interest ofour audience trends away from our current properties toward other offerings based on current media, movies, animated content orcharacters, and if we fail to accurately anticipate trends in popular culture, movies, media, fashion, or technology, our productsmay not be accepted by children, parents, or families and our revenues, profitability, and results of operations may be adverselyaffected.

 

If we are unableto compete effectively with existing or new competitors, our sales and market share could decline.

 

The industries inwhich we operate are competitive, and our results of operations are sensitive to, and may be adversely affected by, competitivepricing, promotional pressures, additional competitor offerings and other factors, many of which are beyond our control. Indirectlythrough our licensing arrangements, we compete for retailers as well as other outlets for the sale and promotion of our licensedmerchandise. Our primary competition comes from competitors such as The Walt Disney Company, Nickelodeon Studios, and the CartoonNetwork.

 

We have sought a competitiveadvantage by providing “content and products with a purpose” which are both entertaining and enriching for childrenand offer differentiated value that parents seek in making purchasing decisions for their children. While we do not believe thatthis value proposition is specifically offered by our competitors, our competitors have greater financial resources and more developedmarketing channels than we do which could affect our ability, through our licensees, to secure shelf space thereby decreasing ourrevenues or affecting our profitability and results of operations.

 

The productionof our animated content is accomplished through third-party production and animation studios around the world, and any failureof these third-parties could negatively impact our business.

 

As part of our businessmodel, to manage cash flows, we have partnered with a number of third-party production and animation studios around the world forthe production of our new content in which these partners fund the production of the content in exchange for a portion of revenuesgenerated in certain territories. We are reliant on our partners to produce and deliver the content on a timely basis meeting thepredetermined specifications for that product. The delivery of inferior content could result in additional expenditures by us tocorrect any problems to ensure marketability. Further, delays in the delivery of the finished content to us could result in ourfailing to deliver the product to broadcasters to which it has been pre-licensed. While we believe we have mitigated this riskby aligning the economic interests of our partners with ours and managing the production process remotely on a daily basis, anyfailures or delays from our production partners could negatively affect our profitability.

 

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If we fail tohonor our obligations under the terms of our third party supply agreements, our business may be adversely affected.

 

In early 2014, weentered into an exclusive 3-year arrangement with Sony DADC US Inc. which gives Sony the right to fulfill our DVD and CD duplicationrequirements for our product. In consideration for these exclusive rights we received an initial marketing support payment of $750,000with an additional $750,000 paid in February 2015. Sony will recoup the marketing support payment through a premium on the physicalmedia unit costs. We are obligated to repay a pro-rata portion of the marketing support payment if we do not order a minimum numberof DVD/CD units during the term. However, while we believe the minimum order threshold is achievable over the term based on ourexisting properties and properties currently in production or in development, if we does not meet the minimum order threshold wewould be obligated to repay any outstanding balances in 2017 and to do so may require it to divert funds from operations whichmay have a material adverse effect on its business.

 

Failure to successfullymarket or advertise our products could have an adverse effect on our business, financial condition and results of operations.

 

Our products are marketedworldwide through a diverse spectrum of advertising and promotional programs. Our ability to sell products is dependent in partupon the success of these programs. If we or our licensees do not successfully market our products or if media or other advertisingor promotional costs increase, these factors could have an adverse effect on our business, financial condition, and results ofoperations.

 

In addition, the availabilityof retailer programs relating to product placement, co-op advertising and market development funds, and our ability and willingnessto pay for such programs, are important with respect to promoting our properties. In addition, although we may have agreementsfor the advertising and promotion of our products through our licensees, we will not be in direct control of those marketing effortsand those efforts may not be done in a manner that will maximize sales of our products and may have a material adverse effect onour business and operations.

 

We may not beable to keep pace with technological advances.

 

The entertainmentindustry in general, and the music and motion picture industries in particular, continue to undergo significant changes, primarilydue to technological developments. Because of the rapid growth of technology, shifting consumer tastes and the popularity and availabilityof other forms of entertainment, it is impossible to predict the overall effect these factors could have on potential revenue from,and profitability of, distributing entertainment programming. As it is also impossible to predict the overall effect these factorscould have on our ability to compete effectively in a changing market, if we are not able to keep pace with these technologicaladvances, our revenues, profitability and results from operations may be materially adversely affected.

 

Loss of keypersonnel may adversely affect our business.

 

Our success greatlydepends on the performance of our executive management team, including Andrew Heyward, our Chief Executive Officer and Amy MoynihanHeyward, our President. The loss of the services of any member of our core executive management team or other key persons couldhave a material adverse effect on our business, results of operations and financial condition.

 

Our managementteam currently owns a substantial interest in our voting stock.

 

Our officers and directorscontrol a substantial portion of our voting securities. Therefore, our management may significantly affect the outcome of all corporateactions and decisions for an indefinite period of time including election of directors, amendment of charter documents and approvalof mergers and other significant corporate transactions. In addition, sales of significant amounts of shares held by our directorsand executive officers, or the prospect of these sales, could adversely affect the market price of our common stock.

 

Litigation mayharm our business or otherwise distract management.

 

Substantial, complexor extended litigation could cause us to incur large expenditures and could distract management. For example, lawsuits bylicensors, consumers, employees or stockholders could be very costly and disrupt business. While disputes from time to time arenot uncommon, we may not be able to resolve such disputes on terms favorable to us.

 

 6 

 

 

Our vendorsand licensees may be subject to various laws and government regulations, violation of which could subject these parties to sanctionswhich could lead to increased costs or the interruption of normal business operations that could negatively impact our financialcondition and results of operations.

 

Our vendors and licenseesmay operate in a highly regulated environment in the US and international markets. Federal, state and local governmental entitiesand foreign governments may regulate aspects of their businesses, including the production or distribution of our content or products.These regulations may include accounting standards, taxation requirements (including changes in applicable income tax rates, newtax laws and revised tax law interpretations), product safety and other safety standards, trade restrictions, regulations regardingfinancial matters, environmental regulations, advertising directed toward children, product content, and other administrative andregulatory restrictions. While we believe our vendors and licensees take all the steps necessary to comply with these laws andregulations, there can be no assurance that they are compliant or will be in compliance in the future. Failure to comply couldresult in monetary liabilities and other sanctions which could increase our costs or decrease our revenue resulting in a negativeimpact on our business, financial condition and results of operations.

 

Protecting anddefending against intellectual property claims may have a material adverse effect on our business.

 

Our ability to competein the animated content and entertainment industry depends, in part, upon successful protection of our proprietary and intellectualproperty. We protect our property rights to our productions through available copyright and trademark laws and licensing and distributionarrangements with reputable companies in specific territories and media for limited durations. Despite these precautions, existingcopyright and trademark laws afford only limited, or no, practical protection in some jurisdictions. It may be possible for unauthorizedthird parties to copy and distribute our productions or portions of our productions. In addition, although we own most of the musicand intellectual property included in our products, there are some titles which the music or other elements are in the public domainand for which it is difficult or even impossible to determine whether anyone has obtained ownership or royalty rights. It is aninherent risk in our industry that people may make such claims with respect to any title already included in our products, whetheror not such claims can be substantiated. Litigation may be necessary in the future to enforce our intellectual property rights,to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claimsof infringement or invalidity. Any such litigation could result in substantial costs and the resulting diversion of resources couldhave an adverse effect on our business, operating results or financial condition.

 

Risks Related to Our Common Stock

 

Our common stockmay be affected by limited trading volume and price fluctuations which could adversely impact the value of our common stock.

 

Trading in our commonstock can fluctuate significantly and there can be no assurance that an active trading market will either develop or be maintained.Our common stock is expected to continue to experience significant price and volume fluctuations. This trading activity could adverselyaffect the market price of our common stock without regard to our operating performance. In addition, we believe that factors suchas quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial marketscould cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodicallyenter the market in the belief that our stock price will decline in the future. We cannot predict the actions of market participantsor the stock market as a whole. We can offer no assurances that the market for our common stock will be stable or that our stockprice will fluctuate in a manner that is consistent with our operating results.

 

We do not expectto pay dividends in the future and any return on investment may be limited to the value of our common stock.

 

We do not currentlyanticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings,financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant.Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and developmentand marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to theholders of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of our Board ofDirectors. If we do not pay dividends, our common stock may be less valuable because the return on investment will only occur ifits stock price appreciates.

 

 7 

 

 

We are authorizedto issue “blank check” preferred stock without stockholder approval, which could adversely impact the rights of holdersof our common stock.

 

Our Articles of Incorporationauthorize us to issue up to 10,000,000 shares of blank check preferred stock, 6,000 shares of which have been designated SeriesA Convertible Preferred Stock (see “Description of Securities”). Any additional preferred stock that we issue in thefuture may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rightsthan our common stock. In addition, such preferred stock may contain provisions allowing those shares to be converted into sharesof common stock, which could dilute the value of common stock to current stockholders and could adversely affect the market price,if any, of our common stock. In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging,delaying or preventing a change in control of the Company. Although we have no present intention to issue any additional sharesof authorized preferred stock, there can be no assurance that we will not do so in the future.

 

If we fail tomaintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

 

Our internal controlover financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of whichmay have an adverse impact on the price of our common stock.  We are required to establish and maintain appropriate internalcontrols over financial reporting. Failure to establish those controls, or any failure of those controls once established, couldadversely affect our public disclosures regarding our business, prospects, financial condition or results of operations.

 

Rules adopted by theSEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financialreporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accountingfirm. The standards that must be met for management to assess the internal controls over financial reporting as effectiveare evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards.We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficultfor us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal controlover financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As aresult, we may not be able to complete the assessment and remediation process on a timely basis. In addition, management’sassessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in ourinternal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceivedweaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’sassessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

FORWARD-LOOKING STATEMENTS

 

This prospectus containsforward-looking statements. Such statements include statements regarding our expectations, hopes, beliefs or intentions regardingthe future, including but not limited to statements regarding our market, strategy, competition, development plans (including acquisitionsand expansion), financing, revenues, operations, and compliance with applicable laws. Forward-looking statements involve certainrisks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that couldcause actual results to differ materially from such forward-looking statements include the risks described in greater detail inthe section of this prospectus entitled “Risk Factors”. All forward-looking statements in this document are made asof the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-lookingstatement, except as may be required under applicable securities laws. Market data used throughout this prospectus is based onpublished third party reports or the good faith estimates of management, which estimates are based upon their review of internalsurveys, independent industry publications and other publicly available information. Management believes such third party sourcesare reliable, but there can be no assurance that such data is in fact accurate.

 

You should reviewcarefully the section entitled “Risk Factors” for a discussion of these and other risks that relate to our businessand investing in shares of our common stock.

 

USE OF PROCEEDS

 

We will receive no proceeds from the saleof shares of common stock offered by the selling stockholders. However, we will generate proceeds from the cash exercise of thewarrants by the selling stockholders, if any. We intend to use those proceeds for general corporate purposes.

 

 8 

 

 

SELLING SECURITY HOLDERS

 

The common stock being offered by the sellingshareholders are those previously issued to the selling shareholders, and those issuable to the selling shareholders, upon exerciseof the warrants. For additional information regarding the issuances of those shares of common stock and warrants, see “PrivatePlacement of Common Shares and Warrants” above. We are registering the shares of common stock in order to permit the sellingshareholders to offer the shares for resale from time to time. Except for the ownership of the shares of common stock and the warrants,the selling shareholders have not had any material relationship with us within the past three years.

 

The table below lists the selling shareholdersand other information regarding the beneficial ownership of the shares of common stock by each of the selling shareholders. Thesecond column lists the number of shares of common stock beneficially owned by each selling shareholder, based on its ownershipof the shares of common stock and warrants, as of November 16, 2015, assuming exercise of the warrants held by the selling shareholderson that date, without regard to any limitations on exercises.

 

The third column lists the shares of commonstock being offered by this prospectus by the selling shareholders.

 

In accordance with the terms of aregistration rights agreement with the selling shareholders, this prospectus generally covers the resale of the sum of (i)the number of shares of common stock issued to the selling shareholders in the October 2015 Private Placement and (ii) themaximum number of shares of common stock issuable upon exercise of the related warrants, determined as if the outstandingwarrants were exercised in full as of the trading day immediately preceding the date this registration statement wasinitially filed with the SEC, each as of the trading day immediately preceding the applicable date of determination and allsubject to adjustment as provided in the registration right agreement, without regard to any limitations on the exercise ofthe warrants. The fourth column assumes the sale of all of the shares offered by the selling shareholderspursuant to this prospectus.

 

Under the terms of the warrants, a sellingshareholder may not exercise the warrants to the extent such exercise would cause such selling shareholder, together with its affiliates,to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding common stock followingsuch exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the warrants whichhave not been exercised. The number of shares in the second column does not reflect this limitation. The selling shareholders maysell all, some or none of their shares in this offering. See “Plan of Distribution.”

 

 9 

 

 

Selling stockholder  Number of shares beneficially owned before offering Number of shares offered Number of shares beneficially owned after offering  Percentage of outstanding shares beneficially owned after offering (1)
Alexis Bard Johnson  50,000   50,000 (2) 0  *
American Capital Management LLC (3)  200,000  

100,000 (4)

100,000 

*

Angus Patrick Deeney UTMA Joseph Reda as Custodian (5)  35,000  

20,000 (6)

15,000 

*

Anne R. Brown IRR Trust UAD 3.30.1990 (7)  50,000  

50,000 (2)

0 

*

Anson Investments Master Fund LP (8)  700,000  

700,000 (9)

0 

*

Bard Micro Cap Value Fund LP (10)  200,000  

200,000 (11)

0 

*

Breanna Maria Reda UTMA Joseph Reda as Custodian (5)  35,000  

20,000 (6)

15,000 

*

Brio Capital Master Fund Ltd. (12)  1,041,450  

700,000 (9)

341,450  2.3%
Carey Family Trust UAD 2/7/94 (13)  50,000  

50,000 (2)

0 

*

Claire Estie Deeney UTMA Joseph Reda as Custodian (5)  35,000  

20,000 (2)

15,000 

*

CVI Investments, Inc. (5) (14)  200,000  

200,000 (11)

0  *
David Jenkins  200,000   200,000 (11) 0  *
Deborah B. Dewing Trust 6-1-1999  50,000  

50,000 (2)

0 

*

Declaration of Trust of Dale F. Snavely UAD 3.30.93  100,000  

100,000 (4)

0 

*

Dustin Russell Reda UTMA Joseph Reda as Custodian (5)  35,000  

20,000 (2)

15,000 

*

Elizabeth Arno  70,000   70,000 (15) 0  *
Elliot J. Steinbaum  50,000   50,000 (2) 0  *
Empery Asset Master, Ltd (16)  230,702  

230,702 (17)

0 

*

Empery Tax Efficient II, LP (18)  217,854  

217,854 (19)

0 

*

Empery Tax Efficient, LP (20)  151,444  

151,444 (21)

0 

*

Goron K. Kapes  50,000   50,000 (2) 0  *
Henry J. Underwood Trust UAD 6/25/02  80,000  

80,000 (22)

0 

*

Intracoastal Capital, LLC (5) (23)  50,000  

50,000 (2)

0 

*

Iroquois Capital Investment Group, LLC (24)  163,793  

150,000 (25)

13,793 

*

Iroquois Master Fund Ltd. (26)  1,171,452  

400,000 (27)

854,652  5.5%
James D. Gerson  600,000   600,000 (28) 0  *
James Leland Boddy  50,000   50,000 (2) 0  *
Jason Adelman (5)  50,000   50,000 (2) 0  *
JBA Investments LLC (5) (29)  30,000  

30,000 (30)

0 

*

Joseph William Reda UTMA Joseph Reda as Custodian (5)  35,000  

20,000 (2)

15,000 

*

Katharine B. Dickson & Mark A. Dickson JTWROS  200,000  

200,000 (11)

0 

*

Kingsbrook Opportunities Master Fund LP (31)  450,000  

200,000 (11)

250,000  1.7%
Laurie M. Harmon Trust of 1996 UAD 9/12/96  50,000  

50,000 (2)

0 

*

M. Edward Sellers & Suzan D. Boyd JTWROS  200,000  

200,000 (11)

0 

*

Marvin J. Pollack Trust UAD 5.22.90  50,000  

50,000 (2)

0 

*

Mary A Heatter Trust UAD 6.28.2004  50,000  

50,000 (2)

0 

*

Michael E. Donnelly (5)  55,000   50,000 (2) 5,000  *
MJA Investments (5) (29)  30,000  

30,000 (30)

0 

*

Next Generation Trust Services FBO Andrew Arno IRA (5)  70,000  

70,000 (15)

0 

*

Palm Global Fund, LLC (32)  200,000  

200,000 (11)

0 

*

Richard Molinsky  125,000   100,000 (4) 25,000  *
Robert S. Steinbaum  50,000   50,000 (2) 0  *
Rosemary Steinbaum  50,000   50,000 (2) 0  *
Scot Cohen  150,000   150,000 (25) 0  *
Seville Enterprises L.P. (33)  50,000  

50,000 (2)

0 

*

Sidney N. Herman  200,000   200,000 (11) 0  *
Steinbaum Family Trust (34)  50,000  

50,000 (2)

0 

*

T. Michael Johnson & Patricia R. Johnson JTWROS  50,000  

50,000 (2)

0 

*

The Special Equities Group, LLC(5) (35)  530,000  

470,000 (36)

60,000 

*

Timothy B. Johnson  200,000   200,000 (11) 0  *
William G Escamilla Trust UAD 7/29/03  50,000  

50,000 (2)

0 

*

William Kellogg 2011 Trust UAD 1-4-11 FBO C. Kellogg (37)  50,000  

50,000 (2)

0 

*

William Kellogg 2011 Trust UAD 1-4-11 FBO K. Kellogg (37)  50,000  

50,000 (2)

0 

*

Chardan Capital Markets, LLC (39)  175,000   85,000 (38) 90,000  *

 

 10 

 

 

(1)Based on 10,859,450 shares of common stock outstandingas of November 16, 2015.
(2)Includes 25,000 shares of common stock and 25,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(3)Kimberly Page has voting and dispositive power over thesecurities held by the selling stockholder.
(4)Includes 50,000 shares of common stock and 50,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(5)The selling stockholder is an affiliate of a broker-dealer.The selling stockholder purchased the securities in the ordinary course of business, and at the time of the purchase of the securities,did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
(6)Includes 10,000 shares of common stock and 10,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(7)Rocky W. Hudson has voting and dispositive power over thesecurities held by the selling stockholder.
(8)M5V Advisors Inc and Frigate Ventures LP (“M5V”and “Frigate”), the Co-Investment Advisers of Anson Investments Master Fund LP (“Anson”), hold votingand dispositive power over the common shares held by Anson. Bruce Winson is the managing member of Admiralty Advisors LLC, whichis the general partner of Frigate. Moez Kassam and Adam Spears are directors of M5V. Mr. Winson, Mr. Kassam and Mr. Spears eachdisclaim beneficial ownership of these common shares except to the extent of their pecuniary interest therein.
(9)Includes 350,000 shares of common stock and 350,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(10)Timothy B. Johnson has voting and dispositive power overthe securities held by the selling stockholder.
(11)Includes 100,000 shares of common stock and 100,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(12)Shaye Hirsch has voting and dispositive power over thesecurities held by the selling stockholder.
(13)Stuart S. Carey has voting and dispositive power over thesecurities held by the selling stockholder.
(14)Heights Capital Management, Inc., the authorized agentof CVI Investments Inc. (“CVI”) has discretionary authority to vote and dispose of the shares held by CVI and maybe deemed to be the beneficial owner of these shares. Martin Kobinger, in his capacity as Investment Manager of Heights CapitalManagement, Inc., may also be deemed to have investment discretion and voting power over the share held by CVI. Mr. Kobinger disclaimsany beneficial ownership of these shares.
(15)Includes 35,000 shares of common stock and 35,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(16)Empery Asset Management LP, the authorized agent of EmperyAsset Master Ltd (“EAM”), has discretionary authority to vote and dispose of the shares held by EAM and may be deemedto be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery AssetManagement LP, may also be deemed to have investment discretion and voting power over the shares held by EAM. EAM, Mr. Hoe andMr. Lane each disclaim any beneficial ownership of these shares.

(17)Includes 115,351 shares of common stock and 115,351 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(18)Empery Asset Management LP, the authorized agent of EmperyTax Efficient II, LP ("ETE II"), has discretionary authority to vote and dispose of the shares held by ETE II and maybe deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of EmperyAsset Management LP, may also be deemed to have investment discretion and voting power over the shares held by ETE II. ETE II,Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares.

(19)Includes 108,927 shares of common stock and 108,927 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(20)Empery Asset Management LP, the authorized agent of EmperyTax Efficient, LP (“ETE”), has discretionary authority to vote and dispose of the shares held by ETE and may be deemedto be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery AssetManagement LP, may also be deemed to have investment discretion and voting power over the shares held by ETE. ETE, Mr. Hoe andMr. Lane each disclaim any beneficial ownership of these shares.
(21)Includes 75,722 shares of common stock and 75,722 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(22)Includes 40,000 shares of common stock and 40,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(23)Michael P. Kopin and Daniel B. Asher, each of whom aremanagers of Intracoastal Capital LLC (“Intercoastal”), have shared voting control and investment discretion over thesecurities reported herein that are held by Intracoastal. As a result, each of Mr. Kopin and Mr. Asher may be deemed to have beneficialownership (as determined under Section 13(d) of the Exchange Act of the securities reported herein that are held by Instracoastal.Mr. Asher, who is a manager of Intracoastal, is also a control person of a broker-dealer. As a result of such common control,Instracoastal may be deemed to be an affiliate of a broker-dealer. Instracoastal acquired the securities being registered hereunderin the ordinary course of business, and at the time of the acquisition of the securities, Instracoastal did not have any arrangementsor understandings with any person to distribute such securities.

 

 

 

 

 

 11 

 

 

(24)Richard Abbe and Joshua Silverman have voting and dispositivepower over the securities held by the selling stockholder.
(25)Includes 75,000 shares of common stock and 75,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(26)Iroquois Capital Management, L.L.C. (“Iroquois Capital”) is the investment manager of Iroquois Master Fund, Ltd (“IMF”). Consequently, Iroquois has voting and investment discretion over securities held by IMF. As managing members of Iroquois Capital, Joshua Silverman and Richard Abbe make voting and investment decisions on behalf of Iroquois Capital in its capacity as investment manager to IMF. As a result of the foregoing, Mr. Silverman and Mr. Abbe may be deemed to have beneficial ownership (as determined under Section 13d of the Exchange Act) of the securities held by IMF. The selling stockholder owns shares of Series A Preferred Stock which may not be converted to common stock to the extent such conversion would result in the holder beneficially owning more than 9.99% of the outstanding common stock. The number of shares deemed beneficially owned is limited accordingly. See “Secutity Ownership of Certain Beneficial Ownership and Management”.
(27)Includes 200,000 shares of common stock and 200,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(28)Includes 300,000 shares of common stock and 300,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(29)Andrew Arno has voting and dispositive power over the securitiesheld by the selling stockholder.
(30)Includes 15,000 shares of common stock and 15,000 sharesof common stock issuable upon exercise of warrants issued in the October 2015 Private Placement.
(31)Kingsbrook PartnersLP (“Kingsbrook Partners”) is the investment manager of Kingsbrook Opportunities Master Fund LP (“KingsbrookOpportunities”) and consequently has voting control and investment discretion over securities held by Kingsbrook Opportunities.Kingsbrook Opportunities GP LLC (“Opportunities GP”) is the general partner of Kingsbrook Opportunities and may beconsidered the beneficial owner of any securities deemed to be beneficially owned by Kingsbrook Opportunities. KB GP LLC (“GPLLC”) is the general partner of Kingsbrook Partners and may be considered the beneficial owner of any securities deemedto be beneficially owned by Kingsbrook Partners. Ari J. Storch, Adam J. Chill and Scott M. Wallace are the sole managing membersof Opportunities GP and GP LLC and as a result may be considered beneficial owners of any securities deemed beneficially ownedby Opportunities GP and GP LLC. Each of Kingsbrook Partners, Opportunities GP, GP LLC and Messrs. Storch, Chill and Wallace disclaimbeneficial ownership of these securities.
(32)Bradley C. Palmerhas voting and dispositive power over the securities held by the selling stockholder.
(33)Marvin J. Pollock has voting and dispositive power overthe securities held by the selling stockholder.
(34)Robert S. Steinbaum has voting and dispositive power overthe securities held by the selling stockholder.
(35)Jon Schecter and Joe Reda have voting and dispositive powerover the securities held by the selling stockholder.
(36)Includes (i) 65,000 shares of common stock issued in theOctober 2015 Private Placement, (ii) 65,000 shares of common stock issuable upon exercise of warrants issued in the October 2015Private Placement, and (iii) 340,000 shares of common stock issuable upon exercise of Placement Agent Warrants.
(37)Henry J. Underwood has voting and dispositive power overthe securities held by the selling stockholder.
(38)Represents shares issuable upon exercise of Placement AgentWarrants.
(39)The selling stockholder is a broker-dealer. The sellingstockholder acquired the securities as compensation for investment banking services. Steven Urbach has voting and dispositivepower over the securities held by the selling stockholder.

 

 12 

 

PLAN OF DISTRIBUTION

 

Each selling stockholderof the securities and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of theirsecurities covered hereby on the OTCQB or any other stock exchange, market or trading facility on which the securities are tradedor in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more ofthe following methods when selling securities:

 

· ordinary brokerage transactions and transactions in which the broker-dealersolicits purchasers;
· block trades in which the broker-dealer will attempt to sell the securitiesas agent but may position and resell a portion of the block as principal to facilitate the transaction;
· purchases by a broker-dealer as principal and resale by the broker-dealerfor its account;
· an exchange distribution in accordance with the rules of the applicableexchange;
· privately negotiated transactions;
· settlement of short sales;
· in transactions through broker-dealers that agree with the selling stockholdersto sell a specified number of such securities at a stipulated price per security;
· through the writing or settlement of options or other hedging transactions,whether through an options exchange or otherwise;
· a combination of any such methods of sale; or
· any other method permitted pursuant to applicable law.

 

The sellingstockholders may also sell securities under Rule 144 or any other available exemption from registration under the Securities Actof 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

 

Broker-dealers engagedby the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissionsor discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser)in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transactionnot in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transactiona markup or markdown in compliance with FINRA IM-2440.

 

In connection withthe sale of the securities or interests therein, the selling stockholders may enter into hedging transactions with broker-dealersor other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positionsthey assume. The selling stockholders may also sell securities short and deliver these securities to close out their short positions,or loan or pledge the securities to broker-dealers that in turn may sell these securities. The selling stockholders may also enterinto option or other transactions with broker-dealers or other financial institutions or create one or more derivative securitieswhich require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, whichsecurities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amendedto reflect such transaction).

 

The selling stockholdersand any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters” withinthe meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealersor agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discountsunder the Securities Act. Each selling stockholder has informed the Company that it does not have any written or oral agreementor understanding, directly or indirectly, with any person to distribute the securities.

 

The Company is requiredto pay certain fees and expenses incurred by the Company incident to the registration of the securities. The Company has agreedto indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under theSecurities Act.

 

We agreed to keep thisprospectus effective until the earlier of (i) the date on which the securities may be resold by the selling stockholders withoutregistration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement forthe Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule ofsimilar effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act orany other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers ifrequired under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not besold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualificationrequirement is available and is complied with.

 

 13 

 

 

Under applicable rulesand regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), any person engaged in thedistribution of the resale securities may not simultaneously engage in market making activities with respect to the common stockfor the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, theselling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, includingRegulation M, which may limit the timing of purchases and sales of the common stock by the selling stockholders or any other person.We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copyof this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the SecuritiesAct).

 

DESCRIPTION OF SECURITIES

 

AuthorizedCapital Stock

 

We have authorized710,000,000 shares of capital stock, of which 700,000,000 are shares of common stock, par value $0.001 per share, and 10,000,000are shares of preferred stock, par value $0.001.

 

Capital Stock Issued and Outstanding

 

As of November 16,2015, we have issued and outstanding:

 

· 10,859,450 shares of common stock; and
   
· 5,690 shares of Series A Convertible Preferred Stock which are convertible into 5,690,000 sharesof common stock.

 

CommonStock

 

The holders of ourcommon stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled to receive ratablysuch dividends, if any, as may be declared by our Board of Directors out of legally available funds; however, the current policyof our Board of Directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up,the holders of our common stock will be entitled to share ratably in all assets that are legally available for distribution. Theholders of our common stock will have no preemptive, subscription, redemption or conversion rights. The rights, preferences andprivileges of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of anyseries of preferred stock, which may be designated solely by action of our board of directors and issued in the future.

 

Preferred Stock

 

Our Board of Directorsis authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue fromtime 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 ofDirectors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptiverights.

 

Series A Convertible Preferred Stock

 

We have designatedsix thousand (6,000) shares of preferred stock as Series A Convertible Preferred Stock. Each share of Series A PreferredStock is convertible into shares of our common stock based on a conversion calculation equal to the Base Amount divided by theconversion price. The Base Amount is defined as the sum of (i) the aggregate stated value of the Series A Preferred Stock to beconverted and (ii) all unpaid dividends thereon. The stated value of each share of the Series A Preferred Stock is $1,000 and theinitial conversion price is $2.00 per share, subject to adjustment in the event of stock splits, dividends and recapitalizations.Additionally, in the event we issue shares of our common stock or common stock equivalents at a per share price that is lower thanthe conversion price then in effect, the conversion price shall be adjusted to such lower price, subject to certain exceptions.Accordingly, in connection with the closing of the October 2015 Private Placement, the conversion price of the Series A PreferredStock was reduced to $1.00. We are prohibited from effecting a conversion of the Series A Preferred Stock to the extent that asa result of such conversion, the holder would beneficially own more than 9.99% in the aggregate of the issued and outstanding sharesof our common stock, calculated immediately after giving effect to the issuance of shares of common stock upon conversion of theSeries A Preferred Stock. The shares of Series A Preferred Stock possess no voting rights.

 

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Options and Warrants

 

Options

 

We adopted our 2008Stock Option Plan pursuant to which 500,000 shares of our common stock are reserved for issuance to employees, directors, consultants,and other service providers, and our 2015 Incentive Plan, pursuant to which 450,000 shares of common stock are reserved for issuance.To date, 0 options have been granted under the 2008 Stock Option Plan and the 2015 Incentive Plan, respectively.

 

Warrants

 

We have issued and outstanding warrantsto purchase 5,055,000 shares of our common stock.

 

Transfer Agent and Registrar

 

Our registrar andtransfer agent is VStock Transfer LLC, 18 Lafayette Place, Woodmere, NY 11598.

 

DESCRIPTION OF BUSINESS

 

General

 

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

 

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

 

In addition to ourwholly-owned brands, we also act as licensing agent for certain brands, leveraging our existing licensing infrastructure to expandthese brands into new product categories, new retailers, and new territories. These include the best-selling children’s bookseries, Llama Llama; Psycho Bunny, a luxury apparel line;  From Frank, a humor greeting card and productline; and Celessence Technologies , the world's leading microencapsulation company.

 

We commenced operationsin January 2006, assuming all of the rights and obligations of our then Chief Executive Officer, under an Asset Purchase Agreementbetween the Company and Genius Products, Inc., in which we obtained all rights, copyrights, and trademarks to the brands “BabyGenius,” “Little Genius,” “Kid Genius,” “123 Favorite Music” and “Wee Worship,”and all then existing productions under those titles. In October 2011, we (i) changed our domicile to Nevada from California, and(ii) changed our name to Genius Brands International, Inc. from Pacific Entertainment Corporation (the “Reincorporation”).In connection with the Reincorporation, the trading symbol of our common stock changed from “PENT” to “GNUS”.

 

On November 15, 2013,we 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 companyand sole member of A Squared (the “Parent Member”) and A2E Acquisition LLC, its newly formed, wholly-owned Delawaresubsidiary (“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 ASquared, as the surviving entity, became a wholly-owned subsidiary of the Company. As a result of the Merger, we acquiredthe business and operations of A Squared.

 

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Strategic Initiatives

 

During 2014, we begana series of strategic initiatives to restructure certain areas of business in an effort to operate more profitably in the longrun. This included product sales, content distribution, production, and product development, including as follows:

 

1)During the second quarter of 2014, we began phasing outthe direct production and sale of physical products including DVDs and CDs and shifted to a licensing model whereby these functionswere outsourced to industry experts and category leaders in their respective industries. On July 14, 2014, we hired Stone Newmanin the newly created position of President - Global Consumer Products to leverage his experience and relationships to manage allconsumer products, licensing and merchandising sales for the Company’s brands.

 

2)Prior to the third quarter of 2014, we utilized an agencyto license our content to international television broadcasters, home video, and digital distribution outlets. To exert greatercontrol over the distribution of our expanding portfolio of content, during the second quarter of 2014, we formed a new globaldistribution division and appointed Andrew Berman to the newly created position of Senior Vice President - International Salesto oversee the division and the appointment of regional agents to represent us locally in key regions.

 

3)During the third and fourth quarter of 2014, we partneredwith various pre-production, production, and animation companies to provide services to us for the production of Thomas Edison’sSecret Lab in exchange for a certain percentage of the series’ forthcoming adjusted net revenues and the ability todistribute the series in certain languages in certain territories. This model helps to better manage our cash flowswhile enabling us to exploit territories that would otherwise be challenging to manage and monetize. We intend to replicatethe model for future productions.

 

4)The infrastructure we have put in place enables us to efficientlyexploit a growing portfolio of brands. We are actively developing a number of new brands to add to our growing portfolio and consistentlylook for existing brands to acquire or act as licensing agent, as with the best-selling line of books, Llama Llama whichwe recently signed. We remain focused on brands that lend themselves to interactive exploitation in multiple areas and are consistentwith our primary point of differentiation: providing multi-media “content and products with a purpose” that entertainand enrich kids.

 

Recent Events

 

Consistent with ourstrategy of securing widespread distribution for our content in a variety of formats and building awareness and engagement forour brands that in turn drives our consumer products business, we have expanded our successful relationship with Comcast, beyondthe already popular Baby Genius on-demand offering. In October 2015, we launched and commenced operating everything fromadvertising to programming of a new Kid Genius Cartoon Channel, offering video-on-demand content on an on-demand basis consistentwith our “content and products with a purpose” mission. The new video on-demand channel includes our own content, inaddition to other content we curate to offer a robust line-up for kids. Our Senior Vice President- International Sales, AndrewBerman, oversees the channel.

 

Products

 

Original Content

 

We own and produceoriginal content that is meant to entertain and enrich toddlers to tweens. We have found it generally requires a period of threeyears from the inception of an idea, through production of the content and development and distribution of a range of consumerproducts to retail, creating an inevitable lag between the creation of the intellectual property to the realization of economicor accounting benefit of those assets. Our goal is to maintain a robust and diverse portfolio of brands, appealing to various interestsand ages, featuring evergreen topics with global appeal. Our portfolio of intellectual property can be licensed, re-licensed, andexploited for years to come, with revenue derived from multiple sources and territories.

 

 

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Our portfolio of originalcontent includes:

 

Already Released Content

 

· Baby Genius: For more than ten years, Baby Genius has earned worldwide recognition for creating award-winning products for toddlers. Its catalogue of 500 songs, 125 music videos, and toys feature classic nursery rhymes, learning songs, classical music, holiday favorites and more. Expanding the timeless appeal of Baby Genius offerings, we re-launched Baby Genius in September 2015 with fresh, new designs, new entertainment and an array of new toddler products.
· Warren Buffet’s Secret Millionaire’s Club: In this popular animated series, Warren Buffett acts as a mentor to a group of kids who have international adventures in business. Secret Millionaire’s Club empowers kids by helping them learn about the business of life and the importance of developing healthy life habits at an early age. In addition to the animated series, product offerings include classroom materials, an annual youth promotion, books, home video and a new line of consumer products  introduced in the fall of 2015.
· Stan Lee’s Mighty 7: This animated feature length film is the first property from Stan Lee Comics, LLC, a joint venture with legendary superhero creator Stan Lee. We continue to expand distribution of the film with recent sales in a number of international territories.
· Martha & Friends: Martha & Friends is an animated series featuring a 10-year-old Martha Stewart. Together with her three best friends and two dogs, the kids learn how easy and fun it is to do-it-yourself. Every show is filled with lots of projects kids can do by themselves.
· Gisele & the Green Team: Supermodel turned superhero, Gisele and her team lead a double life to save the planet. This is the first superhero series that inspires girls to be environmentally responsible while also celebrating diversity and teaching children the power of friendship and teamwork.

 

Current Production

 

· Thomas Edison’s Secret Lab: In this new, original series created by us in partnership with American Public Television and Charles Edison Fund, kids learn how fun science and math can be with Thomas Edison. In this new comedy adventure series, a group of kids discover a secret lab left behind by Edison, who also appears as a hologram guiding and encouraging the kids to explore and discover the world around them. The series began to air on Netflix, starting in July 2015, and on Comcast and PBS in the Fall of 2015, with a line of consumer products to follow in early 2016.

 

Content in Development

 

· Llama Llama: We recently announced we have been appointed to lead the worldwide expansion of Anna Dewdney’s New York Times bestselling and multiple award-winning children’s book franchise, Llama Llama. We will be creating, for the first time, animated content based on the Llama Llama books for multiplatform distribution in addition to a global licensing and merchandise program for Llama Llama across a multitude of categories, including toys, games, apparel, accessories, bedding, and healthy snacks to be introduced in 2016.
· Space Pop: Space Pop is space-adventure/comedy series targeted toward tween girls blending fashion, music, and friendship.
· Girl’s Property #2: A second girls’ property targeted toward tween girls is based on an existing and established brand currently in the retail market.
· Stan Lee Property #2: A kid-friendly superhero brand developed with Stan Lee to appeal to a younger audience.

 

Licensing Agent

 

Augmenting our originalcontent, we act as an agent for the following established brands which maximizes the existing infrastructure while creating incrementalsources of revenue for us without additional overhead:

 

· Psycho Bunny: Inspired by the 17th-century maritime marauders and secret societies such as the infamous Skull & Bones, Psycho Bunny creates timeless wardrobe essentials that couple refined English tailoring with bold American design. Currently available in limited product categories in upscale department stores, we are expanding this popular brand to additional product lines, new retail outlets, and additional international territories. We have already signed licensees for headwear and footwear.
· From Frank: Already a popular line of greeting cards, we are expanding the brand into new product categories and have already signed licensees for publishing, stationery, gifts, lottery and more.
· Celessence: Celessence’s microencapsulation technology releases fragrance and is used to scent products including socks, stationery, toys, bedding and pillows. We are licensing this technology to a range of products from homewares, bedding, fragrance, automotive, pets, apparel and more.
· Llama Llama: With 9.4 million units in print, Anna Dewdney's Llama Llama books have all been New York Times bestsellers, with several titles claiming the #1 spot. Her work has been translated into eight languages. Praised as a “geographer extraordinaire of the emotional terrain of preschoolers and their mothers” (Chicago Tribune), Dewdney's soothing tales are synonymous with calming early childhood anxiety. Llama Llama Red Pajama was chosen as Jumpstart's Read for the Record book in 2011, setting the world record for the most reads of a particular book on one day. Dewdney is an outspoken advocate for literacy and many states and non-profits use her books for literacy campaigns and programs, including the Library of Congress.

 

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Distribution

 

Children today spendupwards of 35 hours/week consuming various forms of media, a 7% increase or an additional 2.2 hours since 2009 (Source: Nickelodeon,November 2013). With the increased demand for and impact of media on kids’ lives, we are focused on serving an underrepresentedsegment of the industry, namely “content with a purpose” meaning content that is both entertaining and enriching ina variety of interactive formats. With this distinct and focused mission, we are focused on expanding content distribution acrossmulti-media platforms, extending our domestic and international presence, building awareness for our brands and building an engagedaudience which in turn drives demand for its consumer products.

 

During 2014, we recruitedand hired a number of key personnel to manage the distribution of our content across all platforms in all markets:

 

· We 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 us locally in key regions and in all formats, including Pay Television, Free or Broadcast Television, Video-on-Demand (“VOD”), subscription on demand (“SVOD”), DVDs/CDs and more.
· We formed a new global consumer products division and appointed Stone Newman to the newly created position of President, Global Consumer Products to manage all consumer products, licensing and merchandising sales for the Company’s brands, including toys, electronics, publishing, home goods, stationary, gifts, and much more.

 

Additionally, duringthe first quarter of 2014, we entered into an exclusive three year agreement with Sony DADC, the optical disc manufacturing andfulfillment arm of Sony, to provide all CD, DVD and BD replication, packaging and distribution to our customers. Under the termsof the long-term, exclusive supply chain services agreement, we will order a minimum level of disc replication, packaging and distributionservices for our content across all physical media, including DVD, CD, and Blu-ray from Sony DADC. As consideration for these minimumorder levels, we received a total of $1,500,000, $750,000 during the first quarter of 2014 and $750,000 during the first quarterof 2015.

 

Marketing

 

The commercial successof every Genius Brands property is reliant on our ability to attract an engaged audience that in turn drives demand for our products.As our properties are introduced into the marketplace, these efforts will intensify to ensure parents and kids are aware of ourofferings. For example:

 

· We formed a new Digital division and appointed industry veteran Jason Brumbaugh to the newly created position of Vice President of Digital, responsible for our digital presence in addition to all forms of online marketing that will be critical to building engaged audiences online. Mr. Brumbaugh held producer and senior producer positions at Disney Interactive Media Group, the Hub Network, DIC Entertainment, and Knowledge Kid Network.
· We work with 360-Communications, a public relations agency that proactively solicits publicity for our content and products, both among the trade and consumers.

 

Competition

 

We compete againstcreators of children’s content, including Disney, Nickelodeon, Cartoon Network, Sesame Street, and many others, small andlarge. In the crowded children’s entertainment space, we compete with other content creators for distribution and retailshelf space that is largely now dedicated to the large studios. To compete, we are focused on filling a void in the marketplaceby offering something the big studios do not: “content and products with a purpose,” a positioning and important pointof differentiation embraced by the industry, as well as parents and educators.

 

Customers and Licensees

 

During 2014, we werereliant on one or a few major customers. However, given the changes in our business model, we will be working with a larger networkof customers and partners from around the world including broadcasters, consumer products licensees, and retailers. This broadcross section includes companies such as Comcast, Netflix, Sony, PBS, Leap Frog Enterprises, Enesco, Zak Designs, Penguin Publishing,Manhattan Toys, Amazon, Barnes & Noble, Target, Bertelsmann Music Group, InGrooves, Discovery International, TF1 and many othersboth domestically and internationally.

 

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Government Regulation

 

The FCC requires broadcastnetworks to air a required number of hours of Educational and Informational content (E/I). We are also subject to online distributionregulations, namely the FTC’s Children’s Online Privacy Protection Act (COPPA) which regulates the collection of informationof kids younger than 13 years old.

 

We are currently subjectto regulations applicable to businesses generally, including numerous federal and state laws that impose disclosure and other requirementsupon the origination, servicing, enforcement and advertising of credit accounts, and limitations on the maximum amount of financecharges that may be charged by a credit provider. Although credit to some of our customers is provided by third parties withoutrecourse to us based upon a customer’s failure to pay, any restrictive change in the regulation of credit, including theimposition of, or changes in, interest rate ceilings, could adversely affect the cost or availability of credit to our customersand, consequently, our results of operations or financial condition.

 

Licensed toy productsare subject to regulation under the Consumer Product Safety Act and regulations issued thereunder. These laws authorize the ConsumerProduct Safety Commission (the “CPSC”) to protect the public from products which present a substantial risk of injury.The CPSC can require the manufacturer of defective products to repurchase or recall such products. The CPSC may also impose finesor penalties on manufacturers or retailers. Similar laws exist in some cities and other countries in which we plan to market ourproducts. Although we do not manufacture and may not directly distribute the toy products, a recall of any of the products mayadversely affect our business, financial condition, results of operations and prospects.

 

We also maintain websiteswhich include our corporate website located at www.gnusbrands.com, as well as www.babygenius.com, www.smckids.com, www.slam7.com,and www.edisonsecretlab.com. These websites are subject to laws and regulations directly applicable to Internet communicationsand commerce, which is a currently developing area of the law. The United States has enacted Internet laws on children’sprivacy, copyrights and taxation. However, laws governing the Internet remain largely unsettled. The growth of the market for Internetcommerce may result in more stringent consumer protection laws, both in the United States and abroad, that place additional burdenson companies conducting business over the Internet. We cannot predict with certainty what impact such laws will have on our businessin the future.  In order to comply with new or existing laws regulating Internet commerce, we may need to modify themanner in which we conduct our website business, which may result in additional expense.

 

Because our productsare manufactured by third parties and licensees, we are not significantly affected by federal, state and local environmental lawsand do not have significant costs associated with compliance with such laws and regulations.

 

Employees

 

As of November 16,2015, we had fifteen full-time equivalent employees and an additional four temporary or contracted full-time equivalents in certainfunctions, such as production management and design. We engage on an outsourced, as-needed basis contractors in the fields of investorrelations, public relations, and production. We believe all of our employee relationships to be good.

 

Intellectual Property

 

As of November 16,2015, we own the following properties and related trademarks: Secret Millionaires Club, Thomas Edison’s SecretLab, “Baby Genius”, “Little Genius”, “Kid Genius”, “Wee Worship”, “ASquared”, and “Ready, Play, Learn” as well as several other names and trademarks on characters that had beendeveloped for our content and brands. Thomas Edison’s Secret Lab, currently in production and estimated to be completedin the summer of 2016, will include 52 eleven-minute episodes as well as 52 90-second music videos.

 

As of November 16,2015, we hold fourteen registered trademarks in multiple classes in the United States as well as additional trademarks in the UnitedStates that are associated with our other brands. We also have a number of registered and pending trademarks in Europe and othercountries in which our products are sold.

 

As of November 16,2015, we also held ninety-six motion picture, thirteen sound recording and one literary work copyrights related to our video, musicand written work products.

 

We own a two-thirdsownership interest in Stan Lee Comics, LLC which owns the publishing brand Stan Lee Comics and all properties produced therein.Stan Lee Comics, LLC is a joint venture with Stan Lee’s POW! Entertainment and Archie Comics. Stan Lee Comics, LLC is theowner of the Stan Lee’s Mighty 7 property.

 

We are party to 50/50ownership agreements with the following partners and their related brands: Martha Stewart’s Martha & Friends;and Gisele Bündchen’s Gisele & the Green Team .

 

In addition to thewholly-owned or partially-owned properties listed above, we have agreements with certain intellectual property owners to representtheir content as a licensing agent. We act as a licensing agent for the following established brands: Llama Llama, Psycho Bunny,From Frank, and Celessence.

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DESCRIPTION OF PROPERTY

 

We own no realestate property. We lease approximately 3,251 square feet of general office space at 301 North Canon Drive, Suite 305, BeverlyHills, CA 90210 pursuant to a 35-month sub-lease that commenced on May 1, 2015. We pay approximately $136,542 annually, subjectto annual escalations of 3%.

 

LEGAL PROCEEDINGS

 

There are presently no material pendinglegal proceedings to which we are a party or as to which any of our property is subject, and no such proceedings are known to usto be threatened or contemplated against us.

 

MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The followingdiscussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in thisprospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties.See “Cautionary Note Regarding Forward-Looking Statements and Industry Data” for a discussion of the uncertainties,risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from thosediscussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors”and elsewhere in this prospectus.

 

Overview

 

The MD&A is basedon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the UnitedStates of America. The preparation of these financial statements requires us to make certain estimates and judgments that affectthe reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Managementbases 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 readilyapparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

 

Results of Operations

 

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

 

Below is a discussion of our operatingresults 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 September30, 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 $ (38,051)   -12%  

 

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

 

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

 

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

 

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Product sales represent physical productsincluding DVDs and CDs in which the Company holds intellectual property rights such as trademarks and copyrights to the charactersand which are manufactured and sold by the Company either directly at wholesale to retail stores or online retailers. During thethree months ended September 30, 2015, there were no product sales, for a decrease of $239,392 compared to the three months endedSeptember 30, 2014 due to the change in business strategy whereby the Company has transitioned from the direct production andsale of physical products and their associated low-margins, to a licensing model in which these functions were outsourced to industryexperts and category leaders. The Company plans to re-launch its Baby Genius brand in fourth quarter 2015 utilizing a newlydesigned 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% 
Other 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 duringthree months ended September 30, 2015 compared to the same period of 2014. The decrease was a result of the decrease in productsales discussed above as well as the elimination of the overhead associated with handling sales directly, replaced by a new modelwhereby these costs will be borne by our licensees.

 

General and Administrative expenses consistprimarily 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 $29,876compared to the same period in 2014. The aggregate decrease for the category results primarily from increases in professional feesof $42,649 related to additional legal fees associated with the 2015 annual shareholder meeting as well as an arbitration thatwas settled in the fourth quarter. Offsetting these increases is a decrease in salaries and related expenses by $13,412 and a decreasein 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 theamortization 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-operatingincome and expense such as interest expense and the gain or loss on certain transactions as well as unrealized foreign currencytranslation 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 primarilythe result of the company recognizing loss on a distribution contract originating pre-merger in the amount of $47,650 during thethree months ended September 30, 2015.

 

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

 

Below is a discussion of our operatingresults for the nine months ended September 30, 2015, compared to our operating results during the comparable period in 2014. Netloss for the nine months ended September 30, 2015, was $2,421,938 compared to net loss of $2,843,763 for the nine months endedSeptember 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.

 

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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 includesitems for which we license the rights to our copyrights and trademarks of our brands and those of the brands for which we act asa licensing agent. During the nine months ended September 30, 2015 compared to September 30, 2014, this category increased $216,681due to increased licensing activity given the strategic restructuring of the Company in 2014.

 

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

 

Product sales represent physical productsincluding DVDs and CDs in which the Company holds intellectual property rights such as trademarks and copyrights to the charactersand which are manufactured and sold by the Company either directly at wholesale to retail stores or online retailers. During thenine months ended September 30, 2015, product sales decreased by $428,855 compared to the nine months ended September 30, 2014due to the change in business strategy whereby the Company has transitioned from the direct production and sale of physical productsto a licensing model in which these functions were outsourced to industry experts and category leaders. The Company plans to re-launchits Baby Genius brand in fourth quarter 2015 utilizing a newly designed and expanded product line, resulting in a period-over-periodloss 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% 
Other 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 duringthe nine months ended September 30, 2015 compared to the same period of 2014. The decrease was a result of the decrease in productsales discussed above as well as the elimination of the overhead associated with handling sales directly, replaced by a new modelwhereby these costs will be borne by our licensees.

 

General and Administrative expenses consistprimarily 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 $59,051compared to the same period in 2014. The aggregate increase for the category results primarily from increases in salaries and relatedexpense of $411,512 related to the addition of several critical hires in sales functions and digital initiatives offset by decreasesin 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 anincrease in trade show expenses which did not exist in the prior period as well as increases in other advertising expenses relatedto the increased size of the portfolio of brands the Company promotes.

 

 22 

 

 

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)       (36,258)   N/A 
Net Other Income (Expense)  $45,488   $(232,546)  $278,034    -120% 

 

Other income (expense) represents non-operatingincome and expense such as interest expense and the gain or loss on certain transactions as well as unrealized foreign currencytranslation 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 $278,034 increase was primarilythe result of the termination of a distribution contract in which certain amounts that had been included in deferred revenue wererecognized 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.

 

Comparison of Results of Operations for the twelve monthsended December 31, 2014 and 2013

 

Below is a discussionof our 2014 operating results compared to our 2013 operating results. 2014 represented a transitional year as the Company restructuredand changed the way it will manage its operations in the future to a licensing model whereby the Company minimizes its risk andoutsources the manufacturing and distribution of its products to industry leaders in their respective industries. In addition,the Company plans to re-launch its Baby Genius brand in September 2015 using a newly designed and expanded product line,resulting in a year over year loss in Baby Genius sales. In addition to the re-launch of Baby Genius this year, theCompany will also be introducing several new brands in addition to the licensing business it now manages on behalf of three existingretail brands.

 

Our summary resultsfor the twelve months ended December 31, 2014 and 2013 are below.

 

Revenues.Revenues by product segment and for the Company as a whole were as follows:

 

 

   12/31/2014 12/31/2013 Change   % Change 
Product Sales  $497,273   $1,682,780   $(1,185,507)   -70% 
Television & Home Entertainment   117,670    505,552    (387,882)   -77% 
Licensing & Royalties   310,845    368,206    (57,361)   -16% 
Total Revenue  $925,788   $2,556,538   $(1,630,750)   -64% 

 

 23 

 

 

Product sales representphysical products in which the Company holds intellectual property rights such as trademarks and copyrights, whether registeredor unregistered, to the characters and which are manufactured and sold by the Company either directly at wholesale to retail storesor online retailers. During the twelve months ended December 31, 2014, product sales decreased by $1,185,507 due to the changein business strategy whereby the Company has transitioned from the direct production and sale of physical products including DVDsand CDs to a licensing model in which these functions were outsourced to industry experts and category leaders. The Company plansto re-launch its Baby Genius brand in September 2015 utilizing a newly designed and expanded product line, resulting ina year over year loss in Baby Genius sales.

 

Television & HomeEntertainment revenue is generated from distribution of our properties for broadcast on television and other platforms in domesticand foreign markets and the sale of DVDs for home entertainment. Television & Home Entertainment revenue totaled $117,670 duringthe twelve months ended December 31, 2014 compared to $505,552 in the prior period. Higher revenue in the 2013 period related tothe distribution of certain properties for which revenue recognition criteria had been met. While the Company has expanded itsportfolio of properties in 2014 and is actively licensing these properties in advance of their release into the marketplace, revenuerelated to these properties, especially Thomas Edison’s Secret Lab , will be recognized in future periods once revenuerecognition criteria have been met.

 

Licensing and royaltyrevenue includes items for which we license the rights to our copyrights and trademarks of our brands and those of the brands inwhich we act as a licensing agent. During the twelve months ended December 31, 2014 compared to December 31, 2013, this categorydecreased $57,361. This decrease is due to the liquidation of previously held DVD titles that are not consistent with the Company’snew “content and products with a purpose” focus.

 

Costs. Costs and expenses, excludingdepreciation and amortization, consisting primarily of cost of sales, marketing and sales expenses, and general and administrativecosts, decreased $465,230 for the twelve months ended December 31, 2014 compared to December 31, 2013.

 

 

   12/31/2014   12/31/2013   Change   % Change 
Cost of Sales  $500,000   $1,504,138   $(1,004,138)   -67% 
General and Administrative   3,452,200    2,806,153    646,047    23% 
Marketing and Sales   338,598    308,355    30,243    10% 
Product Development   1,700    139,082    (137,382)   -99% 
Total Costs and Operating Expenses  $4,292,498   $4,757,728   $(465,230)   -10% 

 

Cost of Sales decreased$1,004,138 during twelve months ended December 31, 2014 compared to the same period of 2013. The decrease was a result of the decreasein product sales discussed above as well as the elimination the overhead of associated with handling sales directly, replaced bya new model whereby these costs will be borne by our licensee.

 

General and Administrativeexpenses 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 twelve months ended December 31, 2014increased $646,047 from the comparable period in 2013. The aggregate increase for the category includes increases in professionalfees of $501,926 of which $231,101 was related to the amortization of certain prepaid consulting agreements; increases in salariesand related expense of $102,599 related to the addition of several critical hires in sales functions; increases in other generaland administration expenses of $392,077; and increases of bad debt expense of $73,458 all of which were offset by decreases of$539,185 in stock based compensation expense.

 

Marketing and salesexpenses increased $30,243 for the twelve months ended December 31, 2014 compared to the twelve months ended December 31, 2013primarily due to increases in sales commission expenses in the third quarter related to certain sales promotions, the amortizationof certain prepaid marketing expenses, and other advertising expenses related to the increased size of the portfolio of brandsthe Company promotes.

 

Product developmentexpenses are for routine and periodic alterations to existing products, primarily those in the Baby Genius line. For the twelvemonths ended December 31, 2014 compared to the twelve months ended December 31, 2013, these expenses decreased by $137,382. As the Company works to re-launch the Baby Genius product line, costs related to the re-launch have been capitalized.

 

 24 

 

 

Interest Expense. During the twelvemonths ended December 31, 2014, interest expense resulted from certain related party short-term debt and other operating interestexpense. During the prior period, interest expense related to certain related-party notes payable and other operating interestexpense as well as interest expense related to certain debentures.

 

 

   12/31/2014   12/31/2013   Change   % Change 
Interest Expense on Debentures & Reissued Debenture  $   $144,808   $(144,808)   -100% 
Interest Expense on Bridge Notes       7,999    (7,999)   -100% 
Amortization of debt and debenture issuance costs   5,687    257,236    (251,549)   -98% 
Accretion of debt discount       1,245,126    (1,245,126)   -100% 
Other operating interest expense   6,063    8,463    (2,400)   -28% 
Interest Expense  $11,750   $1,663,632   $(1,651,882)   -99% 

 

 

   12/31/2014   12/31/2013   Change   % Change 
Interest Expense - Related Party  $25,842   $24,469   $1,373    6% 
Interest Expense on Bridge Notes - Related Party       5,720    (5,720)   -100% 
Interest Expense  $25,842   $30,189   $(4,347)   -14% 

 

From 2007 through2009, the Company borrowed funds from members of its previous management team, the proceeds of which were used to pay operatingobligations of the Company. In association with the closing of our acquisition of the business and operations A Squared EntertainmentLLC pursuant to the Agreement and Plan of Reorganization, dated November 15, 2013, among the Company, A Squared Entertainment LLC,A Squared Holdings LLC, and A2E Acquisition LLC (the “Merger”) (see “Business”), all remaining balancesin association with these notes were converted into common stock. Interest expense was recorded in the twelve months ended December31, 2014 and 2013 in the amounts of $0 and $13,080, respectively.

 

During 2011, fourof the Company’s former officers agreed to convert accrued but unpaid salaries through December 31, 2010 to subordinatedlong term notes payable. In association with the Merger, all remaining balances in association with these notes were convertedinto common stock. Interest expense was recorded in the twelve months ended December 31, 2014 and 2013 in the amounts of $0 and$11,390, respectively.

 

On June 27, 2012,the Company entered into a Securities Purchase Agreement whereby the Company issued and sold (i) the $1,000,000 16% Debenture,and (ii) the Debenture Warrant to purchase up to 50,000 shares of the Company’s common stock. On August 29, 2013, pursuantto an agreement between the Company and certain holders, the original Debenture was assigned and exchanged for an aggregate of$1,163,333 of a Reissued Debenture. The interest rate and maturity date of the Reissued Debenture were not changed. In associationwith the Merger, the Company converted all remaining balances into shares of common stock. Interest expense for the Debenture andReissued Debenture was recorded in the twelve months ended December 31, 2014 and 2013 in the amounts of $0 and $144,808, respectively.

 

On August 30, 2013,the Company issued 12% convertible notes to several parties with a maturity date of October 21, 2013 for an aggregate of $530,000.On November 15, 2013, the Company issued an aggregate of 448,613 shares of common stock to holders of these notes in aggregateprincipal amount of $530,000 and accrued, but unpaid, interest in connection with the automatic conversion of these notes uponconsummation of the Merger. Interest expense was recorded in the twelve months ended December 31, 2014 and 2013 in the amountsof $0 and $5,720, respectively.

 

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 itsoperations and provide working capital from its founder, the Company’s Chief Executive Officer and President, Andrew Heywardand Amy Moynihan Heyward, respectively. As of December 31, 2014, these advances totaled $411,008. These advances are interest freeand have no stated maturity. The Company has applied an imputed interest rate of 6%. During the twelve months ended December 31,2014, the Company recognized imputed interest expense of $25,842 as a contribution to additional paid-in capital with no comparableamount recognized in the prior period.

 

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Liquidity

 

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

 

Cash totaled $2,147,931 and $5,167,606 at September 30, 2015and 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 September30, 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 activityincluding the collection of the first payment related to a long-term, exclusive supply chain services contract and the receiptof funds related to the issuance of preferred stock. During both periods, these funds were primarily used to fund operations aswell as investments in fixed assets, intangible assets, and capitalized product development.

 

Operating Activities

 

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

 

Investing Activities

 

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

 

Financing Activities

 

Cash generatedfrom financing activities during the nine months ended September 30, 2015 was $750,513 as compared to $6,354,897 generated inthe comparable period in 2014 representing a decrease of $5,604,384. During the first quarter of 2014, the Company enteredinto 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 orderlevels, the Company received a total of $1,500,000, $750,000 during the first quarter of 2014 and $750,000 during the firstquarter of 2015. Additionally, during the first quarter of 2014, the Company received net proceeds of $355,116 from the saleof its common stock offset by repayment of related party notes of $100,872. During the second quarter of 2014, the Companyreceived net proceeds from the sale of its preferred stock of $5,379,915.

 

Twelve Months Ended December 31,2014 Compared to December 31, 2013

 

Cash totaled $4,301,099and $527,110 at December 31, 2014 and 2013, respectively. The change in cash is as follows:

 

 

   12/31/2014   12/31/2013   Change 
Cash used in operating activities  $(2,481,988)  $(1,120,317)  $(1,361,671)
Cash provided by (used in) investing activities   (97,986)   212,913    (310,899)
Cash provided by financing activities   6,353,963    986,966    5,366,997 
Increase in cash  $3,773,989   $79,562   $3,694,427 

 

During the twelvemonths ended December 31, 2014, our primary sources of cash were financing activities. During 2014, our financing activities relatedprimarily to the sale of shares of common stock and Series A Convertible Preferred Stock as well as the execution of a long-term,exclusive supply chain services agreement. During the comparable period in 2013, our primary sources of cash were from investingand financing activities. Our investing activities related to cash provided by and assumed in the Merger. Our financing activitiesrelated to the receipt of funds related to the issuance of common stock and short term notes. During both periods, these fundswere primarily used to fund operations as well as investments in intangible assets and capitalized product development.

 

 26 

 

 

Operating Activities

 

Cash used by operationsin the twelve months ended December 31, 2014 was $2,481,988 as compared to a use of $1,120,317 during the same period of 2013,representing an increase in cash used in operations of $1,361,671 based on the operating results discussed above as well as increasesin film and television costs related to the commencement of development of the second installment of the feature film Stan Lee’sMighty 7 and the development and production of episodes of the Thomas Edison’s Secret Lab off-set by the receiptof $500,000 for music advances with third parties.

 

Investing Activities

 

Cash used by investingactivities for the twelve months ended December 31, 2014 was $97,986 as compared funds provided by investing activities of $212,913for the comparable period in 2013. This variance is primarily the result of $283,199 in funds provided by the Merger with A SquaredEntertainment.

 

Financing Activities

 

Cash generated fromfinancing activities during the twelve months ended December 31, 2014 was $6,353,963 as compared to $986,966 generated in comparableperiod in 2013. The increase in cash provided by financing activities relates to the following activities during 2014:

 

· The sale of common stock during the first quarter of 2014 for which the Company received net proceeds of $355,116;
· The execution of a long-term, exclusive supply chain services agreement for which it received $750,000 during the first quarter of 2014, with the remaining $750,000 paid in February 2015;
· Sale of 6,000 shares of the Company’s newly designated Series A Convertible Preferred Stock at a price of $1,000 per share for which the Company received net proceeds of $5,379,915; and
· Expenditures of $105,651 for the repayment of related party notes offset these increases, $10,417 for the repayment of the services advance, and $15,000 in loan origination fees for the Company’s secured line of credit, which was terminated on March 2, 2015.

 

Capital Resources

 

As of September 30,2015 and December 31, 2014, the Company did not have any material commitments for capital expenditures.

 

Critical Accounting Policies

 

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

 

Goodwill and Intangible Assets

 

Goodwill representsthe excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by thepurchase method. In accordance with ASC Topic 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumedto have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicatorsof impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment tests during thefourth 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 regardingthe applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of thefair market value of the reporting units, which could result in an impairment of goodwill.

 

Other intangible assetshave been acquired, either individually or with a group of other assets, and were initially recognized and measured based on fairvalue. Additionally, the Company develops new videos, music, books and digital applications in addition to adding content, improvedanimation and bonus songs/features to its existing product catalog. In accordance with ASC 350 Intangible Assets and ASC 730 Researchand Development, the costs of new product development and significant improvement to existing products are capitalized while routineand periodic alterations to existing products are expensed as incurred. Annual amortization of these intangible assets is computedbased on the straight-line method over the remaining economic life of the asset.

 

 27 

 

 

Films and Televisions Costs

 

The Company capitalizesproduction 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 evidencedby a firm commitment over the period of commitment. The Company expenses all capitalized costs that exceed the initial market firmcommitment revenue in the period of delivery of the episodes.

 

The Company capitalizesproduction 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 therelative fair value of the film(s) delivered and recognized as revenue. The Company evaluates their capitalized production costsannually and limits recorded amounts by their ability to recover such costs through expected future sales.

 

Revenue Recognition

 

The Company recognizedrevenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing thebuyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significantobligation for future performance to directly bring about the resale of the product by the buyer as required by ASC 605 RevenueRecognition.

 

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

 

The Company recognizesrevenue in accordance with ASC Topic 926-605 Entertainment-Films - Revenue Recognition. Accordingly, the Company recognizes revenuewhen (i) persuasive evidence of a sale with customer exists, (ii) the film is complete and has been delivered or is available fordelivery, (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 eachfilm or episode is complete and available for delivery.

 

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

 

Other Estimates

 

The preparation offinancial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilitiesat 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, we do not have any off balance sheet arrangements.

 

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MARKET PRICE OFAND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

 Market forSecurities

 

Our common stock isquoted on the OTCQB under the symbol “GNUS”.

 

The followingtable sets forth the range of high and low bid prices of our common stock as reported and summarized on the OTCQB for theperiods indicated. These prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, oradjustments and may not represent actual transactions.

 

Quarter Ending   Quarter High   Quarter Low
3/31/2013   $11.00   $5.60
6/30/2013   $13.00   $4.50
9/30/2013   $8.00   $1.00
12/31/2013   $7.50   $2.30
3/31/2014   $4.90   $2.90
6/30/2014   $4.05   $2.67
9/30/2014   $2.95   $1.71
12/31/2014   $2.08   $1.33
3/31/2015   $3.00   $1.50
6/30/2015   $3.35   $1.53
9/30/2015   $2.22   $1.25
12/3/1/2015 (as of December 7, 2015)   $1.52   $0.80

 

As of November 16,2015, there were approximately 221 holders of record of our common stock.

 

Dividends

 

The Company has never declared or paidany cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansionof its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.

 

Equity CompensationPlan Information

 

The following tablereflects, as of December 31, 2014, compensation plans pursuant to which we are authorized to issue options, warrants or other rightsto purchase shares of our common stock, including the number of shares issuable under outstanding options, warrants and rightsissued under the plans and the number of shares remaining available for issuance under the plans:

 

   (a)  (b)  (c) 
Plan category  Number of securities to be issued upon exercise of outstanding options, warrants and rights  Weighted-average exercise price of outstanding options, warrants and rights  Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 
Equity compensation plans approved by shareholders(1)  350  $15.09  499,650 
Equity compensation plans not approved by shareholders       
Total  350  $15.09  499,650 

 

(1)On September 2, 2011, the majority shareholders of theCompany adopted an amendment to the Company’s 2008 Stock Option Plan to increase the number of shares of common stock issuableunder the plan from 160,000 to 500,000.

 

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

DIRECTORS AND EXECUTIVE OFFICERS

 

The following tablesets forth information about our directors and executive officers:

 

Name   Age   Position
Andrew Heyward   66   Chief Executive Officer and Chairman of the Board/Director
Amy Moynihan Heyward   48   President and Director
Gregory Payne   61   Corporate Secretary
Michael D. Handelman   56   Chief Financial Officer
Bernard Cahill   49   Director
Joseph “Gray” Davis*   71   Director
P. Clark Hallren*   54   Director
Lynne Segall*   62   Director
Anthony Thomopoulos*   76   Director
Margaret Loesch*   69   Director

_______

* Denotes directors who meet our criteriafor “independence”.

 

Our directors holdoffice until the earlier of their death, resignation or removal or until their successors have been qualified.

 

Background Information

 

Andrew Heywardhas been our Chief Executive Officer since November 2013 and our Chairman of the Board since December 2013. Mr. Heyward co-foundedDIC Animation City in 1983 and served as its Chief Executive Officer until its sale in 1993 to Capital Cities/ ABC, Inc. whichwas eventually bought by The Walt Disney Company in 1995. Mr. Heyward ran the company while it was owned by The Walt Disney Companyuntil 2000 when Mr. Heyward purchased DIC Entertainment L.P. and DIC Productions L.P, corporate successors to the DIC AnimationCity business, with the assistance of Bain Capital and served as the Chairman and Chief Executive Officer of their acquiring companyDIC Entertainment Corporation, until he took the company public on the AIM. He sold the company in 2008. Mr. Heyward co-foundedA Squared Entertainment LLC in 2009 and has served as its Co-President since inception. Mr. Heyward earned a Bachelor of Arts degreein Philosophy from UCLA and is a member of the Producers Guild of America, the National Academy of Television Arts and the PaleyCenter (formerly the Museum of Television and Radio). Mr. Heyward gave the Commencement address in 2011 for the UCLA College ofHumanities, and was awarded the 2002 UCLA Alumni Association's Professional Achievement Award. He has received multiple Emmys andother awards for Children’s Entertainment. He serves on the Board of Directors of the Cedars Sinai Medical Center. Mr.Heyward has produced over 5,000 half hour episodes of award winning entertainment, among them Inspector Gadget; The RealGhostbusters; Strawberry Shortcake; Care Bears; Alvin and the Chipmunks; Hello Kitty’s FurryTale Theater; The Super Mario Brothers Super Show; The Adventures of Sonic the Hedgehog ; Sabrina The Animated Series;Captain Planet and the Planeteers; Liberty’s Kids ; and many others. Mr. Heyward was chosen as a director becauseof his extensive experience in children’s entertainment and as co-founder of A Squared Entertainment.

 

Amy Moynihan Heywardhas been our President since November 2013 and a director of the Company since December 2013. Ms. Heyward is the founder and hasbeen the President of A Squared since 2009. Prior to the formation of A Squared, Ms. Heyward served as the Vice President of Marketingat the Los Angeles Times from 2006 to 2008 and from 2003 to 2006. Ms. Heyward served as the director of global marketing for McDonald’sCorporation. From 2002 to 2003, Ms. Moynihan handled promotions and sponsorships for Hasbro, Inc. and from 1994 to 2000, Ms. Heywardworked in various marketing posts for Disney. Ms. Heyward received degrees in Marketing Communications and Journalism from NortheasternUniversity and sits on the Boards of Directors of LA’s Best and After School All-Stars. Ms. Heyward was chosen as a directorbecause of her commercial and trade experience in creating and managing international brands and as co-founder of A Squared Entertainment.

 

Gregory Paynehas been our Corporate Secretary since November 2013 and the Chief Operating Officer and General Counsel to A Squared EntertainmentLLC since October 2011 and A Squared Holdings LLC since March 2009. He has been an attorney in private practice and the Chairmanof Foothill Entertainment, Inc. from 2000 to present. Mr. Payne served as Senior Vice President Legal and Business Affairs to DICAnimation City, DIC Entertainment L.P. and DIC Productions L.P. variously during the period from 1986 to 1998 and was an attorneyin private practice from 1978 until 1986. Mr. Payne is a director and 50% shareholder of Foothill Entertainment Inc. Mr. Paynereceived his Juris Doctorate from Stanford Law School.

 

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Michael D. Handelmanhas been our Chief Financial Officer since June 26, 2015. Mr. Handelman has over twenty years of experience as a Chief FinancialOfficer. From 2011 to 2015, Mr. Handelman was Chief Financial Officer of Lion Biotechnologies, Inc., a public biopharmaceuticalcompany located in Los Angeles, California, focused on the development and commercialization of novel cancer immunotherapy products.At Lion Biotechnologies, Inc., he was responsible for management of operations relating to all financial and fiscal aspects ofthe company. He prepared quarterly filings for the Securities and Exchange Commission, including Forms 10-Q, 10-K and 8-K, andprepared and oversaw the preparation of the company’s consolidated financial reports. Previously, Mr. Handelman served asChief Financial Officer at Oxis International, Inc., a public company engaged in the research, development and commercializationof nutraceutical products, from August 2009-October 2011. From November 2004 to July 2009, Mr. Handelman served as Chief FinancialOfficer and Chief Operating Officer of TechnoConcepts, Inc., formerly a public company engaged in designing, developing, manufacturingand marketing wireless communications semiconductors, or microchips. Prior thereto, Mr. Handelman served from October 2002 to October2004 as Chief Financial Officer of Interglobal Waste Management, Inc., a manufacturing company, and from July 1996 to July 1999as Vice President and Chief Financial Officer of Janex International, Inc., a children’s toy manufacturer. Mr. Handelmanwas also the Chief Financial Officer from 1993 to 1996 of the Los Angeles Kings, a National Hockey League franchise. Mr. Handelmanis a certified public accountant and holds a degree in accounting from the City University of New York.

 

Bernard Cahillhas been a director of the Company since December 2013. Mr. Cahill is the founding partner of ROAR, LLC, an entertainment consultingfirm, which he founded in 2004 and is the founding partner of Cahill Law Offices, an entertainment law firm, which he founded in1995. Mr. Cahill is the founder of Unicorn Games LLC, which was sold to Hasbro, Inc. in 2000. Mr. Cahill holds a Bachelor’sof Science degree in Biology from Illinois State University and a Juris Doctorate from the John Marshall Law School. Mr. Cahillis a member of the Tennessee State and Illinois State Bar. Mr. Cahill was chosen to be a director based on his expertise in theentertainment field.

 

Joseph“Gray” Davis has been a director of the Company since December 2013. Mr. Davis served as the 37thgovernor of California from 1998 until 2003. Mr. Davis currently serves as “Of Counsel” in the Los Angeles,California office of Loeb & Loeb LLP. Mr. Davis has served on the Board of Directors of DIC Entertainment and is a memberof the bi-partisan Think Long Committee, a Senior Fellow at the UCLA School of Public Affairs and Co-Chair of the Southern CaliforniaLeadership Counsel. Mr. Davis received his undergraduate degree from Stanford University and received his Juris Doctorate fromColumbia Law School. Mr. Davis served as lieutenant governor of California from 1995-1998, California State Controller from 1987-1995and California State Assemblyman from 1982-1986. Mr. Davis was chosen as a director of the Company based on his knowledge of corporategovernance.

 

P. Clark Hallrenhas been a director of the Company since May 2014. Since August 2013, Mr. Hallren has been a realtor with HK Lane/Christie’sInternational Real Estate and since August 2012, Mr. Hallren has served as an outside consultant to individuals and entities investingor operating in the entertainment industry. From August 2012 to August 2014, Mr. Hallren was a realtor with Keller Williams Realtyand from August 2009 to August 2012, Mr. Hallren founded and served as managing partner of Clear Scope Partners, an entertainmentadvisory company. From 1986 to August 2009, Mr. Hallren was employed by JP Morgan Securities Inc. in various capacities, includingas Managing Director of the Entertainment Industries Group. In his roles with JP Morgan Securities, Mr. Hallren was responsiblefor marketing certain products to his clients, including but not limited to, syndicated senior debt, public and private subordinateddebt, public and private equity, securitized and credit enhanced debt, interest rate derivatives, foreign currency and treasuryproducts. Mr. Hallren holds Finance, Accounting and Economics degrees from Oklahoma State University. He also currently holds Series7, 24 and 63 securities licenses. Mr. Hallren was chosen as a director of the Company based on his knowledge and experience inthe entertainment industry as well as in banking and finance.

 

Lynne Segallhas been a director of the Company since December 2013. Ms. Segall has served as the Senior Vice President and Publisher of TheHollywood Reporter since June 2011. From 2010 to 2011, Ms. Segall was the Senior Vice President of Deadline Hollywood. From June2006 to May 2010, Ms. Segall served as the Vice President of Entertainment, Fashion & Luxury advertising at the Los AngelesTimes. In 2005, Ms. Segall received the Women of Achievement Award from The Hollywood Chamber of Commerce and the Women in ExcellenceAward from the Century City Chamber of Commerce. In 2006, Ms. Segall was recognized by the National Association of Women with itsExcellence in Media Award. Ms. Segall was chosen to be a director based on her expertise in the entertainment industry.

 

Anthony Thomopouloswas appointed as a director of the Company on February 27, 2014. Mr. Thomopoulos served as the Chairman of United Artist Picturesfrom 1986 to 1989 and formed Thomopoulos Pictures, an independent production company of both motion pictures and television programsin 1989 and has served as its Chief Executive Officer since 1989. From 1991 to 1995, Mr. Thomopoulos was the President of AmblinTelevision, a division of Amblin Entertainment. Mr. Thomopoulos served as the President of International Family Entertainment,Inc. from 1995 to 1997. From June 2001 to January 2004, Mr. Thomopoulos served as the Chairman and Chief Executive Officer of MediaArts Group, a NYSE listed company. Mr. Thomopoulos served as a state commissioner of the California Service Corps. under GovernorSchwarzenegger from 2005 to 2008. Mr. Thomopoulos is also a founding partner of Morning Light Productions. Since he founded itin 2008, Mr. Thomopoulos has operated Thomopoulos Productions and has served as a consultant to BKSems, USA, a digital signagecompany. Mr. Thomopoulos is an advisor and a member of the National Hellenic Society and holds a degree in Foreign Service fromGeorgetown University and sat on its Board of Directors from 1978 to 1988. Mr. Thomopoulos was chosen as a director of the Companybased on his entertainment industry experience.

 

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Margaret Loeschwas appointed to the Board of Directors on March 18, 2015. Beginning in 2009 through 2014, Ms. Loesch, served as Chief ExecutiveOfficer and President of The Hub Network, a cable channel for children and families, including animated features. The Company has,in the past, provided The Hub Network with certain children’s programming. From 2003 through 2009 Ms. Loesch served as Co-ChiefExecutive Officer of The Hatchery, a family entertainment and consumer product company. From 1998 through 2001 Ms. Loesch servedas Chief Executive Officer of the Hallmark Channel, a family related cable channel. From 1990 through 1997 Ms. Loesch served asthe Chief Executive Officer of Fox Kids Network, a children’s programming block and from 1984 through 1990 served as theChief Executive Officer of Marvel Productions, a television and film studio subsidiary of Marvel Entertainment Group. Ms. Loeschobtained her bachelors of science from the University of Southern Mississippi. Ms. Loesch was chosen to be a director based onher 40 years of experience at the helm of major children and family programming and consumer product channels.

 

Family Relationships

 

There are no familyrelationships between any of our directors and our executive officers, except that Andrew Heyward and Amy Moynihan Heyward aremarried.

  

Involvement in Certain Legal Proceedings

 

To our knowledge,our directors and executive officers have not been involved in any of the following events during the past ten years:

 

1.   any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
   
2.   any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
   
3.   being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; 
   
4.   being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
   
5.   being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
   
6.   being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Corporate Governance

 

General

 

We believe that goodcorporate governance is important to ensure that the Company is managed for the long-term benefit of our stockholders. This sectiondescribes key corporate governance practices that we have adopted.

 

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Board Leadership Structure and Role in Risk Oversight

 

The Board of Directorshas responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations.The primary responsibility of our Board of Directors is to oversee the management of our company and, in doing so, serve the bestinterests of the Company and our stockholders. The Board of Directors selects, evaluates and provides for the succession of executiveofficers and, subject to stockholder election, directors. It reviews and approves corporate objectives and strategies, and evaluatessignificant policies and proposed major commitments of corporate resources. Our Board of Directors also participates in decisionsthat have a potential major economic impact on our company. Management keeps the directors informed of company activity throughregular communication, including written reports and presentations at Board of Directors and committee meetings.

 

Although we have notadopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionallydetermined that it is in the best interest of the Company and its shareholders to partially combine these roles. Due to the smallsize of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officers positions combined.

The Company currentlyhas eight directors, including Mr. Heyward, its Chairman, who also serves as the Company’s Chief Executive Officer. The Chairmanand the Board are actively involved in the oversight of the Company’s day to day activities.

 

Board Committees

 

On June 9, 2014, theBoard of Directors of the Company unanimously decided to form an Audit Committee, Compensation Committee and Nominating Committee.

 

The following tablesets forth the three standing committees of our board and the members of each committee:

 

Director     Board    

Audit

Committee

   

Compensation

Committee

   

Nominating

Committee

Andrew Heyward     Chair                  
Amy Moynihan Heyward     X                  
Bernard Cahill     X     X            
Joseph “Gray” Davis     X                  
P. Clark Hallren     X     Chair     X      
Lynne Segall     X                 Chair
Anthony Thomopoulos     X           Chair      
Margaret Loesch     X                  

 

To assist it in carryingout its duties, the Board of Directors has delegated certain authority to an Audit Committee, a Compensation Committee and a NominatingCommittee as the functions of each are described below.

 

Audit Committee

 

Messrs. Hallren andCahill serve on our Audit Committee. Our Audit Committee’s main function is to oversee our accounting and financial reportingprocesses, internal systems of control, independent auditor relationships and the audits of our financial statements. The AuditCommittee’s responsibilities include:

 

· selecting, hiring, and compensating our independent auditors;
   
· evaluating the qualifications, independence and performance of our independent auditors;
   
· overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;
   
· approving the audit and non-audit services to be performed by our independent auditor;
   
· reviewing with the independent auditor the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies; and
   
· preparing the report that the SEC requires in our annual proxy statement.

 

The Board ofDirectors has adopted an Audit Committee Charter. The Audit Committee members meet NASDAQ’s financial literacy requirements,and the board has further determined that Mr. Hallren (i) is an “audit committee financial expert” as suchterm is defined in Item 407(d) of Regulation S-K promulgated by the SEC and (ii) also meets NASDAQ’s financialsophistication requirements.

 

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Compensation Committee

 

Messrs. Thomopoulosand Hallren serve on the Compensation Committee. Our Compensation Committee’s main functions are assisting our board of directorsin discharging its responsibilities relating to the compensation of outside directors, the Chief Executive Officer and other executiveofficers, as well as administering any stock incentive plans we may adopt. The Compensation Committee’s responsibilitiesinclude the following:

 

· reviewing and recommending to our board of directors the compensation of our Chief Executive Officer and other executive officers, and the outside directors;
   
· conducting a performance review of our Chief Executive Officer;
   
· reviewing our compensation policies; and
   
· if required, preparing the report of the Compensation Committee for inclusion in our annual proxy statement.

 

The Board ofDirectors has adopted a Compensation Committee Charter.

 

The Compensation Committee’spolicy is to offer our executive officers competitive compensation packages that will permit us to attract and retain highly qualifiedindividuals and to motivate and reward these individuals in an appropriate fashion aligned with the long-term interests of ourCompany and our stockholders.

 

Compensation Committee Risk AssessmentWehave assessed our compensation programs and concluded that our compensation practices do not create risks that are reasonably likelyto have a material adverse effect on us.

 

Nominating Committee

 

Ms. Segall serveson our Nominating Committee. The Nominating Committee’s responsibilities include:

 

· identify qualified individuals to serve as members of the Company’s board of directors;
   
· review the qualifications and performance of incumbent directors;
   
· review and consider candidates who may be suggested by any director or executive officer or by any stockholder of the Company; and
   
· review considerations relating to board composition, including size of the board, term and age limits, and the criteria for membership on the board.

 

The Board ofDirectors has adopted a Nominating Committee Charter.

 

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EXECUTIVE COMPENSATION

 

The followingtable sets forth the long-term compensation earned for services in all capacities for the fiscal years ended December 31, 2014and 2013 paid to our Chief Executive Officer and Chief Financial Officer, and each other officer earning in excess of $100,000per year.

 

Summary Compensation Table

 

Name and Principal Position   Year   Salary ($)   Bonus ($)  

Stock Awards

($) (1)

 

Option Awards

($) (1)

 

All Other Compensation

($)

  Total ($)
Andrew Heyward (2)   2014   200,000   500         200,500
Chief Executive Officer   2013   23,077           23,077
                             
Amy Moynihan Heyward (3)   2014   180,000   500         180,500
President   2013   20,769           20,769
                             
Gregory Payne (4)   2014   175,000   500         175,500
Corporate Secretary   2013   21,875   500         22,375
                             
Rebecca D. Hershinger (5)   2014     500       80,875   81,375
Former Chief Financial Officer   2013              
                             
Klaus Moeller (6)   2014           9,120   9,120
Former Chief Executive Officer   2013   173,950     34,000   67,473   8,550   283,973
                             
Richard Staves (7)   2014           35,935   35,935
Former Interim Chief Financial Officer   2013            
                             
Jeanene Morgan (8)   2014   31,644         2,000   33,644
Former Chief Financial Officer   2013   187,500   500   34,000   32,145     254,415

 

(1) The aggregate fair value of the stock awards and stock option awards on the date of grant was computed in accordance with FASB ASC Topic 718.
   
(2) In association with the Merger (see “Description of Business”), Mr. Heyward was appointed Chief Executive Officer of the Company on November 15, 2013. Per his November 15, 2013 Employment Agreement, Mr. Heyward is entitled to an annual salary of $200,000.
   
(3) In association with the Merger, Ms. Heyward was appointed President of the Company on November 15, 2013. Per her November 15, 2013 Employment Agreement, Ms. Heyward is entitled to an annual salary of $180,000.
   
(4) In association with the Merger, Mr. Payne was appointed Corporate Secretary of the Company for which he is entitled to an annual salary of $175,000.
   
(5) Ms. Hershinger was appointed Chief Financial Officer of the Company on October 24, 2014 for which she earned $20,000 pursuant to her engagement letter. Prior to her appointment, she provided hourly contract services to the Company for which she earned $60,875. Ms. Hershinger resigned as Chief Financial Officer on Jun 26, 2015.
   
(6) In association with the Merger, Mr. Moeller resigned from his position as Chief Executive Officer effective November 15, 2013. Klaus Moeller’s compensation includes:

 

· Salaried compensation pursuant to his April 26, 2011 Employment Agreement; the April 26, 2011 Employment Agreement as amended on January 10, 2013; his October 29, 2013 Employment Agreement, and his Termination Agreement.
· 10,000 shares of the Company’s common stock, granted in association with the Merger, for services to the Company.
· Stock options including:

 

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  Pursuant to his April 26, 2011 Employment Agreement, the Company granted up to 10,000 shares of common stock and vesting as to 2,500 shares on the date of the agreement, 2,500 shares on the first anniversary date, 2,500 shares on the second anniversary date and 2,500 on the third anniversary date. The option was granted at an exercise price of $44.00.
  On December 31, 2012, the Board of Directors authorized the grant of a stock option to purchase up to 1,000 shares, fully vesting on the grant date, at an exercise price of $20.00.
  On May 15, 2013, the Board of Directors authorized the grant of a stock option to purchase up to 7,500 shares of common stock, fully vesting on the grant date, at an exercise price of $20.00 per share.

 

· Annual car allowance of $11,400

 

(7) Mr. Staves was the Interim Chief Financial Officer of the Company from March 7, 2014 through October 24, 2014. He provided hourly contract services to the Company for which he earned $35,531. Prior to his appointment, he provided hourly contracted service for which he earned $405.
   
(8) Jeanene Morgan’s compensation includes:

 

· Salaried compensation pursuant to her May 2, 2012 and her October 29, 2013 Employment Agreement.

 

  10,000 shares of the Company’s common stock, granted in association with the Merger, for services to the Company.

 

  § Stock options including:
  § Pursuant to her original offer of employment, the Company granted up to 4,500 shares of common stock and vesting   1,500 shares on the date of the agreement, 1,000 shares on the first anniversary date, 1,000 shares on the second anniversary date and 1,000 on the third anniversary date. The option was granted at an exercise price of $34.00.
  § On May 2, 2012, the Board of Directors authorized the grant of a stock option to purchase up to 2,000 shares, vesting on December 31, 2014, at an exercise price of $44.00.
  § On December 31, 2012, the Board of Directors authorized the grant of a stock option to purchase up to 1,000 shares, fully vesting on the grant date, at an exercise price of $20.00.
  § On May 15, 2013, the Board of Directors authorized the grant of a stock option to purchase up to 7,500 shares of common stock, fully vesting on the grant date, at an exercise price of $20.00 per share.
  § Pursuant to the October 29, 2013 Employment Agreement, all options granted to Ms. Morgan were vested immediately.

 

  Effective March 7, 2014, Ms. Morgan resigned from the Company. After her resignation, she earned an additional $2,000 for transition services. Upon her resignation, she also received cash payments of $32,090 for vacation time accrued during the period of her employment.

 

Outstanding Equity Awards at Fiscal Year

 

There were no outstandingequity awards as of December 31, 2014.

 

Employment Agreements

 

On November 15, 2013,the Company entered into an employment agreement with Andrew Heyward (the “Andrew Heyward Employment Agreement”), wherebyMr. Heyward agreed to serve as the Company’s Chief Executive Officer for a period of five years, subject to renewal, in considerationfor an annual salary of $200,000. Additionally, under the terms of the Andrew Heyward Employment Agreement, Mr. Heywardshall be eligible for an annual bonus if the Company meets certain criteria, as established by the Board of Directors. Mr. Heywardshall be entitled to reimbursement of reasonable expenses incurred in connection with his employment and the Company may take outand maintain during the term of his tenure, a life insurance policy in the amount of $1,000,000. During the term of his employmentand under the terms of the Andrew Heyward Employment Agreement, Mr. Heyward shall be entitled to be designated as composer on allmusic contained in the programming produced by the Company and to receive composer’s royalties from applicable performingrights societies.

 

On November 15, 2013,the Company entered into an employment agreement with Amy Moynihan Heyward (the “Amy Heyward Employment Agreement”),whereby Ms. Heyward agreed to serve as the Company’s President for a period of five years, subject to renewal, in considerationfor an annual salary of $180,000. Additionally, under the terms of the Amy Heyward Employment Agreement, Ms. Heyward shall be eligiblefor an annual bonus if the Company meets certain criteria, as established by the Board of Directors. Ms. Heyward shall be entitledto reimbursement of reasonable expenses incurred in connection with her employment and the Company may take out and maintain duringthe term of her tenure, a life insurance policy in the amount of $1,000,000. During the term of her employment and under the termsof the Amy Heyward Employment Agreement, Ms. Heyward shall be entitled to be designated as composer on all music contained in theprogramming produced by the Company and to receive composer’s royalties from applicable performing rights societies.

 

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Director Compensation

 

The following tablesets forth with respect to the named directors, compensation information inclusive of equity awards and payments made for the fiscalyears ended December 31, 2014 and 2013 in the director's capacity as director. In 2015, we adopted our 2015 Incentive Plan whichprovides for option grants to directors and provide certain directorship fees.

 

Name       Fees Earned or Paid in Cash ($) (1)    

Stock

Awards ($)

   

Option

Awards ($)

   

All Other

Compensation ($)

    Total ($)  
Andrew Heyward   2014   $ 15,000     $     $     $     $ 15,000  
    2013   $     $     $     $     $  
                                             
Amy Moynihan Heyward   2014   $ 15,000     $     $     $     $ 15,000  
    2013   $     $     $     $     $  
                                             
Bernard Cahill   2014   $ 15,000     $     $     $     $ 15,000  
    2013   $     $     $     $     $  
                                             
Joseph “Gray” Davis   2014   $ 15,000     $     $     $     $ 15,000  
    2013   $     $     $     $     $  
                                             
P. Clark Hallren (2)   2014   $ 10,000     $     $     $ 40,000     $ 50,000  
    2013   $     $     $     $     $  
                                             
Lynn Segall   2014   $ 15,000     $     $     $     $ 15,000  
    2013   $     $     $     $     $  
                                             
Anthony Thomopoulos (3)   2014   $ 10,000     $     $     $     $ 10,000  
    2013   $     $     $     $     $  
                                             
Jeffrey Weiss (4)   2014   $ 10,000     $     $     $     $ 10,000  
    2013   $     $     $     $     $  
                                             
Klaus Moeller (5)   2014   $     $     $     $     $  
    2013   $     $     $     $     $  
                                             
William McDonough (6)   2014   $     $     $     $     $  
    2013   $     $     $     $     $  

 

(1) For the board meetings held in the second and third quarter of 2014, Board Members earned $5,000 per meeting attended either physically or telephonically. Beginning with the Board Meeting in the fourth quarter 2014, the structure was revised such that Directors earn $5,000 per meeting attended physically, $2,500 per meeting attended telephonically, and nothing for non-attendance.
(2) On May 15, 2014, Mr. Hallren was appointed to the Board of Directors of the Company. Mr. Hallren earned $10,000 in compensation for his services as a member of the Board of Directors and received $35,000 for consulting services provided to the Company.
(3) On February 27, 2014, Mr. Thomopoulos was appointed to the Board of Directors of the Company.
(4) On March 16, 2015, Mr. Weiss resigned from the Board of Directors of the Company.
(5) On May 15, 2014, Mr. Moeller resigned from the Board of Directors of the Company.
(6) On February 27, 2014, Mr. McDonough resigned from the Board of Directors of the Company.

 

 

 

 

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT

 

The followingtable shows the beneficial ownership of shares of our common stock as of November 16, 2015 known by us through transfer agent andother records held by: (i) each person who beneficially owns 5% or more of the shares of common stock then outstanding; (ii) eachof our directors; (iii) each of our named executive officers; and (iv) all of our directors and executive officers as a group.

 

The information inthis table reflects “beneficial ownership” as defined in Rule 13d-3 of the Exchange Act. To our knowledge and unlessotherwise indicated, each stockholder has sole voting power and investment power over the shares listed as beneficially owned bysuch stockholder, subject to community property laws where applicable. Percentage ownership is based on 10,859,450 shares of commonstock outstanding as November 16, 2015. Unless otherwise indicated in the footnotes to the following table, each person named inthe table has sole voting and investment power and that person’s address is c/o 301 North Canon Drive, Suite 305, BeverlyHills, CA 90210.

 

Name and Address of Beneficial Owner   Amount and Nature of Beneficial Ownership (1)   Percent of Class(1)
Andrew Heyward   4,098,219 (2)   35.8%
Amy Moynihan Heyward   4,098,219 (2)   35.8%
Gregory Payne   60,257 (3)   *
Michael D. Handelman     *
Bernard Cahill   68,934 (4)   *
Joseph “Gray” Davis   15,000   *
P. Clark Hallren   15,000   *
Lynne Segall   15,000   *
Anthony Thomopoulos   15,345   *
Margaret Loesch   15,000   *
Wolverine Flagship Fund Trading Limited (5)   1,183,090 (6)   9.99%
Iroquois Master Fund Ltd. (7)   1,171,452 (8)   9.99%
         
All Officers and Directors (Consisting of 10 persons)   4,233,821   36.9%

 

* Indicates ownership less than 1%

 

(1) Applicable percentage ownership is based on 10,859,450 shares of common stock outstanding as of November 16, 2015, together with securities exercisable or convertible into shares of common stock within 60 days of November 16, 2015. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that a person has the right to acquire beneficial ownership of upon the exercise or conversion of options, convertible stock, warrants or other securities that are currently exercisable or convertible or that will become exercisable or convertible within 60 days of November 16, 2015 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the number of shares beneficially owned and percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Consists of (i) 2,972,183 shares of common stock held by A Squared Holdings LLC over which Andrew Heyward and Amy Moynihan Heyward hold voting and dispositive power, (ii) 100,000 shares of common stock issuable upon conversion of 100 shares of the Company’s Series A Convertible Preferred Stock, (iii) 522,836 shares of common stock held by Andrew Heyward. (iv) 3,200 shares held by Hayward Living Trust, and (v) 500,000 shares issuable upon exercise of warrants held by Andrew Heyward. Andrew Heyward and Amy Moynihan Heyward are spouses who own such shares jointly, and thus both maintain joint voting and dispositive power over such shares.
(3) Includes 250 shares held by Mr. Payne’s spouse.
(4) Consists of (i) 56,434 shares of common stock owned directly by Bernard Cahill and (ii) 12,500 shares of common stock owned by Mr. Cahill’s spouse.
(5) The address of this beneficial owner is 175 West Jackson Blvd., Suite 340, Chicago, Illinois 60604
(6) Consists of (i) 199,800 shares of common stock and (ii) 983,290 shares of common stock issuable upon conversion of Series A Convertible Preferred Stock. The stockholder owns 2,250 shares of the Company’s Series A Convertible Preferred Stock which are convertible into 2,250,000 shares of common stock. The Series A Convertible Preferred Stock may not be converted to the extent that the holder or any of its affiliates would own more than 9.99% of the outstanding common stock of the Company after such conversion, and the Series A Convertible Preferred Stock may not be voted to the extent that the holder or any of its affiliates would control more than 9.99% of the voting power of the Issuer. The number of shares deemed beneficially is limited accordingly.
(7) The address of this beneficial owner is 641 Lexington Avenue, 26th Floor, New York, New York 10022
(8) Includes 304,652 shares of common stock and 200,000 shares of commonstock issuable upon exercise of warrants. The stockholder also owns shares of Series A Preferred Stock which may not be convertedto common stock to the extent such conversion would result in the shareholder beneficially owning more than 9.99% of the outstandingcommon stock. The number of shares deemed beneficially owned is limited accordingly.

 

 38 

 

 

CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Certain Relationshipsand Related Transactions

 

Our Chief ExecutiveOfficer, Andrew Heyward, is the spouse of our President, Amy Moynihan Heyward.

 

Bernard Cahill, adirector of the Company appointed on December 9, 2013, is the founder of ROAR LLC (“ROAR”) which owns 65% of GirlillaMarketing LLC (“Girlilla”). In connection with the Merger, the Company entered into a marketing consultation agreementwith Girlilla pursuant to which Girlilla agreed to provide certain strategic digital marketing services through November 2014 inconsideration for 10,000 shares of common stock. Additionally, the Company entered into an engagement letter with ROAR pursuantto which ROAR agreed to provide the Company services, including the development of a business development strategy, through May2015. In consideration for its services, the Company agreed to issue to ROAR 67,492 shares of common stock.

 

On November 15, 2013,as part of the Merger, the Company acquired these liabilities from A Squared Entertainment, LLC. From time to time, A Squared Entertainment,LLC required short-term advances to fund its operations and provide working capital from its founder, the Company’s currentChief Executive Officer, Andrew Heyward. As of September 30, 2015, these advances totaled $411,521. No interest is due on theseadvances.

 

The investors underour October 2015 Private Placement included Andrew Heyward, who purchased 500,000 shares of common stock and 500,000 warrants fora purchase price of $500,000.

 

Director Independence

 

Each of Messrs. Davis,Hallren, and Thomopoulos as well as Ms. Segall and Ms. Loesch are independent as that term is defined under the Nasdaq MarketplaceRules.

 

ADDITIONAL INFORMATION

  

We are a reportingcompany and file annual, quarterly and special reports, and other information with the Securities and Exchange Commission. Copiesof the reports and other information may be read and copied at the SEC's Public Reference Room at 100 F Street NE, Washington,D.C. 20549. You can request copies of such documents by writing to the SEC and paying a fee for the copying cost. You may obtaininformation on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site athttp://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that fileelectronically with the SEC.

 

This prospectus ispart of a registration statement on Form S-1 that we filed with the SEC. Certain information in the registration statementhas been omitted from this prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits andschedules with the registration statement that are excluded from this prospectus. For further information you may:

 

· read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC's Public Reference Room; or
   
· obtain a copy from the SEC upon payment of the fees prescribed by the SEC.

 

DISCLOSUREOF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

 

Section 78.7502(1)of the Nevada Revised Statutes provides that a corporation may indemnify any person who was or is a party, or is threatened tobe made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative orinvestigative (except in an action brought by or on behalf of the corporation) if that person is or was a director, officer, employeeor agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent ofanother corporation or enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlementactually and reasonably incurred by that person in connection with such action, suit or proceeding, if that person acted in goodfaith and in a manner which that person reasonably believed to be in, or not opposed to, the best interests of the corporation,and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. The terminationof any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent,alone, does not create a presumption that the person did not act in good faith and in a manner which the person reasonably believedto be in, or not opposed to, the best interests of the corporation, and that, with respect to any criminal action or proceeding,the person had reasonable cause to believe his action was unlawful.

 

 39 

 

 

Section 78.7502(2)of the Nevada Revised Statutes provides that a corporation may indemnify any person who was or is a party or is threatened to bemade a party to any threatened, pending or completed action or suit brought by or on behalf of the corporation to procure a judgmentin its favor because the person acted in any of the capacities set forth above, against expenses, including amounts paid in settlementand attorneys' fees, actually and reasonably incurred by that person in connection with the defense or settlement of such actionor suit, if the person acted in accordance with the standard set forth above, except that no indemnification may be made in respectof any claim, issue or matter as to which such person shall have been adjudged by a court of competent jurisdiction after exhaustionof all appeals therefrom to be liable to the corporation or for amounts paid in settlement to the corporation unless and only tothe extent that the court in which such action or suit was brought or other court of competent jurisdiction determines that, inview of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as thecourt deems proper.

 

Section 78.7502(3)of the Nevada Revised Statutes further provides that, to the extent a director or officer of a corporation has been successfulon the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections 1 and 2 thereof, or in thedefense of any claim, issue or matter therein, that person shall be indemnified by the corporation against expenses (includingattorneys' fees) actually and reasonably incurred by that person in connection therewith.

 

Section 78.751 ofthe Nevada Revised Statutes provides that unless indemnification is ordered by a court, the determination to provide indemnificationmust be made by the stockholders, by a majority vote of a quorum of the board of directors who were not parties to the action,suit or proceeding, or in specified circumstances by independent legal counsel in a written opinion. In addition, the articlesof incorporation, bylaws or an agreement made by the corporation may provide for the payment of the expenses of a director or officerof the expenses of defending an action as incurred upon receipt of an undertaking to repay the amount if it is ultimately determinedby a court of competent jurisdiction that the person is not entitled to indemnification. Section 78.751 of the Nevada Revised Statutesfurther provides that the indemnification provided for therein shall not be deemed exclusive of any other rights to which the indemnifiedparty may be entitled and that the scope of indemnification shall continue as to directors, officers, employees or agents who haveceased to hold such positions, and to their heirs, executors and administrators.

 

Section 78.752 ofthe Nevada Revised Statutes provides that a corporation may purchase and maintain insurance on behalf of a director, officer, employeeor agent of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out ofhis status as such whether or not the corporation would have the authority to indemnify him against such liabilities and expenses.

 

Our Articles of Incorporationand By-Laws provide that, to the fullest extent permitted by applicable law, none of our directors will be personally liable tous or our stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this provisionwill be prospective only and will not adversely affect any limitation, right or protection of a director of our company existingat the time of such repeal or modification.

 

Insofar as indemnificationfor liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors,officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC,such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event thata claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid bya director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is assertedby such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinionof our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questionwhether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed bythe final adjudication of such issue.

 

LEGAL MATTERS

 

The validity of the securities being offeredby this prospectus has been passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.

 

EXPERTS

 

The consolidated financialstatements of Genius Brands International, Inc. as of and for the years ended December 31, 2014 and 2013 have been audited by HJAssociates & Consultants, LLP, independent registered public accounting firm as set forth in their report, and are includedin reliance upon such report given on the authority of such firm as experts in accounting and auditing. 

 

 

 

 40 

 

 

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 notesare an integral part of these financial statements.

 

 F-1 

 

 

Genius Brands International, Inc.

 Consolidated Statements of Operations

 ThreeMonth 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 financialstatements.

 

 F-2 

 

 

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 accompanyingnotes are an integral part of these financial statements.

 F-3 

 

 

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. 

 

 F-4 

 

 

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 companydedicated to providing entertaining and enriching “content and products with a purpose” for toddlers to tweens. Ledby industry veterans Andrew Heyward (Chief Executive Officer) and Amy Moynihan Heyward (President), the Company produces originalcontent and licenses the rights to that content to a variety of partners. Our licensees include (i) companies to which the audio-visualrights 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 anddistribute 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’sentertainment that is targeted at children from toddlers to teens including the award-winning Baby Genius, Warren Buffett'sSecret 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-ownedbrands, it also acts as licensing agent for certain brands, leveraging its existing licensing infrastructure to expand these brandsinto 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; andCelessence Technologies, the world's leading microencapsulation company.

 

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

 

The Company commenced operations in January2006, assuming all of the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement betweenthe Company and Genius Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “BabyGenius,” “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 intoan Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delaware limitedliability company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole member ofA Squared (the “Parent Member”) and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“AcquisitionSub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurredconcurrently with entering into the Merger Agreement, the Acquisition Sub merged with and into A Squared, and A Squared, as thesurviving entity, became a wholly-owned subsidiary of the Company.  As a result of the Merger, the Company acquired thebusiness and operations of A Squared.

 

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

  

Strategic Initiatives

 

During 2014, the Company began a series ofstrategic initiatives to restructure certain areas of business in an effort to operate more profitably in the long run. This includedproduct 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.

 

 F-5 

 

 

  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 netlosses. As of September 30, 2015, the Company had an accumulated deficit of $23,574,592 and a total stockholders’ equityof $11,316,854 At September 30, 2015, the Company had current assets of $2,617,458 including cash of $2,147,931 and current liabilitiesof $2,468,972, including short-term debt to related parties which bears no interest and has no stated maturity of $411,521 andcertain trade payables of $925,000 to which the Company disputes the claim, resulting in working capital of $148,486. For the ninemonths ended September 30, 2015 and 2014, the Company reported a net loss of $2,421,938 and $2,843,763, respectively, and reportednet 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. Whilethe 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 unableto attain profitable operations and positive operating cash flows in a reasonable period of time, it may need to (i) seek additionalfunding, (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 debtinstruments with initial maturities of six months or less to be cash equivalents. 

 

Reverse Stock Split

 

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

 

Business Combination

 

On November 15, 2013, the Company entered intothe Merger Agreement with A Squared, the Member, and the Acquisition Sub. Upon closing of the Merger, which occurred concurrentlywith 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 operationsof A Squared.

 

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

 F-6 

 

 

See Note 3 - Business Combination for additionalinformation.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reporting periods.

 

Financial Statement Reclassification

 

Certain account balances from prior periodshave 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 estimatedbased on average sales during the previous year. Based on experience, sales growth, and our customer base, the Company concludedthat 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 obsoleteinventory is established for all inventory deemed potentially non-saleable by management in the period in which it is determinedto be potentially non-saleable. The current inventory is considered properly valued and saleable. The Company concluded that therewas an appropriate reserve for slow moving and obsolete inventory of $53,338 and $54,673 established as of September, 2015 andDecember 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 assetsnor appreciably prolong their lives, are charged to expense as incurred. Gains and losses from any dispositions of property andequipment are reflected in the statement of operations.

   

Goodwill and Intangible Assets

 

Goodwill represents the excess of purchaseprice over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordancewith ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets are presumed to have indefinite useful livesand are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. TheCompany completes the annual goodwill and indefinite-lived intangible asset impairment tests at the end of each fiscal year. Totest for goodwill impairment, we are required to estimate the fair market value of each of our reporting units, of which we haveone. While we may use a variety of methods to estimate fair value for impairment testing, our primary methods are discounted cashflows. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgmentregarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimateof the fair market value of the reporting units, which could result in an impairment of goodwill of indefinite lived intangibleassets 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 bonussongs/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 periodicalterations to existing products are expensed as incurred. Annual amortization of these intangible assets is computed based onthe straight-line method over the remaining economic life of the asset.

 F-7 

 

 

Films and Televisions Costs

 

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

 

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

 

Revenue Recognition

 

The Company recognized revenue related to productsales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated topay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation forfuture 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 productsare recorded when shipped to customers pursuant to approved customer purchase orders resulting in the transfer of title and riskof loss. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reportingdate.

 

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

 

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

 

The Company’s licensing and royalty revenuerepresents both (a) variable payments based on net sales from brand licensees for content distribution rights. These license agreementsare held in conjunction with third parties that are responsible for collecting fees due and remitting to the Company its shareafter expenses. Revenue from licensed products is recognized when realized or realizable based on royalty reporting received fromlicensees 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 tosuppliers 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. DilutedEPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding, plus the assumed exerciseof all dilutive securities using the treasury stock or “as converted” method, as appropriate. During periods of netloss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.

 

Income Taxes

 

Deferred income tax assets and liabilitiesare recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enactedtax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and otherpossible sources of realization of deferred tax assets, and records a valuation allowance that reduces the deferred tax assetsto an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than notwill be realized.

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued Accounting StandardsUpdate 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 unrecognizedtax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset fora net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with limited exceptions. ASU No. 2013-11 iseffective for interim and annual periods beginning after December 15, 2013 and may be applied retrospectively. We are currentlyevaluating the potential impact of adopting this guidance on our consolidated financial statements.

 F-8 

 

 

In April 2014, the FASB issued Accounting StandardsUpdate No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): ReportingDiscontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which raisesthe threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operationsand certain other disposals that do not meet the new definition of a discontinued operation. It also allows an entity to presenta 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 ofan entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Earlyadoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statementspreviously issued or available for issuance. We are currently evaluating the potential impact of adopting this guidance on ourconsolidated financial statements.

 

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

 

In June 2014, the FASB issued Accounting StandardsUpdate No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target CouldBe Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require thata performance target that affects vesting and that could be achieved after the requisite service period be treated as a performancecondition. 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 toaccount for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annualperiods 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 performancetargets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to allnew or modified awards thereafter. We are currently evaluating the potential impact of adopting this guidance on our consolidatedfinancial statements.

 

Various other accounting pronouncements havebeen recently issued, most of which represented technical corrections to the accounting literature or were applicable to specificindustries, 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 intothe Merger Agreement with A Squared and Acquisition Sub. Upon closing of the Merger, which occurred concurrently with enteringinto the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the surviving entity, became awholly-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’spre-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 dilutedbasis.

  

Pursuant to the terms and conditions of theMerger:

 

  · 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.

 

 F-9 

 

 

Accounting Treatment

 

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

 

Purchase Price Allocation

 

The following table summarizes the final purchaseaccounting 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 jointventure, 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 propertybased on exclusive properties created by Stan Lee and owned by POW. Each of A Squared, POW, and Archie own one-third of Stan LeeComics, LLC.

 

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

 

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

 

 F-10 

 

 

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 Companybegan a strategic initiative to restructure its product sales business by phasing out the direct sale of physical products includingDVDs and CDs and shifting to a licensing model. On July 14, 2014, the Company employed Stone Newman in the newly created positionof President - Worldwide Consumer Products to manage all consumer products, licensing and merchandising sales and rights for theCompany’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 madeduring the normal course of business, during the second quarter of 2014, the Company determined that a portion of its inventorymay not be saleable and recorded an additional reserve of $174,963 which was recorded as a loss on inventory. Finally, during thefourth quarter of 2014, the Company donated certain inventory that had already been reserved for at which time the inventory waswritten off.

  

Note 6: Property and Equipment, Net

 

The Company has property and equipment as followsas 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 andCapitalized Product Development in Process

 

As of September 30, 2015, the Company had Filmand Television Costs of $903,634 compared to $303,953 at December 31, 2014. The increase relates to the development and productionof 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 CapitalizedProduct 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 Companyrecognized $10,365,805 in Goodwill, representing the excess of the fair value of the consideration for the Merger over net identifiableassets acquired (See Note 3 - Business Combination for additional information). Pursuant to ASC 350-20, Goodwill is not subjectto amortization but is subject to annual review to determine if certain events warrant impairment to the Goodwill asset. ThroughSeptember 30, 2015, the Company has not recognized any impairment related to Goodwill.

 

Intangible Assets, Net

 

The Company had following intangible assetsas 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 

 

 F-11 

 

 

(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 ofcertain advances or minimum guarantees against future royalty payments or flat license fees from its customers. These amounts representcollections 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.

 

 F-12 

 

 

Note 11: Short Term Debt - RelatedParties

 

As part of the Merger, the Company acquiredcertain liabilities from A Squared. From time to time, A Squared required short-term advances to fund its operations and provideworking 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 haveno stated maturity. The Company has applied an imputed interest rate of 6% in accordance with ASC 835-30-45. During ninemonths ended September 30, 2015 and 2014, the Company recognized imputed interest expense of $18,544 and $19,611 as acontribution to additional paid-in capital, respectively.

 

Note 12: Stockholders’ Equity

 

Common Stock

 

As part of the Reincorporation, the total numberof authorized shares of common stock was changed to 250,000,000 shares, $0.001 par value per share. The common stock and additionalpaid in capital accounts were restated as of December 31, 2012, and for the years then ended, to recognize the change from no parcommon stock to a par value of $0.001 per share. The Company conducted a consent solicitation of its stockholders of record asof September 3, 2013 to approve certain corporate actions. Stockholders, representing at least a majority of outstanding sharesof the Company’s voting capital as of the record date voted by written consent to approve an amendment to the Company’sArticle of Incorporation in order to increase the number of common stock authorized to 700,000,000 from 250,000,000. As of September30, 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 ratioto 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), whichwas to be effective no later than September 30, 2014, at such ratio and at such time in the sole discretion of the Board and inlieu of issuing any fractional shares resulting from the Reverse Split, to issue the next whole share.

 

On April 2, 2014, we filed an amendment toour Articles of Incorporation to effect the Reverse Split on a one-for-one hundred basis. The Reverse Split was effective withFINRA on April 7, 2014. All common stock share and per share information in this Form 10-Q, including the accompanying consolidatedfinancial statements and notes thereto, have been adjusted to reflect retrospective application of the Reverse Split, unless otherwiseindicated. 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 preferredstock authorized with a par value of $0.001 per share. The Board of Directors is authorized, subject to any limitations prescribedby law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or moreseries. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualificationsand 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 authorizedthe designation of a class of preferred stock as “Series A Convertible Preferred Stock”. On May 14, 2014, the Companyfiled the Certificate of Designation, Preferences and Rights of the 0% Series A Convertible Preferred Stock with the Secretaryof State of the State of Nevada.

 

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

 F-13 

 

 

On May 14, 2014, we entered into securitiespurchase agreements with certain accredited investors pursuant to which we sold an aggregate of 6,000 shares of our newly designatedSeries 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 certaincustomary closing conditions and closed on May 15, 2014.

 

On various dates during the nine months endedSeptember 30, 2015, the Company received notices of conversion from certain preferred stock holders to convert 310 shares of SeriesA 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 ConvertiblePreferred 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 ASC718 - Compensation which requires companies to measure the cost of employee services received in exchange for equity instrumentsbased on the grant date fair value of those awards and to recognize the compensation expense over the requisite service periodduring which the awards are expected to vest.

 

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

 

The following schedule summarizes the changesin 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 basedcompensation expense during the nine months ended September 30, 2015 or 2014.

  

Note 14: Warrants

 

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

 

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

 F-14 

 

 

The following schedule summarizes the changesin 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 accordancewith ASC 740 Income Taxes, which requires the recognition of deferred tax liabilities and assets at currently enacted tax ratesfor the expected future tax consequences of events that have been included in the financial statements or tax returns.  Avaluation 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 accountingfor uncertainty in income taxes recognized in a company’s financial statements.  ASC 740 requires a company todetermine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical meritsof the position.  If the more-likely-than-not threshold is met, a company must measure the tax position to determinethe amount to recognize in the financial statements.

  

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

 

The Company includes interest and penaltiesarising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of September30, 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 theU.S. federal jurisdiction and in the state of California.  The Company is currently subject to U.S. federal, state andlocal, 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 conditionto the Merger, the Company entered into five-year employment agreements with Andrew Heyward to serve as Chief Executive Officerand 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 enteredinto 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. Theagreement provides for an annual salary of $175,000.

 

Effective July 14, 2014, the Company employedStone Newman in the newly created operating position of President - Worldwide Consumer Products and executed a three-year employmentagreement which either party may terminate on the 12th and 24th month anniversary upon thirty (30) days’ notice. Mr. Newmanwill have oversight over all consumer products, licensing and merchandising sales and rights for the Company’s brands andprogramming 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 leasedapproximately 2,807 square feet of office space at 9401 Wilshire Boulevard, Beverly Hills, California pursuant to a standard officelease dated February 3, 2012. The lease had a term of 3 years, from May 1, 2012 through April 30, 2015. The monthly rent was $10,807which was to be adjusted upward 3% each year on the anniversary of the lease. The Company did not renew this lease.

 F-15 

 

 

During the first quarter of 2015, the Companyentered into an agreement for new office space to which it relocated its operations upon the expiration of its prior lease. EffectiveMay 1, 2015, the Company began leasing approximately 3,251 square feet of general office space at 301 North Canon Drive, Suite305, 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 leasesduring the nine months ended September 30, 2015 and 2014 were $106,271 and $105,207, respectively.

 

The following is a schedule of future minimumlease 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, theCompany enters into agreements which call for the payment of royalties or “profit” participations for the use of thirdparty intellectual property. For properties such as Gisele & The Green Team, Martha & Friends and StanLee 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 intoan agreement with XingXing Digital Corporation, an animation company based in China pursuant to which in exchange for the investmentof 100% of the costs of the animation, XingXing is entitled to receive a specified percentage of the net proceeds received by theCompany from the exploitation of those series on which XingXing has provided animation services. The series covered by this arrangementare Secret Millionaires Club and Gisele & the Green Team.

 

The Company has also entered into a similararrangement with another production vendor, BangZoom Entertainment, which calls for a payment of $120,000 from the net profitsreceived by the Company from the exploitation of the series Secret Millionaires Club. The payment represents the deferralof 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 withSymbiosis Technologies (“Symbiosis”) in which Symbiosis will provide certain pre-production and production servicesto 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 partneredwith Telegael Teoranta (“Telegael”) in which Telegael will provide certain production services to the Company for theproduction of Thomas Edison’s Secret Lab in exchange for a certain percentage of the series’ forthcoming adjustedrevenues as well as the ability to distribute the series in certain territories.

  

Note 19: Subsequent Events

 

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

 

On October 19, 2015, weentered into a Memorandum Regarding Services with Michael Handelman, our current Chief Financial Officer, effective as of November1, 2015, which supersedes our previous agreement with Mr. Handelman and pursuant to which Mr. Handelman shall continue his engagementas our Chief Financial Officer for a period of one year from the effective date thereof, subject to renewal, in consideration fora fee of $10,000 per month plus reimbursement of certain out-of-pocket expenses.

 

On October 29, 2015, theCompany entered into securities purchase agreements (the “Purchase Agreement”) with certain accredited investors pursuantto which the Company sold an aggregate of 4,330,000 shares of its common stock, par value $0.001 per and warrants to purchase upto 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 customaryclosing conditions and closed on November 3, 2015.

 F-16 

 

 

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

 

Pursuant to the terms ofthe Purchase Agreements, beginning on the closing date of the 2015 Private Placement and ending sixty (60) days after the EffectiveDate (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 commonstock originally purchased by them in the Private Placement and the average daily trading volume of the common stock for a periodof ten (10) consecutive trading days is greater than $75,000 and (ii) the one year anniversary of the closing of the 2015 PrivatePlacement, the Company has agreed to not sell any securities, subject to certain exceptions, at an effective per share price ofcommon stock less than the purchase price of the common stock sold in the 2015 Private Placement then in effect.

 

The Company has agreedto file a “resale” registration statement with the Securities and Exchange Commission (the “SEC”) coveringall shares of common stock and shares of common stock underlying the warrants issued or issuable in the 2015 Private Placement within45 days of the closing of the 2015 Private Placement and to maintain the effectiveness of the registration statement until allsecurities have been sold or are otherwise able to be sold pursuant to Rule 144. The Company has agreed to use its reasonable bestefforts to have the registration statement declared effective within 90 days of the closing of the 2015 Private Placement (or 120days after such closing if the registration statement is subject to review by the SEC. The Company is obligated to pay to investorsa fee of 1% per month in cash for every thirty day period up to a maximum of six (6%) percent, (i) that the registration statementhas not been filed after the required filing date, (ii) following the required effectiveness date that the registration statementhas not been declared effective; and (iii) as otherwise set forth in the Registration Rights Agreement.

 

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

 

 

 F-17 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

 

To the Board of Directors and Stockholders

Genius Brands International, Inc.

Beverly Hills, California

 

 

We have audited the accompanying consolidated balance sheets ofGenius Brands International, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements ofoperations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibilityof the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have,nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, the consolidated financial statements referred toabove present fairly, in all material respects, the financial position of Genius Brands International, Inc. and subsidiaries asof December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformitywith U.S. generally accepted accounting principles.

 

/s/ HJ Associates & Consultants, LLP

 

HJ Associates & Consultants, LLP

March 31, 2015

 

 

 F-18 

 

 

Genius Brands International, Inc.

Consolidated Balance Sheets

As of December31, 2014 and 2013

 

ASSETS  12/31/2014   12/31/2013 
Current Assets:          
Cash and Cash Equivalents  $4,301,099   $527,110 
Accounts Receivable, net   208,486    893,826 
Inventory   11,691    224,351 
Prepaid and Other Assets   217,622    582,056 
Total Current Assets   4,738,898    2,227,343 
           
Property and Equipment, net   32,420    78,748 
Film and Television Costs   303,953     
Capitalized Product Development in Process   7,500    54,575 
Intangible Assets, net   1,876,438    1,865,706 
Goodwill   10,365,805    10,365,805 
Investment in Stan Lee Comics, LLC        
Total Assets  $17,325,014   $14,592,177 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts Payable  $312,728   $889,919 
Accrued Expenses   283,582    219,275 
Deferred Revenue and Advances   242,160    107,264 
Accrued Salaries and Wages   50,288    59,958 
Disputed Trade Payable   925,000    925,000 
Short Term Debt - Related Party   411,008    516,659 
Total Current Liabilities   2,224,766    2,718,075 
           
Long Term Liabilities:          
Deferred Revenue and Advances   640,417    378,000 
Services Advance   739,583     
Total Liabilities   3,604,766    3,096,075 
           
Stockholders’ Equity          
Preferred Stock, $0.001 par value, 10,000,000 share authorized, respectively; 6,000 and 0 shares issued and outstanding, respectively   6     
Common Stock, $0.001 par value, 700,000,000 shares authorized, respectively; 6,374,450 and 5,918,704 shares issued and outstanding, respectively   6,375    5,919 
Additional Paid in Capital   34,866,521    28,914,238 
Accumulated Deficit   (21,152,654)   (17,424,055)
Total Stockholders’ Equity   13,720,248    11,496,102 
           
Total Liabilities and Stockholders’ Equity  $17,325,014   $14,592,177 

 

The accompanying notesare an integral part of these audited financial statements.

 

 F-19 

 

 

Genius Brands International, Inc.

Consolidated Statementsof Operations

Periods Ending December 31, 2014 and 2013

 

   12/31/2014   12/31/2013 
Revenues:          
Product Sales  $497,273   $1,682,780 
Television & Home Entertainment   117,670    505,552 
Licensing & Royalties   310,845    368,206 
Total Revenues   925,788    2,556,538 
           
Cost of Sales   500,000    1,504,138 
           
Gross Profit   425,788    1,052,400 
           
Operating Expenses:          
Product Development   1,700    139,082 
Professional Services   953,463    451,537 
Rent Expense   140,070    24,898 
Marketing & Sales   338,598    308,355 
Depreciation & Amortization   109,753    160,654 
Salaries and Related Expenses   1,432,314    1,329,715 
Stock Compensation Expense       539,185 
Bad Debt Expense   73,458     
Other General & Administrative   852,895    460,818 
Total Operating Expenses   3,902,251    3,414,244 
           
Loss from Operations   (3,476,463)   (2,361,844)
           
Other Income (Expense):          
Other Income   34,700    208 
Interest Expense   (11,750)   (1,663,632)
Interest Expense - Related Parties   (25,842)   (30,189)
Gain (loss) on Distribution Contracts   (47,229)   4,997 
(Gain) loss on Conversion of Accounts Payable   (4,072)   
(Gain) loss on Settlement or Extinguishment of Debt   56,519    (614,073)
Gain (loss) on Disposition of Assets   (70,905)   (251,192)
Gain (loss) on Inventory   (174,963)    
Unrealized gain (loss) on Foreign Currency Translation   (8,594)    
Gain (loss) on Derivative Valuation       (1,886,943)
Gain (loss) on Exchange of Warrants       (312,144)
Net Other Income (Expense)   (252,136)   (4,752,968)
           
Loss before Income Tax Expense   (3,728,599)   (7,114,812)
           
Income Tax Expense        
           
Net Loss from Continuing Operations   (3,728,599)   (7,114,812)
Net Loss from Discontinued Operations       (101,219)
Net Loss  $(3,728,599)  $(7,216,031)
           
Net Loss per Common Share from Continuing Operations  $(0.60)  $(5.03)
Net Loss per Common Share from Discontinued Operations       (0.07)
Total Net Loss per Common Share  $(0.60)  $(5.10)
           
Weighted Average Shares Outstanding   6,254,497    1,413,631 

 

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

 

 F-20 

 

Genius Brands International, Inc.

 Consolidated Statements of Stockholders' Equity (Deficit)

 

   Common Stock   Preferred Stock   Additional
Paid in
   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
Balance, December 31, 2012   719,127   $719       $   $9,962,062   $(10,208,024)  $(245,243)
                                    
Common Stock Issued for Cash, Net of Offering Costs   296,429    297            968,240        968,537 
Common Stock Issued for Services   126,899    127            535,347        535,474 
Common Stock Issued in exchange for repayment of Note Payable   1,685,236    1,685            6,180,411        6,182,096 
Common Stock Issued in exchange for repayment of Accounts Payable   10,020    10            28,046        28,056 
Common Stock Issued in exchange for Warrants, net of costs   53,810    54            336,336        336,390 
Common Stock Issued for Bonuses to Officers and Directors   55,000    55            187,445        187,500 
Common Stock Issued for Merger with A Square Entertainment   2,972,183    2,972            10,399,666        10,402,638 
Stock Compensation Expense                   316,685        316,685 
Net Loss                       (7,216,031)   (7,216,031)
Balance, December 31, 2013   5,918,704   $5,919       $   $28,914,238   $(17,424,055)  $11,496,102 
                                  
Common Stock Issued for Cash, Net of Offering costs   102,860    103            355,013        355,116 
Common Stock Issued for Purchase Price Adjustment pursuant to Securities Purchase Agreement   305,562    306            (306)        
Common Stock Issued in exchange for repayment of Accounts Payable   8,143    8            32,564        32,572 
Common Stock Issues for Services   48,000    48            159,252        159,300 
Series A Convertible Preferred Stock Issued for Cash, Net of Offering Costs           6,000    6    5,379,909        5,379,915 
Imputed Interest for Member Advances                   25,842        25,842 
Cancellation of Common Stock   (9,000)   (9)           9          
Adjustment to reconcile shares outstanding due to Reverse Stock Split   181                         
Net Loss                       (3,728,599)   (3,728,599)
Balance, December 31, 2014   6,374,450   $6,375    6,000   $6   $34,866,521   $(21,152,654)  $13,720,248 

 

 Theaccompanying notes are an integral part of these audited financial statements.

 F-21 

 


GeniusBrands International, Inc.

ConsolidatedStatements of Cash Flows

Periods Ended December 31, 2014 and 2013

 

Cash Flows from Operating Activities:  12/31/2014   12/31/2013 
Net Loss  $(3,728,599)  $(7,216,031)
Adjustments to reconcile net loss to net cash provided in operating activities:          
Depreciation Expense   50,484    13,730 
Amortization Expense   59,269    146,924 
Imputed Interest Expense   25,842     
Bad Debt Expense   73,458     
Accretion of Discount on Convertible Debentures       1,294,350 
Issuance of Common Stock for Interest Expense       51,859 
Issuance of Common Stock for Services   127,200    167,260 
Issuance of Common Stock on Bonuses to Officers and Directors       222,500 
Stock Compensation Expense       316,685 
(Gain) Loss on Conversion of Accounts Payable   4,072     
(Gain) Loss on Settlement or Extinguishment of Debt   (56,519)   614,073 
(Gain) Loss on Derivative Valuation       1,886,943 
(Gain) Loss on Exchange of Warrants       312,144 
(Gain) Loss on Distribution Contracts   47,229    (4,997)
(Gain) Loss on Disposition of Assets   70,905    251,192 
(Gain) Loss on Inventory   174,963     
(Gain) Loss on Discontinued Operations       101,219 
(Gain) Loss on Foreign Currency Translation   8,594     
           
Decrease (increase) in operating assets:          
Accounts Receivable   603,288    279,804 
Inventory   37,697    101,721 
Prepaid Expenses & Other Assets   361,534    36,716 
Other Receivables       466,762 
Film and Television Costs, net   (303,953)    
           
Increase (decrease) in operating liabilities:          
Accounts Payable   (492,173)   (354,498)
Accrued Salaries   (9,670)   196,318 
Accrued Interest       11,135 
Accrued Interest - Related Party        
Deferred Revenue and Advances   397,313     
Other Accrued Expenses   67,078    (16,126)
Net cash provided/(used) in operating activities   (2,481,988)   (1,120,317)
           
Cash Flows from Investing Activities:          
Investment in Capitalized Product Development   (23,830)    
Investment in Intangible Assets   (70,000)   (67,461)
Investment in Fixed Assets   (4,156)   (2,825)
Merger with A Squared Entertainment       283,199 
Net cash provided/(used) by investing activities   (97,986)   212,913 
           
Cash Flows from Financing Activities:          
Sale of Preferred Stock, net of offering costs   5,379,915     
Sale of Common Stock, net of offering costs   355,116    968,537 
Cost of Warrant Exchange       (15,264)
Proceeds from Services Advance   750,000     
Repayment of Services Advance   (10,417)    
Payments of Related Party Notes   (105,651)   (307)
Debt Issuance Costs   (15,000)   (275,000)
Proceeds from Bridge Notes       309,000 
Net cash provided/(used) by financing activities   6,353,963    986,966 
           
Net increase in Cash and Cash Equivalents   3,773,989    79,562 
Beginning Cash and Cash Equivalents   527,110    447,548 
Ending Cash and Cash Equivalents  $4,301,099   $527,110 

 

 F-22 

 

 

Genius Brands International, Inc.

ConsolidatedStatements of Cash Flows - continued

Periods Ended December 31, 2014 and 2013

 

   12/31/2014   12/31/2013 
Supplemental disclosures of cash flow information:          
Cash paid for income taxes  $   $ 
Cash paid for interest  $6,063   $ 
           
Schedule of non-cash financing and investing activities:          
Common Stock issued as Settlement for Accounts Payable  $32,572   $50,100 
Common Stock issued for Pre-Paid Services  $32,100   $333,215 
Common Stock issued for Merger, net of cash  $   $10,119,439 
Conversion of Debentures and Accrued Interest to Common Stock  $   $1,201,474 
Conversion of Warrants to Common Stock  $   $312,144 
Conversion of Short Term Bridge Notes and Accrued Interest to Common Stock  $   $543,719 
Conversion of Related Party Notes and Accrued Interest to Common Stock  $   $472,360 
Conversion of Accrued Salaries to Common Stock  $   $612,443 
Accrued Salaries converted to Short Term Note Payable  $   $221,000 
Common Stock issued for Issuance Costs  $   $15,264 
Common Stock issued for Derivative Liabilities  $   $3,107,608 
Common Stock issued for Debt Discount  $   $342,500 

 

Theaccompanying notes are an integral part of these audited financial statements.

 

 

 

 

 F-23 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 1: Organization and Business

 

Organization and Nature of Business

 

Genius Brands International, Inc. (“we”,“us”, “our”, “GBI” or the “Company”) is aglobal content and brand management company dedicated to providing entertaining and enriching “content and products witha purpose” for toddlers to tweens. Led by industry veterans Andrew Heyward (Chief Executive Officer) and Amy MoynihanHeyward (President), the Company produces original content and licenses the rights to that content to a variety of partners. Ourlicensees 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 moreand (ii) companies that develop and distribute products based on our content within different product categories such as toys,electronics, publishing, home goods, stationary, gifts, and more.

 

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

 

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

 

The Company commenced operations in January2006, assuming all of the rights and obligations of its then Chief Executive Officer, under an Asset Purchase Agreement betweenthe Company and Genius Products, Inc., in which the Company obtained all rights, copyrights, and trademarks to the brands “BabyGenius,” “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 enteredinto an Agreement and Plan of Reorganization (the “Merger Agreement”) with A Squared Entertainment LLC, a Delawarelimited liability company (“A Squared”), A Squared Holdings LLC, a California limited liability company and sole memberof A Squared (the “Parent Member”) and A2E Acquisition LLC, its newly formed, wholly-owned Delaware subsidiary (“AcquisitionSub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurredconcurrently with entering into the Merger Agreement, the Acquisition Sub merged with and into A Squared, and A Squared, as thesurviving entity, became a wholly-owned subsidiary of the Company.  As a result of the Merger, the Company acquired thebusiness and operations of A Squared.

 

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

 

Strategic Initiatives

 

During 2014, the Company began a seriesof strategic initiatives to restructure certain areas of business in an effort to operate more profitably in the long run. Thisincluded 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.

 

 F-24 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

  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 incurrednet losses. As of December 31, 2014, the Company had an accumulated deficit of $21,152,654 and a total stockholders’ equityof $13,720,248. At December 31, 2014, the Company had current assets of $4,738,898, including cash of $4,301,099 and current liabilitiesof $2,224,766, including short-term debt to related parties which bears no interest and has no stated maturity of $411,008 andcertain trade payables of $925,000 to which the Company disputes the claim, resulting in working capital of $2,514,132. For theyears ended December 31, 2014 and 2013, the Company reported a net loss of $3,728,599 and $7,216,031, respectively, and reportednet cash used by operating activities during year ended December 31, 2014 of $2,481,988.

 

During 2014, the Company received proceedsfrom the issuance of common stock, the issuance of Series A Convertible Preferred Shares, the execution of a long-term, exclusivesupply chain services agreement, and the execution music advance agreements. Additionally subsequent to the end of the year, theCompany received the second payment pursuant to its long term supply chain services agreement. While the Company believes thatthese funds will be sufficient to fund operations for the next twelve months, there can be no assurance that cash flows from operationswill continue to improve in the near future. If the Company is unable to attain profitable operations and positive operating cashflows, 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 liquiddebt instruments with initial maturities of three months or less to be cash equivalents. 

 

Reverse Stock Split

 

On April 2, 2014, we filed a certificateof amendment to our Articles of Incorporation to affect a reverse split of our issued and outstanding common stock on a one-for-onehundred basis. The reverse stock split was effective with FINRA on April 7, 2014. All common stock share and per share informationin this Form 10-K, including the accompanying consolidated financial statements and notes thereto, have been adjusted to reflectretrospective application of the reverse split, unless otherwise indicated.

 

Business Combination

 

On November 15, 2013, the Company enteredinto a Merger Agreement with A Squared, the Member, and the Acquisition Sub. Upon closing of the Merger, which occurred concurrentlywith 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 operationsof A Squared.

 

 F-25 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

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

 

See Note 3 - Business Combination for additionalinformation.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of financial statementsin conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reporting periods.

 

Financial Statement Reclassification

 

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

 

Allowance for Sales Returns

 

An Allowance for Sales Returns is estimatedbased on average sales during the previous year. Based on experience, sales growth, and our customer base, the Companyconcluded that the allowance for sales returns at December 31, 2014 and 2013 should be $45,582 and $43,000, respectively.

 

Inventories

 

Inventories are stated at the lower ofcost (average) or market and consist of finished goods such as DVDs, CDs and other products. A reserve for slow-moving and obsoleteinventory is established for all inventory deemed potentially non-saleable by management in the period in which it is determinedto be potentially non-saleable. The current inventory is considered properly valued and saleable. The Company concluded that therewas an appropriate reserve for slow moving and obsolete inventory of $54,673 and $93,607 established as of December 31, 2014 and2013, respectively.

 

Property and Equipment

 

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

   

Goodwill and Intangible Assets

 

Goodwillrepresents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accountedfor by the purchase method. In accordance with ASC 350 Intangibles Goodwill and Other, goodwill and certain intangible assets arepresumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequentlyif indicators of impairment arise. The Company completes the annual goodwill and indefinite-lived intangible asset impairment testsat the end of each fiscal year. To test for goodwill impairment, we are required to estimate the fair market value of each of ourreporting units, of which we have one. While we may use a variety of methods to estimate fair value for impairment testing, ourprimary methods are discounted cash flows. We estimate future cash flows and allocations of certain assets using estimates forfuture growth rates and our judgment regarding the applicable discount rates. Changes to our judgments and estimates could resultin a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwillof indefinite lived intangible assets in future periods.

 

 F-26 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

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 bonussongs/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 periodicalterations to existing products are expensed as incurred. Annual amortization of these intangible assets is computed based onthe straight-line method over the remaining economic life of the asset.

   

Films and Televisions Costs

 

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

 

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

 

Revenue Recognition

 

The Company recognized revenue relatedto product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligatedto pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation forfuture 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 productsare recorded when shipped to customers pursuant to approved customer purchase orders resulting in the transfer of title and riskof loss. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reportingdate.

 

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

 

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

 

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

 

Shipping and Handling

 

The Company records shipping and handlingexpenses in the period in which they are incurred and are included in the Cost of Goods Sold.

 

Stock Based Compensation

 

As required by ASC 718 - Stock Compensation,the Company recognizes an expense related to the fair value of our stock-based compensation awards, including stock options, usingthe Black-Scholes calculation as of the date of grant.

 

 F-27 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

Advertising Costs

 

The Company’s marketing costsare primarily related to advertising, trade shows, public relation fees and production and distribution of collateralmaterials. In accordance with ASC 720 regarding Advertising Costs, the Company expenses advertising costs in the period inwhich the expense is incurred. Marketing and Sales costs incurred by licensees are borne fully by the licensee andare not the responsibility of the Company. Advertising expense for the year ended December 31, 2014 and 2013 was$256,272 and $117,914, respectively.

 

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 forthe 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 liabilitiesare recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enactedtax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and otherpossible sources of realization of deferred tax assets, and records a valuation allowance that reduces the deferred tax assetsto an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than notwill be realized.

 

Concentration of Risk

 

The Company’s cash is maintainedat two financial institutions and from time to time the balances for this account exceed the Federal Deposit Insurance Corporation’s(“FDIC’s”) insured amount. Balances on interest bearing deposits at banks in the United States areinsured by the FDIC up to $250,000 per account. As of December 31, 2014, the Company had one account with an uninsured balanceof $3,923,931. As of December 31, 2013, the Company had one account with an uninsured balance of $123,053.

 

For fiscal year 2014, the Company had threecustomers whose total revenue exceeded 10% of the total consolidated revenue. These customers account for 19%, 13%, and 11% oftotal revenue, respectively. Those three accounts made up 11%, 0%, and 14% of accounts receivable, respectively. For fiscal year2013, the Company had three customers whose total revenue exceeded 10% of the total consolidated revenue. These customers accountfor 22%, 20%, and 14% of total revenue, respectively. Those three accounts made up 0%, 6%, and 39% of accounts receivable, respectively.The major customers for the year ending December 31, 2014 are not necessarily the same as the major customers at December 31, 2013.  There is significant financial risk associated with a dependence upon a small number of customers. The Company periodicallyassesses the financial strength of these customers and establishes allowances for any anticipated bad debt. At December31, 2014 and 2013, no allowance for bad debt has been established for the major customers as these amounts are believed tobe fully collectible.

 

Fair value of financial instruments

 

The carrying amounts of cash, receivablesand accrued liabilities approximate fair value due to the short-term maturity of the instruments.

 

We adopted ASC 820 as of January 1, 2008for financial instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair value, establishes a frameworkfor measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosuresabout fair value measurements.

 

 F-28 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

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

 

  · Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
     
  · Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
     
  · Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

Recent Accounting Pronouncements

 

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

 

In April 2014, the FASB issued AccountingStandards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic360): 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 discontinuedoperations and certain other disposals that do not meet the new definition of a discontinued operation. It also allows an entityto present a discontinued operation even when it has continuing cash flows and significant continuing involvement with the disposedcomponent. The amendments in ASU 2014-08 are effective prospectively for disposals (or classifications as held for sale) of componentsof 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 financialstatements previously issued or available for issuance. We are currently evaluating the potential impact of adopting this guidanceon our consolidated financial statements.

 

In May 2014, the FASB issued AccountingStandards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Thecore principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices. 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 performanceobligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedesthe 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 guidancerelated to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods andinterim periods within those annual periods beginning after December 15, 2016. Early adoption is not permitted. Companies may useeither a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently evaluating the potentialimpact of adopting this guidance on our consolidated financial statements.

 

 F-29 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

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

 

Various other accounting pronouncementshave been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specificindustries, 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 Companyentered into the Merger Agreement with A Squared and Acquisition Sub. Upon closing of the Merger, which occurred concurrentlywith entering into the Merger Agreement, our Acquisition Sub merged with and into A Squared, and A Squared, as the survivingentity, became a wholly-owned subsidiary of the Company. As a result of the Merger, the Company acquired the business andoperations of A Squared. 

 

Immediately following the Merger, the Company’spre-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 dilutedbasis.

 

Pursuant to the terms and conditions ofthe 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 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.

 

Accounting Treatment

 

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

 

 F-30 

 

 

Genius Brands International, Inc.

Notes to Consolidated Financial Statements

December 31, 2014

 

Purchase Price Allocation

 

The following table summarizes the finalpurchase 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.

 

Pro forma

 

The table below presents the pro formarevenue and net loss for the year ended December 31, 2014 and 2013, assuming the Merger had occurred on January 1, 2013, pursuantto ASC 805-10-50. This pro forma information does not purport to represent what the actual results of operations of the Companywould have been had Merger occurred on this date nor does it purport to predict the results of operations for future periods.

 

   Year Ended 
   12/31/2014   12/31/2013 
Revenues  $925,788   $2,752,830 
Net Loss (1)  $(3,728,599)  $(5,855,925)

 

(1) Net loss during the year ended December 31, 2013 includes merge